Commissioner v. F. & R. Lazarus & Co. (1939)
HELVERING, COMMISSIONER OF INTERNAL
REVENUE, v. F. & R.
LAZARUS & CO.
No. 56
SUPREME COURT OF THE UNITED STATES
308 U.S. 252; 60 S. Ct. 209; 84 L.
Ed. 226; 39-2 U.S. Tax Cas. (CCH) P9793; 23 A.F.T.R. (P-H) 778; 1939-2 C.B.
208; 1939 P.H. P5717
November 14, 1939, Argued
December 4, 1939, Decided
PRIOR HISTORY:
CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE
SIXTH CIRCUIT.
CERTIORARI, post, p. 537, to review the affirmance of
a decision of the Board of Tax Appeals, 32 B. T. A. 633, upholding a
taxpayer's claim for allowance of a deduction for depreciation in
computation of income tax.
DISPOSITION: 101 F.2d 728, affirmed.
CORE TERMS: depreciation, lease, exhaustion, trustee
bank, computing, wear, ownership, mortgage, reasonable allowance, net
income, equitable, tear, depreciable, conclusive, capital investment,
written form, life tenant, lessee
SYLLABUS: 1. In computing income tax under the Revenue
Act of 1928, a taxpayer is entitled to the deduction for depreciation in
respect of properties used in its business under leases from a trustee to
whom the properties had been conveyed by the taxpayer in a transaction
which in reality was a mortgage. P. 254.
2. A finding by the Board of Tax Appeals that a
transaction between the taxpayer and a trustee bank -- in written form a
transfer of ownership with a lease back -- was in reality a mortgage, is
conclusive on the courts although the evidence on the subject permits
conflicting inferences. Pp. 254-255.
3. Proceedings before the Board of Tax Appeals are
equitable in nature. P. 255.
***3 COUNSEL: Mr. Norman D. Keller argued the cause,
and Solicitor General Jackson, Assistant Attorney General Clark, and
Messrs. Sewall Key and Ellis N. Slack were on the brief, for petitioner.
Messrs. Murray Seasongood and Robert P. Goldman, with
whom Mr. Harry Stickney was on the brief, for respondent.
JUDGES: Hughes, McReynolds, Butler, Stone, Roberts,
Black, Frankfurter, Douglas; Reed took no part in the consideration or
decision of this case.
OPINIONBY: BLACK
OPINION: MR. JUSTICE BLACK delivered the opinion of
the Court. In computing its net taxable income for 1930 and 1931,
respondent claimed depreciation on three buildings occupied and used in
its business as a department store. During those years, the legal title to
two of these properties and an assignment of a ninety-nine year lease to
the third were in a bank as trustee for certain land-trust certificate
holders. These properties had been transferred to the trustee by the
respondent in 1928 and the trustee had at the same time leased all three
back to respondent for ninety-nine years, with option to renew and
purchase. In claiming the deduction, respondent insisted that the capital
loss from wear, tear, and exhaustion of the buildings was falling upon it,
thus entitling it to the statutory allowance for depreciation of
buildings. n1 The Commissioner disallowed this deduction on the ground
that the statutory right to depreciation follows legal title. Reviewing
the evidence, the Board of Tax Appeals concluded that the transaction
between respondent and the trustee bank was in reality a mortgage loan and
ordered the deduction allowed, n2 and the Circuit Court of Appeals
affirmed. n3 Upon facts which it considered "in all essential
respects identical," the Court of Appeals for the District of
Columbia held depreciation not allowable. n4 Because of the different
results reached by the Courts of Appeal, we granted certiorari. n5
- - - - - - - - - - - - - - - - - -Footnotes- - - - -
- - - - - - - - - - - - -
n1 Revenue Act of 1928, c. 852, 45 Stat. 791, 799-800.
In computing net income there shall be allowed as deductions: . . .
Depreciation. -- A reasonable allowance for the
exhaustion, wear and tear of property used in the trade or business,
including a reasonable allowance for obsolescence. In the case of property
held by one person for life with remainder to another person, the
deduction shall be computed as if the life tenant were the absolute owner
of the property and shall be allowed to the life tenant. In the case of
property held in trust the allowable deduction shall be apportioned
between the income beneficiaries and the trustee in accordance with the
pertinent provisions of the instrument creating the trust, or, in the
absence of such provisions, on the basis of the trust income allocable to
each.
n2 32 B. T. A. 633. The Board found the depreciable
life of the property to be fifty years, instead of forty as originally
claimed by respondent.
n3 101 F.2d 728; cf. Commissioner v. H. F. Neighbors
Realty Co., 81 F.2d 173.
n4 City National Bank Building Co. v. Helvering, 68
App. D. C. 344; 98 F.2d 216, 217.
n5 Post, p. 537.
