Basf Wyandotte Corp. v. Comm'r of Internal Revenue, Docket No. 6838-72.
| Decision Date | 28 August 1974 |
| Docket Number | Docket No. 6838-72. |
| Parties | BASF WYANDOTTE CORP., FORMERLY WYANDOTTE CHEMICALS CORP., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Steven Ugelac, for the petitioner.
Chauncey William Tuttle, for the respondent.
Petitioner sold two powerplants in December 1965 for $4 million. The bill of sale allocated $850,000 of the sales price to buildings and the remaining $3,150,000 to machinery and equipment. Prior to Jan. 1, 1962, petitioner had depreciated the machinery and equipment which were component parts of the powerplants in approximately 1,500 separate item accounts, using the straight-line method of depreciation, some of which were fully depreciated at Dec. 31, 1961. In 1962 petitioner placed all of the straight-line properties in a multiple-asset account with a guideline life of 11 years and was allowed depreciation deductions annually computed on that basis. The multiple-asset account was fully depreciated and had a zero adjusted basis when the powerplants were sold. The aggregate sales price of the sec. 1245 properties sold was less than the depreciation allowed on the properties subsequent to Dec. 31, 1961. Held:
1. If the various sec. 1245 properties placed in the multiple-asset account were sold individually, although in a single transaction, the sec. 1245 gain (recapturable depreciation) should be computed on each individual property sold, where possible, and the sec. 1245 gain is limited to the undepreciated basis of the individual property when it was placed in the multiple-asset account. While the individual properties may lose their identities for purposes of computing depreciation, they do not lose their identities for computing sec. 1245 gain because placed in a multiple-asset account.
2. If the individual properties are sold in one transaction and there is no acceptable method of allocating the sales price among individual properties sold, the Commissioner may compute the sec. 1245 gain on the transaction as though there was a sale of only one property; the sec. 1245 gain being limited to the lower of the aggregate ‘amount realized’ on the sale or the aggregate adjusted bases of the properties at the time they were placed in the multiple-asset account.
3. Petitioner failed to carry its burden of proving either that the transaction was intended to be a sale of the individual component parts of the powerplants or an acceptable method of allocating the lump-sum sales price to the individual component parts. Respondent's method of computing sec. 1245 gain, as modified by concessions, approved.
Respondent determined deficiencies in petitioner's Federal income taxes in the amounts of $34,644.25 and $208,037.17 for the calendar years 1964 and 1965, respectively. Due to concessions by the parties, the only issue remaining for decision by the Court concerns determination of depreciation required to be recaptured by petitioner under section 1245, I.R.C. 1954, upon sale in 1965 of two powerplants consisting of 1,500 items of tangible personal property which had been contained in a multiple-asset account for depreciation purposes. This in turn depends upon (1) whether petitioner was entitled to compute depreciation recapture (section 1245 gain) separately for each of the 1,500 items, or whether the items were to be treated as one aggregate property for recapture purposes; (2) whether, if the former, recapture on items owned by petitioner as of December 31, 1961, is limited to their adjusted bases on that date; and (3) whether petitioner has carried its burden of proving an acceptable allocation of the lump-sum sale price to the individual assets involved.1
Petitioner was a Michigan corporation with its principal offices in Wyandotte, Mich., at the time the petition herein was filed. Petitioner is the successor by merger to Wyandotte Chemicals Corp. (Wyandotte), which was also a Michigan corporation whose principal offices were in Wyandotte, Mich. Wyandotte's returns for the years 1964 and 1965 were filed with the district director of internal revenue at Detroit, Mich. Wyandotte kept its books and reports its income on the accrual method of accounting.
During 1965, and for many years prior thereto, Wyandotte was in the business of manufacturing and selling bulk chemicals for industrial use. One of Wyandotte's plants was in Wyandotte, Mich., and at that location Wyandotte used two steam and electricity-generating powerplants. These plants consisted of real property and 1,500 items of tangible personal property, including various turbo generators, boilers, motors, pumps, switches, conveyors, turbines, powerlines, etc. Except for peak period requirements, these powerplants generally satisfied Wyandotte's needs for steam and electricity at the Wyandotte, Mich., plant.
