Rosenthal v. CIR
| Decision Date | 26 May 1969 |
| Docket Number | No. 251-255,Dockets 31980-31984.,251-255 |
| Citation | 416 F.2d 491 |
| Parties | Fred and Irene ROSENTHAL et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Second Circuit |
Willard I. Zucker, New York City, for petitioners.
Robert I. Waxman, Dept. of Justice, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Washington, D. C., Lee Jackson and Gilbert E. Andrews, Jr., Washington, D. C., attorneys, on the brief), for respondent.
Marvin Lyons, New York City (Debevoise, Plimpton, Lyons & Gates, New York City, D. Bret Carlson and Bruce D. Haims, New York City, of counsel), for American Paper Institute, Continental Can Co., International Paper Co., The Mead Corp., and West Virginia Pulp and Paper Co., amici curiae.
Before MOORE, FRIENDLY and KAUFMAN, Circuit Judges.
This case comes before us on petition of the taxpayers for review of a decision of the Tax Court, 48 T.C. 515 upholding the Commissioner's determination of deficiencies in their income tax for the taxable year 1960.1 The issue it presents for our determination is the proper method of computing a casualty loss deduction claimed under § 165 of the Internal Revenue Code for the partial destruction of a timber tract.
All of the petitioners herein either owned an interest in or filed a joint return for the taxable year 1960 with a person then owning an interest in the Namarib Company-Timber Venture, a joint venture organized under the laws of the State of New York hereinafter venture. Specifically, in 1960, Irene Rosenthal, with whom Fred Rosenthal filed a joint return, owned a 6 2/3% interest in the venture, and Feyna Ginzberg owned a 3 1/3% interest in it. The Namarib Company Company, a New York partnership, owned another 67½% interest in the venture. Joachim Ginzberg owned a 60% interest in the Company; Efim Golodetz, with whom Fanny Golodetz, now deceased, filed a joint return, owned a 20% interest in the Company; and Leo Eliash, with whom Zara Eliash filed a joint return, owned the remaining 20% interest in the Company.
As of January 1, 1960, the venture owned a timber tract of 24,605.6 acres in Tennessee. Of this total, 19,734.7 acres had been acquired in 1951 for $300,000, and the remaining 4,870.9 acres had been purchased in 1956 for $60,000. As required by the Regulations under § 611, dealing with depletion deductions,2 the venture allocated these purchase prices between the land and the timber on it. Thus, of the initial $300,000 expenditure (to which certain capitalized expenditures were added), $93,825 was allocated to the land and $217,875 to the timber; and of the later $60,000 purchase price (again plus capital expenditures), $19,225.93 was allocated to the land and $44,800 to the timber. As of January 1, 1960, the venture's adjusted basis in all the land was $113,080.93, and its adjusted basis in the timber was $212.476.30.3 At that time, the total amount of saw timber on the tract was estimated for purposes of determining the venture's depletion deduction to be 58,445,000 board feet.4
On March 2, 1960, an ice storm struck the southern central section of the Tennessee River Basin, damaging the timber on the venture's tract. It is not disputed that, as the taxpayers have contended, the fair market value of the entire timber tract of 24,605 acres immediately preceding the storm exceeded the fair market value of the tract immediately thereafter by at least $130,000. The taxpayers computed this loss, for which they have received no compensation by insurance or otherwise, as follows:
destruction of 4,757.100 board feet of saw timber (i. e
timber from trees more than 8 inches in diameter at
breast height) having market value of ................. $104,787.29
destruction of 5,058.3 cords of pulpwood (timber from
trees between 4 and 8 inches in diameter at breast
height) having a market value of ...................... 11,643.09
destruction of naturally produced young growth (trees
measuring less than 4 inches in diameter at breast
height) having a market value of ...................... 12,173.00
destruction of plantations on the tract having a market
value of .............................................. 1,906.00
___________
$130,500.38
On its 1960 partnership information return, the venture claimed the entire $130,500.38 as a § 165 casualty loss, and each of the taxpayers took the appropriate percentage of this amount as a deduction on his individual income tax for the same year.5 The Commissioner allowed the $1,906 deduction for the loss of plantations6 but disallowed all except $17,315 of the remaining amount claimed as a loss for damage to the rest of the timber. Accordingly, in his notice to each of the taxpayers, he determined a deficiency resulting from the portion of the venture's disallowed deduction each had claimed in his individual income tax return. The Tax Court upheld the Commissioner's determination, and the taxpayers petition this court for review of that decision. The American Paper Institute, Continental Can Company, Inc., International Paper Company, The Mead Corporation, and West Virginia Pulp and Paper Company have, with the permission of the court, filed a brief as amici curiae supporting the position of the taxpayers. For the reasons below, we affirm the decision of the Tax Court.
