Opposition Brief — Piedmont Cotton Mills v. Commissioner (No. 574)

INDEX

Page

Serre re reer 1

Ta ia Gi 4 Sn aca dn hie ARC d wale soe Rika an ek 4 ck 1

RIT eee eer ee ere 2

Statute and regulations involved ......................... 2

ee tk Eis oc ls ROSS Loon SER CSRS ERA ES KS CN 2

I es ae ean. eee ewe 5

EE cee he S ene GEAC Meee eye ew skh vase rece us 403 10

EE chien eh kd antn eee kK anne ees WARORS RMS MMOS 11

CITATIONS

Cases :

Bank of America Nat. T. €& S. Ass’n v. United States,

69 F. Supp. 932, affirmed per curiam, 168 F. 2d 399,

certiorari denied, 335 U. S. 827..................... 6,7,9

Commerce Co. v. United States, 171 F. 2d 189, certiorari

UNE, PP ie PROF eR Nee ako eaeiaceenas 6

Commissioner v. Kennedy Laundry Co., 133 F. 2d 660,

certiorari denied, 319 U. S. 770, rehearing denied,

SE TE RO nc SN Aa ee ay carvan eaake Cea e 6 7, 8,9

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

: Glewant Genied, 33 U. &. TOS... ....... ee eee eee 7

s Virginian Hotel Co. v. Helvering, 319 U. S. 523, rehear-

Z Ne GORING, See BID. won ee cede ee cas 6, 7, 8, 9, 10

: Statute :

Revenue Act of 1936, ce. 690, 49 Stat. 1648:

ERR Gee Se CUSED ET Tak ERROR DK Ose Kee 5,11

EE. 25, CUES ta va > cee wen etann sh iewcoene 5,11

kG cagwtt cha ceae ei ease ie te ere 5, 12

_ Treasury Regulations 94:

RSE ch 4.0 hs Non be tte RG NEAL EO CORSE Se 6,12

; 5 cwlepnba tba ak chances Cawet hae. Fee 6,12

; SEES eos Ls Oo Waa Aa aa mee nae 6,13

: AAAs ph nck dns sa eR A COR OR On ha AES 6, 14

Ig foe Or ere ee oe 6, 15

—7"

Yuthe Supreme Gourt of the Wnited States

OcTOBER TERM, 1949

No. 574

PrepMONT CorTon MILLS, PETITIONER

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FIFTH

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The memorandum opinion of the Tax Court (R.

23-29) is not officially reported. The per curiam

opinion of the Court of Appeals (R. 39-40) is

reported at 177 F. 2d 148.

JURISDICTION

The judgment of the Court of Appeals was en-

tered on October 12, 1949. (R. 40.) On January

3, 1950, the time for filing a petition for a writ of

certiorari was extended to and including February

1, 1950. (R. 41.) The petition for a writ of cer-

tiorari was filed on February 1, 1950. The juris-

(1)

2

diction of this Court is invoked under 28 U.S.C.

1254.

QUESTION PRESENTED

Whether, in computing taxpayer’s allowance

for depreciation for the taxable years 1936 and

1937 under Sections 23(1) and (n), 113(b) (1) (B)

and 114 of the Revenue Act of 1936, taxpayer’s

basis for depreciation should be reduced by the

amount of depreciation properly allowable for the

fiscal years ended August 31, 1928, through August

31, 1935, as taxpayer contends, or, as this Court,

the court below, and the Tax Court have held, by

the greater amounts of depreciation claimed by

taxpayer and reported for those years, even if the

excess of reported over properly allowable depre-

ciation did not offset taxable income.

STATUTE AND REGULATIONS INVOLVED

The pertinent statute and Treasury Regulations

are set forth in the Appendix, infra, pp. 11-15.

STATEMENT

The facts were stipulated (R. 18-22) and were

repeated in the Tax Court’s memorandum opinion

(R. 23-27). They are as follows:

Piedmont Cotton Mills (hereinafter referred

to as the ‘‘taxpayer’’) is a Georgia corporation

engaged in the manufacture of cotton textiles and

has its principal office in the town of Egan, Geor-

gia. It reported income in the amount of $5,926.92

for the fiscal year ended August 31, 1936, and a net

3

loss of $12,415.74 for the fiscal year ended August

31, 19387. (R. 23-24.)

