DocketNumber： Docket No. 101026.
Citation Numbers： 45 B.T.A. 178, 1941 BTA LEXIS 1161
Judges： Kern
Filed Date： 9/25/1941
Status： Precedential
Modified Date： 1/12/2023
1941 BTA LEXIS 1161">*1161 A corporation procured a contract with a steel company to take all its slag for a term of years, and then agreed with the petitioner, a corporation organized to make concrete with slag, that it would pay half of the cost of a concrete mixing plant to be erected by petitioner.
45 B.T.A. 178">*179 This case comes up on a deficiency of $295.39 in income tax and $90 in excess profits tax for the calendar year 1937. Respondent raised an affirmative issue in his amended answer, which is now pleaded as an alternative, increasing the petitioner's net income for the year by $20,000. The sole question is whether this sum, which was contributed by another corporation to the cost of a plant operated by petitioner, should be included in its cost for1941 BTA LEXIS 1161">*1162 depreciation purposes, which petitioner claims. The respondent urges, in the alternative, that if the sum is a part of the cost it also constituted income to the petitioner in the same year. Other questions raised were settled by stipulation.
Petitioner filed Federal income and excess profits tax returns for 1937 with the collector of internal revenue for the district of Maryland at Baltimore, Maryland.
The facts and pertinent documents were stipulated and may be summarized as follows.
FINDINGS OF FACT.
The issues involved in this proceeding pertain to the new concrete mixing plant erected in 1937 by the petitioner at Sparrows Point, Maryland, and the relation borne to it by the petitioner corporation and the Maryland Slag Co., the Arundel Corporation, and the Bethlehem Steel Co.
The Bethlehem Steel Co. operates a number of blast furnaces at its plant located at Sparrows Point, Maryland. The Maryland Slag Co. was incorporated January 18, 1926, under the laws of Maryland, to process and market slag produced by blast furnaces and, under an agreement with the Bethlehem Steel Co., executed February 23, 1926, obtained the exclusive right for a period of 15 years thereafter1941 BTA LEXIS 1161">*1163 to remove slag from the plant of the Bethlehem Steel Co. at Sparrows Point. This agreement was superseded by a new agreement, executed January 1, 1938, which limited the right to the period beginning January 1, 1938, and ending December 31, 1945.
In January 1937 the Bethlehem Steel Co. was in need of large quantities of concrete for construction work, and petitioner came to an agreement with it to erect and place in operation within 60 days a concrete mixing plant for supplying its needs on land of the Bethlehem Steel Co. adjacent to the plant of the Maryland Slag Co., from which processed slag for coarse aggregate was to be obtained and used in the concrete. The plant was erected at a cost of $39,766.13 and put in operation by April 30, 1937.
The Arundel Corporation of Baltimore, Maryland, during the calendar year 1937 owned all of petitioner's outstanding capital stock. The Maryland Slag Co. had no sale organization of its own and its products were sold to, and marketed by, the Arundel Corporation, 45 B.T.A. 178">*180 which owned 25 percent of the outstanding capital stock of the Maryland Slag Co. before and during the calendar year 1937. During the calendar year 1937 the Maryland1941 BTA LEXIS 1161">*1164 Slag Co.'s board of directors was made up of six persons, two of whom were also directors of the Arundel Corporation. During the same year the petitioner's board of directors was composed of five individuals, elected at the annual meeting of the stockholders held on January 30, 1937. Two were also directors of the Arundel Corporation (the same two mentioned above).
Petitioner's president, in his annual report to the stockholders of the corporation for 1936, submitted at the annual meeting of the stockholders held on January 30, 1937, stated that an agreement had been reached with the Bethlehem Steel Co. and the Maryland Slag Co. for the erection at Sparrows Point of a premixed concrete plant having a capacity of 100 cubic yards per hour; that the Bethlehem Steel Co. had agreed to furnish the necessary land for the plant, without cost to petitioner, and to construct the necessary trackage, aggregate pits, and water lines, and to furnish free water and sand at $1 per ton when its equipment was available for that service; and that the Maryland Slag Co. had agreed, on its part, to furnish in their side-dump cars to the pits, at 90 cents per ton, slag of such gradation as required1941 BTA LEXIS 1161">*1165 by petitioner, and had agreed further to pay for half of the cost of the plant, estimated at $25,000. A resolution adopted at the meeting of the board of directors on the same day authorized the expenditure. The action taken by the Maryland Slag Co. in regard to the erection of the concrete mixing plant by petitioner is shown in minutes of the meeting of the directors of that corporation, put in evidence, and need not be set out here.
