Opinion
Docket No. 21433.
1951-05-22
AMPHITRITE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Joseph E. Keller, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
Joseph E. Keller, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
Reduction of liabilities on petitioner's books upon running of statute of limitations against indebtedness incurred contemporaneously with acquisition of ship, held, as case was presented, not sufficient to justify reduction of ship's basis for depreciation.
Petitioner seeks redetermination of deficiencies in income and declared value excess-profits tax for 1945 of $1,759.31 and $909, respectively, and in income tax for 1946 of $629.61. Certain adjustments are not contested. The primary issue is the deductibility of depreciation on a vessel owned by petitioner.
FINDINGS OF FACT.
Petitioner, a Delaware corporation with principal place of business in Washington, D.C., filed its returns with the collector of internal revenue at Baltimore, Maryland.
In 1927 a hotel ship known as the ‘Amphitrite‘ was owned by Marine Hotel Corporation which was a receivership. In May 1927, a plan was formulated to protect the interests of the shareholders and creditors of that corporation. The plan provided for the formation of a new corporation, the old shareholders to have the right to subscribe to stock for cash, creditors to have the alternative of taking stock or new claims bearing 6 per cent interest, and the new corporation to acquire the ship and assume its predecessor's obligations. and assume its predecessor's obligations.
In November 1927, petitioner was organized and acquired the hote ship from the receiver under the plan. Petitioner's books of account show an original cost, plus capital additions in 1927 and 1928 totaling $119,132.70. That amount includes accounts payable of $92,913.93 owing to a trustee for creditors of the prior owner in receivership, representing obligations assumed by petitioner.
On November 29, 1929, petitioner , as ‘vendor,‘ entered into an agreement with Amphitrite Operating Corporation, as ‘purchaser,‘ providing for a sale of the ship for $100,000, consisting of a down payment in cash of $10,000 and notes aggregating $90,000, maturing at various dates in 1930 and 1931. The vessel was to be delivered by vendor and to be used by purchaser. The agreement further provided that title should not pass to purchaser until the above payments were made and that in the event of default by purchaser the vendor could take possession and might resell the ship.
Petitioner's books show that the Amphitrite asset account of $119,166.10 was written off, that a claim of $100,000 was recorded against the purchaser, and that the sum of $19,166.10 was charged to a profit and loss account. Petitioner received a cash payment in 1929 of $10,000. Petitioner claimed, as a deduction for that year a loss of $19,166.10 on the sale. The discrepancy between $119,132.70 and $119,166.10 is unexplained.
Thereafter the purchaser defaulted on all the notes. In 1932 the vessel was advertised for public sale by an attorney representing petitioner who subsequently executed and gave to petitioner a ‘Bill of Sale‘ for the vessel, which stated that petitioner had bid the highest price of $1,000 at the sale.
Petitioner's 1932 tax return contains balance sheets indicating that during the year the ship was recorded on its books as an asset worth $1,000 and that the amount of notes receivable was reduced from $90,000 to $89,000. The balance sheets on its 1933 return show the ship as a $1,000 asset and indicate that during the year the amount of notes receivable was reduced to $88,255. The returns for 1934, 1935, and 1936 contain balance sheets which continue to show the above items in the same amounts. The balance sheets on the 1937 tax return indicate that during the year the book value of the ship was increased to $99,226.11, and that notes receivable of $88,255 were written off the books. That return shows a net loss. No bad debt deduction was claimed. The 1938 return's balance sheets indicate that during the year the ship's book value was raised to $99,952.41, and it appears as an asset at the figure on balance sheets in subsequent returns.
Petitioner's tax returns for the years 1930 to 1934, inclusive, and 1937 to 1942, inclusive, contain balance sheets for those years showing a liability item of accounts payable to ‘Creditors Committee‘ in the amount of $97,163.99. The balance sheets on the returns for 1928, 1929, 1935 and 1936 show accounts payable to unspecified creditors, and 1943 return contains no balance sheet. The 1944 return contains balance sheets showing that accounts payable to ‘Creditors Committee‘ of $97,163.99 were written off the books during that year, and the following explanation appears: ‘These accounts written off on advice of counsel that statute of limitations had run against their collection. ‘ The return indicates that petitioner did not show an increase of gross income in that year resulting from that action, and it reported a normal-tax net loss for the year of $64,008.29
Petitioner's tax returns show that it claimed the following deductions for depreciation of the hotel ship: It claimed $3,611.32 for 1928 alleging that the remaining life after acquisition was 50 years for the hull, 20 years for the superstructure, and lesser lives for furniture and fixtures, machinery, and tender. It claimed $4,961.31 for 1937, using $99,226.11 as the basis, with a 20-year life. It claimed $4,997.62 for each year in 1938, 1939, and 1940, and $5,059.49 for 1944.
Capital additions to the vessel were made by petitioner in the amount of $726.30 on January 1, 1938, and $545 on July 1, 1942.
Petitioner's 1945 return claimed a depreciation deduction for the ship of $5,021.82, stating 11 years to be the estimated remaining life. The 1946 return claimed depreciation of $5,488.51, giving 10 years as the estimated remaining life.
