UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
May 18, 1956
Hugh SAMSON, Edith W. Samson and Hattie S. Halle, Plaintiffs,
UNITED STATES of America, Defendants
The opinion of the court was delivered by: HERLANDS
This is an action for refund of taxes paid for the calendar year 1948. The material facts are stipulated.
On the question of law which remains, both sides move for summary judgment.
That question of law may be stated as follows:
On a sale in 1948 of depreciable property (a hotel) by trustees of a liquidating trust for the account of remaindermen (including these plaintiffs), must adjustment of the cost basis -- for the purpose of determining gain or loss -- be made for depreciation of the property during the period from February 1, 1915 (the approximate date of the creation of the trust) up to January 1, 1928 (the effective date of section 23(k) of the Revenue Act of 1928, 26 U.S.C.A. (I.R.C.1939) § 23(l))?
The trust instrument did not require or empower the trustees to accumulate a reserve for depreciation. Similarly, under New York law governing such trust, the Trustees could not properly accumulate a reserve for depreciation.
One of the major circumstances giving rise to the litigation is that the liquidating trustees did not make deductions for depreciation for income tax purposes during the period from February 1, 1915 up to January 1, 1928, the effective date of 23(k) of the Revenue Act of 1928. In explanation of their not deducting depreciation for income tax purposes during the 1915-1928 period mentioned, the trustees claim that such depreciation was not allowable for income tax purposes under the tax laws and regulations in force during that particular period. With that interpretation of the tax laws and regulations as their premise, the trustees them make the following argument: since depreciation was not allowable for income tax purposes during the particular period mentioned, the trustees were not required to take into account depreciation for that period in adjusting and determining the original cost basis of the hotel and in computing the profit on the sale of the hotel in 1948.
The Government's position is that the original cost basis of the hotel should be reduced to reflect depreciation for the thirteen-year period from February 1, 1915 to December 31, 1927, inclusive. In order to find that the Government's position is correct, it is only necessary for the Court to determine that a deduction for depreciation was allowable under the statutes applicable to those years. It is not necessary for such determination that depreciation shall have been actually claimed as a deduction for such depreciation to be considered as an adjustment of the original cost basis of the hotel.
The statute applicable to a sale of property in 1948 -- the year in which the hotel was sold -- was Internal Revenue Code of 1939. Section 113(b)(1)(B)
of that Code, 26 U.S.C.A. § 113(b)(1)(B), required the adjusted cost basis -- for determining the gain or loss from the sale of property -- to reflect depreciation since February 28, 1913, the extent being not less than the amount 'allowable' under the 1939 Code 'or prior income tax laws.'
It has been held that the adjusted cost basis should reflect 'allowable' depreciation, notwithstanding the circumstance that a deduction for allowable depreciation would not have benefited the taxpayer taxwise, as where the taxpayer owned a depreciable property which produced no income and where he had no other sources of income.
Thus, the question to be decided is whether depreciation was 'allowable' during the thirteen-year period in question.
The taxpayers' fundamental argument is that, during the thirteen-year period here involved, deductions for depreciation in computing taxable income could not have been taken by either the trustees or the income beneficiaries or the remaindermen because the trust was subject to the following two conditions: (1) under the express terms of the trust instrument, all of the income was required to be and was, in fact, distributed currently; and (2) under the laws of New York State, which determined the trust administration, a depreciation reserve was not authorized, in view of the fact that the trust instrument did not contain an express provision for such a reserve. Plaintiffs concede that, if they had been owners in fee simple of the property for the entire thirteen-year period, they would have been allowed to deduct depreciation and that, consequently, the adjustment of original cost basis now challenged would have been proper. United States v. Ludey, 1927, 274 U.S. 295, 47 S. Ct. 608, 71 L. Ed. 1054.
But the structure of plaintiffs' argument attacking the Commissioner's adjustment to reflect depreciation during the thirteen-year period, is built upon the proposition that, for the particular period, plaintiffs were beneficiaries of an express testamentary trust that was qualified and circumscribed by the two conditions specified above. In this connection, certain facts must be noted.
