Cohn v. United States, 13360-13362.

• Decision Date: 26 September 1958
• Docket Number: No. 13360-13362.,13360-13362.
• Citation: 259 F.2d 371
• Parties: Bertrand W. COHN, Appellant, v. UNITED STATES of America, Appellee. William R. KENT, Appellant, v. UNITED STATES of America, Appellee. Louise C. KENT, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

259 F.2d 371 (1958)

Bertrand W. COHN, Appellant, v. UNITED STATES of America, Appellee.

William R. KENT, Appellant, v. UNITED STATES of America, Appellee.

Louise C. KENT, Appellant, v. UNITED STATES of America, Appellee.

Nos. 13360-13362.

United States Court of Appeals Sixth Circuit.

September 26, 1958.

COPYRIGHT MATERIAL OMITTED

Myron C. Baum, Washington, D. C. (Charles K. Rice, Lee A. Jackson, Harry Baum and Sheldon I. Fink, Washington, D. C., Millsaps Fitzhugh and Edward N. Vaden, Memphis, Tenn., on the brief), for appellee.

Lewis R. Donelson, III, Memphis, Tenn. (Elwood L. Edwards, Memphis, Tenn., of counsel; Donelson & Adams, Memphis, Tenn., on the brief), for appellants.

Before SIMONS, Chief Judge, MILLER, Circuit Judge, and CECIL, District Judge.

SHACKELFORD MILLER, Jr., Circuit Judge.

The appellants, Bertrand W. Cohn, William R. Kent and Louise C. Kent, filed separate actions in the District Court against the United States of America for recovery of certain additional income taxes and interest thereon paid by them for the years 1942 through 1945, inclusive. The claims were based upon the alleged erroneous reduction by the Commissioner of Internal Revenue of certain depreciation deductions taken by the taxpayers in making their income tax returns for the years in question. Other claims on the part of the taxpayers were also made in the District Court actions, but the rulings with respect thereto are not involved in these appeals. The three actions were consolidated for hearing in the District Court. The District Judge entered separate judgments for the respective appellants which, however, by reason of his adverse ruling on the depreciation deductions, were substantially less than the appellants claimed, resulting in these three appeals. The basic facts and legal issues are the same in each case and the three appeals will, accordingly, be disposed of in this one opinion.

The material facts, about which there is no real dispute, were found by the District Judge as follows. The appellants were partners in three flying schools which were engaged in training pilots under the Army Air Corps Contract Flying School Program. These schools were (1) Pine Bluff School of Aviation at Pine Bluff, Arkansas, hereinafter referred to as "Pine Bluff School", (2) Helena Aero Tech at Helena, Arkansas, hereinafter referred to as "Helena Aero School", and (3) Clarksdale School of Aviation at Clarksdale, Mississippi, hereinafter referred to as "Clarksdale School". The contracts under which the flying schools were operated were simply memorandum agreements whereby the Army Air Corps agreed to furnish the air planes and to pay a price of $17.50 per revenue hour flying time and the contractor agreed to furnish all facilities and personnel, under the supervision of an air corps detachment, necessary for the training of Cadets. The term of the contracts was for one year or from the beginning of the school until the following June 30, whichever term was shorter, and was cancellable without cause by the Army Air Corps on 30 days notice. No assurances of renewal or extension were made.

The appellants, who were responding to an emergency request from the Air Corps, were required to provide for an initial investment of $250,000 before commencing operation of the Pine Bluff School. This operation began on March 22, 1941. In the spring of 1941 appellants William R. Kent and Bertrand W. Cohn were contacted by R. A. Van Devere in regard to commencing a similar school at Helena, Arkansas. After some discussion, they became minority limited partners in the Helena Aero School, with Van Devere as general partner. This school began operation on October 16, 1941. In the spring of 1942 the appellants and Van Devere were asked to undertake equipping and operating a third school, which was constructed by them for the Defense Plant Corporation. This school, known as the Clarksdale School, commenced training pilots on July 1, 1942.

