In conclusion, the court holds that plaintiff's unadjusted basis for determining its 1946 gain or loss relating to its sale of the Venezuelan rights is the fair market value on July 12, 1923, of the property then exchanged for those rights (less the cash then received).
(2) The SS. Caribbean Depreciation Issue
On December 12, 1942, plaintiff purchased the tanker 'SS. Caribbean' from the United States Maritime Commission for $ 3,054,960.86. Plaintiff paid $ 781,670.86 cash at the time of the purchase and the $ 2,273,290 balance of the purchase price was evidenced by mortgage notes. Between December 12, 1942, and March 8, 1946, plaintiff paid cash to the Commission on account of the mortgage notes in the amount of $ 681,987. The balance due on the mortgage notes on March 8, 1946, was $ 1,591,303.
On May 29, 1946, plaintiff filed with the Commission
an application for an adjustment in the price of the Caribbean. On October 12, 1948, the Commission advised the plaintiff that an adjustment of $ 528,480.21 on its mortgage was proposed, before taking into account applicable tax credits. Plaintiff concurred with the Commission's computation, subject to further adjustment covering interest from March 8, 1946.
On April 5, 1949, and January 27, 1950, plaintiff and the Commission agreed that the amount of the adjusted mortgage indebtedness on the Caribbean as of March 8, 1946, before allowance of the tax credit to which plaintiff was entitled under § 9(b)(8) of the Merchant Ship Sales Act of 1946, was to be $ 1,062,822.79. The amount of the tax credit was subsequently determined to be $ 173,522.31 resulting in an adjusted mortgage indebtednes as of March 8, 1946, of $ 889,300.48 after application of the tax credit.
Subsequent to March 8, 1946, plaintiff paid $ 681,987 to the Commission to reduce the mortgage indebtedness. These payments consisted of $ 227,329 on December 15, 1946, 1947, and 1948. On July 22, 1949, the unpaid balance of the adjusted mortgage indebtedness was $ 207,313.48. The adjusted mortgage indebtedness was satisfied in full on that date by payment by plaintiff to the Commission of $ 122,582.56, and the crediting by the Commission against the mortgage indebtedness of excess interest of $ 84,730.92 paid by plaintiff to the Commission for the period March 8, 1946, to December 14, 1948; the latter amount was disallowed by the Commissioner of Internal Revenue as a deduction.
Upon examination of plaintiff's consolidated corporation income tax return for the taxable year 1946, the Commissioner of Internal Revenue determined that the depreciable cost (exclusive of improvements) of the Caribbean on March 8, 1946, was $ 1,555,828.97 and that for the period March 8, 1946, to December 31, 1946, plaintiff was entitled to depreciation in the amount of $ 75,974.70.
Plaintiff contends that the depreciable cost (exclusive of improvements) of the Caribbean on March 8, 1946, should be $ 2,352,958.34, and that it is entitled to have the depreciation for the period March 8, 1946, to December 31, 1946, computed on that amount, plus improvements.
The taxpayer contends that the cost of the SS. Caribbean was $ 2,352,958.34, representing the original purchase price of $ 3,054,960.86 less the reduction in price of $ 702,002.52 granted by the Maritime Commission. This cost, taxpayer argues, should be its basis for computing depreciation on the vessel for the purpose of federal income tax.
Defendants contend that the taxpayer's basis for computing depreciation should be $ 1,638,688.97,
which is both the actual cost of the vessel and its 'statutory sales price' as defined by the Merchant Ship Sales Act of 1946.
The computations of the parties differ by $ 714,269.37, the amount which defendants argue should not be considered as part of plaintiff's cost of the vessel. The defendants admit that plaintiff made total 'payments' of $ 2,352,958.34, but they argue that the total 'cost' of the vessel was $ 1,638,688.97. They contend that the $ 714,269.37 difference was due to certain adjustments required by the Merchant Ship Sales Act of 1946 to enable plaintiff to purchase the vessel at the statutory sales price of $ 1,638,688.97. As set forth in defendants' brief, those adjustments were:
Total charter hire paid to taxpayer by
the United States from 12/12/42
3/8/46 which taxpayer had to repay to
the United States. $ 1,232,876.71
Credits allowed to taxpayer against
liability for charter hire:
(a) Interest on original purchase
from 12/12/42 to 3/8/46 at 3 1/2% $ 345,085.03
(b) Tax credit computed by allowing
benefit to taxpayer for tax paid on
charter hire income and disallowing
benefit for deduction for
depreciation allowed from 12/12/42
to 3/8/46 173,522.31 518,607.34
Charter hire repayable after allowance
of credits. $ 714,269.37
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