In its returns for the fiscal years 1936 and 1937,

taxpayer deducted depreciation in the respective

amounts of $31,562.76 and $30,919.39. In deter-

mining the deficiencies here involved the Commis-

sioner disallowed $19,262.17 of the amount deducted

for depreciation for the fiscal year 1936 and dis-

allowed $18,123.78 of the amount deducted for de-

preciation for the fiscal year 1937. (R. 24.)

The controversy relates to the Commissioner’s

action in computing taxpayer’s depreciation base

by adding to taxpayer’s depreciation reserve as of

August 31, 1927, in the amount of $266,426.25, the

full amounts of depreciation reported on tax-

payer’s returns for each of the years ended

August 31, 1928, to August 31, 1935, inclusive,

aggregating $182,955.97." (R. 24-25, 26-27.)

Prior to his investigation of taxpayer’s 1936

and 1937 returns, the Commissioner had not ques-

tioned the depreciation deductions as reported by

taxpayer on its returns for the years 1928 to 1935,

inclusive. (R. 27.) In determining the deficien-

cies against taxpayer for the years 1936 and 1937,

the Commissioner used percentage rates of depre-

ciation which are admittedly correct for all the

fiseal years 1928 to 1937, inclusive. (R. 25, 26.)

The amount of depreciation reported by taxpayer

‘Taxpayer does not question the correctness of the de-

preciation reserve as of August 31, 1927. (See Stip. 5, R.

24-25.)

——

4

for each of the years 1928 to 1935, inclusive, was

more than the amount properly allowable for each

of those years, as shown by the following tabulation

which is a part of the stipulation (R. 25) :?

(1) (2) (3) (4) (5) (6)

Net Loss After

Deducting

Depreciation Depreciation Difference Increase

Fiscal on eae Allowable between in Taxable

Year turns Depreciation (3) and (4) Income

1928 $59,410.62 $ 20,899.28 $ 14,277.90 $ 6,621.38 None

1929 17,051.14 30 , 295.98 15,626.77 14,669.21 None

1930 45,944.14 24,575.76 16,264.50 8,311.26 None

1931 32,818.32 22 ,033 . 44 16,373.32 5,60u.12 None

1932 29,563.99 22,033.44 16,452.38 5,581.06 one

1933 5,393.82 22,885.41 16,518.08 6,367.33 $973.51

1934 16,836.43 21,561.54 16,196.68 5,364.86 None

1935 37,072.22 18,671.12 15,972.08 2,699.04 None

Totals $182,955.97 $127,681.71 $55,274.26 $973.51

If the total excess of depreciation claimed over

that properly allowable ($55,274.26) may not be

restored to taxpayer’s undepreciated balance as

of September 1, 1935, then the correct allowable

depreciation for the fiscal year 1936 is $12,300.59,

and for the fiscal year 1937 is $12,795.61 (R. 27),

as the Commissioner determined (R. 24). If the

excess for which taxpayer did not receive a tax

benefit ($55,274.26 minus $973.51 for 1933, or a net

amount of $54,300.75) may be restored to taxpay-

er’s undepreciated base, the correct allowable de-

preciation for the fiscai year 1936 is $16,346.91, and

for the fiscal year 1937 is $16,763.03.’ (R. 26-27.)

? Column (6) of the tabulation represents the increase which

results in taxable income for each year when the depreciation

properly allowable, rather than the reported depreciation, is

deducted from gross income.

* The parties thus assumed that only $973.51 for 1933 offset

taxable income. As to the remainder of the excess of reported

|

5

The statute of limitations has run on the assess-

ment of any additional tax or the claiming of any

refund for each of the fiscal years included in the

period beginning September 1, 1927, and ending

August 31, 1935. (R. 27.)

On these facts, the Tax Court sustained the Com-

missioner’s determination and held that taxpay-

er’s depreciation base for the fiscal years 1936 and

1937 could not be increased by the amount of ex-

cessive depreciation deducted in its income tax

returns for the prior years from 1928 through

1935, for which it received no tax benefit in those

years. (R. 27-29.) On appeal, the decision of the

Tax Court was affirmed per curiam. (R. 39-40.)

