Opposition Brief — Commerce Co. v. United States

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Statutes and regulations involved ................. ..-----

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CITATIONS

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or me © 69 69 2D ee

Cases:

Bank of America Nat. Trust & Sav. Ass’n v. United

States, 168 F. 2d 399, certiorari denied, 335 U. S. 827. . 10

Commissioner v. Kennedy Laund. Co., 133 F. 2d 660, certi-

eran: Gemned, S10 U.S. T7O... . ... 2... 2.28... rere 10

Pittsburgh Brewing Co. v. Commissioner, 107 F. 2d 155. . 13,14

Repplier Coal Co. v. Commissioner, 140 F. 2d 554, certi-

SE NEE BI Wis Ws ss hk ho oss wrens vsbanas 10, 14

Virginian Hotel Co. v. Helvering, 319 U. S. 523, rehearing

oS oe Se eee eee 9, 10, 11, 12, 13, 14

Statutes :

Revenue Act of 1938, c. 289, 52 Stat. 447:

a SR oe Ceo res tae eres te 15

RE ree eer ry yrs err rer er 9,16

Eg uA a cab ak ENRON EOS S URN TERRE WEA 16

Miscellaneous:

Treasury Regulations 101, Art. 113(b)-1............... 17

(1)

——7_"

Futhe Supreme Court of the Wited States

OcrToBER TERM, 1948

No. 628

COMMERCE COMPANY, PETITIONER

Vv.

UnitTep STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FIFTH

CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINION BELOW

The District Court rendered no opinion but

entered findings of fact and conclusions of law

(R. 34-87) which are unreported. The opinion

of the Court of Appeals (R. 42-47) is reported in

171 F. 2d 189.

JURISDICTION

The judgment of the Court of Appeals was

entered on December 7, 1948 (R. 48). The petition

for a writ of certiorari was filed on March 5, 1949.

(1)

2

The jurisdiction of this Court is invoked under

28 U.S.C., See. 1254.

QUESTION PRESENTED

The Commissioner of Internal Revenue adjusted

the depreciation rates claimed by the owners of

the Texas State Hotel properties and the Krupp

and Tuffly Building for 1929, 1930 and 1931, pur-

suant to revenue agent reports and conferences

relating to such years. No corresponding adjust-

ments were made in the depreciation claimed on

the Texas State Hotel properties for the years

1932, 1933 and 1935, and the Krupp and Tuffly

Building for the years 1932, 1933, 1934 and 1935.

The tax returns of the owners for these latter

years were accepted by the Commissioner as filed.

The question here presented is whether, in de-

termining the ‘‘adjusted basis’’ of the properties

for the purpose of computing depreciation on the

Texas State Hotel properties for the taxable

periods in suit and for the purpose of computing

the deductible loss from the sale of the Krupp and

Tuffly Building on May 31, 1938, the full amount

of the deductions taken as depreciation in the years

in which the returns were accepted as filed should

be subtracted from the cost, or only an amount equal

to the depreciation for such years computed at the

rates used by the Commissioner for 1929, 1930 and

1931. The answer depends upon whether the

deductions for depreciation claimed in the owners’

tax returns which were accepted as filed were

eee ae

—————

3

‘‘allowed’’ within the meaning of Section 113

(b) (1) (B) of the Revenue Act of 1938,

STATUTES AND REGULATIONS INVOLVED

The applicable statutes and regulations are set

forth in the Appendix, infra, pp. 15-18.

STATEMENT

This is an action brought against the United

States by the Commerce Company (herein some-

times referred to as the taxpayer) for the recovery

of income tax paid. For the period January 1,

1938, to September 23, 1938, the taxes were as-

sessed to and collected from the taxpayer as trans-

feree of State Properties Corporation. The taxes

were paid by the taxpayer on its own account for

the fiscal year June 1, 1938 to May 31, 1939. (R.

