[20]*20OPINION.
Littleton :
This proceeding involves two issues:
(1) Whether under the facts the costs subject to amortization should include the costs which had been incurred by the Coastwise Transportation Co. prior to April 6, 1917, under the contract which it had entered into with the New York Shipbuilding Corporation in 1915 for the construction of the 8. 8. Fairmont.
(2) The period over which, and manner in which, the allowable amortization is to be spread.
A third issue was raised in the petition as to the residual value of the 8. 8. Fairmont in postwar use, but the parties have stipulated that such value is not less than $490,168, which, on the basis of $56 per ton on an agreed dead weight tonnage of the vessel of 8,753 tons, is the figure fixed by the Commissioner, and no evidence was introduced as to its actual residual value in postwar use. This value will, therefore, be affirmed, and the point will not be considered further.
In 1915, the Coastwise Transportation Co. entered into a contract with the New York Shipbuilding Corporation for the construction of a vessel at a cost of $507,500. Prior to April 6, 1917, the Coast-wise Transportation Co. had incurred costs under this contract of $268,502.73, but had actually expended up to August 8, 1917, only $240,303.40. On August 3, 1917, the United States Shipping Board Emergency Fleet Corporation, acting under statutory authority and an executive order of the President, issued a requisition order to the New York Shipbuilding Corporation on account of certain vessels then in process of construction in the New York Shipbuilding Corporation’s plant, among them being the vessel here in question, and proceeded to complete such vessels at a cost in excess of that originally contracted for by the Coastwise Transportation Co.
Subsequently, in recognition of the fact that costs in the construction of the vessels were greater than those originally contracted for, and with the desire to transfer the vessels when completed to [21]*21an owner1 or agency for operation under the orders of the United States Shipping Board Emergency Fleet Corporation, a three-party contract was entered into by the United States Shipping Board Emergency Fleet Corporation, the New York Shipbuilding Corporation, and the American International Corporation, under which the compensation to be paid the New York Shipbuilding Corporation was fixed at a price in excess of that originally agreed upon in the contract between the New York Shipbuilding Corporation and the Coastwise Transportation Co. This contract provided further, that if the former owners of these vessels, i. e., the parties who had contracts with the New York Shipbuilding Corporation for the construction of vessels at the time the requisition order in question was issued, did not avail themselves of the privilege of taking over the vessels when offered to them on the basis of the total cost to the United States Shipping Board Emergency Fleet Corporation, the American International Corporation would take them over on this basis.
In determining the amounts to be paid the New York Shipbuilding Corporation on a cost-plus basis, it was provided that whatever payments had previously been made to it by the former owners should be credited against the total cost in favor of the United States Shipping Board Emergency Fleet Corporation.
On February 15, 19ÍS, the Coastwise Transportation Co. accejjted the offer of the United States Shipping Board Emergency Fleet Corporation for the acquisition of the S. S. Fairmont and this vessel was transferred to it, for which the Coastwise Transportation Co. paid $803,764.60 made up as follows: Cash, $485,000; assumption of a liability of $78,461.20 which it later paid; and release of all claims which the Coastwise Transportation Co. had against the Government on account of the requisition of the vessel, which claims the parties have stipulated as being worth not less than $240,303.40, which is likewise the amount which the Coastwise Transportation Co. had paid to the New York Shipbuilding Corporation on account of the work done on this vessel under its original contract at the time the requisition order became effective.
On the basis of the transaction on February 15,1918, the petitioner contends that the cost of the 8. 8. Fairmont to its predecessor was $803,764.60 and that this amount, less the value in use of $490,168, is the amortization allowance to which it is entitled, whereas the Commissioner contends that the total costs of $803,764.60 should be reduced by $268,502.72 before determining the amortization allowance since costs to this extent had been incurred by the Coastwise Transportation Co. prior to April 6, 1917, and, therefore, were not costs which were borne by it after April 6, 1917,
[22]*22The provisions of the statute under which the deduction is claimed is section 234(a) (8), Revenue Act of 19X8, and reads in part as follows:
(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(S) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. * * ■ *
In effect the petitioner says that on February 15, 1918, the Coast-wise Transportation Co. acquired the S. S. Fairmont, and, therefore, under the above-quoted provision its total cost on that date must govern, regardless of what may have happened in prior transactions, whereas the respondent says that of the costs contended for, $268,502.72 had been borne by the Coastwise Transportation Co. prior to April 6, 1917, and, therefore, could not be subject to amortization. It therefore becomes a question of determining the effect of the requisition order of August 3, 1917, and the subsequent transfer of the vessel to the Coastwise Transportation Co. In other words, did the requisition order in question result in the vesting of title to the vessel in its uncompleted state in the United States Shipping Board Emergency Fleet Corporation, and leave the Coast-wise Transportation Co. with only a claim for money damages against the United States? And was the transaction of February 15, 1918, an entirely new acquisition with which the former transactions had no necessary legal connection?
