Real Estate-Land Title & Trust Co. v. United States - 309 U.S. 13 (1990)
U.S. Supreme Court
Real Estate-Land Title & Trust Co. v. United States, 309 U.S. 13 (1940)
Real Estate-Land Title & Trust Co. v. United States
Argued January 5, 1940
Decided January 15, 1990
309 U.S. 13
CERTIORARI TO THE CIRCUIT COURT OF APPEALS
FOR THE THIRD CIRCUIT
Under the Revenue Act of 1928, § 23(k), and Treasury Regulations 74, Art. 206, a deduction for obsolescence is not allowed for a plant which has not functionally depreciated, but which is a needless duplication acquired in a voluntary business consolidation, and which the management desires to eliminate, preferring another which is also adequate but which can be operated with fewer employees. Pp. 309 U. S. 117.
102 F.2d 582 affirmed.
Certiorari, 308 U.S. 539, to review a judgment reversing a judgment recovered in the District Court in a suit for a refund of income taxes.
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 economics 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, [Footnote 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, 102
F.2d 582. We granted certiorari, 308 U.S. 539, because of the asserted conflict of that decision with Crooks v. Kansas City Title & Trust Co., 46 F.2d 928.
Sec. 23(k) of the Revenue Act of 1928, 45 Stat. 791, 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 Regulations [Footnote 2] state the circumstances
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, 284 U. S. 516. See also Burnet v. Niagara Falls Brewing Co., 282 U. S. 648, 282 U. S. 654. 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. [Footnote 3] More than nonuse or disuse is necessary to establish it. [Footnote 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 decision
of management to abandon facilities or to discontinue their use gives rise to a claim for obsolescence. For obsolescence under the Act requires that the operative cause of the present or growing uselessness arise from external forces which make it desirable or imperative that the property be replaced. What those operative causes may be will be dependent on a wide variety of factual situations. "New and modern methods" appear to have been one of the real causes of abandonment of the title plant in Crooks v. Kansas City Title & Trust Co., supra. Suffice it here to say that no such external causes are present, for the record shows little more than the desire of a management to eliminate one plant which was a needless duplication of another, but which functionally was adequate. [Footnote 5] The fact that fewer employees were required to operate the one retained than the one discarded is inconclusive here. For this is not the case of acquisition of a new plant to take the place of one outmoded or less efficient. Rather, the conclusion is irresistible that the plant was discarded only as a proximate result of petitioner's voluntary action in acquiring excess capacity.
In view of this conclusion, we do not reach respondent's further objections to allowance of this claim on grounds of obsolescence.
But petitioner contends that, in any event, it has abandoned the plant, and hence is entitled to a deduction under § 23(f) of the 1928 Act, which allows a corporation to deduct "losses sustained during the taxable year and not compensated for by insurance or otherwise." Whether petitioner has satisfied those requirements we do not decide,
for its claim for refund was based exclusively and solely on the ground that it was entitled to an allowance for obsolescence. Hence, in absence of a waiver by the government, Tucker v. Alexander, 275 U. S. 228, or a proper amendment, petitioner is precluded in this suit from resting its claim on another ground. United States v. Felt & Tarrant Mfg. Co., 283 U. S. 269. There has been no amendment, and there are no facts establishing a waiver.
Accordingly, the judgment of the Circuit Court of Appeals is
MR. JUSTICE ROBERTS and MR. JUSTICE REED took no part in the consideration or decision of this case.
Evidence of use subsequent to the consolidation or merger is quite tenuous, the only specific instances occurring immediately prior to the actual consummation of the consolidation on October 31, 1927.
Treasury Regulations 74, Art. 206, promulgated under the Revenue Act of 1928, provide in full:
"With respect to physical property the whole or any portion of which is clearly shown by the taxpayer as 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, a reasonable deduction for obsolescence, in addition to depreciation, may be allowed in accordance with the facts obtaining with respect to each item of property concerning which a claim for obsolescence is made. No deduction for obsolescence will be permitted merely because, in the opinion of a taxpayer, the property may become obsolete at some later date. This allowance will be confined to such portion of the property on which obsolescence is definitely shown to be sustained, and cannot be held applicable to an entire property unless all portions thereof are affected by the conditions to which obsolescence is found to be due."
See also Bureau of Internal Revenue Bulletin "F," January, 1931.
Kester, Advanced Accounting, 3d Ed.1933, ch. 10; Hatfield, Accounting, 1927, ch. V; Saliers, Depreciation Principles and Applications, 3d Ed., 1939, ch. 4; Kester, Depreciation, 1924; Transactions, Amer.Soc.C.E., 1917, vol. 81, p. 1527; Marston & Agg, Engineering Valuation, 1936, pp. 83-85.
2 Paul & Mertens, Law of Federal Income Taxation, § 20.114.
According to petitioner's own witnesses, the discarded plant was a "more complete plant than any other plant in the City;" and it had a "background which went all the way back to William Penn."