14.) All facts were stipulated and the only ques-

tion involved is with the respect to the computa-

tion of the adjusted basis on the Texas State Hotel

properties and the Krupp and Tuffly Building for

the periods in suit. The Texas State Hotel prop-

erties include ten individual items (R. 29, 30, 31)

on each of which depreciation was allowed in the

years 1929 through 1937, at rates peculiarly ap-

plicable to each item. Four separate items were

similarly treated in connection with the Krupp

and Tuffly Building. (R. 32.)

In the following statement, for the sake of

clarity, reference to precise figures with respect

to cost and depreciation has been omitted. The

4

figures are set forth in the stipulation of facts (R.

29-33).

Texas State Hotel Properties.—The Texas State

Hotel properties were first placed in use in 1929,

They were owned and operated by the Theo Develop-

ment Company from 1929, to December 31, 1931,

when the name of the company was changed by

charter amendment to Texas State Company. The

Texas State Company owned and operated the

Texas State Hotel properties from December 31,

1931, to September 30, 1936, when they were trans-

ferred to State Properties Corporation. The

transfer to State Properties Corporation was a

tax-free transaction. On July 1, 1938, the State

Properties Corporation transferred all of its

assets and liabilities to the taxpayer through a

tax-free reorganization. (R. 15, 19.) Inasmuch

as the transfer to State Properties Corporation

and the reorganization whereby the taxpayer ac-

quired the assets of State Properties Corporation

were tax-free transactions, the taxpayer acquired

the depreciation basis of the prior owners.

The owners of the Texas State Hotel properties

filed income tax returns for each year from 1928,

through 1937, and claimed deductions for deprecia-

tion on such properties each year (R. 19-22). The

depreciation claimed for the years 1929, 1930 and

1931, was partially disallowed by the Commis-

sioner of Internal Revenue. This action was taken

pursuant to a conference report dated August 29,

1936, it having been agreed that the useful life of

_—

5

the properties had been underestimated in the re-

turns for these years and that the depreciation

rates used in computing the deductions claimed in

the returns should be adjusted accordingly. (R.

19-20. )

Pursuant to subsequent revenue agent reports,

a part of the deductions for depreciation claimed

for the year 1934, the taxable periods in 1936 and

the year 1937, was also disallowed. The deprecia-

tion allowed for 1934, and the taxable periods in

1936, was recomputed by employing the rates

finally used by the Commissioner for 1929, 1930

and 1931. For the year 1937, the same rates were

used on all items except the building and the

elevators. It was decided that the building and

elevators had a longer useful life than previously

estimated and an appropriate change was made

with respect to their depreciation rates. (R. 21-

23.)

The Commissioner of Internal Revenue accepted

the income tax returns of the owners of the prop-

erties for 1932, 1933 and 1935, as filed, and made

no challenge to the deductions for depreciation

taken in them. The depreciation allowed in these

returns was at a higher rate than was finally

allowed for 1929, 1930 and 1931. During the years

1932, 1933 and 1935, the returns disclosed a net

loss in excess of the difference between the amount

of depreciation claimed and the amount allowable

for those years at the rates finally used by the

—

6

Commissioner for the years 1929, 1930 and 1931.

(R. 20-22.)

In determining the adjusted basis for computing

depreciation on the Texas State Hotel properties

for the period involved in this suit, beginning

January 1, 1938, the Commissioner of Internal

Revenue subtracted from the cost of the properties

the full amount of the depreciation claimed in the

returns accepted as filed for the years 1932, 1933

and 1935, as well as the amount allowed pursuant

to the various revenue agent and conference re-

ports for the other years in which the building had

been in use. The adjusted basis of each property

item thus determined was then divided by the esti-

mated number of years of remaining useful life

of the item to determine the depreciation deduc-

tion for the taxable periods here involved. (R. 30.)

