Commissioner of Internal Rev. v. Superior Yarn Mills
| Decision Date | 21 December 1955 |
| Docket Number | No. 7058.,7058. |
| Parties | COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. SUPERIOR YARN MILLS, Inc., Respondent. |
| Court | U.S. Court of Appeals — Fourth Circuit |
C. Moxley Featherston, Atty., Dept. of Justice, Washington, D. C. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Hilbert P. Zarky, and Harry Baum, Attys., Dept. of Justice, Washington, D. C., on brief), for petitioner.
Before PARKER, Chief Judge, SOPER, Circuit Judge, and BRYAN, District Judge.
On its petition for a redetermination of deficiency assessments of income and excess profits taxes for 1944, 1945 and 1946, Superior Yarn Mills, Inc. has been allowed by the Tax Court to increase from $243,592 to $316,670 — an added $73,078 — the sum originally allocated by the taxpayer as the cost basis of the depreciable items of the plant it purchased in 1929 for $500,000. In framing an order to effectuate the Tax Court's conclusion, under its Rule 50, 26 U.S.C. § 7453, the Commissioner of Internal Revenue insisted that for use in 1944 the new cost base must be adjusted by deduction of the amount of depreciation theretofore allowed for the period 1929 to 1944, as well as of the sum allowable over the same years for depreciation on the cost-accession. Contra, the taxpayer contended that to find the adjusted cost basis for 1944, the only depreciation deductible was the amount which had actually been allowed for the 1929-1944 depreciation — that no deduction could be made in those years for depreciation of the increment.
The argument of the Commissioner was that only the new or correct cost base could be used for the descendent adjustment of the original cost base from 1929 to the tax years in question; that under sections 114(a) and 113(a) and 113(b) (1) (B) of the Internal Revenue Code, such adjusted basis must be the cost less the depreciation "to the extent allowed (but not less than the amount allowable)"; and that to use the old base or to deduct only the depreciation heretofore allowed, as the taxpayer urged, would violate the Revenue Act, for, indisputably, the new base was the correct base, and depreciation was allowable against the entire correct base, including the increase granted by the Tax Court.
The taxpayer argued (a) that the claim for depreciation in excess of that allowed before 1944 was never advanced at the trial and could not be pressed for the first time on a Rule 50 computation; (b) that to discount the whole of the new 1929 cost base for depreciation from 1929 to 1944 would be penally inequitable, for depreciation on the increment was neither allowed nor allowable in those years, inasmuch as the facts warranting the increase were then unknown; (c) that it is unfair also because the taxpayer did claim more depreciation during 1929 to 1944 than he was allowed and he is now barred by time from obtaining credit for the deductions demanded by the Commissioner; and (d) that the Commissioner is asking the Tax Court here to apply depreciation retroactively and this it has no power to do.
The Tax Court sided with the taxpayer and the Commissioner appeals. The Tax Court was of the opinion that the new 1929 cost basis was found only for 1944 and post years, that it could not be used for any purpose before 1944 because it was not known in that period, and that to arrive at the adjusted cost basis for 1944, depreciation must be computed on the former 1929 cost basis. We think the Tax Court was in error, the Commissioner right.
Superior Yarn Mills, Inc. is a North Carolina corporation whose capital stock is owned in toto by the Duke Power Company, a producer and distributor of electricity throughout the piedmont areas of North and South Carolina. With funds borrowed from Duke, Superior on April 2, 1929, purchased the Long Island Cotton Mills plant situated on the Catawba River in North Carolina, consisting of machinery, mill buildings, water wheels, dam mill villages, water and sewer lines, and cotton stock in process and yarn on hand, as well as 565 acres of land, on which the plant is located and through which the river flows. As the proprietor on both sides of the river at this point, Superior was vested with the common law rights of a riparian owner, embracing the privileges of damming the water and flooding the adjacent land and designated in this litigation as water power rights or water rights. The dam impounded the waters of the Catawba and the head thus created was sluiced onto several water wheels, one providing direct power to certain machinery and the others generating electric current for use in the plant generally.