On June 30, 1937, petitioner submitted to the Maryland Slag Co. a bill for $20,000 as its share of the cost of the concrete mixing plant, and this sum was paid by the Maryland Slag Co. to petitioner by check on December 10, 1937. On the books of petitioner the $20,000 thus received was at first credited to the account representing the cost of the new plant, but later, by adjustment, credited to surplus; and depreciation at the rate of 10 percent per annum was set up on the full cost of the mixing plant, $39,766.13, for the eight months from April 30 to December 31, 1937.
In his determination of tax liability of petitioner the respondent applied the same rate of depreciation, but reduced the base to $19,766.13 by ruling that the $20,000 received1941 BTA LEXIS 1161">*1166 from the Maryland Slag Co. represented a reduction in the depreciation base. The parties agreed that the depreciation of plant and equipment at Sparrows Point should be based on a useful life of 8 3/4 years and that an additional deduction of $275.40 for Federal tax on pay roll should be allowed.
45 B.T.A. 178">*181 OPINION.
KERN: The issue here is clear-cut - whether the $20,000 contributed by another corporation, the Maryland Slag Co., to the erection of petitioner's concrete mixing plant, or approximately one-half its cost, should be included, as petitioner contends, in the cost of the plant for purposes of the depreciation deduction which may be taken by the petitioner. Respondent contends that it may not be so included and argues, in the alternative, that, if the petitioner may deduct on the basis of the total cost, then this sum contributed by the Maryland Slag Co. constituted income to petitioner in the year 1937 when it was contributed.
A third corporation, the Arundel Corporation, was involved. It owned all of petitioner's capital stock and 25 percent of the capital stock of the Maryland Slag Co. It also had a hand, though not a controlling one, in the directorates of1941 BTA LEXIS 1161">*1167 petitioner and the Maryland Slag Co., for two of its directors were also on the boards of each of these corporations.
The Maryland Slag Co. had an exclusive right for 15 years to remove slag from the Bethlehem Steel Co.'s blast furnaces at Sparrows Point, and this slag could be used in coarse aggregate concrete. It had no sales organization, but this was taken care of by Arundel. Petitioner agreed with the Maryland Slag Co. to erect the concrete mixing plant in question, and that company agreed to share the cost of its erection with petitioner. It was obviously to its interest to do so, as petitioner points out on brief, for it thus got another outlet for its slag. Petitioner further argues that in this posture of affairs it can not be said that petitioner gave any consideration for the $20,000 contribution made by the Maryland Slag Co. to the cost of the concrete plant.
Respondent contends (1) that "cost", as used in the applicable section, section 113(a), Revenue Act 1936 (the same basis to be employed for depreciation under section 114(a)), means the cost to the taxpayer, and, in the alternative, (2) that the contribution by the Maryland Slag Co. to building the plant1941 BTA LEXIS 1161">*1168 constituted income to petitioner. The basis being established, depreciation is allowable under section 23(1). Since we agree with respondent on the first issue, we put aside the other, with its discussion of capital contributions, under the doctrine of , and related cases.
The principle involved is fundamental. Deductions from income allowed under the statutes have, and have always had, a direct relation to the production of income. Taxes and interest are allowed generally, whether or not incurred in the taxpayer's effort to make money, but all expenses and losses are strictly limited to those arising 45 B.T.A. 178">*182 out of the production of income. There is, it is true, one exception among losses, where it arises from fire or other casualty, and is not compensated by insurance; but this exception, conceded by Congress because of the peculiar hardship which would otherwise result, serves merely to emphasize the rule. The loss allowed for wear and tear is no exception to the general rule, for depreciation is limited to property used in the trade or business. A man may own two houses and live in one and rent the other, 1941 BTA LEXIS 1161">*1169 but he may claim depreciation only on the house which produces income.
