Dodge Brothers v. United States

• Decision Date: 10 March 1941
• Docket Number: No. 4722-4725.,4722-4725.
• Citation: 118 F.2d 95
• Parties: DODGE BROTHERS, Inc., v. UNITED STATES (four cases).
• Court: U.S. Court of Appeals — Fourth Circuit

118 F.2d 95 (1941)

DODGE BROTHERS, Inc., v. UNITED STATES (four cases).

Nos. 4722-4725.

Circuit Court of Appeals, Fourth Circuit.

March 10, 1941.

COPYRIGHT MATERIAL OMITTED

John W. Drye, Jr., of New York City (Larkin, Rathbone & Perry and T. R. Iserman, all of New York City, and Hershey, Donaldson, Williams & Stanley, Albert E. Donaldson, and Raymond S. Williams, all of Baltimore, Md., on the brief), for appellant.

Milford S. Zimmerman and Arthur L. Jacobs, Sp. Assts. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and J. Louis Monarch, Sp. Assts. to Atty. Gen., and Bernard J. Flynn, U. S. Atty., and G. Randolph Aiken, Asst. U. S. Atty., both of Baltimore, Md., on the brief), for appellee.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

Dodge Brothers, Incorporated (hereinafter called appellant), instituted four suits, in the order in which they are numbered, for the recovery of $374,682.15, $545,666.94, $947,623.80, and $498,657.85, as alleged overpayments of federal income taxes for the taxable years 1925, 1926, 1927 and 1928, respectively. The actions arose under the Revenue Acts of 1926 and 1928, 26 U.S.C.A. Int.Rev.Acts, pages 145 et seq., 351 et seq., and, because the taxes in question were paid to a former Collector who was not in office when the suits were begun, were brought against the United States of America (hereinafter called appellee). See 28 U.S.C.A. § 41 (20). From the District Court's judgments in favor of appellee, (33 F.Supp. 312), appellant brought these appeals. The four cases by agreement were tried together and were consolidated for argument before this Court.

John F. Dodge and Horace E. Dodge, as partners, established a machine-shop in Detroit in 1900. From 1903 to 1914, the partnership manufactured automobile parts for the Ford Motor Company. In 1914, however, the Messrs. Dodge decided to manufacture and sell an automobile of their own make and, accordingly, incorporated the company of Dodge Brothers in the State of Michigan on July 7, 1914. Until their deaths in 1920, they wholly owned and personally managed the business of the corporation which consisted primarily of the manufacture and sale of the Dodge 4-cylinder automobile. After their deaths, the stock in the corporation passed to their respective estates.

On May 1, 1925, an underwriting syndicate of bankers, headed by Dillon, Read & Company (hereinafter called D. R. & C.), purchased all the assets of Dodge Brothers for $146,000,000 in cash. D. R. & C. then organized in Maryland the appellant corporation and sold to it the recently-acquired assets of Dodge Brothers in exchange for: (1) a payment by appellant of $14,000,000 in cash; (2) the issuance to D. R. & C. of substantially all appellant's debentures and stock; and (3) the assumption by appellant of all the liabilities of Dodge Brothers. Since appellant paid the $14,000,000 in cash out of the assets received, the net market value and cost of the assets of Dodge Brothers was $132,000,000. Of this latter sum, it is agreed that $81,913,473.62 represented the value of the so-called tangible assets (viz., cash, securities held, notes and accounts receivable, investment in inventories, land, buildings, machinery and equipment). Although the item of "Good Will" had formerly been carried on the books of Dodge Brothers at the nominal valuation of one dollar, appellant, under the terms of this sale, had apparently become the owner of intangible assets of an approximate value of $50,000,000.

In fulfilling its obligations under the purchase contract, appellant issued to D. R. & C. the following securities:

(a) $75,000,000, principal amount of 6% Sinking-Fund Gold Debentures;

(b) 850,000 shares of Preference Stock, without par value;

(c) 1,500,000 shares of Common Stock Class A, without par value;

(d) 500,000 shares of Common Stock, Class B, without par value.

The underwriting group organized several selling syndicates which, in turn, sold all of the debentures and a very large part of the stock to the public. The debentures were offered and sold to the public at 99; the preference stock, each share carrying with it a bonus of one share of Class A common stock, was offered and sold as a unit at 100; the preference stock was sold on the New York Stock Exchange at about 75; while the Class A common stock was sold on the Curb Exchange at about 25. The Class B common stock was not sold to the public, but since, in addition to all the rights of the Class A stock it had also voting rights, it may fairly be presumed to have had at least the same value as the Class A stock. In short, the public market value of the securities issued originally by appellant aggregated about $190,500,000, and the underwriting group, in addition to the retention of a large part of the more valuable common stock, realized a rather sizeable profit of more than $20,000,000.

