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National Bulk Carriers Inc. v. United States

decided: May 8, 1964.

NATIONAL BULK CARRIERS, INC., APPELLANT,
v.
UNITED STATES OF AMERICA. NATIONAL BULK CARRIERS, INC., V. UNITED STATES OF AMERICA, APPELLANT.



Author: Staley

Before STALEY, GANEY and SMITH, Circuit Judges.

STALEY, CIRCUIT JUDGE.

THE PRIMARY QUESTION POSED BY THESE APPEALS IS WHETHER THE DISTRICT COURT CORRECTLY DETERMINED THE COST BASIS FOR TAX PURPOSES OF THREE VESSELS PURCHASED BY THE PLAINTIFF FROM THE UNITED STATES, THE PRICES OF WHICH WERE ADJUSTED PURSUANT TO THE MERCHANT SHIP SALES ACT OF 1946, 50 U.S.C. APPENDIX, §§ 1735-1746 (1958 ED.). THE DISTRICT COURT HELD THAT THE COST BASIS OF THESE VESSELS IS THEIR "STATUTORY SALES PRICE" AS COMPUTED UNDER THE ACT, REJECTING THE PLAINTIFF'S CONTENTION THAT ALL OF THE ADJUSTMENTS AND CREDITS REFERRED TO IN § 9(B) OF THE STATUTE, 50 U. S.C. APPENDIX, § 1742, MUST BE APPLIED TO DETERMINE THE PROPER COST BASIS. 214 F. SUPP. 585 (D. DEL. 1963).

THE OPERATIVE FACTS HAVE BEEN STIPULATED AND ARE FULLY SUMMARIZED IN THE OPINION OF THE DISTRICT COURT. ACCORDINGLY, THEY WILL BE REPEATED HERE ONLY IN SUCH BRIEF OUTLINE FORM AS IS ESSENTIAL TO A DETERMINATION OF THE ISSUES RAISED IN THIS COURT.

THE PLAINTIFF PURCHASED THE VESSELS IN QUESTION DURING THE SECOND WORLD WAR AT A PRICE OF $7,707,957.12.*fn1 A PORTION OF THIS PRICE WAS PAID FROM AN ALLOWANCE FOR TWO VESSELS TRADED IN AT THE TIME OF THE PURCHASES. THE NEW VESSELS WERE THEN CHARTERED BY THE GOVERNMENT, AND ON ITS FEDERAL TAX RETURNS PLAINTIFF REPORTED THIS CHARTER HIRE AS INCOME FOR THE YEARS IN WHICH IT WAS RECEIVED, IN ADDITION TO MAKING DEPRECIATION DEDUCTIONS FOR THE VESSELS. FOLLOWING THE ENACTMENT OF THE MERCHANT SHIP SALES ACT OF 1946, THE PLAINTIFF APPLIED FOR A PRICE ADJUSTMENT UNDER § 9 OF THE STATUTE.

THE ADJUSTED "STATUTORY SALES PRICE" OF THE THREE VESSELS AS COMPUTED IN ACCORDANCE WITH § 3(D) WAS $5,107,796.02.*fn2 ACCORDINGLY, UNDER § 9(B)(3), THE OUTSTANDING MORTGAGE INDEBTEDNESS WAS REDUCED BY $1,886,619.97. HOWEVER, § 9(B) PROVIDES FOR ADDITIONAL ADJUSTMENTS, MORE FULLY DISCUSSED LATER IN THIS OPINION, INCLUDING A CREDIT TO THE MARITIME COMMISSION FOR ALL AMOUNTS OF CHARTER HIRE PAID FOR THE USE OF THE VESSELS PRIOR TO THE DATE OF THE ACT, A CREDIT TO THE APPLICANT FOR CHARTER HIRE HE WOULD HAVE RECEIVED FOR THE USE OF ANY VESSEL TRADED IN AT THE TIME OF THE ORIGINAL PURCHASE, AND A RECOMPUTATION OF FEDERAL TAX LIABILITY BASED ON THESE ADJUSTMENTS. THESE ADDITIONAL ADJUSTMENTS RESULTED IN A CREDIT OF $1,397,283.08 IN FAVOR OF THE MARITIME COMMISSION. THIS AMOUNT WAS THEN DEDUCTED FROM THE $1,886,619.97 CREDIT DUE THE PLAINTIFF ON ITS MORTGAGE INDEBTEDNESS, RESULTING IN A NET REDUCTION IN MORTGAGE INDEBTEDNESS OF $489,336.89. THE PLAINTIFF THEN SUBTRACTED THAT AMOUNT FROM THE AGREED UPON COST BASIS OF THE VESSELS AS OF THE DATE OF THE ACT, $6,602,366.17 TO ARRIVE AT $6,113,029.28 AS ITS COST BASIS UNDER THE STATUTE. ITS DEPRECIATION DEDUCTIONS FOR THE TAX YEARS IN QUESTION, 1946-1953 AND 1955, WERE BASED ON THAT FIGURE.*fn3