In a notice of deficiency mailed on October 7, 1948, respondent determined, among other matters, ‘that indebtedness incurred in the original purchase lapsed and was unenforceable prior to January 1, 1941, and is not includible in the cost of the vessel for the purpose of depreciation,‘ and that ‘the basis for depreciation on the vessel except for $1,271.30 for later additions, was fully exhausted prior to January 1, 1941.‘
OPINION.
OPPER, Judge:
If this were a ‘cancellation of indebtedness case‘ under the Kirby
rule, the gain arising at the time the obligations became outlawed in 1944 might have been taxable in a prior year. If, on the other hand, the elimination of the debt had been accompanied by the petitioner's surrender of the property a question of gain on its disposition might have arisen. Lutz & Schramm Co., 1 T.C. 682; Mendham Corporation, 9 T.C. 320. Here, however, no significant event occurred in 1945 and 1946, the years before us, and first by the sole question is whether petitioner's basis has been so reduced first by the events of 1944 and second, by depreciation previously allowed, that non remains upon which to compute current depreciation deductions.
United States v. Kirby Lumber Co., 284 U.S. 1.
It is true that if petitioner's creditors allowed their obligations to lapse because petitioner's property had decreased in value, it might have advanced the argument in the earlier year that gain on that cancelation was not taxable under the ‘adjustment of purchase price‘ approach of the Hirsch case /2/. But the existence of such a situation is an exceptional one, and we have expressed the view that the rule is one of strictly limited application. Denman Tire & Rubber Co., 14 T.C. 706, 715.
The record, to be sure, leaves much to be desired. We are not apprised of the value of petitioner's property either at the time the indebtedness lapsed, nor in other tax years. Nor are we informed of the reasons, if they are know, for which the creditors may have allowed the statute of limitations to run against them. But there are so many grounds upon which the failure to report as income any gain from the cancelation in the prior year can be explained— including the mere failure to report petitioner's income correctly— that it does not appear warranted to make the assumption that a readjustment of purchase price, as developed in the Hirsch case, must have been the explanation. If, for example, the forgiveness was a gift or a contribution to capital, or if petitioner had remained insolvent even after the indebtedness was released, the obligation to report any income would have disappeared. Helvering v. American Dental Co., 318 U.S. 322; Chenango Textile Corp. v. Corp. v. Commissioner (C.A. 2), 148 F.2d 296; Dallas Transfer & Terminal Warehouse Co. v. Commissioner (C.A. 5), 70 F.2d 95. But we are not aware of any rule that an adjustment of basis below cost would then be requisite, and we have been referred to no authority for any such proposition.
These are not in fact the contentions advanced by respondent but they seem to us the only ones for which any authority could be found. Respondent's actual position is that the purchase price consisted of part cash and part obligations; that when the obligations became unenforceable they disappeared as part of the consideration, leaving only the cash as the cost of the property; and that this amount has already been recovered through previously allowed depreciation. Such a contention seems to us entirely inadmissible. Barring exceptional circumstances, the elimination of the indebtedness would have resulted in an income item in the prior year. Denman Tire & Rubber Co., supra. If this were the correct treatment, it would be both unnecessary and unauthorized to add a further detriment to the taxpayer by proposing a corresponding reduction in basis.
It follows that the only theory upon which petitioner's basis could be regarded as having been reduced by the outlawing of its obligations is on an approach similar to estoppel. We should have to assume that the failure to report the cancelation as income was justified only by the Hirsch rule, and that since the Government was deprived of the tax, petitioner is consequently barred from asserting now that its basis has not been reduced as that case would presumably require. Not only, however, do the pleadings fail to suggest the presence of an issue relating to estoppel, but even if they had, the burden of such an affirmative defense would have rested upon its proponent. Northport Shores, Inc., 31 B.T.A. 1013. There is no evidence from which we can conclude that the respondent's consequent burden of developing the facts with respect to the earlier year has been discharges.
It follows that petitioner's right to recover its original basis by adequate depreciation deductions has not been shown to have been destroyed. Since the parties expressly disavow any other issue,
2. Hirsch v. Commissioner (C.A. 7), 115 F.2d 656.As the case was presented, the burden of showing such facts as whether the obligations had in fact become unenforceable cannot in any event be place upon petitioner. Throughout the hearing respondent's counsel made it clear that he considered the legal effect of the events connected with the abortive sale by petitioner about 1930 to be the only question in the case as to the case as to basis, and the evidence appears to have been presented by both parties with that understanding. Indeed respondent's counsel did not even mention the outlawed notes. In the course of his opening remarks, he stated that ‘it is our position that the sale of the ship in 1930 established the value of the ship * * *‘ and subsequently manifested no disagreement with opposing counsel's affirmative reply to an inquiry by the Court as to whether the issues were clear. The contention as to the effect of the 1930transaction on the basis of the property has now been abandoned by respondent. See Helvering v. Wood, 309 U.S. 344.
such as the amount of the depreciation base
The parties agree, on brief, that a question of loss carry-back from 1947 turns upon the decision as to basis.
or the anticipated useful life of the property,
Both briefs take $100,000 to be the proper basis, after the events of 1932, and the cost of subsequent capital improvements is not in dispute.
the deficiency seems to us to have been erroneously determined in this respect.
The lower rate is the one adopted by petitioner and no claim of overpayment is made.
Decision will be entered under Rule 50.