ARGUMENT

Pursuant to Sections 23 (n), 113 (a) and (b)

and 114 (a) of the Revenue Act of 1936 (Appen-

dix, infra, pp. 11-12), taxpayer’s depreciation base

for computing its depreciation deductions for the

fiscal years 1936 and 1937, under Section 23 (1)

(Appendix, infra, p. 11), is the cost of the depre-

ciable property less the depreciation on that prop-

depreciation over properly allowable depreciation, the Tax

Court stated that considering the lanzuage of the stipulation,

particularly paragraph 7, and the terms in which the issue

was stated by the parties, it considered the parties to agree

that the amount of excess of “allowed” over “allowable”

depreciation in the previous years did not serve to offset in-

come. The Tax Court noted, however, that in three of the

previous years (1929, 1933 and 1934) the depreciation reported

exceeded the net loss after deducting reported depreciation—

a fact which raises the question whether the amount of depre-

ciation deducted for those years served to reduce taxable

income. The Tax Court passed this question. (R. 23, fn. 1.)

6

erty for prior years “to the extent allowed (but not

less than the amount allowable)”. See also, Treas-

ury Regulations 94, Articles 23(1)-4, 23(1)-5, 22

(1)-9, 113(b) (1), and 114-1 (Appendix, infra, pp.

12-15). In Virginian Hotel Co. v. H elvering, 319

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

Court held that the depreciation ‘“‘allowed’”’ for

years prior to the taxable year is the amount of

depreciation actually claimed by the taxpayer and

not challenged by the Commissioner, including any

part thereof for which the taxpayer received no

tax benefit. That decision therefore requires a

rejection of taxpayer’s contention in the present

case, as the court below held (R. 39-40), and as

taxpayer concedes (Pet. 7).

The sole reason urged by taxpayer for the grant-

ing of its petition for a writ of certiorari is that

the Court should overrule its decision in the Vir-

gintan Hotel case and ‘‘correct its erroneous inter-

pretation of the statute’’ in that case. (Pet. a,

The Court has already denied certiorari in three

cases in which the petition for a writ of certiorari

raised a question as to the correctness or the appli-

cability of the Virginian Hotel decision. Commerce

Co. v. United States, 171 F. 2d 189 (C.A. 3D), cer-

tiorari denied, 336 U. S. 972; Bank of America

* Taxpayer also asserts that the question involved is of

general applicability and of great importance in our tax system

(Pet. 18) but, since the question involved has already been

decided by the Court, this assertion also necessarily assumes

that the Court should overrule its decision in the Virginian

Hotel Co. case.

|

7

Nat. T. & S. Ass’n v. United States, 69 F. Supp.

932 (N.D. Cal.), affirmed per curiam, 168 F. 2d

399 (C.A. 9), certiorari denied, 335 U. 8S. 827; Rep-

plier Coal Co. v. Commissioner, 140 F. 2d 554 (C.A.

3), certiorari denied, 323 U. S. 736; see also Com-

missioner V. Kennedy Laundry Co., 133 F. 2d 660

(C.A. 7), certiorari denied, 319 U. 8. 770, rehearing

denied, 320 U. S. 810.

Most, if not all, of taxpayer’s arguments against

the result reached in the Virginian Hotel case were

considered in that case. The arguments with re-

spect to the legislative intent (Pet. 10-12, 14-15)

and the principle that an error in a prior tax year

may be corrected if it had no effect on taxes (Pet.

15-17) were both urged in the petitioner’s brief in

the Virginian Hotel case (see No. 766, October

Term, 1942, Pet. Br. 11-16, 17-19). The arguments

as to what the Commissioner does or may do in

different factual situations (Pet. 12-14), and as

to the administrative practice respecting deprecia-

tion deductions (Pet. 11-12; Supp. Br. for Pet.

2-4), were fully covered in the petition for rehear-

ing (pp. 3-9, 17-19) filed in that case.

