Detroit & Windsor Ferry Co. v. Woodworth

• Decision Date: 13 November 1940
• Docket Number: No. 8342.,8342.
• Citation: 115 F.2d 795
• Parties: DETROIT & WINDSOR FERRY CO. v. WOODWORTH, Former Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Sixth Circuit

115 F.2d 795 (1940)

DETROIT & WINDSOR FERRY CO. v. WOODWORTH, Former Collector of Internal Revenue.

No. 8342.

Circuit Court of Appeals, Sixth Circuit.

November 13, 1940.

Hal H. Smith, of Detroit, Mich. (Hal H. Smith, Joseph A. Vance, Jr., and Beaumont, Smith & Harris, all of Detroit, Mich., on the brief), for appellant.

Leon F. Cooper, Sp. Asst. to Atty. Gen. (Sewall Key and Leon F. Cooper, Sp. Assts. to Atty. Gen., John C. Lehr and J. Thomas Smith, both of Detroit, Mich., on the brief), for appellee.

Before SIMONS, ALLEN, and HAMILTON, Circuit Judges.

ALLEN, Circuit Judge.

Appeal from a judgment dismissing petition to recover income taxes paid under protest for the calendar years 1929 and 1930.

For many years prior to the years in question, and up to the time of hearing, appellant has owned and operated a ferry business on the Detroit River between Detroit, Michigan, and Windsor, Ontario. While the record does not definitely reveal the full extent of appellant's business operations, it is evident that in addition to its ferry it operates excursion boats. Prior to November, 1929, appellant handled a major part of the traffic between Detroit and Windsor. At that time an international bridge, constructed across the Detroit River about two miles from the line of appellant's ferry, was opened to traffic. In November, 1930, a tunnel for foot and vehicular traffic was opened under the Detroit River, a few feet from appellant's Detroit docks, running to the business center of Windsor.

The net earnings of appellant's ferry department, before deduction for obsolescence, in the taxable years 1928, 1929, and 1930, were $562,653.83, $675,124.14, and $181,062.44, respectively. In each year from 1931 to 1937, inclusive, appellant operated the ferry business at a substantial loss.

Appellant deducted as items of "obsolescence" on its four ferry boats and ferry equipment $365,059.61 for 1928, and $358,755.16 and $358,755.18 for the years 1929 and 1930, respectively. The Commissioner allowed a deduction for obsolescence for 1928 in the sum of $227,348.67. In redetermining appellant's tax liability for 1929 and 1930, however, the Commissioner allowed as deduction the usual depreciation on appellant's equipment, and with respect to 1929, also allowed as a deduction $49,437.03 on account of the loss of the useful value of the ferryboat Pleasure, which was retired from ferry service in 1929. The deductions claimed for obsolescence in the years 1929 and 1930 were disallowed. Appellant paid the taxes assessed, and later filed claims for refund based upon the deductions claimed for obsolescence. These claims were refused, and this proceeding was instituted.

The sole question is whether appellant is entitled to a deduction from its income tax for the taxable years on the ground that its ferry facilities became obsolescent by reason of the construction and operation of a bridge and tunnel, both competitive, which caused it to operate at a loss, though still conducting its ferry business and using a major part of its equipment therein.

The statute and regulation involved are § 23 of the Revenue Act of 1928, 45 Stat. 791, 799, 26 U.S.C.A. Int.Rev.Acts, page 356, and Treasury Regulation 64, Art. 206.¹

The District Court found that the construction of the competitive bridge and tunnel did not make obsolete appellant's ferry equipment, which has been, and still is, used for the same purposes for which it was acquired. The court also held that "Competition, resulting in a decrease or entire elimination of profits, is not a proper ground for the allowance of a deduction for obsolescence of assets which are continued in use in the business as an income-producing factor and, for all that is known, may be continued in use as such until the end of their normal useful life."

Appellant contends that there need be no cessation at a definite future time of the physical use of the property to justify the allowance for obsolescence, urging that such deductions are allowable notwithstanding its continued use of the property for its original purpose, without any evidence of intention to abandon it, so long as the revenue-producing power of the property is impaired.

We think the judgment of the District Court must be affirmed. Obsolescence is the state or process of becoming obsolete, and obsolete means no longer in use; disused as being antiquated; of a type or fashion no longer current, or worn out. Webster's New International Dictionary, 2d Ed. The clause in the statute, "including a reasonable allowance for obsolescence," provides for an allowance resulting from the disuse of the property in the business. Renziehausen v. Commissioner, 3 Cir., 31 F.2d 675, affirmed Renziehausen v. Lucas, 280 U.S. 387, 50 S.Ct. 156, 74 L. Ed. 501. Cf. State Line & Sullivan Rd. Co. v. Phillips, 3 Cir., 98 F.2d 651, 120 A.L.R. 441. To permit the allowance, therefore, while the property is being continuously used for its original purpose, and while no intention to discontinue its use appears, is to make an allowance for a condition the opposite of obsolescence.

Under the regulations, before an allowance for obsolescence can be made, the taxpayer must make a clear showing that in the taxable years the property was "affected by economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life." These regulations, under the familiar rule, in so far as they are not inconsistent with statute, have the force and effect of law. Maryland Casualty Co. v. United States, 251 U.S. 342, 349, 40 S.Ct. 155, 64 L.Ed. 297. In order that the taxpayer may claim a deduction for obsolescence, it must appear with reasonable certainty that obsolescence will take place. Lassen Lumber & Box Co. v. Blair, 9 Cir., 27 F.2d 17. The burden of proof is on the taxpayer to establish by clear and convincing evidence that it is entitled to the claimed deductions. Burnet v. Houston, 283 U.S. 223, 227, 228, 51 S.Ct. 413, 75 L. Ed. 991; North American Coal Corp. v. Commissioner, 6 Cir., 97 F.2d 325. The taxpayer must show with reasonable certainty (1) that the property is becoming obsolete, and (2) when it will be obsolete; that is, he must show what is the normal life of the equipment, and that the property will be obsolete before the end of that normal life. Here, instead of disclosing obsolescence, the record establishes that seven years after it was claimed by appellant that the property would be obsolete, it was still in constant use with the exception of the ferryboat Pleasure, for which a deduction was allowed on account of the loss of useful value. Also there is no prospect whatever that the use of the boats and equipment in ferry...