The taxpayer contends that the Commissioner

of Internal Revenue erred with respect to the years

in suit in subtracting from the cost of the Texas

State Hotel properties the full amount of de-

preciation claimed in the tax returns of the owners

for the years 1932, 1933 and 1935. It contends that

only a sum equal to the depreciation allowable for

those years at the rates finally used for 1929, 1930

and 1931, should have been subtracted. The Dis-

trict Court and the Court of Appeals sustained the

Commissioner’s action. (R. 35, 47.)

Krupp and Tuffly Building.—Substantially the

same problem arises with respect to the Krupp

and Tuffly Building. This building was erected

7

by the Hewitt Construction Company in 1929, a

subsidiary of Jesse H. Jones & Company, and was

transferred upon completion to the Southern Loan

and Investment Company, then also a subsidiary

of Jesse H. Jones & Company. This transfer was

a tax-free transaction. On December 31, 1932, the

building was transferred to Hippodrome Building

and Amusement Company and this was a tax-free

transaction. On September 30, 1936, the name of

the Hippodrome Building and Amusement Com-

pany was changed to State Properties Corpora-

tion. (R. 24.) As pointed out above, the taxpayer

is a successor through a tax-free reorganization

of the assets and liabilities of the State Properties

Corporation. Inasmuch as the transfers of the

building were tax-free transactions, the State

Properties Corporation, of which the taxpayer is

transferee, acquired the depreciation basis of the

former owners.

The total cost of the Krupp and Tuffly Build-

ing, including additions, was $211,799.50 (R. 32).

It was sold on May 31, 1938, by State Properties

Corporation to the Southern Loan and Invest-

ment Company for the sum of $152,348.93. This

was a taxable transaction. (R. 27-28.)

From 1929 through 1937, the owners of the build-

ing filed income tax returns and therein claimed

deductions for depreciation on the building. The

rates used in the returns were the same for each

year. The Commissioner of Internal Revenue

a

8

adjusted the amounts of depreciation claimed in

the returns for the vears 1929, 1930 and 1931, pur-

suant to a conference report dated July 13, 1936,

and allowed only a part of the depreciation claimed.

The returns for all other years were accepted by

the Commissioner as filed. (R. 24-26.)

In computing the loss from the sale of the Krupp

and Tuffly Building, the Commissioner deducted

from the cost of $211,799.50 the amount of the de-

preciation allowed for the years 1929, 1930 and

1931, the full amount claimed in the income tax

returns filed for the years 1932 through 1937, and

the amount claimed for the period January 1,

1938, to the date of the sale, May 31, 1938. The

total amount of such depreciation was $55,488.02.

(R. 32.) The difference between this amount and

the cost of the building is $156,311.48, and this

figure was taken as the adjusted basis. The dif-

ference between this figure of $156,311.48 and the

sales price of $152,348.93 is $3,962.55, and this was

the amount allowed by the Commissioner as a

deductible loss. (R. 33.)

The taxpayer contends that the Commissioner

erred in deducting from the cost the full amount

of the depreciation claimed in the tax returns of

the owners for the years 1932, 1933, 1934 and 1935,

years in which the owners’ income tax returns dis-

closed net losses (R. 20, 25-26). It is of the view

that the Commissioner should have subtracted

in respect of these years only a sum equal to the

depreciation allowable at the rates finally used by

9

the Commissioner for the years 1929, 1930 and

1931. Both the District Court and the Court of

Appeals sustained the action of the Commissioner.

(R. 36, 47.)

ARGUMENT

1. The controlling statute is Section 113 (b) (1)-

(B) of the Revenue Act of 1938, Appendix, infra,

p. 16, which provides that the ‘‘adjusted basis” for

computing gain or loss (and depreciation under

other statutory provis-ons) shall be determined by

making proper adjustments for exhaustion, wear

and tear, and obsolescence in prior years ‘‘to the

extent allowed (but not less than the amount allow-

able) under this Act or prior income tax laws.’’ In

Virginian Hotel Co. v. Helvering, 319 U. 8S. 523,

rehearing denied, 320 U. S. 810, the petitioner

claimed deductions for depreciation in its returns

for 1927 through 1937 at rates in excess of those

determined for 1938. For the years 1931 through

1936, the petitioner had net losses in excess of the

amounts of depreciation claimed as deductions.

