Ambrose v. Commissioner

*690 The respondent has determined a deficiency in income tax for 1943 in the amount of $ 13,417.40. The petitioner contends that there is no deficiency and that he has overpaid the 1943 tax to the extent of $ 11,377.78, for which he has *150 filed claim for refund. The question is whether the petitioner is entitled, under section 124 (d) (4) of the Internal Revenue Code, to have the tax for 1943 recomputed in accordance with an amortization deduction relating to an emergency facility computed on the basis of the short amortization period specified in section 124 (d) (1).

The petitioner filed his return with the collector for the first district of New York. The facts have been stipulated.

FINDINGS OF FACT.

We find the facts as stipulated and incorporate herein by reference the stipulation of facts. The material facts are as follows:

Prior to 1943, the petitioner conducted a civilian school for technological training in aviation, the Aviation Institute of Technology, *691 located in Long Island City, New York. At some time prior to 1943, the United States Army made a contract with the petitioner for the training of soldiers at the Aviation Institute. The petitioner did not own the property where the school was located.

On January 29, 1943, the petitioner purchased the property where the school was located for $ 125,834.25, ¹ after receiving from the War Department a Certificate of Necessity which certified that*151 the property was necessary in the interest of national defense during the emergency period.

The petitioner owned the property where the Aviation Institute was located, hereinafter called the "emergency facility," until June 7, 1945. On that date title passed to the United States Government under a Declaration of Taking in condemnation of the property for use by the United States. The Government paid the petitioner $ 200,000 for the property. Although title passed to the Government on June 7, 1945, ² petitioner did not receive payment of the full consideration under the condemnation until January 1946.

The Secretary of War did not ever issue a certificate*152 that the emergency facility had ceased to be an emergency facility.

The emergency period, for purposes of sections 124 (d) and (e) ( 2) of the Internal Revenue Code, ended on September 29, 1945.

In his income tax return for 1943, the petitioner duly elected, under sections 124 (a) and (b) of the Code, to take amortization deductions with respect to the emergency facility on the basis of an amortization period of 60 months beginning with the month of February 1943, the month following the acquisition of the emergency facility. Under this election, and on the basis of 60 months, the amortization deduction amounted to $ 23,069.61 for 1943, and $ 25,166.85 for 1944, which deductions were taken by the petitioner in his returns for 1943 and 1944.

On November 21, 1945, the petitioner forwarded to the Commissioner a written statement of election to terminate the amortization period with respect to the emergency facility as of September 30, 1945, for the purpose of computing deductions for amortization of the basis of the emergency facility under sections 124 (d) (1) and (d) (4) of the Code. Under this election the period of amortization was 32 months, February 1, 1943 to September 30, 1945. *153 A copy of this written election also was attached to the petitioner's income tax return for 1945, in which the petitioner deducted $ 35,390.88 for amortization based on the shorter amortization period of 32 months, and reported that the allowable amortization deductions for prior *692 years (1943 and 1944) amounted to $ 90,443.37, ³ based on a period of 32 months, so that, in his return for 1945, the petitioner computed a total reserve for amortization of the emergency facility of $ 125,834.25.

The petitioner has filed a timely claim for*154 refund of income tax for 1943 in the amount of $ 11,377.78, in which he has stated as the ground for the refund that "An additional amortization deduction, with respect to emergency facilities should be allowed in 1943 due to termination of the amortization period on September 30, 1945, by presidential proclamation," and by which he has made claim that he is entitled to recompute the amortization deduction for 1943 on the basis of a 32-month period instead of a 60-month period. The respondent has denied the claim for refund and the claim for recomputation of the amount of the amortization deduction for 1943 and for other years on the basis of the shorter amortization period of 32 months.

The statute of limitations for refund of income tax as well as for assessment of additional tax for the years 1944, 1945, and 1946 will not expire before June 30, 1952.

The petitioner obtained permission in 1946 from the Commissioner, under section 112 (f) of the Code and section 29.112 (f)-2 of Regulations 111, to establish a replacement fund with the proceeds he received for the property -- the emergency facility -- which was taken by the Government in 1945 by condemnation for the use of the Government; *155 and in 1947 the petitioner invested $ 121,820.99 of such fund in similar, replacement property. He has filed an amended return for 1946 in which he has reported the recognizable capital gain from the emergency facility to be $ 71,929.01. ⁴ The petitioner, in his returns for the years 1947 to 1950, both years inclusive, has not claimed any depreciation deductions with respect to the replacement property which he acquired in 1947.