Starting, then, with the proposition that deductions generally, and those for depreciation specifically, bear a direct relation to the production of income and are limited to property so employed, the next step follows naturally, that the basis of depreciation of such property must bear some relation to the money embarked in the enterprise. We find that this is so, and that "cost" has been taken as the basis. Conceivably value might have been taken instead of cost. Such a standard would have borne a reasonable relation to the income or return on the investment, but value is a fluctuating standard and, even if fixed as of a basic date, would be a difficult one to determine. Congress was trying to adjust the tax burden equitably by allowing for the wasting of assets used in the production of income, and if value were an impracticable standard, cost would certainly serve as fairly for all purposes arising after March 1, 1913, as to which the constitutional objection was not to be considered. If a taxpayer received a return through depreciation of the cost of his wasted asset, he could not fairly complain because1941 BTA LEXIS 1161">*1170 he had not received a return of its value. Cost would at least represent what the taxpayer had invested in the business, and as of a basic date, cost would ordinarily approximate value. Divergencies between cost and value would no doubt occur, but a rule suitable for the great majority of cases must serve for all.
With these statutory premises accepted, that the depreciation deduction is allowable only for assets used to produce income and that the basis of that deduction is cost, the conclusion seems inevitable that cost as a basis must mean cost to the taxpayer claiming the deduction. It is his income which is being taxed, and the equitable relief represented by the depreciation deduction which is extended by the grace of Congress to reduce gross or apparent gains for tax purposes to actual, or net, gains is a relief in each instance extended to him as taxpayer, with a direct relation to the assets which he is using in the business and with a direct relation to the money which he has risked in acquiring the asset so used. Once Congress decided that cost was to be the proper basis for depreciation and not value, there would be no possible ground for doubt that it meant cost1941 BTA LEXIS 1161">*1171 to the taxpayer. Value is a quality which inheres in the thing itself, and, of course, fluctuates with it; cost imports a relation between the thing 45 B.T.A. 178">*183 and its purchaser and as between them it is forever fixed. Cost, therefore, has no meaning apart from the purchaser, and, since a deduction has no meaning apart from the taxpayer claiming it, the cost spoken of by the statute must mean the taxpayer's cost and no other. Any other interpretation, we conceive, would stultify the whole theory of statutory deductions.
We have said so much on this elemental question for the reason that, being elemental, it has generally been tacitly assumed in our own decisions. Inarticulately assumed, it might always be inferred, but to meet the taxpayer's argument here, the assumption should be explicitly stated so as to refute the fundamental fallacy of the argument. Citation of cases is unnecessary to support a conclusion so obvious. Where Congress intended that the cost of the asset to another than the taxpayer should be taken as the basis for gain or loss, it said so in unequivocal terms, as in the case of gifts
We must conclude, therefore, that for depreciation purposes the cost of the concrete plant was its cost to the petitioner alone, and the $20,000 contributed by the Maryland Slag Co. to build it is irrelevant.
The only question left is whether half of the plant had a depreciable basis as a gift made to petitioner by the Maryland Slag Co. We think not. The petitioner negatives such a conclusion when he says on brief:
* * * The Maryland Slag Company was interested in having petitioner erect the mixing plant at Sparrows Point because, if located there, processed slag would have to be used for coarse aggregate and it could sell its product to petitioner; and, as an inducement to petitioner to locate the plant there, it agreed to contribute towards the cost of erecting the plant. There was no consideration passing to it in exchange for such contributions as it had agreed to make to petitioner, other than the benefit it would derive from obtaining another customer for its product, or an increased outlet for its processed slag. * * *
Moreover, nothing in the record indicates a gift, but quite the contrary. Throughout the language used1941 BTA LEXIS 1161">*1173 is that of an agreement between the petitioner and the Maryland Slag Co. for mutual profit and advantage, and for the accomplishment of a business purpose desirable to both parties.
There was no gift here, so that there is no need to adjust the depreciable cost basis of the concrete plant to petitioner by the addition of its cost basis to petitioner's donor. We hold accordingly that petitioner is entitled to depreciate only the amount of $19,766.13, which it actually expended in erecting the plant.