Virginian Hotel Corporation of Lynchburg v. Helvering

• Decision Date: 07 June 1943
• Docket Number: No. 766,766
• Parties: VIRGINIAN HOTEL CORPORATION OF LYNCHBURG v. HELVERING, Commissioner of Internal Revenue
• Court: U.S. Supreme Court

319 U.S. 523

63 S.Ct. 1260

87 L.Ed. 1561

VIRGINIAN HOTEL CORPORATION OF LYNCHBURG

v HELVERING, Commissioner of Internal Revenue.

No. 766.

Argued May 12, 13, 1943.

Decided June 7, 1943.

Rehearing Denied Oct. 11, 1943.

See 320 U.S. —-, 64 S.Ct. 24, 88 L.Ed. —-.

Mr. William A. Sutherland, of Washington, D.C., for petitioner.

Mr. Samuel H. Levy, of Washington, D.C for respondent.

Mr. Justice DOUGLAS delivered the opinion of the Court.

The facts of this case are stipulated. Petitioner operates an hotel. From 1927 through 1937 petitioner (or its predecessor) reported in its income tax returns depreciation on certain of its assets on a straight line basis.¹ No objection was taken by the Commissioner or his agents to the amounts claimed and deducted. In 1938 petitioner claimed a deduction for depreciation at the same rates. The Commissioner determined that the useful life of the equipment was longer than petitioner claimed and that therefore lower depreciation rates should be used.² Accordingly a deficiency was computed. The depreciation theretofore claimed as deductions was subtracted from the cost of the property. The remainder was taken as the new basis for computing depreciation. A lesser deduction for depreciation accordingly was allowed. ³ There had been a net gain for some of the years in question. For the years 1931 to 1936 inclusive there was a net loss and, says the stipulation, 'the entire amount of depreciation deducted on the income tax returns for those years did not serve to reduce the taxable income.' Petitioner does not challenge the new rates. It contends that the amount of depreciation claimed for the years 1931 to 1936 inclusive in excess of the amount properly allowable should not be subtracted from the depreciation basis, since it did not serve to reduce taxable income in those years. The Tax Court in reliance on an earlier ruling⁴ held for the petitioner. The Circuit Court of Appeals reversed. 132 F.2d 909. The case is here on a petition for a writ of certiorari which we granted because of a conflict between the decision below and Pittsburgh Brewing Co. v. Commissioner, 107 F.2d 155, decided by the Circuit Court of Appeals for the Third Circuit.

A reasonable allowance for depreciation is one of several items which Congress has decl red shall be 'allowed' as a deduction in computing net income. Int.Rev.Code § 23(a)(1), 26 U.S.C.A. Int.Rev.Code, § 23(a)(1). The basis upon which depreciation is to be 'allowed' is the cost of the property with proper adjustments for depreciation 'to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws.'⁵ That provision makes plain that the depreciation basis is reduced by the amount 'allowable' each year whether or not it is claimed. Fidelity-Philadelphia Trust Co. v. Commissioner, 3 Cir., 47 F.2d 36. Moreover the basis must be reduced by that amount even though no tax benefit results from the use of depreciation as a deduction. Wear and tear do not wait on net income. Nor can depreciation be accumulated and held for use in that year in which it will bring the taxpayer the most tax benefit. Congress has elected to make the year the unit of taxation. Burnet v. Sanford & Brooks Co., 282 U.S. 359, 51 S.Ct. 150, 75 L.Ed. 383. Thus the amount 'allowable' must be taken each year. United States v. Ludey, 274 U.S. 295, 304, 47 S.Ct. 608, 611, 71 L.Ed. 1054.