THE UNITED STATES, ON THE OTHER HAND, SUCCESSFULLY CONTENDED IN THE PLAINTIFF'S SUIT FOR TAX REFUND IN THE DISTRICT COURT THAT THE PROPER COST BASIS OF THE VESSELS IS THEIR ADJUSTED "STATUTORY SALES PRICE," $5,107,796.02, OR $1,005,233.26 LESS THAN THE FIGURE USED BY THE PLAINTIFF. THIS JUDGMENT WAS PREMISED ON THE VIEW THAT THE ADDITIONAL ADJUSTMENTS REQUIRED BY § 9 WERE MERELY INTENDED TO ELIMINATE THE BENEFITS AND DETRIMENTS OF PRE-ENACTMENT OWNERSHIP AND WERE NOT TO BE CONSIDERED IN DETERMINING THE COST BASIS OF THE VESSELS.

SECTION 9(B), 50 U.S.C. APPENDIX, § 1742, CONTAINS DETAILED PROVISIONS FOR DETERMINING THE AMOUNT OF THE PRICE ADJUSTMENT ON PRIOR SALES TO CITIZENS. WE THINK IT INAPPROPRIATE TO SET FORTH THAT SECTION IN ITS ENTIRETY BUT SHALL BRIEFLY SUMMARIZE IT. THE FIRST SENTENCE OF THE SECTION STATES THAT THE ADJUSTMENT IN PRICE "SHALL BE MADE, AS HEREINAFTER PROVIDED, BY TREATING THE VESSEL AS IF IT WERE BEING SOLD TO THE APPLICANT ON THE DATE OF THE ENACTMENT OF THIS ACT [MARCH 8, 1946], AND NOT BEFORE THAT TIME. THE AMOUNT OF SUCH ADJUSTMENT SHALL BE DETERMINED AS FOLLOWS * * *." (EMPHASIS SUPPLIED.) EIGHT COMPREHENSIVE PARAGRAPHS FOLLOW THIS DECLARATION. PARAGRAPH (1) REQUIRES AN INITIAL PAYMENT OF 25% OF THE STATUTORY SALES PRICE OF THE VESSEL. ANY PAYMENTS MADE UPON THE ORIGINAL PURCHASE PRICE IN EXCESS OF THAT AMOUNT ARE CREDITED TO THE APPLICANT, AND IF SUCH PAYMENTS WERE LESS THAN THAT PROPORTION OF THE STATUTORY SALES PRICE THE DIFFERENCE MUST BE PAID TO THE MARITIME COMMISSION. PARAGRAPHS (2) AND (3) READJUST THE MORTGAGE INDEBTEDNESS TO AN AMOUNT EQUAL TO THE EXCESS OF THE STATUTORY SALES PRICE OVER THE SUM RETAINED BY THE UNITED STATES UNDER PARAGRAPH (1) PLUS THE READJUSTED TRADE-IN ALLOWANCE (COMPUTED UNDER PARAGRAPH 7) OF ANY VESSEL EXCHANGED BY THE APPLICANT ON THE ORIGINAL PURCHASE. THUS, THESE THREE PARAGRAPHS CHARGE THE APPLICANT WITH THE STATUTORY SALES PRICE OF THE VESSEL.