Taxpayer’s remaining argument for overruling

Virginian Hotel Co. v. Helvering consists of the

suggestion that in that case the Court may not have

considered the factual situation involved in the

present case and apparently failed to realize the

inequitable and unjustified result of its holding

when applied to such facts. (Pet. 7-10, 17.) The

argument has as its premise statements (Pet. 7-9)

——

8

which in effect constitute an assertion that tax-

payer here claimed excessive depreciation in each

of the years 1928 through 1935 even though, on the

basis of the facts reasonably known to exist at the

end of each of those years, it knew or should have

known what amount of depreciation was properly

“‘allowable’’, whereas in the Virginian Hotel case

the taxpayer claimed, in the prior years, the amount

of depreciation which was properly ‘“‘allowable’’

to it on the basis of facts then known to exist, the

amounts claimed as depreciation being excessive

only because of facts subsequently ascertained.

Such a factual distinction hardly furnishes a basis

for an appeal to equity and justice, and, actually,

the stipulations in the two cases do not even afford

an adequate basis for taxpayer's assumption that

the factual distinction exists. Cf. par. 9 of the

instant stipulation (R. 26) with the portion of the

stipulation in the Virginian Hotel case quoted by

taxpayer at Pet. 9, fn. 7. In any event, the Court

has already been urged to draw this line, and has

declined to review Court of Appeals’ decisions

that the Virginian Hotel rule applies to such a fae-

tual situation as taxpayer portrays for itself. In

Commissioner v. Kennedy Laundry Co., 133 F.

2d 660 (C.A. 7), certiorari denied, 319 U. 8.

770, rehearing denied, 320 U. S. 810, the taxpayer

had erroneously taken depreciation in the earlier

years which was excessive in the light of facts

known in those years and, like the taxpayers in the

Virginian Hotel case and in the present case,

—_—

claimed that the excessive depreciation was not

‘‘allowed”’ to the extent for which no tax benefit

had been received. The Kennedy case was before

the Court contemporaneously with the Virginian

Hotel case, the petition for a writ of certiorari

having been filed after certiorari was granted, but

before oral argument, in the Virginian Hotel case.

The petition in the Kennedy case urged that the

case was on all fours with the Virginian Hotel case

but also specifically called attention to the differ-

ence in facts now emphasized. The Government

did not oppose certiorari, but suggested that the

Court might wish to withhold action upon the

petition until disposition of the Virginian Hotel

case. The denial of certiorari in the Kennedy case

just one week after decision in the Virginian Hotel

case effected a disposition of the Kennedy case con-

sistent with disposition of the Virginian Hotel

case. Petitions for rehearing in both cases were

denied on the same day. The Court has also since

denied certiorari in another case involving a fac-

tual situation similar to that taxpayer assumes for

itself in the present case. Bank of America Nat.

T. & S. Ass’n v. United States, 69 F. Supp. 932

(N. D. Cal.), affirmed per curiam, 168 F. 2d 399

(C.A. 9), certiorari denied, 335 U. S. 827.

It is fair to say, therefore, that all the reasons

now advanced to show the error in the Virginian

ITotel rule have heretofore been presented to, and

considered by, the Court. Petitioner suggests

nothing that has not already been canvassed.

9

10

CONCLUSION

The decision below is correct under this Court’s

decision in the Virginian Hotel case and no ade-

quate reason is presented for a re-examination of

the question there decided. The petition for a writ

of certiorari should therefore be denied.

Respectfully submitted,

Pur B. PERLMAN,

Solicitor General.

THERON LAMAR CAUDLE,

Assistant Attorney General.

' Exuis N. Stack,

Lee A. JACKSON,

MeEtva M. GRANEY,

Special Assistants to the

Attorney General.

4

Marcu, 1950.

11

APPENDIX

Revenue Act of 1936, c. 690, 49 Stat. 1648:

Sec. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be al-

lowed as deductions:

* 7 * * *

(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 al-

lowed in respect of any property shall be as

provided in section 114.

* * * . *

Sec. 113. ApsusTEpD Basis ror DETERMINING

GAIN oR Loss.

(a) Basis (Unadjusted) of Property—The

basis of property shall be the cost of such prop-

erty ; except that—

* * * * om

(b) Adjusted Basis.—The adjusted basis

for determining the gain or loss from the sale

or other disposition of property, whenever ac-

quired, shall be the basis determined under

subsection (a), adjusted as hereinafter pro-

vided.