Upon a consideration of all the facts in the case, we are convinced that both of the above questions must be answered in the affirmative and that the costs to be considered in determining the amortization allowance are $803,764.60.
Our first question is as to the effect of the requisition order in question. It is not necessary in this opinion to determine in whom title to the uncompleted ship vested prior to August 3, 1917— whether the Coastwise Transportation Co.
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[20]*20OPINION.
Littleton :
This proceeding involves two issues:
(1) Whether under the facts the costs subject to amortization should include the costs which had been incurred by the Coastwise Transportation Co. prior to April 6, 1917, under the contract which it had entered into with the New York Shipbuilding Corporation in 1915 for the construction of the 8. 8. Fairmont.
(2) The period over which, and manner in which, the allowable amortization is to be spread.
A third issue was raised in the petition as to the residual value of the 8. 8. Fairmont in postwar use, but the parties have stipulated that such value is not less than $490,168, which, on the basis of $56 per ton on an agreed dead weight tonnage of the vessel of 8,753 tons, is the figure fixed by the Commissioner, and no evidence was introduced as to its actual residual value in postwar use. This value will, therefore, be affirmed, and the point will not be considered further.
In 1915, the Coastwise Transportation Co. entered into a contract with the New York Shipbuilding Corporation for the construction of a vessel at a cost of $507,500. Prior to April 6, 1917, the Coast-wise Transportation Co. had incurred costs under this contract of $268,502.73, but had actually expended up to August 8, 1917, only $240,303.40. On August 3, 1917, the United States Shipping Board Emergency Fleet Corporation, acting under statutory authority and an executive order of the President, issued a requisition order to the New York Shipbuilding Corporation on account of certain vessels then in process of construction in the New York Shipbuilding Corporation’s plant, among them being the vessel here in question, and proceeded to complete such vessels at a cost in excess of that originally contracted for by the Coastwise Transportation Co.
Subsequently, in recognition of the fact that costs in the construction of the vessels were greater than those originally contracted for, and with the desire to transfer the vessels when completed to [21]*21an owner1 or agency for operation under the orders of the United States Shipping Board Emergency Fleet Corporation, a three-party contract was entered into by the United States Shipping Board Emergency Fleet Corporation, the New York Shipbuilding Corporation, and the American International Corporation, under which the compensation to be paid the New York Shipbuilding Corporation was fixed at a price in excess of that originally agreed upon in the contract between the New York Shipbuilding Corporation and the Coastwise Transportation Co. This contract provided further, that if the former owners of these vessels, i. e., the parties who had contracts with the New York Shipbuilding Corporation for the construction of vessels at the time the requisition order in question was issued, did not avail themselves of the privilege of taking over the vessels when offered to them on the basis of the total cost to the United States Shipping Board Emergency Fleet Corporation, the American International Corporation would take them over on this basis.
In determining the amounts to be paid the New York Shipbuilding Corporation on a cost-plus basis, it was provided that whatever payments had previously been made to it by the former owners should be credited against the total cost in favor of the United States Shipping Board Emergency Fleet Corporation.
On February 15, 19ÍS, the Coastwise Transportation Co. accejjted the offer of the United States Shipping Board Emergency Fleet Corporation for the acquisition of the S. S. Fairmont and this vessel was transferred to it, for which the Coastwise Transportation Co. paid $803,764.60 made up as follows: Cash, $485,000; assumption of a liability of $78,461.20 which it later paid; and release of all claims which the Coastwise Transportation Co. had against the Government on account of the requisition of the vessel, which claims the parties have stipulated as being worth not less than $240,303.40, which is likewise the amount which the Coastwise Transportation Co. had paid to the New York Shipbuilding Corporation on account of the work done on this vessel under its original contract at the time the requisition order became effective.
