1. In computing income tax under the Revenue Act of 1928, a
taxpayer is entitled to the deduction for depreciation in respect
of properties used in its business under leases from a trustee to
whom the properties had been conveyed by the taxpayer in a
transaction which, in reality, was a mortgage. P.
308 U. S.
254.
2. A finding by the Board of Tax Appeals that a transaction
between the taxpayer and a trustee bank -- in written form a
transfer of ownership with a lease back -- was, in reality, a
mortgage, is conclusive on the courts, although the evidence on the
subject permits conflicting inferences. Pp.
308 U. S.
254-255.
3. Proceedings before the Board of Tax Appeals are equitable in
nature. P.
308 U. S.
255.
101 F.2d 728 affirmed.
Certiorari,
post, p. 537, to review the affirmance of a
decision of the Board of Tax Appeals, 32 B.T.A. 633, upholding a
taxpayer's claim for allowance of a deduction for depreciation in
computation of income tax.
MR. JUSTICE BLACK delivered the opinion of the Court.
In computing its net taxable income for 1930 and 1931,
respondent claimed depreciation on three buildings occupied and
used in its business as a department store.
Page 308 U. S. 253
During those years, the legal title to two of these properties
and an assignment of a ninety-nine year lease to the third were in
a bank as trustee for certain land trust certificate holders. These
properties had been transferred to the trustee by the respondent in
1928, and the trustee had, at the same time, leased all three back
to respondent for ninety-nine years, with option to renew and
purchase. In claiming the deduction, respondent insisted that the
capital loss from wear, tear, and exhaustion of the buildings was
falling upon it, thus entitling it to the statutory allowance for
depreciation of buildings. [
Footnote 1] The Commissioner disallowed this deduction on
the ground that the statutory right to depreciation follows legal
title. Reviewing the evidence, the Board of Tax Appeals concluded
that the transaction between respondent and the trustee bank was,
in reality, a mortgage loan, and ordered the deduction allowed,
[
Footnote 2] and the Circuit
Court of Appeals affirmed. [
Footnote 3] Upon facts which it considered "in all
essential respects identical," the Court of Appeals for the
District
Page 308 U. S. 254
of Columbia held depreciation not allowable. [
Footnote 4] Because of the different results
reached by the Courts of Appeal, we granted certiorari. [
Footnote 5]
The Federal income tax is aimed at net income determined from
gross income less items such as necessary expenses incurred or
capital consumed in earning it. Thus, the controlling statute
permits a taxpayer, in computing net income, to deduct a
"reasonable allowance for . . . exhaustion, wear and tear." While
it may more often be that he who is both owner and user bears the
burden of wear and exhaustion of business property in the nature of
capital, one who is not the owner may nevertheless bear the burden
of exhaustion of capital investment. Where it has been shown that a
lessee using property in a trade or business must incur the loss
resulting from depreciation of capital he has invested, the lessee
has been held entitled to the statutory deduction. [
Footnote 6]
Here, the taxpayer used business property in which it had a
depreciable capital investment, provided it had not recovered its
investment through a sale. The Board, in substantial effect, found
that the instrument under which the taxpayer purported to convey
legal ownership to the trustee bank was, in reality, given and
accepted as no more than security for a loan on the property; the
"rent" stipulated in the concurrently executed ninety-nine year
"lease" back was intended as a promise to pay an agreed five
percent interest on the loan, and the "depreciation fund" required
by the "lease" was intended as an amortization fund, designed to
pay off the loan
Page 308 U. S. 255
in forty-eight and one-half years. These findings are supported
by evidence which permits, at most, conflicting inferences, and are
therefore conclusive here. And, unless the Board committed error of
law, we must affirm. [
Footnote
7]
We think the Board justifiably concluded from its findings that
the transaction between the taxpayer and the trustee bank, in
written form a transfer of ownership with a lease back, was
actually a loan secured by the property involved. General
recognition has been given the "established doctrine that a court
of equity will treat a deed, absolute in form, as a mortgage when
it is executed as security for a loan of money." [
Footnote 8] In the field of taxation,
administrators of the laws and the courts are concerned with
substance and realities, and formal written documents are not
rigidly binding. Congress has specifically emphasized the equitable
nature of proceedings before the Board of Tax Appeals by requiring
the Board to act "in accordance with the rules of evidence
applicable in courts of equity of the District of Columbia."
Revenue Act 1928, § 601, 26 U.S.C. § 611.
The Government relies in part upon
Senior v. Braden,
295 U. S. 422.
Whatever the significance of that case, it can have no application
here. In the
Braden case, the equitable doctrine -- here
controlling -- of looking to extrinsic evidence behind a transfer
absolute on its face to determine whether only a security
transaction was contemplated by the parties was neither invoked nor
passed upon.
Judgment below is
Affirmed.
MR. JUSTICE REED took no part in the consideration or decision
of this case.
[
Footnote 1]
Revenue Act of 1928, c. 852, 45 Stat. 791, 799-800.
"In computing net income there shall be allowed as deductions: .
. ."
"
Depreciation. -- A reasonable allowance for the
exhaustion, wear, and tear of property used in the trade or
business, including a reasonable allowance for obsolescence. In the
case of property held by one person for life with remainder to
another person, the deduction shall be computed as if the life
tenant were the absolute owner of the property, and shall be
allowed to the life tenant. In the case of property held in trust,
the allowable deduction shall be apportioned between the income
beneficiaries and the trustee in accordance with the pertinent
provisions of the instrument creating the trust, or, in the absence
of such provisions, on the basis of the trust income allocable to
each."
[
Footnote 2]
32 B.T.A. 633. The Board found the depreciable life of the
property to be fifty years, instead of forty as originally claimed
by respondent.
[
Footnote 3]
101 F.2d 728;
cf. Commissioner v. H. F. Neighbors Realty
Co., 81 F.2d 173.
[
Footnote 4]
City National Bank Building Co. v. Helvering, 68
App.D.C. 344, 98 F.2d 216, 217.
[
Footnote 5]
308 U.S. 537.
[
Footnote 6]
Duffy v. Central R. Co., 268 U. S.
55; Appeal of Gladding Dry Goods Co., 2 B.T.A. 336, 338;
Cogar v. Commissioner, 44 F.2d 554.
See Bowman Co. v.
Commissioner, 59 App.D.C. 13, 32 F.2d 404, 405;
Nat'l City
Bank of Seattle v. United States, 64 Ct.Cls. 236,
cert.
denied,
276 U.S. 620;
Commissioner v. H. F. Neighbors Realty Co.,
supra.
[
Footnote 7]
26 U.S.C. § 641(c).
[
Footnote 8]
Peugh v. Davis, 96 U. S. 332,
96 U. S. 336;
Hughes v.
Edwards, 9 Wheat. 489,
22 U. S. 495;
Russell v.
Southard, 12 How. 139;
Teal v. Walker,
111 U. S. 242.
See cases collected in
Parks v. Mulledy, 49 Idaho
546, 290 P. 205.