Matson Navigation Co. v. Comm'r of Internal Revenue, Docket Nos. 1625—74
| Decision Date | 16 March 1977 |
| Docket Number | Docket Nos. 1625—74,1626—74. |
| Citation | 67 T.C. 938 |
| Parties | MATSON NAVIGATION COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTALEXANDER AND BALDWIN, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Rule 121, Tax Court Rules of Practice and Procedure.—P moved for summary judgment, asserting that its depreciation deductions for the taxable years 1965 through 1969 were allowable in accordance with Rev. Procs. 62—21, 1962—2 C.B. 418, and 65—13, 1965—1 C.B. 759, or in the alternative, that if adjustments are to be made in its depreciation deductions, the Court can and should decide in accordance with such revenue procedures the amount of such adjustments. Held, motion granted in part and denied in part; Rev. Procs. 62—21, 65—13, and 68—27, 1968—2 C.B. 911, interpreted and applied. Hart H. Spiegel and Robert C. Livsey, for the petitioners.
Vernon R. Balmes, for the respondent.
The petitioners have made a timely motion for partial summary judgment pursuant to Rule 121, Tax Court Rules of Practice and Procedure. The issues raised by this motion are: (1) Whether Matson Navigation Co. (Matson) can justify its claimed depreciation deductions for its water transportation equipment for the taxable years 1965 through 1969 on the basis of Rev. Proc. 62—21, 1962—2 C.B. 418,1 as modified by Rev. Proc. 65—13, 1965—1 C.B. 759; (2) whether, if Matson cannot justify its claimed depreciation deductions for such years on the basis of such revenue procedures, it may continue to claim depreciation at a rate previously accepted by the Internal Revenue Service on audit; and (3) whether, if Matson's depreciation is to be adjusted to a rate lower than that previously approved for it, the Commissioner is barred from making any adjustment in excess of that allowed by the minimal adjustment rule of Rev. Proc. 65—13. An extensive stipulation of facts with exhibits was submitted, and the parties have filed briefs in support of their positions.
The Commissioner determined deficiencies in income taxes for the calendar years 1965 through 1969 in the following amounts:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1965 ¦$885,041 ¦
+------+-------------¦
¦1966 ¦2,899,308 ¦
+------+-------------¦
¦1967 ¦189,505 ¦
+------+-------------¦
¦1968 ¦1,152,825 ¦
+------+-------------¦
¦1969 ¦819,747 ¦
+--------------------+
The deficiencies resulted from the disallowance of depreciation deductions claimed by Matson on some of its vessels and from certain other adjustments not before us on this motion.
The petitioners filed timely petitions with this Court, seeking a redetermination of such deficiencies. Alexander & Baldwin, Inc., is involved in this proceeding solely because it filed consolidated returns with Matson for the taxable years 1968 and 1969, and Matson will be referred to as the petitioner.
In disallowing a portion of Matson's claimed depreciation deductions, the Commissioner made adjustments to the useful lives and salvage values claimed with respect to certain of its vessels. Matson's main contention is that the class lives used by it in computing the claimed depreciation deductions on its water transportation equipment were justified on the basis of the reserve ratio test of Rev. Proc. 62—21, as modified by Rev. Proc. 65—13, and that therefore the Commissioner is precluded from disturbing its depreciation deductions. In the alternative, Matson argues that, pursuant to Rev. Proc. 62—21, it is entitled to depreciation deductions based on the class life previously justified on audit. Finally, Matson contends that even if this Court finds that its depreciation deductions were not justified, and does not accept its alternative contention regarding use of the class life previously justified on audit, the Commissioner is nonetheless barred by the minimal adjustment rule of Rev. Proc. 65—13 from making any adjustments to its depreciation deductions.
Matson was audited by the IRS for the calendar years 1962, 1963, and 1964. As a result of such audit, the examining agent proposed adjustments to the depreciation deductions claimed by Matson on three of its vessels, the Californian, the Hawaiian, and the Citizen, by extending their useful lives from 10 to 15 years. Matson filed a protest taking exception to the proposed adjustments to its depreciation deductions on the three vessels and requested a hearing with the Appellate Division. The Appellate Division, after review of the agent's adjustments to the depreciation deductions on the three vessels for the years 1962, 1963, and 1964 and after several conferences with Matson, advised Matson that there was no deficiency. The appellate conferee's report concluded that the taxpayer's arguments in justification of the depreciation claimed, without regard to the application of Rev. Procs. 62—21 and 65—13, had considerable merit. Additionally, the report stated that Matson had satisfied the guideline form of the reserve ratio test outlined in Rev. Procs. 62—21 and 65—13, and that therefore its depreciation deductions were justified.
