Citations
- 9 F. Supp. 611
Full opinion text
LITTLETON, Judge.
In this suit plaintiff seeks to recover $776,400.75, income and profits tax for 1918, on the ground that a certain determined amortization allowance should be allowed as a deduction from the gross income for 1918 instead of being allocated to the years 1918 to 1921, inclusive.
June 26, 1918, plaintiff entered into a contract with the War Department under which it agreed to construct and equip a plant for the production of toluol, ammonium sulphate, and benzol, which were articles contributing to the prosecution of the war. The United States, through the War Department, agreed to buy the aforementioned products at stated prices during the period of two years from the beginning of the operation of the plant. September 16, 1918, plaintiff entered into a subcontract for the construction of the plant, and its construction was immediately started. The contract with the United States contained no provision for cancellation, but about the date .of the Armistice the War Department instructed plaintiff to suspend operations under the contract with a view of adjusting the existing contract by a settlement agreement. When the contract was suspended the construction of the plant was approximately 30 per cent, completed. After various conferences and negotiations, a settlement was finally agreed upon by which plaintiff was paid $1,525,207.30 in full settlement, payment, and discharge of its contract with the War Department. As a part of the settlement plaintiff agreed that it would complete the construction of its plant. The plant was completed May 1, 1920. No products were ever delivered to the War Department through the operation of the plant; the discharge of this obligation in the contract referred to above having been taken care of through the award of $1,525,-207.30, hereinbefore referred to, which was paid to plaintiff in 1919.
The parties agree that the total cost of the plant was $6,147,608.35 and that its post war residual value was $4,395,529.97. On that basis the Commissioner of Internal Revenue determined an amortization allowanee of $1,752,078.38, being the difference between these amounts, and further determined that in computing plaintiff’s tax liability for 1918, 1919, 1920, and 1921 the amortization allowance should be allocated to those years on the basis of the expenditures made in the respective years during the construction of the plant, as follows:
Plaintiff contends that the foregoing allocation is improper and that, in lieu thereof, it is entitled to the entire amortization allowance as a deduction from gross income for 1918 instead of having that amount allocated in part to 1918 and the remainder to the other years. Section 234 (a) (8) of the Revenue Act of 1921 (42 Stat. 254, 255), which superseded a corresponding provision in the Revenue Act of 1918, provided 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 : ** * *
“(8) 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 war * * * there shall be allowed, for any taxable year ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable years 1918, 1919, 1920, or 1921) 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 article 185, regulations 62, the Commissioner, of Internal Revenue provided for the allocation of the “reasonable deduction” authorized by the statute, as follows: “The amortization allowance shall be apportioned (a) in cases where the property was employed in the production of articles contributing to the prosecution of the war, over the respective accounting periods of the taxpayer, having reasonable regard to his gross and net income, and where separately-ascertainable the income from the facilities 'upon which amortization is claimed, between January 1, 1918 (or if the property was acquired subsequent to that date, January 1 of the year in which acquired), and the actual or estimated date of cessation of operations as a war facility, and (b) in cases where the property was not completed in time for use in the production of articles contributing to the prosecution of the war, on the basis of the expenditures made on account of which amortization is allowed.”
The Commissioner followed this regulation in his allocation of the determined amortization, but plaintiff insists that such allocation does not result in the allowance of a “reasonable deduction” whereas defendant takes the opposite view. The statute provides only for a “reasonable deduction” and makes no provision as to how such deduction shall be determined or allocated. The question presented is whether an application of the Commissioner’s regulations in this case reasonably carries out the intent of the statute.
Plaintiff makes some argument that the 1921 act and the regulations promulgated thereunder can have no effect on the case for the reason that the year involved is 1918 and, therefore, is governed by the Revenue Act of 1918. The only material change in the 1921 act from the 1918 act is the addition of a clause making the provision applicable to “any taxable year ending before March 3,' 1924 (if claim therefor was made at the time of filing return for the taxable years 1918,1919,1920, or 1921).” Section 234 (a) (8). The year in controversy is 1918, and claim was made in the return for that year on account of the item here in controversy. We think the 1921 act is clearly applicable to such a return.
The purpose of the amortization provision has been stated on many occasions by the Board of Tax ' Appeals and various courts which have had the matter under consideration. Although in the general discussions in those decisions lack of harmony in some respects exists, they agree as td the alleviative purpose of the statute and the intendment to relieve taxpayers of unbalanced investments made for war purposes through deductions from gross income. In that manner the excess costs brought about by the prices prevailing during the war period are reduced to costs on a normal or peace-time basis, and, therefore, when a given taxpayer comes to operate war-constructed facilities after the termination of the war, the cost of such facilities, on which the peace-time operation is based, will be a cost comparable to other peace-time constructions. After deductions have been allowed from gross income because of the excess costs, deductions in subsequent years are to be allowed on what has then become the balanced investment. The cost of the wartime plant in the case at bar was $6,147,-608.35, whereas its post war value when completed in 1920 was $4,395,529.97, the difference, $1,752,078.38, representing the deduction to be allowed as amortization in order to permit future deductions on the balanced investment of $4,395,529.97.
So far the parties and authorities agree, but the parties differ as to the year or years in which the amortization is to be allowed as a deduction. The position of plaintiff is that the deduction was intended only as relief from high taxes resulting from war profits a“nd that, therefore, the deductions should be made only from profits accruing during the war period. Some support for this view can be found in the discussions by the Board of Tax Appeals in certain decided cases, but a situation fairly analogous to the case at bar has not been presented to that tribunal and, when a careful analysis is made of those cases, much that was said has no controlling influence on the casé under consideration. In any event, we are of opinion that in all cases the purpose of the statute in authorizing the allowance of a reasonable deduction cannot be accomplished by having the allowance taken as a deduction from the war profits earned during the war period; on the contrary, we think that each case must be judged on its merits and that it is difficult to set out a definite rule to cover all cases.
This view is well illustrated by the case at bar. The contract with the War Department was not made, and construction of the plant in question was not begun until a short time before the Armistice. Plaintiff had substantial profits during 1917 and 1918, but, of course, no profits from the plant with respect to which it now seeks amortization. The profits in 1918 are referred to as war profits, that is, profits created during the period of the war; and the same applies to the profits earned for 1917; but no part of these profits resulted from the operation of war facilities on account of which amortization was allowable. The Revenue Act of 1917 (40 Stat. 300), makes no provision for an amortization allowance, and the provision of the Revenue Act of 1918 (40 Stat. 1078, § 234 (a) (8) allowing amortization is applicable only on and after January 1, 1918. The Board of Tax Appeals has held (Appeal of Manville Jenckes Co., 4 B. T. A. 765), and the Commissioner has acquiesced in the decision (C. B. VII-I, p. 20), that commitments made prior to April 6, 1917, with respect to property not actually acquired until after April 6, 1917, but when acquired was devoted to war purposes, are subject to amortization,