Virginian Hotel Corporation v. Helvering, Commissioner of Internal Revenue

319 U.S. 523, 63 S. Ct. 1260, 87 L. Ed. 1561, 1943 U.S. LEXIS 1247

• Court: Supreme Court of the United States
• Decided: October 11, 1943
• Docket: 766
• Status: Published

Opinions

Me. Justice Douglas

delivered the opinion of the Court.

The facts of this case are stipulated. Petitioner operates an hotel. From 1927 through 1937 petitioner (or its predecessor) reported in its income tax returns depreciation on certain of its assets on a straight-line basis.¹ No objection was taken by the Commissioner or his agents to the amounts claimed and deducted. In 1938 petitioner claimed a deduction for depreciation at the same rates. The Commissioner determined that the useful life of the equipment was longer than petitioner claimed and that therefore lower depreciation rates should be used.² Accordingly a deficiency was computed. The depreciation theretofore claimed as deductions was subtracted from the cost of the property. The remainder was taken as the new basis for computing depreciation. A lesser deduction for depreciation accordingly was allowed.³ There had been a net gain for some of the years in question. For the years 1931 to 1936 inclusive there was a net loss and, says the stipulation, “the entire amount of depreciation deducted on the income tax returns for those years did not serve to reduce the taxable income.” Petitioner does not challenge the new rates. It contends that the amount of depreciation claimed for the years 1931 to 1936 inclusive in excess of the amount properly allowable should not be subtracted from the depreciation basis, since it did not serve to reduce taxable income in those years. The Tax Court, in reliance on an earlier ruling,⁴ held for the petitioner. The Circuit Court of Appeals reversed. 132 F. 2d 909. The case is here on a petition for a writ of certiorari which we granted because of a conflict between the decision below and Pittsburgh Brewing Co. v. Commissioner, 107 F. 2d 155, decided by the Circuit Court of Appeals for the Third Circuit.

A reasonable allowance for depreciation is one of several items which Congress has declared shall be “allowed” as a deduction in computing net income. Int. Rev. Code § 23 (1). The basis upon which depreciation is to be “allowed” is the cost of the property with proper adjustments for depreciation “to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws.” ⁵ That provision makes plain that the depreciation basis is reduced by the amount “allowable” each year whether or not it is claimed. Fidelity-Philadelphia Trust Co. v. Commissioner, 47 F. 2d 36. Moreover the basis must be reduced by that amount even though no tax benefit results from the use of depreciation as a deduction. Wear and tear do not wait on net income. Nor can depreciation be accumulated and held for use in that year in which it will bring the taxpayer the most tax benefit. Congress has elected to make the year the unit of taxation. Burnet v. Sanford & Brooks Co., 282 U. S. 359. Thus the amount “allowable” must be taken each year. United States v. Ludey, 274 U. S. 295, 304.

But it is said that “allowed,” unlike “allowable,” connotes the receipt of a tax benefit. The argument is that though depreciation in excess of an “allowable” amount is claimed by the taxpayer and not disallowed by the Commissioner, it is nevertheless not “allowed” if the deductions other than depreciation are sufficient to produce a loss for the year in question. “Allowed” in this setting plainly ha% the effect of requiring a reduction of the depreciation basis by an amount which is in excess of depreciation properly deductible. We do not agree, however, with the contention that such a reduction must be made only to the extent that the deduction for depreciation has resulted in a tax benefit. The requirement that the basis should be adjusted for depreciation “to the extent allowed (but not less than the amount allowable)” first appeared in the Revenue Act of 1932. 47 Stat. 169, 201. Prior to that time the adjustment required was for the amount of depreciation “allowable.”⁶ The purpose of the amendment in 1932 was to make sure that taxpayers who had made excessive deductions in one year could not reduce the depreciation basis by the lesser amount of depreciation which was “allowable.” If they could, then the government might be barred from collecting additional taxes which would have been payable had the lower rate been used originally.⁷ But we find no suggestion that “allowed,” as distinguished from “allowable,” depreciation is confined to those deductions which result in tax benefits. “Allowed” connotes a grant. Under our federal tax system there is no machinery for formal allowances of deductions from gross income. Deductions stand if the Commissioner takes no steps to challenge them. Income tax returns entail numerous deductions. If the deductions are not challenged, they certainly are “allowed,” since tax liability is then determined on. the basis of the returns. Apart from contested cases, that is indeed the only way in which deductions are “allowed.” And when all deductions are treated alike by the taxpayer and by the Commissioner, it is difficult to see why some items may be said to be “allowed” and others not “allowed.” ⁸ It would take clear and compelling indications for us to conclude that “allowed” as used in § 113 (b) (1) (B) means something different than it does in the general setting of the revenue acts. See Helvering v. State-Planters Bank & Trust Co., 130 F. 2d 44.