OPINION.

The question is whether the petitioner is entitled, under section 124 (d) (4) of the Code, to have income tax for 1943 recomputed to give effect to a retroactive revision of the amount of the amortization deduction on the emergency facility which he owned. He owned the property in 1945 for a period of 6 months until it was taken by the United States*156 Government under condemnation proceedings on *693 June 7, 1945, and in his income tax return for 1945 he computed the amortization deduction on the basis of an amortization period of 32 months, i. e., from February 1943, to and including September 30, 1945, which latter date was the end of the emergency period as defined in section 124 (e) (2). Section 124 (d) (1) of the Code provides that a taxpayer may elect to terminate the amortization period with respect to an emergency facility as of the end of the month in which the presidential proclamation ending the emergency period occurred. Section 124 (d) (4) of the Code provides the method for making the election under section 124 (d) (1). Regulations 111, section 29.124-5-(e), page 531, sets forth the steps to be taken in order to make an election under section 124 (d) (1). The petitioner complied with the Commissioner's regulation by filing a written statement of his election with the Commissioner on November 21, 1945. Also, the petitioner, in his income tax return for 1945, actually computed the amount of the amortization deduction with respect to the emergency facility on the basis of an amortization period of 32 months*157 rather than 60 months. The provisions of section 124 (d) (1) and 124 (d) (4) are set forth in the margin. ⁵

*158 Although the question to be decided relates only to the year 1943, the year before us in this proceeding, the issue will affect the year 1944 if the question is decided for the petitioner.

The respondent has determined that the petitioner did not have the right to make the election under sections 124(d) (1) and (4) because he did not own the emergency facility at the end of the emergency period, September 30, 1945.

The petitioner, prior to 1943, conducted an aviation training school which was located on leased property. He had a contract with the *694 United States Army for the training of soldiers at his school. He gave consideration to the matter of investing his capital in the property. Before he did so, he was granted a Necessity Certificate by the War Department which certified that the property was necessary in the interest of national defense during the emergency period. He invested his capital in the property in January 1943, and he elected, in his income tax return for 1943, to take amortization deductions under section 23 (t) in lieu of depreciation deductions over the useful life of the property under section 23 (l). He computed the amortization deduction for *159 1943 on the basis of an amortization period of 60 months under sections 124 (a) and (b). He held the emergency facility during all of 1943, 1944, and 6 months of 1945. He gave up the property involuntarily when the Government took it through condemnation proceedings on June 7, 1945. He was entitled to take amortization deductions under section 23 (t) for as long as he owned the property. In this proceeding we have a very narrow question. Although the issue arises in connection with the determination of the tax for 1943, it is necessary to consider what right, if any, the petitioner had with respect to computing his amortization deduction for the 6 months of 1945 during which he held the property. He did not own the property on September 30, 1945, the end of the emergency period. Under the facts, the narrow aspect of the question is whether ownership of the property during part of 1945, but not on the date of the end of the emergency period in 1945, suffices in applying the provisions of sections 124 (d) (1) and (4).

The view of the respondent, under the facts of this proceeding, represents a very narrow interpretation of all of the provisions of section 124 of the Code, and *160 means that a taxpayer who made the election under sections 124 (a) and (b) to amortize the cost of an emergency facility over a period of 60 months cannot make any adjustment of the amortization period so as to have it terminate as of the end of the emergency period, September 30, 1945, unless he owned the emergency facility on that date, even though he owned the emergency facility during the year in which the emergency period ended. This view should not be approved because it restricts the application of section 124 (d) and, in effect, limits the right to exercise the election provided by section 124 so that no emergency facility can be amortized on the basis of an amortization period which terminates with the end of the emergency period if the emergency facility was disposed of at any time during a taxable year ending in 1945.

It is clear that the Congress intended to make a liberal provision for the amortization of an emergency facility by allowing the amortization at an accelerated rate; and that section 124 was enacted as a relief provision giving taxpayers who invested capital in emergency facilities a more favorable allowance for amortization deductions than *695 section*161 23 (l) provided. Ways and Means Committee, H. Rept. No. 2894, 76th Cong., 3d Sess., pp. 16, 38 (1940-2 C. B. pp. 496, 507-8).

