Lenkin v. District of Columbia

• Citation: 149 US App. DC 129,461 F.2d 1215
• Decision Date: 17 February 1972
• Docket Number: No. 21573,21755.,21573
• Parties: Jeannette LENKIN et al., Petitioners, v. DISTRICT OF COLUMBIA, Respondent. Morris POLLIN et al., Appellants, v. DISTRICT OF COLUMBIA, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

149 US App. DC 129, 461 F.2d 1215 (1972)

Jeannette LENKIN et al., Petitioners, v. DISTRICT OF COLUMBIA, Respondent.

Morris POLLIN et al., Appellants, v. DISTRICT OF COLUMBIA, Appellee.

Nos. 21573, 21755.

United States Court of Appeals, District of Columbia Circuit.

Argued February 19, 1969.

Decided February 17, 1972.

Mr. Werner Strupp, Washington, D. C., with whom Mr. Nathan Sinrod, Washington, D. C., was on the brief, for petitioners in No. 21,573.

Mr. Joel N. Simon, Washington, D. C., with whom Mr. Earl M. Colson, Washington, D. C., was on the brief, for appellants in No. 21,755.

Mr. Robert E. McCally, Asst. Corporation Counsel for the District of Columbia, with whom Messrs. Charles T. Duncan, Corporation Counsel at the time the brief was filed, Hubert B. Pair, Principal Asst. Corporation Counsel at the time the brief was filed, Henry E. Wixon, Asst. Corporation Counsel, and Robert C. Findlay, Asst. Corporation Counsel at the time the brief was filed, were on the brief, for respondent in No. 21,573 and appellee in No. 21,755.

Before PRETTYMAN^*, Senior Circuit Judge, and McGOWAN and ROBINSON, Circuit Judges.

SPOTTSWOOD W. ROBINSON, III, Circuit Judge:

These two cases, consolidated in this court, present similar fact patterns and similar issues for our consideration. In each, the assets of a dissolved corporation, consisting chiefly of an apartment building, were distributed, subject to outstanding corporate debts, to its stockholders who promptly discharged the indebtedness and continued, through the medium of a newly-formed partnership, the preexisting corporate business of operating the facility. In each, deductions for depreciation on the apartment property, taken on partnership returns filed under the District of Columbia Income and Franchise Tax Act of 1947,¹ were administratively disallowed, almost totally, as resting upon an improper depreciation basis. In one case, the property's alleged fair market value on liquidation and, in the other, what essentially was its book value at that point, were rejected as appropriate bases; in both, the depreciation base administratively substituted excluded the amount of corporate indebtedness existing at the time of liquidation. The courts whose reviews preceded ours have substantially upheld the administrative determinations.

So, once again, we are called upon to construe provisions of the Income and Franchise Tax Act, but perhaps for the very last time. During the pendency of this appeal,² the Act was amended to important respects³ and the problems now posed will not recur.⁴ During the same period, the course of judicial review of District Tax assessments was legislatively altered,⁵ and such reviews no longer come to this court.⁶ Since, however, these changes are inapplicable to the litigation at hand,⁷ we proceed to our task.

I

While factually these cases share much in common, there are differences which must be accounted for in any decision of the questions raised. Our review accordingly begins with a summary of the relevant developments in each.

The Lenkin Case

Lencshire House, Inc., a Maryland corporation, was organized on March 21, 1949, and for the next 15 years it ran an apartment building in the District of Columbia. On March 24, 1964, the corporation dissolved and Lencshire House Company, a partnership, was formed. The partners were the corporation's three stockholders at dissolution, and their interests in the partnership coincided with their shareholdings at that time. The corporate assets were distributed, subject to the corporate liabilities, to the stockholders, who took conveyance of the apartment property as tenants in common and thereafter continued its operation as partners.⁸

On liquidation, the corporation had assets of $756,892.31 and liabilities of $809,751.83, and so a net deficit of $51,859.52.⁹ The principal asset was the apartment property, which had book valuations of $42,529.04 for land and, for building and maintenance equipment, $1,070,640.38 less a depreciation reserve of $448,772.29, or a depreciable net of $621,868.09.¹⁰ The corporation's books also recorded paid-in surplus of $1,500.00—the shareholders' capital stock investment—which, in conjunction with an accrued deficit of $64,997.78 as reduced by undistributed profits of $11,638.26 to $53,359.52, produced the net deficit of $51,859.52 referred to.¹¹ The corporation's main liability was a balance of $795,948.76, principal and accrued interest, on a corporate promissory note secured by the lien of a first deed of trust on the apartment premises.¹² That indebtedness remained outstanding when the corporation dissolved and the conveyance of that property occurred.¹³ Thereafter, the partners obtained refinancing and paid the note in full.

