July 26, 1932
DIAMOND ALKALI CO.
HEINER, COLLECTOR OF INTERNAL REVENUE; HEINER, COLLECTOR OF INTERNAL REVENUE, V. DIAMOND ALKALI CO.; LEWELLYN V. SAME.
On Petition for Rehearing.
Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.
DAVIS, Circuit Judge.
The Diamond Alkali Company filed a petition for rehearing on two points and seeks:
1. To have the tax rate of 54.54 per cent. and 18.31 per cent., determined by the Commissioner in a special assessment to be the fair and just rate for this corporation for 1918 and 1919, respectively, applied to its income as reduced by the decision of this court.
2. A deduction for depreciation on so much of its war facilities as were not amortized.
These questions will be considered in the above order.
1. The taxes for 1918 and 1919 are involved. The Commissioner allowed a deduction for 1918 for amortization of war facilities of $315,956.89 and for 1919 a deduction of $71,267.51. But this court on reversing the redetermination of the Board of Tax Appeals allowed a deduction for 1918 of $790,187.16 and a deduction for 1919 of $175,838.94, making a total allowance for both years of $966,026.10, instead of $327,224.40 allowed by the Commissioner. The net income of the petitioner, as determined by the Commissioner for 1918, was $3,921,143.63 and for 1919, $2,708,248.07. Applying the rate of 54.54 per cent. to the income of 1918 as determined by him, the Commissioner found that the company owed a profits tax of $2,084,324.26 for that year, and applying the rate of 19,31 per cent. to the income for 1919, he found it owed a profits tax of $495,871.87 for that year.
The net income of the petitioner for the two years was reduced by our former decision by $578,801.70, yet the Commissioner insists, and we held, that the total amount of the tax should not be reduced. If it is not reduced it would result in a tax rate of 61.62 per cent. for 1918 and a rate of 19.05 per cent. for 1919, instead of 54.54 per cent. and 18.31 per cent. for those years, respectively, as fixed by the Commissioner. This new rate would in effect be fixed by the court, which allowed deductions, but refused to apply the rate fixed by the Commissioner to the reduced income. In other words, if the contention of the collector prevails, the petitioner will pay the same tax for the two years that it would have paid if its taxable income had not been reduced by $578,801.70. The collector contends that although the corporation's income was reduced more than one-half million dollars, its tax must nevertheless remain the same for the reason that this court is without power to review the Commissioner's determination of the taxpayer's liability for taxes inasmuch as the taxes were determined by a special assessment.
The allowance or denial of a special assessment provided for in sections 327 and 328 of the Revenue Act of 1918 (40 Stat. 1093) is an administrative question committed to the discretion or judgment of the Commissioner of Internal Revenue, subject, however, to review by the Board of Tax Appeals. Whether or not there are abnormal conditions affecting capital, as alleged in this case, or income which would work upon the corporation an exceptional hardship without the benefit of a special assessment; what are representative corporations to be used as comparatives, engaged in a like or similar trade or business; whether or not they are similarly circumstanced with respects to income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits, and all other relevant facts and circumstances -- are questions for the sole determination of the Commissioner. Blair v. Oesterlein Machine Co., 275 U.S. 220, 48 S. Ct. 87, 72 L. Ed. 249; Williamsport Wire Rope Company v. United States, 277 U.S. 551, 559, 48 S. Ct. 587, 72 L. Ed. 985. They have been committed by Congress to his judgment and discretion which may not be exercised by the court. He has considered all these questions and in the light of all the facts has determined rates which must be accepted by the court as fixed, fair and just. In holding that the rates fixed by him shall be applied to the petitioner's true income, the court does not usurp the discretionary functions expressly conferred upon him.
The collector raises the objection that if the Commissioner had not made a mistake in not allowing proper depreciation, other representative corporations might have been selected from which a different rate might have been fixed. This may or may not be true. It is purely supposititious. But when the Commissioner applied these rates found and fixed by him as the proper ones to an improper income and thus unjustly increased the taxes of the petitioner, the court does have power to order that the proper rate be applied to the proper income so that the taxpayer will pay only a proper and just tax. The power of the Commissioner to determine an abnormality, to select representative corporations as comparatives, to allow a special assessment, and fix the rate thereof, does not carry with it, power so to fix the income on which the profits tax must be computed that an admittedly unjust amount of the tax is put beyond the review of the court. It is a bare possibility that the reduction of the income to the proper and just amount might have some conceivable effect on the selection of representative corporations. That was a matter for the Commissioner, but when he found the correct rate, he could not apply it to an incorrect and false income and produce an unjust tax.