It was necessary for the operators of the schools to furnish all the needed movable assets for the operation of the schools on an expanded basis. Investments by the different schools at the peak of their operations in such equipment were $171,465.91 at Pine Bluff, $96,905.43 at Helena, and $92,343.77 at Clarksdale. The movable assets which made up this investment were divided into certain general classes: (a) Barracks equipment, including iron beds, linens, wooden chairs and blankets; (b) Mess hall equipment consisting of china, chairs, wooden tables and various cooking utensils; (c) Shop equipment consisting of tools and machinery; (d) A large sum invested in parachutes; (e) Fire fighting equipment of a special airport variety; (f) Ground school equipment, including maps, cutaway airplane engines and navigational instruments; (g) Office equipment, including desks, chairs, typewriters, and adding and bookkeeping machines; (h) Rolling equipment, consisting of trucks, buses, and automobiles.

In the latter part of 1942 the partners held a meeting in an effort to determine a proper method of depreciation of the movable assets of the schools during the existence of the Civilian Contract Flying Program. This meeting was also attended by the managers, bookkeepers and auditors of the three schools. Based upon a thorough investigation by the partners, including discussions with Air Corps personnel, it was finally determined that a target date of December 31, 1944, represented the reasonable maximum duration of the Civilian Contract School Program, and it was decided that the movable equipment other than the automobiles, regardless of the date of purchase, would be depreciated to this date. This method and rate of depreciation was based upon the useful economic life of the equipment in the business with the target date of December 31, 1944. Deductions for depreciation on this basis were taken by the appellants for income tax purposes for the tax years involved herein.

All of the contracts between the Air Corps and the partnerships were subject to renegotiation. The Army Renegotiation Board, consisting of representatives of the Treasury Department and the Air Corps, approved this method of computing depreciation as being a reasonable and proper operating expense under the contract and allowed the depreciation expense for renegotiation purposes.

On August 4, 1944, the Helena Aero School was terminated. On October 16, 1944, the Pine Bluff School and the Clarksdale School were terminated. Various methods of disposing of the movable equipment were considered. The partners learned that other schools had successfully auctioned this type of property. A professional auctioneer was engaged, who reconditioned the equipment, advertised the sales widely, and sold the equipment at good prices. One auction was held at Helena in August, 1944; another at Pine Bluff (including the Clarksdale School property) in November, 1944. Because of wartime shortages and price increases, the movable equipment at Pine Bluff School was sold at a net profit of $63,077.77. The equipment of the Helena Aero School was sold at a net profit of $40,207.57, and the movable equipment of the Clarksdale School was sold at a net profit of $38.631.58. Appellants reported this profit, which represented the excess of the sale price over the cost basis which remained on their books in the year of the sale, as income subject to the provisions of Sec. 117(j) of the Internal Revenue Code, 26 U.S.C.A. § 117(j), taxable as long-term capital gains.

The flight-training schools did not consider and take into account the salvage value of this movable equipment in determining the depreciation which they were claiming. Operators of similar schools determined their depreciation allowances on the basis of a salvage value equal to 10 per cent of the original cost of such equipment.

Subsequent to the filing of the Federal Income Tax Returns for the years 1942, 1943, 1944 and 1945, the Commissioner took the position that the allowable depreciation should be computed upon a basis of a useful life of ten years for ground school, shop and canteen equipment, and five years for certain other types of equipment, including automobiles, trucks, barracks furniture and fixtures. He, accordingly, disallowed depreciation deductions by the three schools as follows: $16,377.06 by the Pine Bluff School for 1942, $16,188.13 by the Helena Aero School for 1942, $39,028.96 by the Pine Bluff School for 1943, $23,748.48 by the Helena Aero School for 1943, $15,270.25 by the Clarksdale School for 1943, $21,888.75 by the Pine Bluff School for 1944, $7,900.12 by the Helena Aero School for 1944, $29,611.80 by the Clarksdale School for 1944. These disallowances resulted in assessments for additional income taxes against the partners in the respective schools, which were paid. Claims for refunds were filed and denied. The present actions were then filed in the District Court.

The District Judge made the following conclusions of law: (1) The appellants in depreciating the movable equipment of the flying schools over the period of the estimated useful economic life used a reasonable and proper method under the circumstances to reflect the value of the assets; (2) The appellants failed to establish that the movable equipment of the flight-training schools did not have some salvage value which could have been estimated at the end of 1941 or during 1942, 1943, and 1944; (3) The intensification of the war effort and the growing scarcity of goods made it reasonable for the schools to expect that the movable equipment would have some salvage value at the termination of their operation; and (4) The appellants, in determining a reasonable allowance for depreciation, should have taken into account an estimated net salvage value either through a reduction in the basis or a reduction in the rate of depreciation, and, under the circumstances, a salvage value equal to 10 per cent of the original cost of all the...