The petitioner contended that its adjusted basis for

1938 should be computed by subtracting from the

cost, in re pect of the years 1931 through 1936, only

an amount equal to the deduction allowable for

those years at the rates used for 1938, because it had

received no tax benefit from the excessive deduc-

tions. This Court held that under Section 113 (b)-

(1)(B), excessive amounts deducted from gross

income in prior years as depreciation should be de-

ducted from the cost of the property in question in

_—_—

10

determining the adjusted basis of the property for

the current taxable year even though, in the earlier

years, no tax benefit was realized by the taxpayer

from such excessive deductions.’

The Virginian Hotel case was in no material re-

spect different from the one here presented. In

both cases, the Revenue Act of 1938 was the control-

ling statute. The taxpayer in each case filed, for

years in which no net income was realized, tax re-

turns in which amounts were deducted as deprecia-

tion on the properties involved in excess of the rates

finally determined and agreed upon with the Com-

missioner of Internal Revenue in respect of other

years. These returns were accepted as filed and no

challenge was made ox the deductions for deprecia-

tion therein made. In each case, in computing the

adjusted basis for the tax periods in 1938, the Com-

missioner subtracted from the cost of the properties

the full amount of the depreciation claimed in the

accepted returns and allowed depreciation (and

here the loss on the sale of the Krupp and Tuffly

Building) in accordance with the adjusted basis so

computed. In each case, the taxpayer contended

that the cost basis should be reduced with respect to

the loss years only by an amount equal to a deduc-

tion allowable at rates agreed upon by the taxpayer

?Certiorari has since been denied in the following cases

presenting this issue: Commissioner v. Kennedy Laund. Co.,

133 F. 2d 660 (C.A. 7th), certiorari denied, 319 U.S. 770;

Repplier Coal Co. v. Commissioner, 140 F. 2d 554 (C.A. 3d),

certiorari denied, 323 U.S. 736; Bank of America Nat. Trust

& Sav. Ass’n v. United States, 168 F. 2d 399 (C.A. 9th), cer-

tiorari denied, 335 U.S. 827.

LE

11

and the Commissioner in connection with other

years and that the difference between such amounts

and the amounts claimed in the returns should be

restored to the adjusted basis for 1938. The action

taken by the Commissioner on the tax returns for

the loss years and the contentions of the taxpayers

with respect to them are, therefore, the same in both

cases. :

The only difference between the underlying facts

in the two cases is with respect to the action taken

by the Commissioner on the returns for prior years

in which net income was reported. In Virginian

Hotel Co. v. Helvering, 319 U. S. 523, rehearing

denied, 320 U. S. 810, the Commissioner accepted

as filed the returns for prior years in which net in-

come was reported and did not challenge the deduc-

tions for depreciation taken in them. The adjusted

basis for 1938 was computed by subtracting from

the cost the full amount claimed in the returns for

such years. In the instant case, the Commissioner

made adjustments of the depreciation claimed on

the Texas State Hotel properties for 1929, 1930,

1931, 1934, 1936 and 1937, and on the Krupp and

Tuffly Building for 1929, 1930 and 1931. In com-

puting the adjusted basis for 1938, the amounts al-

lowed as depreciation for these years in accordance

with the adjustments so made were subtracted from

the cost.