THE CREDIT ALLOWED IN PARAGRAPH (4) IS NOT APPLICABLE TO THE CASE AT BAR. PARAGRAPH (5) CREDITS THE APPLICANT WITH INTEREST FOR THE LOSS OF HIS INVESTMENT AT THE RATE OF 3 1/2% PER ANNUM FROM THE DATE OF THE ORIGINAL DELIVERY OF THE VESSEL TO THE DATE OF THE ACT. PARAGRAPH (6) REQUIRES THE APPLICANT TO CREDIT THE MARITIME COMMISSION WITH ALL AMOUNTS PAID BY THE UNITED STATES AS CHARTER HIRE FOR THE USE OF THE VESSEL PRIOR TO THE DATE OF THE ACT. CONVERSELY, THE COMMISSION IS REQUIRED TO CREDIT THE APPLICANT WITH THE AMOUNT OF CHARTER HIRE WHICH WOULD HAVE BEEN PAID FOR THE USE OF ANY VESSEL EXCHANGED ON THE ORIGINAL PURCHASE. PARAGRAPH (7) PROVIDES FOR A READJUSTMENT OF THE TRADE-IN ALLOWANCE FOR ANY VESSEL EXCHANGED ON THE ORIGINAL PURCHASE. PARAGRAPH (8) IS A DETAILED TAX PROVISION, THE EFFECT OF WHICH IS TO RECOMPUTE THE APPLICANT'S TAXES BY DISALLOWING DEPRECIATION AND AMORTIZATION ON THE NEW VESSEL FOR THE PERIOD PRIOR TO THE ACT; BY TREATING CHARTER HIRE RETURNED TO THE GOVERNMENT UNDER PARAGRAPH (6) AS NEVER HAVING BEEN RECEIVED AS INCOME; AND BY TREATING THE INTEREST AND CHARTER HIRE CREDITED TO THE APPLICANT UNDER PARGRAPHS (5) AND (6) AS INCOME IN THE TAXABLE YEAR OF THE ACT.

IT WILL THUS BE SEEN THAT THE STATUTE DOES NOT SPECIFICALLY STATE WHICH FIGURE IS TO BE USED AS THE APPLICANT'S COST BASIS FOR DEPRECIATION PURPOSES. THE PLAINTIFF ASSERTS THAT THE STATUTORY MANDATE STATING "THE AMOUNT OF THE ADJUSTMENT SHALL BE DETERMINED AS FOLLOWS" COUPLED WITH THE ENSUING EIGHT PARAGRAPHS IS A CLEAR INDICATION THAT ALL OF THOSE PARAGRAPHS MUST BE APPLIED TO DETERMINE ITS COST BASIS. THE GOVERNMENT ARGUES THAT THE STATUTE WAS INTENDED TO PUT PRE- AND POST-ENACTMENT PURCHASERS ON THE SAME BASIS BY ESTABLISHING A UNIFORM "STATUTORY SALES PRICE" FOR THE SAME CLASS OF VESSELS, AND THAT THE PROVISIONS OF § 9 RELIED UPON BY THE PLAINTIFF WERE SIMPLY INTENDED TO EFFECT AN UNWINDING OF THE PRIOR CONTRACT OF SALE.