Superior paid $500,000.00 for the plant. As did the Tax Court, we use that figure as the cost throughout the discussion of the principles governing this case, omitting reference to the subordinate additions and transfers made from time to time. The 1929 purchase was immediately entered on Superior's general ledger in a single, unbroken sum as "Long Island Plant $500,000.00." For 1929, 1930, 1931 and 1932 the taxpayer claimed depreciation of $12,012, $16,000, $16,000 and $12,000, respectively. In 1934, on the advice of one Bell, an engineer and architect employed to appraise the plant, the taxpayer assigned $243,592.28 of the total purchase price to the 1929 cost of the depreciable parts of the plant. The remaining $256,407.72 was allocated to "unclassified intangibles". At the direction of the taxpayer he allotted no amount of the purchase price to the 565 acres or for water rights.
Taxpayer's income returns for the years 1933 to 1944, inclusive, followed the Bell valuation and division of price in claiming depreciation. As so claimed the depreciation was allowed each year thereafter through 1944. In 1945 the taxpayer raised by $239,907.72 the amount of the purchase price to be apportioned, as of 1929, to the cost of the depreciables; it set $16,500 as the cost of the land, but still allotted no separate amount to water rights. In doing so it retroactively attributed a total cost of $483,500 to all assets, except land, acquired on April 2, 1929; this amount, with the acreage at $16,500, obviously accounts for the entire original cost of $500,000. This enhancement of the depreciables was not accomplished by bringing into that category any property not initially so classified; it was effected by ascribing a greater value, as of April 2, 1929, to the items already placed in that class by Bell.
The Bell "breakdown" and the 1945 write-up were spread among the several book accounts as follows:
Bell Appraisal 1945 Additions Reappraisal
Total
Machinery $ 71,510.15 $127,623.17 $199,133.32
Mill bldgs. 42,436.23 37,941.50 80,377.73
Dam 69,767.76 20,500.63 90,268.39
Mill villages 34,836.82 31,262.29 66,099.11
Water & sewer
lines 19,478.79 7,997.47 27,476.26
Water wheel &
shaft 2,962.53 17,182.66 20,145.19
Wells 2,600.00
"Unclassified Intangibles"
256,407.72 0.00
Less Wells1 2,600.00
Land 0.00 0.00 16,500.00
____________ ___________ ___________
$500,000.00 $239,907.72 $500,000.00
The 1945 elevation was advised and made by A. B. Hossack, a tax consultant. The difference between the Hossack and Bell reports appears principally in two considerations: Hossack concluded that Bell had underestimated the cost in buildings by approximately $200,000.00, and he observed surviving serviceable life in certain other items where Bell had seen none.
All the "hydraulic facilities" acquired in 1929 were abandoned in 1945 as worthless, save as salvage, and Superior contracted with Duke to supply its electric energy requirements. Hossack had been engaged to formulate adjusted cost bases for 1944, 1945 and 1946, respectively, of the plant acquisition of 1929, for use in determining the amount of the abandonment loss and in fixing the annual depreciation in these years. To show that depreciables were entitled to every dollar of the purchase price, except the land's value, the taxpayer strove to establish in the Tax Court that the water power rights were never of any value, or, alternatively, that they should be treated as a part of the hydro-electric generating facilities and abandoned with them. Income tax returns for the three years were predicated on the Hossack figures.
The Commissioner rejected the upward readjustments of the Hossack appraisal, held the taxpayer to the cost figures carried on its books since 1933, that is, to the Bell cost-separation, and assessed the deficiencies initially in contest. On review the Tax Court gave consideration to both appraisals and much other evidence. It found that the water power rights were of substantial value; but it also found "that the cost to petitioner for tax purposes of depreciable tangibles was somewhat in excess of the original figure". The Court concluded that the correct cost base in 1929 of the expendables was the amount of the Bell estimate increased by 30%. Applied, this judgment took 30% of the $243,592.28 assigned by Bell to depreciable properties, or $73,078.00, and added this product to the $243,592.28, giving a total of $316,670.00; it made no assignment of the balance of the $500,000 cost price.
On this appeal both the taxpayer and the Commissioner accept the new cost basis declared by the Tax Court. Obviously, then, unless the point has been waived by the Commissioner as the taxpayer avers, the...
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