The taxpayer does not here challenge the correct-

ness of the adjustments made by the Commissioner

in respect of the depreciation rates for prior years

12

in which net income was received or the correctness

of the Commissioner’s action in subtracting from

the cost the revised amounts for those years for the

purpose of computing the adjusted basis. How-

ever, the taxpayer argues that the rule of the Vir-

ginian Hotel case is inapplicable because the de-

preciation rates were here adjusted for 1929, 1930

and 1931, years prior to the loss years, whereas in

the Virginian Hotel case the rate adjustments were

made for 1938, a year subsequent to the loss years.

This factual difference obviously does not affect

the question whether the depreciation claimed in

the returns accepted by the Commissioner as filed

for the loss years was ‘‘allowed’’ within the mean-

ing of Section 113 (b)(1)(B). There is nothing in

the statute to suggest that this difference between

the two cases dictates or even permits a different

result. The revenue laws impose no more obligation

upon the Commissioner to make audits and corre-

sponding corrections in returns for net loss years

subsequent to the years for which audits are made

than it does in respect of returns for prior years.

The taxpayer suggests no concrete reason stated in

the statute, its language or its legislative history,

which would cause the result in this case to be dif-

ferent from that in the Virginian Hotel case. The

taxpayer’s general plea that this Court develop

some theory or another to lift it ‘‘out of a mire of

statutory words’’ (Pet. 7) indicates that it recog-

nizes that no such reason exists.

——

13

That the Commissioner’s action with respect to

the return for one taxable year is not determina-

tive of whether a deduction for depreciation has

been allowed in another is shown by the language

of this Court in Virginian Hotel Co. v. Helvering,

319 U. S. 523, rehearing denied, 320 U. S. 810.

After explaining the purpose of Section 113 (b)-

(1) (B), this Court said (p. 527) :

Under our federal tax system there is no ma-

chinery for formal allowances of deductions

from gross income. Deductions stand if the

Commissioner takes no steps to challenge them.

Income tax returns entail numerous deduc-

tions. If the deductions are not challenged,

they certainly are ‘‘allowed,”’ since tax liability

is then determined on the basis of the returns.

* * *

From the foregoing, it seems apparent that the

court below was correct in its conclusion that the

instant case is controlled by the decision of this

Court in the Virginian Hotel case and that the case

was correctly decided.

2. There is no merit in the taxpayer’s contention

(Pet. 8) that a writ of certiorari should be granted

in the instant case because of a conflict with Pitts-

burgh Brewing Co. v. Commisstoner, 107 F. 2d 155

(C.A. 3d). If, as the taxpayer states (Pet. 8), its

‘‘facts are like the facts of the Pittsburgh Brewing

ease,’’ this Court has, in effect, already upheld the

correctness of the decision below. For, in its opin-

ion in the Virginian Hotel case (319 U. 8S. at 525),

ee

14

this Court stated that it had granted certiorari ‘‘be-

cause of a conflict between the decision below and

Pitisburgh Brewing Co. v. Commissioner, 107 F.

2d 155, decided by the Circuit Court of Appeals

for the Third Circuit.’’ The conflict was resolved

by rejecting the rule announced in the Pittsburgh

Brewing case. As pointed out in the quotation

from Repplier Coal Co. v. Commissioner, 140 F,

2d 554, 558 (C.A. 3d), in the opinion below in the

instant case (R. 46), the decision in the Pittsburgh

Brewing Co. case ‘‘was in effect overruled’’ by this

Court in the Virginian Hotel case. And if the facts

in this case differ materially from those involved

in the Pittsburgh Brewing case, there is no conflict.

CONCLUSION

The decision below is correct. It is in accord

with the decision of this Court in Virginian Hotel

Co. v. Helvering, supra. It involves no conflict

which has not previously been resolved. The peti-

tion for a writ of certiorari should, therefore, be

denied.

Respectfully submitted,

/ Puuir B. Per_may,

/ Solicitor General;

THERON LAMAR CAUDLE,

/. Assistant Attorney General;

Exuis N. Suack,

LEE A. JACKSON,

C. MoxLEY FEATHERSTON,

Special Assistants to the

ApriL, 1949. Attorney General.