On June 30, 1928, appellant's entire business was sold to the Chrysler Corporation, a manufacturer and seller of motor cars. The sale was completed by an exchange of Chrysler stock for Dodge stock in the proportion of one share of Chrysler for one share of Dodge preference stock, one share of Chrysler for five shares of Dodge Class A common stock, and one share of Chrysler for ten shares of Dodge Class B common stock. Chrysler assumed the liability of the debentures, all of which were eventually retired, either by conversion through the sinking fund or by call and payment by Chrysler. The Chrysler Corporation received all of appellant's assets, and continued the manufacture and sale of the Dodge car. Although the corporate identity of appellant has been continued, appellant has engaged in no active business since July 30, 1928.

For the years 1925 to 1928 inclusive, appellant made the necessary income tax returns and, in turn, duly paid the amount of taxes shown thereon, a sum of about $6,500,000. In the current course of the audit of appellant's returns by the Commissioner of Internal Revenue, various corrections and adjustments were made, resulting in a determination by the Commissioner of a deficiency for the year 1925 of $477,647.95, and an overassessment for the years 1926, 1927 and 1928 of an aggregate sum of $922,198.99. During the negotiations between appellant and the Commissioner, appellant for the first time made two additional claims: (1) that in appellant's purchase of all the assets of Dodge Brothers on May 1, 1925, appellant had "acquired for a part of the purchase price the model and design of the Dodge 4-cylinder automobile, which was a depreciating asset, the cost of which was deductible over its estimated life;" and (2) that appellant "was entitled to deduct from its gross income the amount of the discount applicable to the years 1925 to 1928, inclusive, at which it claimed its 6% Sinking Fund Gold Debentures were issued." Appellant's claim (1) for depreciation (in the nature of obsolescence) and its claim (2) for amortization of the bond discount were both rejected by the Commissioner. After appropriate petitions for refund were filed and, later, rejected, these suits were instituted.

The Depreciation Issue

The corporation of Dodge Brothers, formed in July, 1914, had for its policy the manufacture and sale of a single model of automobile. It was the opinion of the owners of the corporation that this method of operation would be both cheaper and more efficient than either the making of several models simultaneously or the making of radical changes on a model from year to year. Hence, after careful experimentation and testing, a single-model 4-cylinder car was produced for sale in November, 1914. The corporation consistently adhered to the original plan of manufacture and sale and the Dodge Brothers motor cars were, thus, described by consecutively-running serial numbers and not by year or model designations. It is stipulated that up to May 1, 1925, changes in the Dodge car were made so gradually from time to time that units manufactured in each successive year were substantially similar to those made in the preceding year.

Dodge Brothers advertised its products extensively, always emphasizing the car's stable design. Notwithstanding the fact that other automobile manufacturers, with the exception of Ford, followed the policy of introducing yearly models, the automobile buying public became thoroughly familiar with the characteristics of the Dodge Brothers motor car and with the fixed policy of the corporation. This car became known as the "utility motor car." Appellant describes this car as the "proved car."

Up to, and after, May 1, 1925, the Dodge car enjoyed tremendous popularity and brought large profits to the Dodge corporation. Nevertheless, about this date, there was a marked trend towards the use of 6-cylinder cars in the Dodge's competitive field. Appellant maintains that the Dodge executives had "actually foreseen" that eventually a time must come when the 4-cylinder Dodge could no longer be made and sold profitably. But the uncertainty of the corporation's future policy is strongly indicated by the history of appellant's manufacturing program subsequent to May 1, 1925 (Appellee's Brief pp. 4, 5):

"Up to January, 1927, all passenger automobiles manufactured and sold by the appellant had four cylinders. On January 3, 1927, appellant began to produce a Dodge four cylinder automobile with a redesigned motor, known as the `126.' On January 8, 1927, a Dodge six cylinder passenger automobile was announced to the public, termed the `Dodge Senior 6.' In April, 1927, the appellant offered for sale a four cylinder passenger automobile with a new motor, known as the `124.' In July, 1927, the appellant offered for sale a four cylinder passenger automobile known as the `128.' In December, 1927, a Dodge six cylinder automobile was offered for sale to the public, termed the `Dodge Victory Six.' In March, 1928, the appellant offered for sale a Dodge six cylinder...