Red Wing Malting Co. v. Willcuts

• Decision Date: 05 November 1926
• Docket Number: No. 7242.,7242.
• Citation: 15 F.2d 626
• Parties: RED WING MALTING CO. v. WILLCUTS, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Eighth Circuit

15 F.2d 626 (1926)

RED WING MALTING CO. v. WILLCUTS, Collector of Internal Revenue.

No. 7242.

Circuit Court of Appeals, Eighth Circuit.

November 5, 1926.

William H. Oppenheimer, of St. Paul, Minn. (Frederick N. Dickson, Frank C. Hodgson, Montreville J. Brown, and Stan D. Donnelly, all of St. Paul, Minn., on the brief), for plaintiff in error.

Floyd F. Toomey, Sp. Atty. Bureau of Internal Revenue, of Washington, D. C. (Lafayette French, Jr., U. S. Atty., and L. W. Scott, Asst. U. S. Atty., both of St. Paul, Minn., and A. W. Gregg, Solicitor of Internal Revenue, of Washington, D. C., on the brief), for defendant in error.

Before KENYON and VAN VALKENBURGH, Circuit Judges, and John B. SANBORN, District Judge.

KENYON, Circuit Judge.

This is an action brought by the Red Wing Malting Company, a corporation, plaintiff in error (designated for convenience as plaintiff), against Levi M. Willcuts, collector of internal revenue for the district of Minnesota, defendant in error (designated for convenience as defendant), for the recovery of $29,893.44, income and profits taxes alleged to have been erroneously assessed for the fiscal year ending August 31, 1918, and which were paid by plaintiff.

Plaintiff, prior to the advent of prohibition, was engaged in the business of manufacturing barley malt and selling the same to brewers engaged in the manufacture of fermented malt liquors. That was its sole business. Its market was destroyed as a result of the Prohibition Amendment and the acts of Congress relating to the manufacture and sale of intoxicating liquors. There is no dispute as to the facts. We set forth a number of the court's findings thereon, as follows:

"That on March 1, 1913, the plaintiff had built up a large and profitable business and had a good will of large value. That at said date, namely, March 1, 1913, the good will of the plaintiff's business was worth the sum of $153,618.75.

"11. That, by reason of the acts of Congress and the presidental proclamations thereunder, the business and trade of plaintiff, built up over a number of years, was totally destroyed, for, although the plaintiff still had the right to manufacture its malt, its customers were, by said acts of Congress and presidential proclamations thereunder, all put out of business and prohibited by law from using the products of this plaintiff. That as a result of this action the market for plaintiff's products was wholly destroyed, and as a result plaintiff closed its plant and ceased all manufacturing operations in May, 1918. That in December, 1918, plaintiff sold its plant, including its real estate, machinery, and equipment, to the Fleischmann Yeast Company under a contract, for $150,000.

"12. That, as plaintiff was forced out of business by reason of the foregoing facts, the good will of said business went with it and ceased to be."

For the fiscal year ending August 31, 1918, the Commissioner of Internal Revenue determined plaintiff's taxable net income to be $120,536.42. Plaintiff claims that in arriving at its taxable net income for said fiscal year a deduction for obsolescence of good will in the sum of $153,618.75, being the entire March 1, 1913, agreed value of its good will, should have been deducted. This would have left no taxable income for that year. Plaintiff seeks to recover the total income and profits taxes paid by it for said year.

The District Court held against the contention of the plaintiff, and from that holding this writ of error is prosecuted. The issue presented is a narrow and precise one, viz.: Is plaintiff, in computing its taxable net income for the fiscal year ending August 31, 1918, entitled to a deduction on account of obsolescence or loss of good will? The statute involved is the Revenue Act of 1918 (40 Stat. 1057, 1077). The particular portions thereof are parts of section 234 (a), being Comp. St. § 6336 1/8pp, reading as follows:

"That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

* * * * *

"(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise;

* * * * *

"(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence."