Congress has provided for deductions of annual amounts of depreciation which, along with salvage value, will replace the original investment of the property at the time of its retirement. United States v. Ludey, supra; Detroit Edison Co. v. Commissioner, ante, p. 98. The rule which has been fashioned by the court below deprives the taxpayer of no portion of that deduction. Under that rule, taxpayers often will not recover their investment tax-free. But Congress has made no such guarantee. Nor has Congress indicated that a taxpayer who has obtained no tax advantage from a depreciation deduction should be allowed to take it a second time. The policy which does not permit the second deduction in case of “allowable” depreciation (Beckridge Corp. v. Commissioner, 129 F. 2d 318) is equally cogent as respects depreciation which is “allowed.”

Affirmed.

1 15% on carpets and 10% on all other equipment. At those rates the properties would have been fully depreciated in 6% and 10 years respectively.

2 8% on carpets and 5% on the other equipment, the estimated life being 12% years and 20 years respectively.

3 $1,295.47 for 1938 as compared with $4,341.97 which was claimed. The difference between the depreciation claimed in the loss years and the depreciation properly allowable in such years is $31,400.25.

4 Kennedy Laundry Co. v. Commissioner, 46 B. T. A. 70, which followed Pittsburgh Brewing Co. v. Commissioner, 107 F. 2d 155. Prior to the Kennedy Laundry Co. case and prior to the time when Pittsburgh Brewing Co. v. Commissioner, 37 B. T. A. 439, was overruled, the Tax Court took a contrary view. Its decision in the Kennedy Laundry Co. case was reversed by the Circuit Court of Appeals. 133 F. 2d 660.

5 See. 113 (b) (1) (B), which is made applicable by reason of § 23 (n), § 114, and § 113 (a).

6 For a summary of the legislative history, see 40 Col. L. Rev. 540.

7 S. Rep. No. 665, 72d Cong., 1st Sess., p. 29: “The Treasury has frequently encountered cases where a taxpayer, who has taken and been allowed depreciation deductions at a certain rate consistently over a period of years, later finds it to his advantage to claim that the allowances so made to him were excessive and that the amounts which were in fact 'allowable’ were much less. By this time the Government may be barred from collecting the additional taxes which would be due for the prior years upon the strength of the taxpayer’s present contentions. The Treasury is obliged to rely very largely upon the good faith and judgment of the taxpayer in the determination of the allowances for depreciation, since these are primarily matters of judgment and are governed by facts particularly within the knowledge of the taxpayer, and the Treasury should not be penalized for having approved the taxpayer’s deductions. While the committee does not regard the existing law as countenancing any such inequitable results, it beLieves the new bill should specifically preclude any such possibility.”

8 As we have noted, the stipulation of facts states that "the entire amount of depreciation deducted on the income tax returns” for the years in question “did not serve to reduce the taxable income.” That has been taken to mean that no part of the depreciation deduction resulted in tax benefits. We do not stop to inquire how that could be true when the depreciation deducted on each return from 1931 through 1936 was larger than the net loss for each of those years. If the stipulation were not accepted, one other problem would be presented. That is the theory that when there is a loss, depreciation may be singled out as not offsetting gross income, even though it is only one of several deductions which is claimed. See Kennedy Laundry Co. v. Commissioner, 46 B. T. A. 70, 75, Judge Disney dissenting. In view of the stipulation, we do not reach that question. Cf. Butler Bros. v. McColgan, 315 U. S. 501, 508-509.