—

15

APPENDIX

Revenue Act of 1938, c. 289, 52 Stat. 447:

Sec. 23. DEDUCTIONS FRoM Gross INCOME.

In computing net income there shall be al-

lowed as deductions:

* * * ” *

(f) Losses by Corporations.—In the case

of a corporation, losses sustained during the

taxable year and not compensated for by in-

surance or otherwise.

” ” * * *

(i) Basis for Determining Loss.—The basis

for determining the amount of deduction for

losses sustained, to be allowed under subsec-

tion (e) or (f), and for bad debts, to be al-

lowed under subsection (k), shall be the ad-

justed basis provided in section 113 (b) for

determining the loss from the sale or other

disposition of property.

(1) Depreciation.—A reasonable allowance

for the exhaustion, wear and tear of property

used in the trade or business, including a rea-

sonable allowance for obsolescence. * * *

* * * * *

(n) Basis for Depreciation and Depletion.

—The basis upon which depletion, exhaustion,

wear and tear, and obsolescence are to be

allowed in respect of any property shall be as

provided in section 114.

* * * * *

16

Sec. 113. Apgustep Basis ror DETERMINING

GAIN oR Loss.

(a) * * * The basis of property shall be

the cost of such property; * * *

* * * * *

(b) Adjusted Basis.—The adjusted basis

for determining the gain or loss from the sale

or other disposition of property, whenever

acquired, shall be the basis determined under

subsection (a), adjusted as hereinafter pro-

vided.

(1) General Rule.—Proper adjustment

in respect of the property shall in all cases

be made—

* Hw w « *

(B) in respect of any period since

February 28, 1913, for exhaustion, wear

and tear, obsolescence, amortization, and

depletion, to the extent allowed (but not

jess than the amount allowable) under this

Act or prior income tax laws. * * *

* * * * *

Src. 114. Basis FOR DEPRECIATION AND DEPLE-

TION.

(a) Basis for Depreciation.—The basis upon

which exhaustion, wear and tear, and obsoles-

cence are to be allowed in respect of any prop-

erty shall be the adjusted basis provided in

section 113 (b) for the purpose of determin-

ing the gain upon the sale or other disposition

of such property.

* * * * *

17

Treasury Regulations 101, promulgated under the

Revenue Act of 1938:

Art. 113(b)-1. Adjusted basis: General

rule-—The adjusted basis for determining the

gain or loss from the sale or other disposition

of property, is the cost of such property or,

in the case of such property as is described in

paragrapius (1) to (18), inclusive, of section

113(a), the basis therein provided, adjusted

to the extent provided in section 113 (b).

The cost or other basis shall be properly ad-

justed for any expenditure, receipt, loss, or

other item, properly chargeable to capital ac-

count, including the cost of improvements and

betterments made to the property. * * *

* * ” * ”

The cost or other basis must also be de-

creased by the amount of the deductions for

exhaustion, wear and tear, obsolescence,

amortization, and depletion to the extent such

deductions have in respect of any period since

February 28, 1913, been allowed (but such

decrease shall not be less than the amount of

deductions allowable) under the Revenue Act

of 1938 or prior income tax laws. The adjust-

ment required for any taxable year or period

is the amount allowed or the amount allowable

for such year or period under the law applic-

able thereto, whichever is the greater amount.

A taxpayer is not permitted to take advantage

in a later year of his prior failure to take any

depreciation allowance or of his action in tak-

ing an allowance plainly inadequate under the

known facts in prior years. The determina-

18

tion cf the amount properly allowable shall,

however, be made on the basis of facts reason-

ably known to exist at the end of such year or

period. The aggregate sum of the greater of

such annual amounts is the amount by which

the cost or other basis of the property shall

be adjusted. * * *

* * * * *

W ©. S. GOVERNMENT PRINTING OFFICE: 1940 esstes sey