On the basis of the transaction on February 15,1918, the petitioner contends that the cost of the 8. 8. Fairmont to its predecessor was $803,764.60 and that this amount, less the value in use of $490,168, is the amortization allowance to which it is entitled, whereas the Commissioner contends that the total costs of $803,764.60 should be reduced by $268,502.72 before determining the amortization allowance since costs to this extent had been incurred by the Coastwise Transportation Co. prior to April 6, 1917, and, therefore, were not costs which were borne by it after April 6, 1917,
[22]*22The provisions of the statute under which the deduction is claimed is section 234(a) (8), Revenue Act of 19X8, and reads in part as follows:
(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(S) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. * * ■ *
In effect the petitioner says that on February 15, 1918, the Coast-wise Transportation Co. acquired the S. S. Fairmont, and, therefore, under the above-quoted provision its total cost on that date must govern, regardless of what may have happened in prior transactions, whereas the respondent says that of the costs contended for, $268,502.72 had been borne by the Coastwise Transportation Co. prior to April 6, 1917, and, therefore, could not be subject to amortization. It therefore becomes a question of determining the effect of the requisition order of August 3, 1917, and the subsequent transfer of the vessel to the Coastwise Transportation Co. In other words, did the requisition order in question result in the vesting of title to the vessel in its uncompleted state in the United States Shipping Board Emergency Fleet Corporation, and leave the Coast-wise Transportation Co. with only a claim for money damages against the United States? And was the transaction of February 15, 1918, an entirely new acquisition with which the former transactions had no necessary legal connection?
Upon a consideration of all the facts in the case, we are convinced that both of the above questions must be answered in the affirmative and that the costs to be considered in determining the amortization allowance are $803,764.60.
Our first question is as to the effect of the requisition order in question. It is not necessary in this opinion to determine in whom title to the uncompleted ship vested prior to August 3, 1917— whether the Coastwise Transportation Co. or the New York Shipbuilding Corporation — but we must determine whether the Government thereby acquired an unqualified right to the vessel. In Brooks-Scanlon Corporation v. United States, 58 Ct. Cls. 274; 265 U. S. 106, there was before the courts the question of whether when the same requisition order with which we are dealing was issued, the contract [23]*23itself for one of the bulls mentioned in the order was expropriated. In considering the case neither court seems to have entertained any doubt that, in so far as the uncompleted vessel was concerned and all materials and supplies which were on hand for the construction of the vessel, title thereto passed unreservedly to the Government. As stated by Chief Justice Campbell in the dissenting opinion of Brooks-Scanlon v. United States, 58 Ct. Cls. 274:
When the Government’s requisition issued and required completion for its own benefit, agreeing to pay therefor the contract price, diminished, however, by the amount of the payments plaintiff had made, it is conceded that the uncompleted vessel was taken.
Similarly, the Supreme Court in passing on the same case (265 U. S. 106) said:
By its orders the Fleet Corporation put itself in the shoes of the claimant and took from claimant and appropriated to the use of the United States all the rights and advantages that an assignee of the contract would have had.
The situation in the case at bar is parallel to that referred to above, in so far as it concerns the legal effect of the requisition order. In the exercise of the power of eminent domain, the Fleet Corporation came into ownership of the 8. S. Fairmont just as effectively as if it had gone into the market and made an outright purchase thereof. After this, the Coastwise Transportation Co. had no claim against, or lien upon, this vessel. What it had was a claim against the Government for the taking of its property without making just compensation therefor. What it would get was not determined then and had not been determined prior to February 15, 1918. That it was eventually reimbursed for the expenditures which it had made under its original contract with the New York Shipbuilding Corporation does not alter the fact that until the contract of February 15, 1918, was entered into it had merely an unliquidated claim against the Government.
The Commissioner admits that in form the Fleet Corporation got title to the S. S. Fairmont through the requisition order and that the Coastwise Transportation Co. acquired the completed vessel on February 15, 1918, but insists, in effect, that, upon looking through form to the substance of the transaction, the costs borne in the acquisition of the vessel which are subject to amortization were not those incurred on February 15,1918, but those, less certain liabilities incurred prior to April 6, 1917, under its original contract with the New York Shipbuilding Corporation, since liability to pay for work done prior to the war had already been incurred by it, and therefore it could not be said that the costs so incurred had been “ borne by the taxpayer ” on or after April 6, 1917.
[24]*24This argument disregards the fact of complete acquisition on February 15, 1918, and would provide for acquisition on this date of only those rights which were in the Fleet Corporaiton as distinguished from those which yet remained in the Coastwise Transportation Co.
This argument does not appeal to us as sound. Prior to February 15, 1918, complete right, title, and interest in the S. S. Fairmont was vested in the Fleet Corporation, and on this date the Coastwise Transportation Co. acquired the vessel. If the Coastwise Transportation Co. acquired the vessel on February 15, 1918, then when did it bear the cost for its acquisition? We fail to see how the cost could have been borne on any other date. The parties have stipulated that the total cost was $803,764.60. The fact that a part of this cost is made up of a claim which arose on account of an expenditure made prior to April 6, 1917, is immaterial. What cost the Coastwise Transportation Co. bore in the acquisition was not less than $803,764.60 and this entire amount was borne after April 6, 1917, namely on February 15, 1918. The petitioner’s contention with respect to the first point must, therefore, be sustained.
