188 F.2d 950 | 2d Cir. | 1951
Lead Opinion
This appeal concerns the deductions-, from income taxes taken by the Union Pacific Railroad during four years; there are six other appeals affecting that road and four affiliated roads, but, since all turn on the same questions, we shall discuss this one alone. Those questions are (1) whether the road, to which the Interstate Commerce Commission had until 1942 given-leave to keep its books on a “Retirement Accounting” system, in computing deductions for depreciation, was obliged to conform to § 113(b)(1)(C) of the Internal' Revenue Code;
Theoretically, the ideal way to compute-the depreciation of -a road’s “ways and
The Commissioner’s argument is that any deduction taken for an abandoned item in “Retirement Accounting” must be limited to its cost, properly reduced for depreciation before 1913. The road answers that this would falsify the theory upon which that system of accounting proceeded. For example, if a bridge having a life of fifty years were abandoned in 1914, upon the Commissioner’s theory the road would be allowed a deduction of only two per cent of its cost, and would not be allowed any deduction for the indubitable depreciation in that year of any other items. It may be answered that, even so, that would not finally forfeit the road’s right to the actual depreciation in that year of an item not then abandoned; but that it would only suspend the deduction until the item >was itself abandoned, when the aggregate of all its past annual depreciations would be allowed at once. There are, however, two answers to such an argument. It is true that, if “Retirement Accounting” had gone on indefinitely, in the end the road would have got credit for all the suspended annual increments of depreciation of an item, when that item was in its turn abandoned. Suppose, however, that “Retirement Accounting” was discontinued in a given year, as in fact happened in the year 1942. In that year there were many items which had not been abandoned, and although each of these had depreciated in all the preceding years, the road would be finally deprived of all this aggregate depreciation, for it would start in the year 1943 with “Straight Line Depreciation.” True, it would have been fair to forfeit any deductions for these depreciations, accumulated before 1942, if the system had started in 1913 with an allowance of the whole cost of the items abandoned in that year, because the depreciations before 1913 so deducted would have been the equivalent of those which would be lost by the abolition of “Retirement Accounting” ; but only in case' the depreciations before 1913 should have been allowed. Besides, there would have been another objection. Even though the “Retirement Accounting” had been allowed to go on indefinitely and though all deductions upon items not abandoned had, though suspended, been eventually allowed, they would not have been allowed in the year in which they had occurred. That is contrary to the underlying basis of all income taxation. It is plain from the foregoing ' that the Commissioner’s position is neither “Straight Line Depreciation,” nor “Retirement Accounting”; but an unjust and illogical hybrid.
The Commissioner’s position must therefore depend upon whether § 113(b)(1)(C) inexorably required a road, which had adopted “Retirement Accounting” with the leave of the Interstate Commerce Commission, so to mutilate it — for that is not too strong a word — in application. During the years in question the Regulations
“Retirement Accounting” was the generally approved system of railroads long before they had any motive to reduce taxes. It dealt with a problem whose answer inevitably involved some kind of conventional treatment, for “Straight Line Depreciation” — the alternative — does not itself conform literally to the truth, since it presupposes without any warrant in fact that all the items of “ways and structures” depreciate equally every year. Probably it is impossible to prove that, even over a large number of years, the deduction of the full cost of retired items is as close an equivalent of the aggregate actual depreciation of all the items, as “Straight Line Depreciation”; but it is also impossible to prove that it is not. Convention for convention, there is, at least on this record, no a priori reason to say that one hits nearer the mark than the other. We must always keep in mind that the allowance for the full cost of an item abandoned, say in 1914, was not a deduction for past depreciation; for, although in form it may appear to have been such, it was allowed only as a measure of those actual depreciations in that year which would otherwise never have been allowed. The purpose of § 113(b) (1) (C) was only to make sure that in computing “gain or loss” upon a piece of property, one should begin with its value when the Sixteenth Amendment took effect. It would be a complete perversion of its purpose to read it as forbidding a reasonable and authorized method of appraising depreciations after March 1, 1913. Such literalism the Supreme Court has again and again disapproved;
Order reversed; cause remanded.