12

(1) General rule-—Proper adjustment in

respect of the property shall in all cases be

made—

* * * * *

(B) in respect of any period since Feb-

ruary 28, 1913, for exhaustion, wear and

tear, obsolescence, amortization, and de-

pletion, to the extent allowed (but not less

than the amount allowable) under this

Act or prior income tax laws.

* * * ~ *

Sec. 114. Basis ror DEPRECIATION AND DEPLE-

TION.

(a) Basis for Depreciation—The basis

upon which exhaustion, wear and tear, and

obsolescence are to be allowed in respect of

any property shall be the adjusted basis pro-

vided in section 113 (b) for the purpose of

determining the gain upon the sale or other

disposition of such property.

* * * * *

Treasury Regulations 94, promulgated under the

Revenue Act of 1936:

ArT. 23(1)-4. Capital sum recoverable

through depreciation allowances.—The capital

sum to be replaced by depreciation allowances

is the cost or other basis of the property in

respect of which the allowance ismade. * * *

ArT. 23(1)-5. Method of computing depre-

ciation allowance.—The capital sum to be re-

13

covered shall be charged off over the useful

life of the property, either in equal annual in-

stallments or in accordance with any other

recognized trade practice, such as an appor-

tionment of the capital sum over units of pro-

duction. Whatever plan or method of appor-

tionment is adopted must be reasonable and

must have due regard to operating conditions

during the taxable period. The reasonableness

of any claim for depreciation shall be deter-

mined upon the conditions known to exist at

the end of the period for which the return is

made. If the cost or other basis of the prop-

erty has been recovered through depreciation

or other allowances no further deduction for

depreciation shall be allowed. The deduction

for depreciation in respect of any depreciable

property for any taxable year shall be

limited to such ratable amount as may

reasonably be considered necessary to re-

cover during the remaining useful life of the

property the unrecovered cost or other basis.

The burden of proof will rest upon the tax-

payer to sustain the deduction claimed. * * *

A taxpayer is not permitted under the law

to take advantage in later years of his prior

failure to take any depreciation allowance or

of his action in taking an allowance plainly

inadequate under the known facts in prior

ss. -. 7 =

Art. 23(1)-9. Records of depreciable prop-

erty.—In order that the verification of depre-

ciation allowances claimed by the taxpayer

may be facilitated, depreciation shall be re-

14

corded on the taxpayer’s books, the amount

measuring a reasonable allowance for depre-

ciation either being deducted directly from the

book value of the assets or preferably being

credited to a depreciation reserve account,

which should be reflected in the annual bal-

ance sheet. * * * Also, the taxpayer’s books

shall show the basis of the depreciable prop-

erty and any adjustments thereto * * *,

If a taxpayer does not desire to have his regu-

lar books of account show all of the factors

entering into the computation of depreciation

allowances, such factors shall be recorded in

permanent auxiliary records which shall be

kept with and reconciled with the regular

books of account.

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 * * *

adjusted to the extent provided in section

113 (b).

* * * * *

The cost or other basis must also be de-

creased by the amount of the deductions for

exhaustion, wear and tear, obsolescence, amor-

tization, and depletion to the extent such de-

ductions have in respect to any period since

February 28, 1913, been allowed (but such de-

crease shall not be less than the amount of

deductions allowable) under the Revenue Act

of 1936 or prior income tax laws. The adjust-

ment required for any taxable year or period

15

is the amount allowed or the amount allow-

able for such year or period under the law

applicable 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 taking an allowance plainly inade-

quate under the known facts in prior years.

The determination of the amount properly

allowable shall, however, be made on the basis

of facts reasonably 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.

* * * * *

Art. 114-1. Basis for allowance of depre-

ciation and depletion.—The basis upon which

exhaustion, wear and tear, obsolescence, and

depletion will be allowed in respect of any

property is the same as is provided in section

113 (a), adjusted as provided in section 113

(b), for the purpose of determining the gain

from the sale or other disposition of such prop-

erty, except as provided in article 23(m)-3,

relating to depletion based on discovery value,

in article 23(m)-4, relating to percentage de-

pletion in the case of oil and gas wells, and in

~article 23(m)-5, relating to percentage deple-

tion in the case of coal mines, metal mines, and

sulphur mines or deposits.

wus. GOVERNMENT PRINTING OFFICE: 1950 s766s0 s2s