The second point involves two questions: (1) The period over which the allowable amortization shall be spread, and (2) the manner in which the amortization shall be spread over the period decided upon.
As to the amortization period, the parties hereto have stipulated that the period ends February 28, 1919, and we have heretofore found in this opinion that the asset in question subject to amortization was acquired and costs borne on February 15, 1918. Consistent with the foregoing, we must hold that the amortization period extends from February 15, 1918, to February 28, 1919, and that the amortization should be spread over this period.
The second question is not so easy of solution. No argument was advanced by the Commissioner for the method used by him, so that we have only the computation made by him, and the argument advanced by the petitioner against the method used.
The statute is silent as to the manner in which amortization shall be spread, merely providing that “ there shall be allowed a reasonable deduction for * * * amortization.” So long, therefore, as the method adopted by the Commissioner provides for a reasonable allowance, it satisfies the statute and the fact that it may differ from some other device to accomplish the same result should not ordinarily be material. Our question is whether a reasonable result is obtained.
The computation which was made by the Commissioner was prepared in accordance with article 185, Regulations 45, which reads as follows:
[25]*25Amortization period. — The amortiza! ion allowance shall be spread in proportion to the net income (computed without benefit of the amortization allowance) between January 1, 1918 (or if the property was acquired subsequent to that date, January 1st of the year in which acquired) and either of the following dates:
(a) If the claim is based on (1) of article 184, the date when the property was or will be sold or permanently discarded as a war facility; or (b) if the claim is based on (2) of article 184, the actual or estimated date of cessation of operation as a war facility.
All taxpayers claiming an allowance for amortization shall compute (or, to the extent that accurate computations can not be made, shall estimate) the amount of their net income for the period between January 1, 1918, and the dates specified above, and shall also compute (or estimate as above) flint part thereof properly assignable to each of the calendar years falling within the amortization period; and the amount of income so computed or estimated shall be the basis for apportioning the amounts of amortization applicable to each of the calendar years affected. Taxpayers reporting on the fiscal year basis shall (a) in all computations based upon 1918 rates for fiscal years ending in 1918 and 1919, use the amount of such allowance apportioned to the calendar year 1918; (5) in all computations based upon 1919 rates for a year beginning in 1918 and ending in 1919, use the amount of such allowance apportioned to the calendar year 1919; and (e) in all computations for subsequent fiscal years, use the number of twelfths of the allowance apportioned to each calendar year falling within such fiscal year that there are months of such calendar year falling within such fiscal year.
Since the vessel on which amortization is being allowed was acquired subsequent to January 1,1918, and since the petitioner reports on a fiscal year basis, objection is made to that part of the above-quoted article which would require the amortization period to be considered as beginning January 1, 1918, and also to the manner of allocating the allowance as between fiscal years.
The Commissioner’s computation, for the fiscal year ended February 28, 1919, based on the allowance made by him of $208,834.50 is as follows:
(a) Net income fiscal year 1918 before amortization adjustment $2,068,510.23 2/12 applicable to 1918_ $344, 751. 71
(b) Net income fiscal year 1919 before amortization adjustment $2,724,568.43 10/12 applicable to 1918_ 2, 270,473.69
(c) Applicable to calendar year 1918_ 2, 015, 225. 40
(d) 2/12 of $2,724,568.43 applicable to end of amortization period Feb. 28, 1919_ 454,004. 74
(e) Total net income_ 3, 069,320.14
(f) Percentage (c) to (d) [should be (e)]_ .85205
Total amortization allowable $208,834.50 x S5.205% equals amortization 1918_ 177,937.44
This produces an allowance of $177,937.44 which is deducted from the income determined for the fiscal year ending February 28, 1919, before making the computation of tax for that year at the 1918 rates, [26]*26and similarly this same deduction would be allowed in determining income subject to tax at the 1918 rates for the fiscal year ending February 28, 1918. The remaining amount of the allowance, or $30,897.06 is deducted from income before making the computation of tax at the 1919 rates for the fiscal year ending February 28, 1919, and similarly, ten-twelfths thereof would be allowed as a deduction in the determination of income subject to tax for the fiscal year ending February 28, 1920.
In this manner the Commissioner first apportions the income of the amortization period to the calendar years beginning January 1, 1918, and extending to the end of the amortization period. Next, he apportions the amortization allowance as follows: (a) The amortization deductible for the calendar year 1918 is that proportion of the total amortization allowance which the net income for the calendar year 1918 boars to the total income for the amortization period; (b) the amortization deductible for the calendar year 1919 is that proportion of the total allowance which the net income from January 1, 1919, to February 28, 1919, bears to the total net income of the amortization period.
