Burnet v. Niagara Falls Brewing Co

• Decision Date: 24 February 1931
• Docket Number: No. 61,61
• Citation: 282 U.S. 648,75 L.Ed. 594,51 S.Ct. 262
• Parties: BURNET, Commissioner of Internal Revenue, v. NIAGARA FALLS BREWING CO. et al
• Court: U.S. Supreme Court

282 U.S. 648

51 S.Ct. 262

75 L.Ed. 594

BURNET, Commissioner of Internal Revenue,

v NIAGARA FALLS BREWING CO. et al.

No. 61.

Argued Jan. 21, 1931.

Decided Feb. 24, 1931.

The Attorney General and Mr. Claude R. Branch, of Providence, R. I., for petitioner.

[Argument of Counsel from page 649 intentionally omitted] Mr. Basil Robillard, of Niagara Falls, N. Y., for respondents.

Mr. Justice BUTLER delivered the opinion of the Court.

In making its tax returns for 1918 and 1919 the brewing company, because of approaching prohibition, made deductions for obsolescence of its buildings, machinery, and equipment. The Commissioner disallowed the deductions on the ground that, after prohibition, the taxpayer continued to use his property to make and sell near beer and other nonintoxicating beverages. The Board of Tax Appeals sustained the Commissioner. 13 B. T. A. 1040. The Circuit Court of Appeals reversed. 38 F.(2d) 217.

The pertinent words of the statute, Revenue Act of 1918, § 234(a)(7), 40 Stat. 1078, are: 'A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.'

The government contends that this statute did not authorize a deduction for obsolescence of tangible property resulting from the imminence of prohibition. But in the Gambrinus Case, 282 U. S. 638, 51 S. Ct. 260, 75 L. Ed. 588, just decided we hold the contrary.

The government also maintains that on the facts of this case no allowance for obsolescence should be made.

We take judicial notice of the following: Prior to the submission of the Eighteenth Amendment in 1917, more than 30 states had enacted prohibitory laws. A war measure, effective August 10, 1917, required the reduction of the alcoholic content of beer. The proposed amendment was ratified by 12 states in the first six months of 1918 and by 3 more before the expiration of that year; 21 states ratified in the early part of January, 1919, and in that month the amendment became a part of the Constitution, and took effect one year later, January 16, 1920.

There is no controversy as to facts found by the Board of Tax Appeals:

The brewing company from 1902 until October, 1919, was engaged in making and selling beer. Its sales from 1912 to 1917, inclusive, ranged from 30,681 to 37,176 barrels per year. Due to war-time prohibition, its sales fell off in 1918 to 30,204 barrels, about 19 per cent. less than the sales of the preceding year, and in 1919 to 17,823 barrels, about 40 per cent. less than in 1918.

At the end of 1917 the depreciated cost, and actual value, of te c ompany's land, buildings and equipment, was $477,054.60. After deducting the allowances in 1918 and in 1919 for exhaustion, wear, and tear of its plant and for obsolescence of property used for making beer, the book value of such property was reduced to $279,117.08. But, due to prohibition laws, its actual value at the end of 1919 was only $90,475. That is $188,642.08 less than the book value after such deductions.

Its buildings, machinery, and equipment were designed and constructed for the brewing and selling of beer, and were not available or readily adaptable to other uses. The buildings were damp, the floor levels uneven; there were few openings for light and no elevators, and the property was located in a manufacturing zone. Much of the machinery could not be removed without dismantling or tearing out the walls of the building, and some of it could not be removed except by tearing out a side of the building. The company's officers considered selling or converting its buildings and machinery into a plant for a dairy, cold storage, ice cream manufacturing, dry storage, ice manufacture, fruit storage, semicold storage, machine shop, or chemical plant. They could find no use for the property except for the purpose of making near beer and other soft drinks.

In 1917 the company began to manufacture near bear, and for that purpose used the machinery and processes employed in the making of bear. An additional process for dealcoholizing was necessary. It sold 16 barrels in that year, 327 in 1918, 8 in 1919, 7,921 in 1920 and 2,852 in 1921.

In 1918 it began the manufacture of other soft drinks by use of machinery not here involved. In October, 1919, because of prohibition, the company discontinued the making of beer. It abandoned the lower floor of one of its buildings which had been devoted to storing and aging beer. That process is not involved in making near beer. Thereafter a part of another building with the equipment therein which had been used three or four times a week in making and bottling beer was used only once in about two weeks in making near beer. Apparently the rest of the property was used in connection with the making of such near beer and other soft drinks as were made by the company prior to its going out of business.

The company could not operate at a profit after prohibition, and the corporation was voluntarily dissolved in December of 1921. Its affairs were administered by its former directors acting as trustees. In January, 1922, they leased all the property, including equipment that had been added for the making of soft drinks, for a term of three months, with privilege of renewal by the lessee. The lease was still in effect at the time of the hearing before the Board in 1927. The rent was at the rate of $5,000 per year, plus taxes, insurance, and repairs.

The difference between the depreciated cost (found to be actual value) December 31, 1917, and the value of the property in 1918 and 1919 was due to the imminence and incidence of war-time and permanent prohibition. There was no material change in the value of land and buildings in the vicinity used for purposes other than brewing. In December, 1921, the company sold certain of its land, free from buildings, for $20,000. Up to...