Plaintiffs are the remaindermen of the express testamentary trust created by Gustavus Sidenberg (who died in 1915) in favor of (inter alia) Henry Sidenberg (who died in 1925). Although the trustees continued to administer the trust in solido (because the hotel could not be divided readily), from and after Henry Sidenberg's death in 1925, these plaintiffs-remaindermen were never beneficiaries under the trust instrument,
but were presumably owners in fee simple of an undivided one-third interest in the hotel when they took as remaindermen in 1925. Thus, as to them, the trustees were, in legal effect, acting not as trustees but as agents. Consequently, as to the period from Henry Sidenberg's death in 1925 to December 31, 1927, there is no arguable basis for plaintiffs' challenge of the Commissioner's adjustment to reflect allowable depreciation. This narrows the scope of plaintiffs' challenge to the period from February 1, 1915 to the death of Henry Sidenberg in 1925.
Citing the applicable statutes
and six judicial decisions
allegedly supporting plaintiffs' statutory construction, plaintiffs strenuously contend that the adjusted original cost basis as reported by plaintiffs should not have been altered by the Commissioner to reflect non-allowable depreciation. Additional reliance for their argument is placed by plaintiffs upon contemporary interpretative regulations issued by the Commissioner.
The Government's position is that the applicable statutes allowed depreciation on the trust property during the thirteen-year period and that, therefore, the Commissioner properly deducted the agregate depreciation for the period in computing the gain on the sale of the hotel. The following cases are relied upon by the Government: Fidelity-Philadelphia Trust Co. v. Commissioner, 3Cir., 1931, 47 F.2d 36; United States Trust Co. of New York v. Commissioner, 1934, 31 B.T.A. 54; Hall v. United States, 1942, 43 F.Supp. 130, 95 Ct.Cl. 539, certiorari denied 1942, 316 U.S. 664, 62 S. Ct. 944, 86 L. Ed. 1740, rehearing denied 1942, 316 U.S. 709, 62 S. Ct. 1105, 86 L. Ed. 1776; Jones v. Commissioner, 8 Cir., 1934, 72 F.2d 114, certiorari denied 1934, 294 U.S. 716, 55 S. Ct. 515, 79 L. Ed. 1249; Old Colony Trust Co. v. White, D.C.Mass.1929, 34 F.2d 448.
An analysis of the above-cited cases shows them to be clearly in point. In the Fidelity-Philadelphia Trust Co. case, which bears striking similarities to the litigation now before this Court, the taxpayer petitioned the Third Circuit to review a Board of Tax Appeals order sustaining an assessment of income tax by the Commissioner. The issue was whether the Commissioner could adjust the cost basis of property at the time of its sale in 1923 to reflect depreciation for the years 1913 to 1923, which depreciation had in fact never been claimed because the trustee (as in the case at bar) contended that, under the applicable acts and regulations, it was not entitled to take deductions for depreciation. The precise question before the Third Circuit was whether depreciation was 'allowable' to the trustee during the applicable years.
The following three arguments advanced by the trustee as to why depreciation was not 'allowable' closely parallel those submitted by the plaintiffs at bar: (1) that the trustee was not permitted to take a depreciation deduction under the applicable Revenue codes; (2) that the regulations specifically forbade a deduction for depreciation by the trustee except where the trust instrument made specific provision for keeping the corpus intact; (3) that deductions for depreciation were not available to the trustee and, therefore, not binding upon it in view of a specific Pennsylvania statute which forbade accumulations is trust estates and made it unlawful for the trustee to set aside a reserve for depreciation and to make deductions of depreciation from year to year.
All three arguments were rejected by the Third Circuit. The first contention was overruled on the basis of the explicit wording of the Revenue Act of 1921,
inasmuch as section 219(a) of that Act provided that the tax imposed by sections 210 and 211 (the tax on individual income) should apply to trust income, and that section 214(a)(8) allowed a deduction for depreciation in computing the net income upon which an individual was taxable.