The amortization thus apportioned to the respective calendar years is allowed as a deduction in the computation of tax as follows: (a) The amortization apportioned to the calendar year 1918 is allowed as a deduction in the determination of income subject to tax at the 1918 rates for the fiscal years ending in 1918 and 1919; (b) the amortization apportioned to the calendar year 1919 is allowed (1) as a deduction in the determination of income subject to tax at the 1919 rates for the fiscal year ending in 1919, and (2) ten-twelfths thereof is allowed as a deduction in the determination of income subject to tax for the fiscal year ending in 1920.
The purpose underlying this rather involved computation seems to have been to give the taxpayer the full benefit of the amortization deduction due him where the fiscal year was one beginning in 1917, for which no amortization deduction is allowable, since the Revenue Act of 1917 makes no provision for an amortization allowance. But in this attempt to allow an effective amortization deduction for the entire amount allowable — as to the necessity for which we express grave doubt — is the Commissioner allowing a reasonable deduction for amortization in the year on appeal ? By following his method, it would be immaterial whether the vessel in question was acquired on January 2, or February 27, 1918; in any case where the amortizable asset was acquired after January 1, and before February 28 (where the fiscal year ends on the latter date), the amortization deduction for the fiscal year ending February 28, 1918, in a computation at the 1918 rates, would be the entire portion of the amorti[27]*27zation apportioned to the calendar year 1918, even though the.asset may not have been acquired until February 27, 1918, and, therefore, have been an income-producing factor for only a single day.
It further appears that in the case on appeal a part of the deduction in question would be allowed in the fiscal year ended February 28, 1920, when as a fact the amortization period ended February 28, 1919, and no war income was earned in this fiscal year.
Other difficulties in the application of the Commissioner’s method could be pointed out, though those given will suffice to show that such a method is not in accordance with the rule laid down in the Appeal of G. M. Standifer Construction Corporation, 4 B. T. A. 525, where the Board approved the principle that the spread of amortization should be in accordance with income where the facilities or vessels produced income, and said:
In order that taxpayers may have the full benefit of such a deduction and obtain a full measure of relief, it seems to us that the deduction should be allocated in accordance with the amount of the net income during the different periods before taking into consideration the amortization allowance. When relief is given by statute to a taxpayer by means of a deduction, that relief can be more adequately given by determining the amount of the deduction in each of the years in accordance with the income; otherwise, as in this case, a taxpayer may be required to expend large sums of money during a taxable year and, on account of the changes in its business conditions and other circumstances, may have no net income from which it can take a deduction or get the benefit which was intended to be given.
Likewise, see Appeal of John Polachek, 3 B. T. A. 1051.
Further, we are of the opinion that when amortization is being spread on the basis of income (a principle to which both parties are agreed) and a fiscal year is involved, it is unnecessary to resort to the method of first placing the deduction on a calendar, year basis and likewise erroneous to consider in effect that an amortizable asset was acquired on the first day of a calendar year when in fact it was not acquired on that date. The purpose of the statute was clearly to allow the deduction for amortization against the war income which was produced while the amortizable asset was an income-producing factor.
The factors necessary for a determination of the spread of amortization on what we conceive to be the correct basis are available in this case. We have found that the amortization period begins February 15, 1918, and ends February 28, 1919, and the allowable amortization deduction is the difference between the total costs of the vessel in question of $803,764.60 and its residual value in postwar use of $490,168, or $313,596.60. The total income for the amortization period may be determined with a reásonable degree of accuracy by adding fourteen three hundred and sixty-fifths of the [28]*28total income for tbe fiscal year ending February 28, 1918, to the total income for the fiscal year ending February 28, 1919, using the income in both cases before making the amortization adjustment. The ratio which the income for the fiscal year ending February 28, 1919, before making the amortization adjustment, bears to the total income for the amortization period, as determined above, is the proper ratio to be used in determining the portion of the total amortization allowance which should be allowed as a deduction in a determination of net income for the fiscal year ending February 28, 1919, and this net income should be used in the computations of tax, both at the 1918 and 1919 rates.
In the Appeal of G. M. Standifer Construction Corporation, supra, and the Appeal of John Polachek, supra, where different questions were involved from the one here in issue, the Board held that article 185, Regulations 45, was a fair and reasonable interpretation of the amortization section of the statute. To the extent that these decisions may be considered in conflict with the holding in this case, they are hereby so modified.
Redetermination should be made consistent with the foregoing.
Judgment will he entered on 15 days’ notice, under Rule 50.