Reading section 124 as a whole, the owner of an emergency facility was given the right, if he so elected, to amortize the cost thereof over a period of 60 months, or less, from the month following acquisition. In the first instance, the emergency period was categorically fixed at 60 months, or 5 years, by the provisions of section 124 (a); but in section 124 (e) (2) provision was made for fixing the date of the termination of the emergency facility by presidential proclamation. Since the event which would terminate the emergency facility could not be known at the time a taxpayer made his election under section 124 (a), it was necessary to provide a method for giving effect to the termination of the emergency facility, retroactively. This was done by allowing a second election to be made under section 124 (d) (1) under which the end of the amortization period would coincide with the end of the emergency period. The provisions of section 124 (d) (4) likewise provided a method for giving retroactive effect to the event -- the*162 proclamation ending the emergency period. Such retroactive effect is given by allowing recomputation of the tax for earlier years on the basis of the allowance of amortization deductions in the earlier years, recomputed on the basis of an amortization period of less than 60 months.

The petitioner in this proceeding was in a position to receive the benefits of sections 124 (d) (1) and (4) because he owned the emergency facility during the year in which the emergency period ended. He was in an entirely different position than was the taxpayer in Ken-Rad Transmitting Tube Corporation, 10 T. C. 1217, revd. 180 F. 2d 940. In that proceeding the taxpayer corporation acquired emergency facilities during 1942 and 1943, but on June 30, 1943, it transferred all of its assets to its parent corporation, Ken-Rad Tube & Lamp Corporation, in exchange for its outstanding stock -- a taxfree exchange -- and then went out of existence. The transferee corporation disposed of all of the emergency facility properties by sale for cash on January 2, 1945. Under such facts, we held in the Ken-Rad case that the corporation which had owned the*163 emergency facilities, Ken-Rad Transmitting Tube Corporation, was not "able to bring itself within the terms of the statute." The facts in this proceeding differ materially from the facts in the Ken-Rad case, and it is, therefore, distinguishable.

To say that the petitioner could not properly compute the amortization deductions on his emergency facility for 1945, in his income tax return for 1945, on the basis of an amortization period ending on September 30, 1945, is wholly unrealistic. The return for 1945 was due after the event had occurred which ended the emergency period. The petitioner knew all of the statutory facts on the basis *696 of which an adjustment in the length of the amortization period could be made. The Commissioner, in his regulations, has taken the view that "The reasonableness of any claim for depreciation shall be determined upon the conditions known to exist at the end of the period for which the return is made." Regs. 111, pp. 125, 126; sec. 29.23 (l)-5. He duly notified the Commissioner of his election to take amortization deduction on the basis of the shorter period of, in his case, 32 months; and he actually computed the amortization deduction*164 for 1945 on that basis. If it was proper for the petitioner to make the computation for 1945 on that basis, it must inevitably follow as a matter of logic that he is entitled under the provisions of section 124 (d) (4) to make adjustments for 1942 and 1943 of the amounts of the amortization deductions, retroactively, on the basis of a 32-month period. We so hold, and conclude that the petitioner is entitled, under section 124 (d) (4) to have the tax for the year before us -- 1943 -- recomputed to give effect to the retroactive adjustment of the 1943 amortization deduction.

It is not material under the facts in this proceeding that the property passed from the petitioner during 1945 under a condemnation award by which the petitioner received consideration for the property so taken. We are dealing here with amortization in lieu of depreciation, and the theory involved in the allowance of depreciation deduction applies with equal validity. That theory, as set forth in the Commissioner's regulations, is that a depreciation allowance is necessary because of the use of property in the taxpayer's business for the production of income. Use of property exhausts the usefulness *165 thereof, and the depreciation (or amortization) allowance is given because "property used in the business, * * *, for the production of income, gradually approaches the point where its usefulness is exhausted." Section 29.23 (l)-2, Regulations 111, p. 124.

Property may be completely depreciated during the period a taxpayer uses it in his business, so that when, and if, it is sold, its adjusted basis for computing gain or loss on the sale is zero. The question before us relates to the rate of amortization which the petitioner was entitled to adopt for the purpose of the amortization deduction during the entire period in which he used the property in his business. The fact that the petitioner received a consideration for the property when it was taken by condemnation does not enter, at all, into the considerations properly to be given to the question of the rate of depreciation which the petitioner was entitled to adopt under all of the provisions of section 124 which were intended to provide an accelerated rate of depreciation. ⁶