As noted, there is no dispute as to the market value of the taxpayers' loss resulting from the ice storm. The only point of contention is how much of this loss may be claimed as a deduction under § 165.
Section 165(a) sets forth the general rule: "There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise." As the Regulations make clear, a casualty loss coming within the provisions of § 165 is deductible to the extent of (1) the difference between the fair market value of the property immediately before and after the casualty, or (2) the taxpayer's basis in that property, whichever amount is less. Treas.Reg. § 1.165-7 (b) (1). The issue on which the taxpayers and the Commissioner differ is the proper basis figure to be used in computing the amount of their loss deduction.
The taxpayers contend that the appropriate basis for this purpose is their basis in the entire tract. Under this theory, since the amount by which the market value of their property was reduced by the casualty ($130,500.38) is less than their basis in the property ($212,476.30), they are entitled to deduct all of the former amount. The Commissioner argues in response that the taxpayers cannot apply the whole of their basis in the tract to this partial loss, but that they must apportion that basis between the timber destroyed and that left unharmed in the manner in which they apportion basis for determining the allowable depletion allowance when timber is sold.
Briefly, the Regulations provide that deductions for depletion of timber shall be computed in the following manner. Each year the taxpayer is to estimate the total number of units of merchantable timber (e. g., board feet) on his timber tract. This number is then divided into his adjusted basis in all the timber on that tract, and the quotient obtained is called the "depletion unit." The depletion unit multiplied by the number of units of timber on the tract cut (or sold) during that year equals the amount of the depletion deduction to which the taxpayer is entitled for that taxable year.7 Treas.Reg. § 1.611-3.
Following this formula, the Commissioner divided the taxpayers' adjusted basis in the tract as of January 1, 1960 ($212,476.30) by the total number of merchantable units of timber on the tract as of that date (58,445,000 board feet of saw timber) to arrive at a depletion unit for the timber of $3.64 per 1,000 board feet. Multiplying this figure by the number of units of merchantable timber destroyed by the casualty (4,757,100 board feet of saw timber), he arrived at $17,315.48,8 which he claims to be the basis allocable to the timber lost.9 This amount, substantially less than the loss of market value due to the casualty, then sets the limit on the amount of the § 165 deduction to which the taxpayers are entitled.
Both the taxpayers and the Commissioner seek to draw support for their respective positions from the language of the relevant Code provisions. The relevant words of the Code are to be found in typical "Cross-reference to" cross-reference and "exception upon exception" fashion. Dilliard, The Spirit of Liberty, 213 (quotation from Learned Hand). The starting point for both is § 165(b), which provides: "the basis for determining the amount of the deduction for any § 165 loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property." Section 1011 provides: "The adjusted basis for determining the gain or loss from the sale or other disposition of property * * * shall be the basis (determined under section 1012 * * * or other sections not applicable here), adjusted as provided in section 1016." Section 1012 in turn instructs: "The basis of property shall be the cost of such property * * *."
The taxpayers argue quite simply that the "property" referred to in each of these sections is, in their case, the entire tract of timber. This is the unit of property they purchased and its cost therefore provides the relevant basis. Further, they urge, nothing in §§ 1011 or 1012, to which § 165 refers for the definition of basis "requires or suggests that their cost had to be allocated to the trees or board feet of the tract purchased."
This overly simplistic argument, we believe, is of little help. It is true that §§ 1011 and 1012 in defining the basis of the property do not suggest any requirement...
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