On their franchise tax returns for the taxable periods ending at the close of calendar years 1964 and 1965,¹⁴ the partners listed deductions for depreciation on the apartment property. The deductions were predicated upon a fair market valuation of $966,273.37 at inception of the partnership, of which $884,742.45 was allocated to improvements. The District's assessing authorities disallowed the deductions, practically in their entirety,¹⁵ on the theory that property received as a dividend—ostensibly the apartment property—could not enter the depreciation base,¹⁶ and assessed tax deficiencies accordingly. On appeal therefrom,¹⁷ the District of Columbia Tax Court¹⁸ sustained the assessment with but a very minor adjustment.¹⁹ The matter is here on the taxpayers' petition for review.²⁰

The Pollin Case

Crestwood Apartment Corporation, a Delaware entity, owned and operated an apartment building in the District from its inception in 1950 until its dissolution on January 2, 1962. On the latter date, its assets were $1,679,222.26, including the apartment property valued on the corporation's books at $1,630,848.12 net of depreciation,²¹ and its liabilities were $1,576,763.37, of which $1,763.37 was the residue of the corporation's accounts payable and $1,575,000.00 was the unpaid principal balance of an unsecured corporate note.²² Net worth was then $102,458.89, of which $1,200.00 was paid-in surplus—the capital stock investment —and $101,258.89 was earned surplus.²³

After dissolution, the corporate assets were distributed ratably to the stockholders,²⁴ who immediately formed a partnership, Crestwood Apartment Company, and continued the operation of the apartment building. Appellants, the distributees, have maintained throughout that on distribution they assumed the corporation's liabilities proportionately to their stockholdings, and that the distribution and assumption were in complete cancellation and redemption of their stock.²⁵ In any event, it appears without controversy that the distributees, within a matter of days after distribution, paid the corporation's note and accounts payable in full.

Each of the partnership's franchise tax returns for the four calendar years 1962-65 claimed a deduction for depreciation on the apartment building. The deduction was predicated upon an assumed period of useful life and a formulated cost basis.²⁶ Cost was computed at $1,630,848.12, the aggregate of paid-in surplus, earned surplus and corporate liabilities, minus the aggregate of the distributed assets other than the apartment property.²⁷ This method of computation, it will be noted, set the cost figure for that property at precisely its value on the books of the corporation.²⁸

The District's assessing authorities disagreed, however, and fixed the basis for depreciation at $66,222.87. Their standard for measuring basis seemingly was cost to the partnership; and their computation involved aggregation of the $1,200.00 in paid-in surplus and the $101,258.89 in earned surplus and subtraction therefrom of the $36,236.02 in cash distributed on the corporate dissolution. The factor thus chiefly differentiating the partnership's and the District's calculations of basis was the corporate indebtedness of $1,576,763.37 outstanding at liquidation, which the former included, but the latter disallowed.

Tax deficiencies were assessed for each of the four years and were paid under protest, and suit was then filed in the District Court seeking recovery of the excess payments.²⁹ On the taxpayers' motion for partial summary judgment on the main issue —the inclusions of the corporate liabilities in the depreciation base—the court concluded in the District's favor.³⁰ The court's final judgment incorporating that ruling is the subject of the appeal brought here.³¹

The Judicial Rulings

In the Lenkin case, the Tax Court rendered an opinion elucidating the reasoning that led it to affirm the deficiency assessment therein in all material respects.³² It referred to its holding in Oppenheimer v. District of Columbia³³ "that the basis for depreciation of real property distributed by a corporation to its stockholders was not the unrealized value of the property, but was the capital stock investment of the stockholder . . . plus the earned surplus."³⁴ It read our opinion in the same case—Oppenheimer II³⁵—as an affirmance of its ruling therein "that only the capital stock investment and the earned surplus was the proper basis for depreciation. . . ."³⁶ It then expressed its overall conclusion:

The stipulation of the parties and an exhibit thereto . . . show that the capital stock investment (paid in surplus) of the petitioners in Lencshire House, Inc., was $1,500.00. There was no earned surplus. While it is true that the capital invested by the three stockholders had been dissipated, the amount was actually paid by them. The Court believes that such amount should be the basis for depreciation.³⁷

And, having so held, the court ruled out any inclusion in the depreciation base of the indebtedness the corporation owed when it liquidated, subject to which petitioners accepted distribution of the corporate assets in kind.³⁸

In Pollin, the District Court's ruling on appel...