The dispute over Matson's depreciation deductions for the taxable years 1962, 1963, and 1964 arose in the context of a modernization program begun by it in 1958. In such year, upon the recommendation of its research department, Matson began a program of conversion to carry containerized cargo; this program involved the overhaul of its fleet, adapting its vessels so that they could carry the containers.2 Prior to 1960, Matson had modified seven of its vessels to carry containers on deck. In 1960, the Citizen was converted to a full container ship, carrying containers in the holds as well as on deck. In such year, Matson also purchased two vessels (the Californian and the Hawaiian) which it converted to combination bulk cargo carriers and container ships; another vessel, the Fisherman, was converted to an auto carrier and renamed the Motorist. In 1963, Matson acquired the Legislator and converted it to an auto carrier, which could also carry containers on deck. In such year, the Motorist was further adapted to carry containers on deck.
Matson's modernization program continued during the years at issue. In 1964, Matson exchanged the Packer and the Retailer for the Queen and the Monarch, which were converted into full container vessels and put into service in 1965. The conversion consisted of adding a midbody, removing the intermediate ship decks in the hold, and installing cell guides and cell structures so that the ship was able to carry cargo containers in the hold. The crews' quarters and bridge were relocated on the deck. In 1967, the Planter and the Craftsman were converted into full container vessels and renamed the Trader and the Banker. The amounts expended by Matson for the purchase, conversion, and improvement of its vessels, as of the end of each of the years 1964 through 1969, were as follows:
+-----------------------------------------------------------------------------+
¦ ¦ ¦ ¦Other ¦Total cost ¦
+------------------+----------------+-------------+--------------+------------¦
¦Date ¦Purchase price ¦Conversions ¦improvements ¦1 ¦
+------------------+----------------+-------------+--------------+------------¦
¦ ¦ ¦ ¦ ¦ ¦
+------------------+----------------+-------------+--------------+------------¦
¦12/31/64 ¦$20,937,179 ¦$33,895,081 ¦$1,789,832 ¦$56,622,092 ¦
+------------------+----------------+-------------+--------------+------------¦
¦12/31/65 ¦21,408,126 ¦50,029,435 ¦1,853,147 ¦73,290,708 ¦
+------------------+----------------+-------------+--------------+------------¦
¦12/31/66 ¦21,408,126 ¦50,029,435 ¦2,156,462 ¦73,594,023 ¦
+------------------+----------------+-------------+--------------+------------¦
¦12/31/67 ¦25,055,109 ¦57,539,093 ¦2,190,648 ¦84,784,850 ¦
+------------------+----------------+-------------+--------------+------------¦
¦12/31/68 ¦25,055,109 ¦57,539,093 ¦2,566,011 ¦85,160,213 ¦
+------------------+----------------+-------------+--------------+------------¦
¦12/31/69 ¦24,247,822 ¦57,539,093 ¦3,322,457 ¦85,109,372 ¦
+------------------+----------------+-------------+--------------+------------¦
¦Net increase from ¦ ¦ ¦ ¦ ¦
¦12/31/64 to 12/31/¦3,310,643 ¦23,644,012 ¦1,532,625 ¦28,487,280 ¦
¦69 ¦ ¦ ¦ ¦ ¦
+------------------+----------------+-------------+--------------+------------¦
¦ ¦ ¦ ¦ ¦ ¦
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Matson computed its depreciation deductions on its vessels for the taxable years 1965 through 1969 on the straight-line basis for its books of account and financial statements. For tax purposes, it computed such deductions on the straight-line basis for assets acquired before 1963, and on a combination of the straight-line or the double-declining-balance method for assets acquired in 1963 and thereafter. Matson used individual item accounts for depreciating its water transportation equipment and claimed useful lives for the years 1964 through 1969 as follows:
+-------------------------------------------------+
¦ ¦Matson's estimated ¦
+--------------------------+----------------------¦
¦Vessel ¦useful life in years ¦
+--------------------------+----------------------¦
¦ ¦ ¦
+--------------------------+----------------------¦
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