The second argument, based upon the regulations, was disposed of in the following words:
'However that may be, and whether the regulations were validly explained or ruled in Pennsylvania Co. v. Commissioner, 10 B.T.A. 428, such regulations are subordinate to the revenue act and, like the Act itself, are finally controlled by the decision in the Ludey case. (United States v. Ludey, 274 U.S. 295, 47 S. Ct. 608, 71 L. Ed. 1054).'
The third point, involving the restrictive effect of state law, was considered without merit for the reason that state law could not interfere with federal income tax calculations, i.e., that state law could not deprive a trustee of a deduction to which he was entitled or with which he was charged under federal law.
The cases cited by plaintiffs are readily distinguishable as involving situations where the income beneficiary -- as distinguished from the trustee -- attempted to claim the deduction for depreciation.
Relying on Helvering V. Winmill, 1938, 305 U.S. 79, 59 S.Ct 45, 83 L. Ed. 52; Crane v. Commissioner, 1947, 331 U.S. 1, 67 S. Ct. 1047, 91 L. Ed. 1301; and Helvering v. R. J. Reynolds Tobacco Co., 1939, 306 U.S. 110, 59 S. Ct. 423, 83 L. Ed. 536, plaintiffs argue that depreciation was not allowable under the applicable acts as interpreted by the regulation, in light of the 'doctrine' that the contemporary and long-standing construction given a statute by authorized officials and administrative agencies of the Government acquires the force and effect of a statute.
In determining the weight to be given to a particular regulation of the Treasury Department, where the question is one of statutory interpretation, a court may apply either one or both of two doctrines. One is that the courts will give great weight to the regulations as the reasoned interpretations of men peculiarly and intimately familiar with the filed.
The second (sometimes referred to as the 'reenactment doctrine') is that Congress is deemed to be cognizant of all the regulations of administrative agencies interpreting federal legislation, and that, in repeatedly passing the interpreted statute in unchanged form, Congress is in effect approving the administrative interpretation contained in the regulations, thereby endowing the administrative regulations with a force equivalent to a congressionally enacted statute. The case law on the subject is extensive. The doctrines are not without their areas of confusion. The 'reenactment doctrine' has been criticized as being an unrealistic fiction.
For present purposes, it will suffice to note the settled canon of construction that, where the language and meaning of the statute are clear, the subsequent reenactment of the statute does not constitute an adoption of its administrative construction.
Plaintiffs have argued at length that Freuler v. Helvering, 1934, 291 U.S. 35, 54 S. Ct. 308, 78 L. Ed. 634, has seriously impaired the authority of the Fidelity-Philadelphia Trust Co. case. As I read the Freuler case, it dealt with a question that is essentially different from the issue now before the Court, or that was before the Court in the Fidelity-Philadelphia Trust Co. case. In the Freuler case, the Supreme Court was called upon to construe section 219(d) of the Revenue Act of 1921, which required an income beneficiary to pay a tax on that part of the income of an estate or trust which, 'pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not.' The only issue was whether income beneficiaries were required to pay taxes on trust income that was actually distributed to them or only on that portion which a state court later held was properly distributable to them. The Supreme Court held that local law determines the income 'distributable' to the life tenant -- a result dictated by the language of the federal statute, which implicitly refers such determination to state law.
By contrast, the fidelity-Philadelphia Trust Co. case passed on the question whether depreciation was allowable to a trustee under the terms of a trust instrument requiring all income to be distributed to the beneficiaries, under the Internal Revenue codes applicable for the years 1913 to 1923. The Freuler case is, therefore, not to be read as being inconsistent with the Fidelity-Philadelphia Trust Co. case. This conclusion is buttressed by the double fact that the Freuler case does not mention the Fidelity-Philadelphia Trust Co. case, whereas the Supreme Court in a later case, Virginian Hotel Co. v. Helvering, 1943, 319 U.S. 523, 525, 63 S. Ct. 1260, 87 L. Ed. 1561, cites the Fidelity-Philadelphia Trust Co. case with approval.
Plaintiffs' motion for summary judgment is denied. Defendant's motion for summary judgment is granted.
Settle order on notice.