It is the theory of plaintiff that the phrase in subsection (7) of said statute, "including a reasonable allowance for obsolescence," created a new and additional tax deduction to the "exhaustion, wear, and tear" clause of said subsection.

It is the contention of defendant that an allowance for obsolescence under the statute is merely supplementary to the allowance for "exhaustion, wear and tear," in those cases where by reason of economic circumstances the allowance for "exhaustion, wear and tear," based upon the estimated normal period of utility, would be insufficient to restore to the taxpayer the cost of the capital investment; that the allowance for obsolescence applies only to property of a depreciable character. It will thus be seen that the matter presented raises legal questions of far-reaching importance.

Plaintiff contends that the Treasury Department has established an interpretation of the various acts relating to depreciation for the purpose of arriving at taxable income through office decisions, Treasury decisions, an advisory tax board, and the committee on appeals and review, and that such construction has been that obsolescence of intangible property is permissible as a deduction in arriving at taxable income.

Article 163 of Regulations 45, promulgated by the Treasury Department, construing the Revenue Act of 1918, is as follows:

"Depreciation of Intangible Property. — Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses and franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the commissioner. There can be no such allowance in respect of good will, trade-names, trade-marks, trade brands, secret formulæ, or processes."

This would seem to indicate the attitude of the Treasury Department at that time. It is true that, after the promulgation of this Regulation, the Internal Revenue Bureau recognized for a time at least deductions for obsolescence of good will, the taxpayer having the burden of proving the beginning and end of the claimed obsolescence period. The deduction for good will was recognized only where it was assignable, as distinguished from good will attached to the owning or carrying on of the business, or connected with the premises on which the business was conducted. No allowance for good will was recognized, where it would be valuable in another business after the termination of the business in which the taxpayer was engaged.

The case of Rock Spring Distilling Company, 2 Board of Tax Appeals, Decision No. 207, was a case considering somewhat the question of obsolescence of good will, and the board held there was no such thing under the Revenue Act of 1916 (39 Stat. 756). It does not decide that such deduction was permissible under the Act of 1918. We have been unable to find any decision of the board of tax appeals passing directly upon the question of whether, under the act of 1918, a deduction could be allowed for obsolescence of good will.

In the decision on the appeal of the Brevoort Hotel Company Case before the committee on appeal and review, and in its holdings as to hotels operating bars, there is language justifying the claim that a good will value may be established, for the loss of which an allowance for obsolescence may be made as distinct from the good will of the hotel. In the hotel cases may be noted the following language of the opinion: "It is therefore held that hotels, which can establish a good will, value which might have been assigned separate and distinct from the good will of the hotel, are entitled to obsolescence for the loss of their good will due to national prohibition legislation."

We have examined the references in the brief of plaintiff to the Cumulative Bulletins of the Treasury Department, and the tax rulings contained therein bearing on this question, the holdings of the committee on appeal and review, and the decisions of the tax appeals board, and conclude that either side to this controversy may find some comfort therein.

Courts have respect for and give weight to departmental construction of a statute, although such construction is not controlling. 22 Cyc. 1606; Baltzell v. Mitchell (C. C. A.) 3 F.(2d) 428. Certainly, however, there has been no such consistent and uniform construction of the statute in question as to be persuasive with the court or of appreciable assistance. Nor do we see much force in the claim that Congress has re-enacted in 1921, 1924 (Comp. St. § 6336 1/8pp), and 1926 (44 Stat. 42) the section under consideration substantially as in the act of 1918, and thereby has acquiesced in the interpretation by the Treasury Department of the congressional intent as to obsolescence of good will as a tax deduction entity. There is no decision of the Treasury Department construing the act of 1918 as authorizing a deduction for obsolescence of good will as a separate and distinct entity, nor is there any such definite and uniform construction of provisions in other statutes to warrant a conclusion that Congress was adopting any particular construction of the Treasury Department. The...