Fidelity-Philadelphia Trust Co. v. Commissioner of Int. Rev.

• Decision Date: 05 March 1931
• Docket Number: No. 4429.,4429.
• Citation: 47 F.2d 36
• Parties: FIDELITY-PHILADELPHIA TRUST CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

47 F.2d 36 (1931)

FIDELITY-PHILADELPHIA TRUST CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 4429.

Circuit Court of Appeals, Third Circuit.

February 7, 1931.

Rehearing Denied March 5, 1931.

Robert T. McCracken and C. Russell Phillips, both of Philadelphia, Pa., for petitioner.

G. A. Youngquist, Asst. Atty. Gen., and Norman D. Keller and Morton Poe Fisher, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and De Witt M. Evans, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY, Circuit Judge.

Jacob K. Smith, who died in 1884, devised his real estate to a trustee to be held and, when occasion should arise, to be sold and the proceeds held under the trusts and distributed upon the happening of a future event.

In 1923 the trustee, petitioner in this case, sold several tracts of improved real estate, the buildings on which had an agreed value of $214,500.00 as of March 1, 1913. In its income tax returns through the years the trustee had not made deductions for depreciation and in calculating profits on the sale of real estate in the tax return in question, it deducted nothing for the depreciation which had normally grown since March 1, 1913, nor had the beneficiaries ever made deductions to cover depreciation. The Commissioner, in determining the income tax due by the trust estate for 1923 under the Revenue Act of 1921 (42 Stat. 227), estimated a depreciation of 2% on the 1913 value of the buildings for 9 5/6 years, or from March 1, 1913 to December 31, 1922, aggregating $42,185.00. He deducted this sum from the agreed 1913 value and thereby increased the sales profits and, correspondingly, the income tax for that year. The question is whether this deduction was right.

The petitioning trustee rests its case generally on the fact that prior to the Revenue Act of 1924 (43 Stat. 253) no specific provision of law compelled the deduction of depreciation, which had accrued prior to sale, from the cost or March 1, 1913 value of property sold as a basis for determining the profit on such sale, and rests its case particularly on a distinction made in the law, or to be made in this court's interpretation of the law, between deductions for sustained depreciation made by individuals, personal or corporate, in estimating profits from sale in their income tax returns and like deductions made by trustees. Indeed, the petitioner makes the distinction on the threshold of its argument as follows:

"At the beginning of this argument we wish to state frankly that we have no purpose to try to establish the principle that, under the ordinary circumstances surrounding the sale of capital assets by individuals and corporations, sustained depreciation is not to be given effect. This would be contrary to the law, as interpreted by the Board as well as the courts.

"Our aim is to show the court that where property is devised in trust, the income being paid to a life beneficiary, with remainder over to others, and where this income, without deduction for depreciation, is paid to the life beneficiary, and where the trust property is sold by the trustee, the basis for profit or loss on such sale is not properly to be adjusted by theoretical depreciation sustained subsequent to the basic date."

Although this entirely correct statement of the question of law involved in this case contains a concession that deduction of sustained depreciation in ascertaining profits from the sale of improved real estate for income tax purposes is the law with respect to individuals, we must look at the law more closely in order to discern the distinction — in legal effect an exception to the general rule — which the petitioner says exists with respect to trust estates.

The Revenue Act of 1926 is perhaps the first Revenue Act which provides in terms that in computing loss or gain from the sale of property a deduction for depreciation shall be made from the original cost or 1913 value. The mandatory words of this Act (44 Stat. 11, § 202(b), 26 USCA § 933(b) refer to deductions for depreciation "allowable" in respect to such property, differing from the words in the Revenue Act of 1924 — though perhaps not differing in legal effect — where the deduction is for depreciation "allowed" (43 Stat. 255, § 202b). All prior revenue acts — 1913 to 1921 inclusive — are silent on the subject of sustained depreciation being used to reduce the basis for profit or loss on sales, whether such basis be cost or March 1, 1913 value. Thus on the face of the statutes there would seem to be a serious question whether an individual (distinguished from a trustee) should be compelled to adjust his profits on a sale of real property to the depreciation accruing in the preceding years. However perplexing that question may be, the Supreme Court has answered it in the case of United States v. Ludey, 274 U. S. 295, 47 S. Ct. 608, 610, 71 L. Ed. 1054, where on the same question arising under the silent Revenue Act of 1917 the court (dealing with oil property) held that while neither that act nor any prior revenue act expressly required deduction for depreciation in estimating profits, all Acts permitted it and accordingly the deduction should be...