Commissioner of Internal Revenue v. Oxford Paper Co.

• Decision Date: 05 February 1952
• Docket Number: Docket No. 22105-22108.,No. 122-125,122-125
• Citation: 194 F.2d 190
• Parties: COMMISSIONER OF INTERNAL REVENUE v. OXFORD PAPER CO.
• Court: U.S. Court of Appeals — Second Circuit

194 F.2d 190 (1952)

COMMISSIONER OF INTERNAL REVENUE v. OXFORD PAPER CO.

Nos. 122-125, Docket Nos. 22105-22108.

United States Court of Appeals Second Circuit.

Argued December 12, 1951.

Decided February 5, 1952.

Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Lee A. Jackson, Hilbert P. Zarky, Special Assts. to the Atty. Gen., for petitioner.

Willke, Owen, Farr, Gallagher & Walton, New York City (Thomas N. Tarleau, Charles A. Davey, New York City, of counsel), for respondents.

Before CHASE, CLARK and FRANK, Circuit Judges.

CHASE, Circuit Judge.

By an order of this court, made pursuant to a stipulation of the parties, three other petitions to review decisions of the Tax Court were consolidated for hearing with this petition and, the legal principles applicable to all being the same, decision as to them is to be entered in accordance with the decision here.

The question presented is whether the taxpayer, in computing its taxes in each of the taxable years involved, was entitled to an allowance for depreciation on a building and machinery, used in its business, which it had acquired in the following way:

In 1936 the Rumford Falls Paper Company, hereinafter called Power, a wholly owned subsidiary of the petitioner, was the lessor in a lease in perpetuity to the Continental Paper & Bag Corporation, to be called Continental, of the right to draw a given number of cubic feet of water per second from a canal connected with the Androscoggin River at Rumford, Maine. The average annual rental paid Power by Continental was $69,200. In December, 1936, Continental, being in a weak financial position, desired to rid itself of its obligations under the lease and did so by assigning the lease to the taxpayer who assumed the rent obligations of Continental under the lease. Power accepted the taxpayer as the lessee in place of Continental. As part of this transaction, despite the fact that the rental reserved in the lease was herein shown to be a low one, Continental also paid the taxpayer $100,000 in cash and transferred to it stock in another corporation worth $6,000 and the land, buildings, machinery and equipment comprising Continental's so-called Island Division Plant at Rumford, Me., which then had a fair market value, exclusive of the land, of $350,000.¹ The taxpayer included the cash and the value of part of the property received² in its gross taxable income for 1936 but actually paid no taxes thereon because its allowable deductions for that year exceeded its income. While it did not deduct depreciation on the buildings and machinery, hereinafter called the Plant, in computing its taxes for the years involved, it filed claims for refunds which put in issue the right to such deductions.

The majority of the Tax Court held, and the taxpayer here argues that, since the fair market value of the Plant was includible in its gross income for the year in which it was acquired, the same value is the base upon which depreciation deductions are to be computed. Salvage v. Commissioner, 2 Cir., 76 F.2d 112, affirmed sub nom. Helvering v....