2.The second question is whether or not the taxpayer should have been allowed depreciation on so much of the war facilities as were not amortized.
The taxpayer's contention is tersely presented in the following statement:
1. Facilities Based on Production of Soda Ash
1917 cost less depreciation $543,082.60
Amortization allowed, 49.803%
of cost 270,473.60
Unamortized cost $272,609.00
1918 cost $1,002,144.35
Amortization allowed, 49.8034%
of cost $499,101.96
Unamortized cost $503,042.39
2.Boiler House Equipment
1917 cost $56,583.88
Amortization 15% 8,487.58
Unamortized cost $48,096.30
1918 cost $140,015.57
Amortization 15% 21,002.34
Unamortized cost $129,013.23
3. Flaking Machine
1918 cost $2,880.00
Amortization allowed 1,631.81
Unamortized cost $1,248.19
4. Six Tank Cars
1918 cost $23,655.00
Amortization allowed 13,402.92
Unamortized cost $10,252.08
1917 Unamortized Costs on which Depreciation at 10.4% is claimed.
10.4% of above is $33,353.35
1918 Unamortized Costs on which Depreciation at 5.2% is Claimed.
5.2% of above is $33,464.91.
The Commissioner did not allow any amortization on the limestone dock which cost $340,000, but the District Court did allow amortization at the rate of 32 per cent. or a deduction of $108,800. This much of the cost of the limestone dock which has been allowed by way of amortization should not be included in the depreciation base, for the Commissioner had already allowed depreciation at the rate of 10.4 per cent. on the entire cost of $340,000. Therefore, 10.4 per cent. of the amortized cost should be deducted from any additional depreciation. This is 10.4 per cent. of $108,800, or $11,315.20.
The total additional depreciation claimed by the taxpayer is therefore as follows:
10.4% of unamortized 1917 costs $33,353.35
5.2% of unamortized 1918 costs 33,464.91
Less 10.4% of $108,800, amortized
cost of dock $11,315.20
Additional depreciation $55,503.06
There is no contention, if we correctly understand the parties, that the above statement is not correct as to amounts and rate of depreciation, if depreciation is to be allowed in addition to allowance for amortization.
There is a question, however, as to whether or not amortization was intended to exclude depreciation for obsolescence or wear and tear. This is shown by the legislative history of the sections in question of the Revenue Act of 1918 (40 Stat. 1077) which controls this case. The Committee on Ways and Means, having charge of this measure, in its report, said that many facilities provided for war purposes would be of little value after the end of the war; that under the law then existing, it was impossible to allow deductions other than for "ordinary exhaustion, wear and tear, and depletion of such property"; and that the purpose of the provision was "to allow special amounts for amortization, according to the peculiar conditions in each case." House Report 767, 65th Congress, 2d Session, p. 10; Senate Report 617, 65th Congress, 3d Session, p. 7. It is thus evidence that the allowance for amortization was not intended to exclude allowance for depreciation on unamortized war facilities. This question is settled by the case of the United States Cartridge Company v. United States, 284 U.S., 511, 516, 52 S. Ct. 243, 245, 76 L. Ed. 431, where the Supreme Court in construing this provision said that "deductions for amortization were not intended to exclude obsolescence, but rather were to be made in addition or having regard to allowances deducted on account of obsolescence and the like."
The record, it seems to us, shows that the allowances made were for amortization only and not for depreciation for exhaustion, wear, tear, and obsolescence for the year 1918. The taxpayer is entitled to a deduction for depreciation for exhaustion, wear, tear, and obsolescence on its unamortized war facilities. No question has been raised as to the correctness of the composite rate of 10.4 per cent. for depreciation, for exhaustion, etc., on war facilities installed in 1917 and 5.2 per cent. on those installed in 1918.
The order of the court is that the rates fixed by the Commissioner for the years 1918 and 1919 will be applied to the reduced income, and that the order of the District Court denying deductions for depreciation on unamortized war facilities is reversed.
THOMPSON, Circuit Judge, dissents.
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