AN EXAMINATION OF THE STATUTORY SCHEME OF § 9 TOGETHER WITH A STUDY OF ITS LEGISLATIVE HISTORY CONVINCES US THAT THE POSITION OF THE GOVERNMENT IS SOUND. THE GENESIS OF THE LEGISLATION IS FOUND IN THE COMMITTEE REPORTS OF BOTH THE HOUSE AND THE SENATE. H.R. REP. NO. 831, 79TH CONG., 1ST SESS. 2-3 (1945), U.S. CODE CONG. SERV., 79TH CONG., 2D SESS., PP. 1086, 1087-1088 (1946); S. REP. NO. 807, 79TH CONG., 1ST SESS. 1-2 (1945). THESE REVEAL A CONGRESSIONAL PURPOSE TO AVOID THE CATASTROPHIC ECONOMIC CONDITIONS IN THE MARITIME INDUSTRY WHICH FOLLOWED WORLD WAR I WHEN THE UNITED STATES DISPOSED OF ITS MERCHANT VESSELS WITHOUT PRESCRIBING THE PRICE AT WHICH THEY WERE TO BE SOLD. AS A RESULT PRICES DECLINED SEVERELY, AND THOSE WHO HAD PREVIOUSLY PURCHASED VESSELS AT HIGHER APRICES FACED BANKRUPTCY. THE METHOD DEVISED BY CONGRESS TO AVOID A RECURRENCE OF THIS SITUATION AFTER WORLD WAR II WAS THE ESTABLISHMENT OF A "STATUTORY SALES PRICE" FOR EACH CLASS OF VESSELS. WITH REGARD TO THE PLIGHT OF THOSE WHO HAD PURCHASED VESSELS AT INFLATED PRICES PRIOR TO THE ENACTMENT OF THE BILL, THE HOUSE REPORT STATES:

"THESE PURCHASERS WILL SUFFER AN UNWARRANTED DISCRIMINATION UNLESS THE PRICE AT WHICH THEY PURCHASED OR AGREED TO PURCHASE THESE VESSELS IS ADJUSTED TO CONFORM TO THE STATUTORY SALES PRICE PRESCRIBED IN THE BILL. THERE WOULD BE NOTHING MORE DEMORALIZING TO A FLOOR PRICE ON WARBUILT VESSELS THAN TO FAIL TO MAKE THIS ADJUSTMENT, EVEN THOUGH IT INVOLVES RELATIVELY LARGE AMOUNTS OF MONEY.THE EFFECT OF MAKING THE ADJUSTMENT IS THE SAME AS IF THE BILL HAD BEEN ENACTED AT THE BEGINNING OF THE WAR PERIOD AND ALL SALES DURING THE WAR PERIOD HAD BEEN AT THE STATUTORY SALES PRICE.

"THE AMOUNT OF THE ADJUSTMENT (SEC. 9) IN EACH CASE IS FIRST APPLIED TO REDUCE ANY MORTGAGE INDEBTEDNESS TO THE COMMISSION ON THE VESSEL, AND THE BALANCE, IF ANY, IS REFUNDED TO THE PURCHASER.

"AS A CONDITION TO RECEIVING AN ADJUSTMENT UNDER THIS PROVISION OF THE BILL, THE PURCHASER MUST AGREE TO TREAT THE SALE FOR ALL PURPOSES AS IF IT HAD BEEN MADE UNDER THE BILL, FOR THE BILL REQUIRES THAT THE CHARTER HIRE CHARGED TO THE UNITED STATES FOR BARE-BOAT USE OF THE VESSEL SINCE THE SALE MUST BE READJUSTED TO AN AMOUNT EQUAL TO 15 PERCENT PER ANNUM OF THE READJUSTED PRICE. * * * THESE COUNTER ADJUSTMENTS IN FAVOR OF THE UNITED STATES WILL OF COURSE SUBSTANTIALLY LESSEN THE GROSS EFFECT OF READJUSTING THE PRIOR SALES PRICE DOWN TO THE STATUTORY SALES PRICE PROVIDED IN THE BILL." (EMPHASIS SUPPLIED.) U.S. CODE CONG. SERV., 79TH CONG., 2D SESS., AT 10971098 (1946). THE SENATE REPORT IS TO THE SAME EFFECT.S. REP. NO. 807, 79TH CONG., 1ST SESS., AT 19. THUS, THE ORIGINAL BILLS IN BOTH THE HOUSE AND SENATE ...


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