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Land v. Commissioner of Internal Revenue.

September 15, 1943


On Petition for Review of the Decisions of the United States Board of Tax Appeals.

Author: Goodrich

Before BIGGS, JONES, and GOODRICH, Circuit Judges.

GOODRICH, Circuit Judge.

The taxapayer, petitioner on this appeal, is the Hoboken Land and Improvement Co., a New Jersey corporation with its office and principal place of business in Newark. Its appeal from the decisions of the Board of Tax Appeals involves income taxes for the calendar years 1934 and 1937. The three issues involved are not interrelated and will be separately considered.


The taxpayer has continuously been engaged in the business of owning and renting real estate, buildings and other structures.It claimed deductions for depreciation on "Piers and Waterfront" properties for the years 1934, 1936 and 1937. These were disallowed by the Commissioner, whose action was sustained by the Board, because of alleged excessive depreciation allowances in prior years by which it is said that petitioner recovred fully the cost of its depreciable assets. The taxpayer disputes this.

In 1926 Petitioner filed amended income tax returns and claims for refunds, for the years 1921 to 1925 inclusive, based on the claim that the depreciation sustained on its "Piers and Waterfronts" during that time was $741,679.55 in lieu of $385,561.55 as originally stated. The difference was due to the fact that on the amended return the taxpayer included in the basis for depreciation the cost of the land, a non-depreciable asset, in the assets classified as "Piers and Waterfronts". A revenue agent, in verifying the claim, examined the petitioner's books of account and allowed depreciation to the extent of $744,411.28. The tax liabilities of petitioner for the years 1921 to 1925 were adjusted accordingly and the petitioner received full benefit for the additional allowances for depreciation for those years.*fn1

The aggregate cost of the buildings or structures in the properties classified as "Piers and Waterfronts" erected prior to 1932 was $1,684,393.26. The depreciation allowed for those years was in excess of that sum. In 1932 other buildings and structures were erected at a cost of $127,837.The depreciation allowed for 1932 and 1933, on "Piers and Waterfronts", which included the 1932 additions, exceeded that sum.

Land as such is a non-depreciable asset and has so been treated ever since the Revenue Act of 1916.*fn2 The difficulties in this case began when the taxpayer included the value of the land in calculating the depreciation base on its amended returns for 1921-1925 for the items which it called "Piers and Waterfronts". the fact that the mistake was made by an independent public accountant employed by the taxpayer does not make the latter's responsibility for the returns filed on its behalf any the less. Now, although the taxpayer concedes that it was at fault therein and benefited from its own error, it nevertheless contends that the government was equally at fault since its investigator, through the examinations of the returns and the taxpayer's records which he made, had opportunity to discover the error and correct it. Having failed to do so, the argument runs, the government should not be permitted to distort petitioner's income as affected by its depreciable property by charging up to petitioner over a short period depreciation which the taxpayer could advantageously spread out over a greater span of years. If the taxpayer had its way the depreciation taken on the land and erroneously allowed would not be taken into account in calculating the depreciation base of the buildings and structures at all but would be regarded as a partial restoration of the cost or other basis of the particular parcels of land. Thus there would be left room for the depreciation claimed in the tax years in question. But we do not think that the facts and the applicable statute support the conclusion thus urged.

The Board's findings clearly show that the returns did not indicate that, in calculating the depreciation, the taxpayer had taken into account the land value. Our examination of those parts of the returns confirm such conclusion. The Board further stated that the revenue agent in making his determination of the depreciation was misled (not intentionally), by petitioner's claims and general ledger control account in which the total basis for the land and buildings and structures was reflected without segregation between parcels or between land and buildings. The taxpayer challenges this finding, pointing out that its property ledger, carrying separate accounts for each parcel of real estate, and segregating land and structures, was available to the agent along with the original returns, so that he could not have been misled. Although the agent did not testify we think the conclusion that the agent was misled was a finding within the Board's province as the trier of fact which cannot be upset on the record made and in view of the clearly established regulation that land was not a depreciable asset. The claimed depreciation was allowed as it actually appeared to have been sustained, on buildings and structures only. And claimed depreciation, though excessive, reduces the depreciation base, if it is allowed and results in a tax benefit.

Under the statutory provisions here involved the basis taken for depreciation is the adjusted basis provided in § 113(b). § 114(a) of Revenue Acts of 1934 and 1936, 26 U.S.C.A.Int.Rev. Acts pages 701, 866. Under § 113 the basis is the cost of the property adjusted "for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws." The legislative purpose underlying the italicized words has a direct bearing on this case. It is set out in the margin.*fn3 It clearly evidences an intent that where the taxpayer has claimed and been allowed an excessive depreciation, the cost basis of the property for purpoes of further depreciation shall be reduced to that extent.

It is not disputed that the taxpayer received a tax benefit from the allowance. From the Board's opinion it is also clear that the depreciation appeared to be claimed on depreciable assets. What the taxpayer had in mind or what mistaken basis of calculation was employed becomes immaterial. There is by hypothesis error in any depreciation claim which is excessive. But the quality or degree of error is immaterial under the statute. Excessive depreciatoin was allowed on the taxpayer's assets. The cost basis must be reduced accordingly.

Commissioner of Internal Revenue v. Saltonstall, 1 Cir., 1941, 124 F.2d 110, relied on by taxpayer is not in point. There a transaction was treated originally as a sale and the basis deducted to determine the gain. When it was later determined that the sales price should have been treated as rent-income, the Commissioner unsuccessfully tried to treat the amount previously deducted as the cost basis for computing the gain, as depreciation claimed and allowed. Nor is Pittsburgh Brewing Company v. Commissioner of Internal Revenue, 1938, 37 B.T.A. 439, reversed on other grounds, 3 Cir., 1939, 107 F.2d 155, helpful since it involved an attempt to apply excessive ...

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