The present case concerns a portion of the tangible personal property associated with the powerplants which was depreciated on a straight-line basis and which will be referred to as the ‘straight-line properties.’ The remaining properties associated with the powerplants were depreciated by other than a straight-line method and are not involved here. Prior to January 1, 1962, the total original cost of the straight-line properties was $9,955,116. Total depreciation allowed or allowable prior to January 1, 1962, for Federal income tax purposes under section 167 with respect to the straight-line properties was $7,109,791. This depreciation was an aggregate of amounts determined separately for each item of straight-line property. The total undepreciated cost of the straight-line properties on January 1, 1962, was $2,845,325; as of that date, some of the straight-line properties had been fully depreciated, while others had some portion of their original cost remaining unrecovered through depreciation.
Effective January 1, 1962, Wyandotte transferred all of the straight-line powerplant properties and other properties consisting of machinery and equipment to one open-end, multiple-asset depreciation account in accordance with the provisions of section 1.167(a)-7(a), Income Tax Regs., permitting depreciable property to be treated ‘by combining two or more assets in a single account.’ Depreciation charges subsequent to January 1, 1962, upon the multiple-asset account were computed on a straight-line basis using an 11-year average useful life (in conformance with Rev. Proc. 62-21, 1962-2 C.B. 422, for chemical and allied products). The original cost of all property transferred to the straight-line, multiple-asset account on January 1, 1962, totaled $62,925,963, of which $9,955,116 constituted the original cost of the straight-line powerplant properties. Subsequent to January 1, 1962, $32,316 in original cost of powerplant tangible property which is part of the straight-line property at issue in this case, was put into the multiple-asset account.
The reserve for depreciation associated with all of the property transferred to the straight-line, multiple-asset account on January 1, 1962, was $45,865,357, of which $7,109,791 was the depreciation reserve attributable to the straight-line powerplant properties.
During the taxable years 1962 to 1964, all of the assets in the straight-line, multiple-asset account in the aggregate had allowable depreciation, using an 11-year useful life, as follows:
+----------------+
¦1962¦$5,707,488 ¦
+----+-----------¦
¦1963¦5,607,742 ¦
+----+-----------¦
¦1964¦5,499,759 ¦
+----------------+
At December 31, 1964, the original cost basis of all the assets remaining in the straight-line, multiple-asset account (after additions and retirements not pertinent to this case) was an aggregate amount of $59,090,923, and the depreciation reserve applicable to the account was $57,553,963. During the tax year 1965, Wyandotte incurred additional depreciation charges with respect to the assets in the straight-line, multiple-asset account, and said account then became fully depreciated.
On December 18, 1965, Wyandotte sold the straight-line powerplant properties to Detroit Edison Co. for the aggregate value of $2,676,523. At that time, the total original cost of all the tangible personal property associated with the powerplants was $11,474,511 of which $9,987,432 represented the total original cost of the straight-line properties ($9,955,116 attributable to straight-line properties acquired prior to January 1, 1962, and $32,316 to such properties acquired thereafter). At the time of the sale, the straight-line powerplant properties were fully operative and being used for Wyandotte's business. After the sale the two electric powerplants were owned and operated by Detroit Edison Co. in the same location as when owned by Wyandotte. Wyandotte purchased steam and electric power from these plants for use in its business after the sale to Detroit Edison Co. The bill of sale transferred ‘all and singular the buildings and steam and electrical generating facilities at its North Works and South Works both situated in Wyandotte, Michigan, together with related electrical facilities, tie cables, reactors, switchgear and transformers plus certain coal handling facilities on the premises being leased by Wyandotte to Edison and the electric cables between the two plants.’ The purchase price was $850,000 for the buildings and $3,150,000 for machinery and equipment, The bill of sale did not otherwise allocate the purchase price among the individual items of property transferred.
Shortly after the sale, at petitioner's behest, an organization known as the American Appraisal Co. made an appraised allocation of the purchase price among the items sold. A letter from the appraisal company attached to the appraisal report set forth the basis on which the allocation was made:
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