*166 *697 It is necessary for the parties to make recomputation under Rule 50, in the course of which the petitioner will take into consideration revisions of the amounts of the allowances for amortization at the accelerated rate of amortization based upon an amortization period of 32 months which follow from his admission in this proceeding that he erred in (1) failing to add to the basis of the property -- the emergency facility -- legal fees in the amount of $ 3,500; (2) in his original understanding that he did not become divested of the title to the property on June 7, 1945, rather than on some later date after September 30, 1945, when the total payments by the United States under the condemnation proceeding were made, this error having been due, according to our understanding, to petitioner's misconception of the rule of law applicable to the condemnation proceeding whereby the date of the passing of title to the United States was June 7, 1945, even though payment in full of the condemnation award was not made until January 1946. The petitioner has admitted here that he was entitled to deduction in his 1945 return for amortization for about 5 months only, January to June*167 7, 1945. We point out, for the purpose of clarity, that under our conclusion the petitioner would not be entitled to take (and he does not claim) deduction in 1945 for amortization for the period June 8 to September 30, 1945, (the balance of the emergency period) during which months he did not use in his business, and did not own, the emergency facility. The question presented relates only to the rate of amortization which the petitioner is entitled to use in computing the amounts of the deductions for amortization for the months in which he owned and used the emergency facility, the rate of amortization being dependent upon the length of the amortization period, i. e., either 60 months or 32 months. We point out, further, that the issue presented here did not raise any question about, and the petitioner did not claim, that the correct amortization period was less than 32 months, ending, for example, on June 7, 1945, rather than on September 30, 1945. If a question on that point might be raised, it was not raised in this proceeding, and under our rule that we will consider only questions raised by the pleadings, we have not considered any possible question about a *168 possibly shorter amortization period than 32 months for obtaining the rate of amortization.

The respondent's determination is reversed.

Decision will be entered under Rule 50.

Opper, J., dissenting: It would be hard enough to unearth any distinction from the principle of Ken-Rad Transmitting Tube Corporation, *698 10 T. C. 1217, if the present facts were much more at variance than they are. But in reality, even the facts are almost identical. In both facilities were bought in 1943 and disposed of in 1945. In each the year 1945 is not involved, but 1943 is in issue. In both the transfer in 1945 was prior to the close of the emergency and in each the effort was made to reopen 1943, further accelerate amortization, and recover full cost over a life shortened to conform to the end of the emergency even though the taxpayer no longer owned the property at that time. In Ken-Rad we said no but here we say yes.

The fact that in our prior case there was a tax-free liquidation in 1943 with an accompanying intercompany transfer certainly constitutes no discernible distinction for at least three reasons. First, the Ken-Rad*169 opinion points out that both the right to accelerated amortization and to a carry-over basis accompanied the transfer, so that taxwise it was comparable to a single ownership. Second, the same reasons given there for relying on the legislative purpose exist here, namely, that the intention was to assure the recovery of cost ¹ which was bound to result in both cases, not a windfall tax refund. And third, because petitioner cannot here, any more than in Ken-Rad, conform to the technical requirements of the statute.

Congress has plainly said of the Presidential proclamation terminating the emergency: "* * * In such case the amortization period with respect to such facility shall *170 end with the end of such month in lieu of the sixty-month period." Sec. 124 (d) (1), Internal Revenue Code. (Emphasis added.) Petitioner cannot end its amortization period with the end of September 1945, as it now freely admits, because it did not then own the facility. Since it cannot bring itself within the express language and underlying purpose of the statute, see United States v. Ludey, 274 U.S. 295, I think its claim should be denied as it was in the Ken-Rad case.

Raum, J., dissenting: The purpose behind the provisions of section 124 relied upon here was to protect a taxpayer who found himself with a war facility on his hands after the emergency period, where he had not yet fully recouped his basis with respect to such facility. No such circumstances exist here. As of June 7, 1945, petitioner had recovered his unamortized investment in the property. From that time forward, he had no interest in the property, and he had already *699 recouped, taxwise, his entire basis. It is a distortion of the purpose for which section 124 was enacted to award petitioner the extraordinary benefits which the Court's opinion bestows upon him, *171 and no such result is required by the language of the statute.

As Judge Opper points out, our decision in Ken-Rad Transmitting Tube Corporation, 10 T. C. 1217, calls for a similar disposition of the present case. True, the Ken-Rad case was reversed by the Court of Appeals in 180 F. 2d 940; but this Court has not accepted that reversal as a correct statement of the law (cf. American Coast Line v. Commissioner, 159 F. 2d 665, 668-669 (C. A. 2); Estate of William E. Edmonds, 16 T. C. 110, 117). The majority opinion herein carefully avoids any attempt to follow the decision of the Court of Appeals. Rather, it seeks to find a distinction between the cases, a distinction that is elusive and unconvincing.