But it is said that 'allowed' unlike 'allowable' connotes the receipt of a tax benefit. The argument is that though depreciation in excess of an 'allowable' amount is claimed by the taxpayer and not disallowed by the Commissioner, it is nevertheless not 'allowed' if the deductions other than depreciation are sufficient to produce a loss for the year in question. 'Allowed' in this setting plainly has the effect of requiring a reduction of the depreciation basis by an amount which is in excess of depreciation properly deductible. We do not agree, however, with the contention that such a reduction must be made only to the extent that the deduction for depreciation has resulted in a tax benefit. The requirement that the basis should be adjusted for depreciation 'to the extent allowed (but not less than the amount allowable)' first appeared in the Revenue Act of 1932. 47 Stat. 169, 201, 26 U.S.C.A. Int.Rev.Acts, page 518. Prior to that time the adjustment required was for the amount of depreciation 'allowable'.⁶ The purpose of the amendment in 1932 was to make sure that taxpayers who had made excessive deductions in one year could not reduce the depreciation basis by the lesser amount of depreciation which was 'allowable'. If they could, then the government might be barred from collecting additional taxes which would have been payable had the lower rate been used originally.⁷ But we find no suggestion that 'allowed', as distinguished from 'allowable', depreciation is confined to those deductions which result in tax benefits. 'Allowed' connotes a grant. Under our federal tax system there is no machinery for formal allowances of deductions from gross income. Deductions stand if the Commissioner takes no steps to challenge them. Income tax returns entail numerous deductions. If the deductions are not challenged, they certainly are 'allowed' since tax liability is the determined on the basis of the returns. Apart from contested cases, that is indeed the only way in which deductions are 'allowed'. And when all deductions are treated alike by the taxpayer and by the Commissioner, it is difficult to see why some items may be said to be 'allowed' and others not 'allowed'.⁸ It would take clear and compelling indications for us to conclude that 'al- lowed' as used in § 113(b)(1)(B) means something different than it does in the general setting of the revenue acts. See Helvering v. State-Planters Bank & Trust Co., 4 Cir., 130 F.2d 44.

Congress has provided for deductions of annual amounts of depreciation which, along with salvage value, will replace the original investment of the property at the time of its retirement. United States v. Ludey, supra; Detroit Edison Co. v. Commissioner, 319 U.S. 98, 63 S.Ct. 902, 87 L.Ed. —-. The rule which has been fashioned by the court below deprives the taxpayer of no portion of that deduction. Under that rule taxpayers often will not recover their investment tax-free. But Congress has made no such guarantee. Nor has Congress indicated that a taxpayer who has obtained no tax advantage from a depreciation deduction should be allowed to take it a second time. The policy which does not permit the second deduction in case of 'allowable' depreciation (Beckridge Corp. v. Commissioner, 2 Cir., 129 F.2d 318) is equally cogent as respects depreciation which is 'allowed'.

Affirmed.

Mr. Chief Justice STONE, dissenting.

It is true that the 1938 Revenue Act does not speak of a 'tax benefit' to the taxpayer. Section 23, 26 U.S.C.A. Int.Rev.Code, § 23(l) speaks only of deductions from gross income which 'shall be allowed' in computing net income, among which it includes, § 23(l), 'a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business'. And by § 113(b)(1) (B), 26 U.S.C.A. Int.Rev.Code, § 113(b)(1)(B), the basis for depreciation of property is its cost adjusted by depreciation 'to the extent allowed (but not less than the amount allowable)'. It is equally true and obvious. and of some importance to the correct interpretation of the statute, that any depreciation in excess of the reasonable allowance authorized can, under the statute, result in no tax advantage to the taxpayer and in no tax prejudice to the Government, unless the excess has in fact been deducted from the taxpayer's gross income.

I can find no warrant in the purpose or the words of the statute, or in the principles of accounting, for our saying that the taxpayer is required to reduce his depreciation base by any amount in excess of the depreciation 'allowable', which excess he never has in fact deducted from gross income. Whatever else the statutory reference to depreciation 'allowed may mean, it obviously cannot and ought not to be construed to mean that a deduction for depreciation which has never in fact been subtracted from gross income is a deduction 'allowed'.

And there is no reason why such should be deemed to be its meaning. The only function of depreciation in the income tax laws is the establishment of an amount, which may be deducted annually from gross income, sufficient in the aggregate to restore a wasting capital asset at the end of its estimated life. The scheme of the 1938 Revenue Act is to prescribe the permissible deductions for depreciation, and to preclude the taxpayer from gaining any unwarranted advantage by the amount and distribution of those deductions. The Act accomplishes the latter by compelling the taxpayer to reduce his depreciation base by the amount of the allowable annual depreciation, whether deducted from gross income or not, and by such further amount as he has in fact deducted from gross income. No reason is suggested why the taxpayer's tax for future years should be increased by reducing his depreciation base by any amount in excess of the depreciation 'allowable', unless the excess has at some time and in some manner been deducted from gross income. So inequitable a result cannot rightly be achieved by saying that a 'deduction' for depreciation which never has been deducted from gross income has nevertheless been 'allowed'.

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