Real Estate 8212 Land Title Trust Co v. United States

• Citation: 84 L.Ed. 542,60 S.Ct. 371,309 U.S. 13
• Decision Date: 15 January 1940
• Docket Number: No. 229,229
• Parties: REAL ESTATE—LAND TITLE & TRUST CO. v. UNITED STATES
• Court: United States Supreme Court

309 U.S. 13

60 S.Ct. 371

84 L.Ed. 542

REAL ESTATE—LAND TITLE & TRUST CO.

v UNITED STATES.

No. 229.

Argued Jan. 5, 1940.

Decided Jan. 15, 1940.

Messrs. Joseph Neff Ewing and Maurice Bower Saul, both of Philadelphia, Pa., for petitioner.

Miss Helen R. Carloss, Sp. Asst. to Atty. Gen., for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

Petitioner, a pennsylvania corporation, was formed in October 1927 as a result of a statutory consolidation or merger of three companies. Two of the constituent companies owned title search plants which were among the assets acquired by petitioner as a result of the consolidation. While it was known that two title plants would be acquired on the consolidation, there was at that time no definite plan for their disposition. But an immediate investigation was made and it was decided to store one of the plants in order to effect economies of operation. That was done substantially simultaneously with the consummation of the consolidation. About two months thereafter it was decided that the plant retained in use was adequate and that the one in storage would not be needed. Although for a brief period some slight use appears to have been made of the stored plant,¹ it was not kept up to date by the addition of current recordings. As a result it had only a salvage value by October 31, 1928. Meanwhile, negotiations for its sale had been unsuccessful.

In this action petitioner seeks a refund of income taxes for the fiscal year ended October 31, 1928, based on the refusal of the Collector of Internal Revenue to allow a deduction for obsolescence of this plant. It had been carried on the books of the constituent company at $275,000 and was brought into the consolidation at $800,000. The District Court, however, found that its value on March 1, 1913, was $1,000,000; on October 31, 1928, $125,000—making an actual loss of $875,000, which that court allowed as a deduction for obsolescence for the taxable year 1928. It accordingly allowed a refund. That judgment was reversed by the Circuit Court of Appeals, 3 Cir., 102 F.2d 582. We granted certiorari, 308 U.S. 539, 60 S.Ct. 101, 84 L.Ed. —-, because of the asserted conflict of that decision with Crooks v. Kansas City Title & Trust Co., 8 Cir., 46 F.2d 928.

Sec. 23[k] of the Revenue Act of 1928, 45 Stat. 791, 26 U.S.C.A. Int.Rev.Code, § 23(l), allows as a deduction from gross income a 'reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.' Admittedly, if the deduction is allowed under this provision it must be for obsolescence, as there has been no exhaustion, wear or tear of the title plant within the meaning of the Act. Now it is true that in the popular sense a thing which is obsolete is one which is no longer used, a meaning which gives color to petitioner's claim for deduction since there is no question that the title plant here involved is no longer utilized to any degree whatsoever. But the term 'allowance for obsolescence', as used in the Act and in the Treasury Regulations, has a narrower or more technical meaning than that derived from the common, dictionary definition of obsolete. The Treasury Regulations² state the cir- cumstances under which an allowance for obsolescence of physical property may be allowed, viz., where such property is 'being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life, so that depreciation deductions alone are insufficient to return the cost (or other basis) at the end of its economic term of usefulness.' This Court, without undertaking a comprehensive definition, has held that obsolescence for purposes of the revenue acts 'may arise from changes in the art, shifting of business centers, loss of trade, inadequacy, supersession, prohibitory laws, and other things which, apart from physical deterioration, operate to cause plant elements or the plant as a whole to suffer diminution in value.' United States Cartridge Co. v. United States, 284 U.S. 511, 516, 52 S.Ct. 243, 245, 76 L.Ed. 431. See, also, Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 654, 51 S.Ct. 262, 264, 75 L.Ed. 594. Such specific examples illustrate the type of 'economic conditions' whose effect on physical property is recognized as obsolescence by the Treasury Regulations. Others could be mentioned which similarly cause or contribute to the relentless march of physical property to the junk pile. But in general, obsolescence under the Act connotes functional depreciation, as it does in accounting and engineering terminology.³ More than non-use or disuse is necessary to establish it.⁴ To be sure, reasons of economy may cause a management to discard a title plant either where it has become outmoded by improved devices or where it is acquired as a duplicate and therefore is useless. But not every deci- sion of management to abandon...