# Opposition Brief — Piedmont Cotton Mills v. Commissioner (No. 574) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_2559%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1949 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_2559%3A3. Public record. Not legal advice.