- - - - - - - - - - - - - - - - -End Footnotes- - - -
- - - - - - - - - - - - -
The federal income tax is aimed at net income
determined from gross income less items such as necessary expenses
incurred or capital consumed in earning it. Thus, the controlling statute
permits a taxpayer in computing net income to deduct a "reasonable
allowance for . . . exhaustion, wear and tear." While it may more
often be that he who is both owner and user bears the burden of wear and
exhaustion of business property in the nature of capital, one who is not
the owner may nevertheless bear the burden of exhaustion of capital
investment. Where it has been shown that a lessee using property in a
trade or business must incur the loss resulting from depreciation of
capital he has invested, the lessee has been held entitled to the
statutory deduction. n6
- - - - - - - - - - - - - - - - - -Footnotes- - - - -
- - - - - - - - - - - - -
n6 Duffy v. Central R. Co., 268 U.S. 55; Appeal of
Gladding Dry Goods Co., 2 B. T. A. 336, 338; Cogar v. Commissioner, 44
F.2d 554. See, Bowman Co. v. Commissioner, 59 App. D. C. 13; 32 F.2d 404,
405; National City Bank v. United States, 64 C. Cls. 236, cert. den. 276
U.S. 620; Commissioner v. H. F. Neighbors Realty Co., supra.
- - - - - - - - - - - - - - - - -End Footnotes- - - -
- - - - - - - - - - - - -
Here, the taxpayer used business property in which it
had a depreciable capital investment, provided it had not recovered its
investment through a sale. The Board in substantial effect found that the
instrument under which the taxpayer purported to convey legal ownership to
the trustee bank was in reality given and accepted as no more than
security for a loan on the property; the "rent" stipulated in
the concurrently executed ninety-nine year "lease" back was
intended as a promise to pay an agreed five per cent interest on the loan;
and the "depreciation fund" required by the "lease"
was intended as an amortization fund, designed to pay off the loan in
forty-eight and one-half years. These findings are supported by evidence
which permits, at most, conflicting inferences and are, therefore,
conclusive here. And, unless the Board committed error of law we must
affirm. n7
- - - - - - - - - - - - - - - - - -Footnotes- - - - -
- - - - - - - - - - - - -
n7 26 U. S. C. 641 (c).
- - - - - - - - - - - - - - - - -End Footnotes- - - -
- - - - - - - - - - - - -
We think the Board justifiably concluded from its
findings that the transaction between the taxpayer and the trustee bank,
in written form a transfer of ownership with a lease back, was actually a
loan secured by the property involved. General recognition has been given
the "established doctrine that a court of equity will treat a deed,
absolute in form, as a mortgage, when it is executed as security for a
loan of money." n8 In the field of taxation, administrators of the
laws, and the courts, are concerned with substance and realities, and
formal written documents are not rigidly binding. Congress has
specifically emphasized the equitable nature of proceedings before the
Board of Tax Appeals by requiring the Board to act "in accordance
with the rules of evidence applicable in courts of equity of the District
of Columbia." 26 U. S. C. 611.
- - - - - - - - - - - - - - - - - -Footnotes- - - - -
- - - - - - - - - - - - -
n8 Peugh v. Davis, 96 U.S. 332, 336; Hughes v.
Edwards, 9 Wheat. 489, 495; Russell v. Southard, 12 How. 139; Teal v.
Walker, 111 U.S. 242. See cases collected in 79 A. L. R. 937.
- - - - - - - - - - - - - - - - -End Footnotes- - - -
- - - - - - - - - - - - -
The Government relies in part upon Senior v. Braden,
295 U.S. 422. Whatever the significance of that case, it can have no
application here. In the Braden case, the equitable doctrine -- here
controlling -- of looking to extrinsic evidence behind a transfer absolute
on its face to determine whether only a security transaction was
contemplated by the parties, was neither invoked nor passed upon.
Judgment below is
Affirmed.
MR. JUSTICE REED took no part in the consideration or
decision of this case.
|