. § 113(b) (1). (O), Title 26, U.S.Code.
. Article 23 (Í) (5), Regulations 86, 94.
. § 20(5), 15116 49, U.S.C.A.
. The Abby Dodge, 223 U.S. 186, 32 S.Ct. 310, 56 L.Ed. 390; United States v. Walter, 263 U.S. 15, 44 S.Ct. 10, 68 L.Ed. 137; Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596; United States v. American Trucking Associations, 310 U.S. 534, 60 S.Ct. 1059, 84 L.Ed. 1345; United States v. Hutcheson, 312 U.S. 219, 235, 61 S.Ct. 463, 85 L.Ed. 788; United States v. N. E. Rosenblum Truck Lines, 315 U.S. 50, 55, 62 S.Ct. 445, 86 L.Ed. 671; Markham v. Cabell, 326 U.S. 404, 66 S.Ct. 193, 90 L.Ed. 165.
. McGhee v. United States, D.C., 154 F.2d 101, 105; Walling v. Connecticut Co., 1
. 4 T.C. 634.
Dissenting Opinion
(dissenting in part).
I agree with the remand of the case for trial, but I disagree with the disposition made of the major issue which makes remand of little importance. For my part I should prefer to postpone decision until we have a complete record of the actual facts, rather than merely the various asseverations of the parties. Quite possibly ultimate decision would not be changed, the issue being one of statutory meaning; but fuller knowledge does justify a greater confidence in adjudication, whatever the outcome. Thus the opinion rests largely, if not wholly, on the unfairness to the railroad if it “was obliged to conform to § 113(b) (1) (C) of the Internal Revenue Code.” In argument the contention appeared to rest upon the assertion that the railroad’s records would not reflect proper additions to the pre-1913 capital account and hence taking depreciation to March 1, 1913, would be in effect a one-way approach, always subtracting but never adding to this account. The Commissioner contests this and a trial might well show the railroad’s books to be better than it thinks and sufficient at least to set up tolerably clear accounts for the purpose in hand. But if we must now make decision, I cannot avoid a conclusion that an express statutory mandate — applying equally to all taxpayers, with no exceptions for railroads — has been disobeyed.
It should be made clear just what the statute does, and for what purpose; for
“ * * * (C) in respect of any period prior to March 1, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent sustained.” (Emphasis supplied.)
This is now so old a rule, United States v. Ludey, 274 U.S. 295, 297, 298, 47 S.Ct. 608, 71 L.Ed. 1054, that, if for no other ground than ancient use in income tax law, one would, it seems, hesitate to upset it for all corporations or even individuals. Further, given the definite change from unconstitutionality to constitutionality of the income tax, some method, more or less arbitrary in any event, had to be devised in 1913 to settle these problems. Certainly I cannot now think of a better, or even a fairer, one. But if we now read some exceptions into the statute they surely must apply to all taxpayers equally in like situation. What are the facts that might give special position to railroads — other than the mere passage of time which may prevent other taxpayers from now raising question ? A full trial might illuminate these matters further, but at present I have difficulty in seeing what they are. The I. C. C. rules of accounting until 1942 do not seem to me to answer this narrow question, nor do the Commissioner’s rulings or regulations dealing with the separate matter of adjusting yearly income tax payments after the initial take-off. Further, of course, the Commissioner cannot estop the United States or set aside clear statutory commands.
Retirement accounting could be employed — or claimed — by a business corporation or individual. Suppose the “small-business” man, about which we now hear so much, was to claim, in reduction of a substantial capital gain, that his 1913 value was substantially the original cost of the property whenever acquired because of his practice in always replacing his machinery and plant whenever there was need. Could he not rely upon this decision as his authority? Perhaps time has sealed the mouths of all except the group of taxpayers now before us; but how can we be sure we are not now opening a veritable Pandora’s box ?
There seems little gain in discussion by me here of the respondent’s further claim of res judicata because of the earlier Los Angeles case, though I should think the contention not valid and am hence brought to the discussion of the Revenue Code provision above.