Commissioner of Internal Revenue v. Oxford Paper Co, 194 F.2d 190, 2d Cir. (1952)
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Scribd Government DocsCommissioner of Internal Revenue v. Oxford Paper Co, 194 F.2d 190, 2d Cir. (1952)
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Scribd Government Docs194 F.
2d 190
COMMISSIONER OF INTERNAL REVENUE
v.
OXFORD PAPER CO.
Nos. 122-125.
Docket Nos. 22105-22108.
United States Court of Appeals Second Circuit.
Argued December 12, 1951.
Decided February 5, 1952.
Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Lee A. Jackson,
Hilbert P. Zarky, Special Assts. to the Atty. Gen., for petitioner.
Willke, Owen, Farr, Gallagher & Walton, New York City (Thomas N.
Tarleau, Charles A. Davey, New York City, of counsel), for respondents.
Before CHASE, CLARK and FRANK, Circuit Judges.
CHASE, Circuit Judge.
By an order of this court, made pursuant to a stipulation of the parties, three
other petitions to review decisions of the Tax Court were consolidated for
hearing with this petition and, the legal principles applicable to all being the
same, decision as to them is to be entered in accordance with the decision here.
The question presented is whether the taxpayer, in computing its taxes in each
of the taxable years involved, was entitled to an allowance for depreciation on a
building and machinery, used in its business, which it had acquired in the
following way:
In 1936 the Rumford Falls Paper Company, hereinafter called Power, a wholly
owned subsidiary of the petitioner, was the lessor in a lease in perpetuity to the
Continental Paper & Bag Corporation, to be called Continental, of the right to
draw a given number of cubic feet of water per second from a canal connected
with the Androscoggin River at Rumford, Maine. The average annual rental
paid Power by Continental was $69,200. In December, 1936, Continental,
being in a weak financial position, desired to rid itself of its obligations under
the lease and did so by assigning the lease to the taxpayer who assumed the rent
obligations of Continental under the lease. Power accepted the taxpayer as the
lessee in place of Continental. As part of this transaction, despite the fact that
the rental reserved in the lease was herein shown to be a low one, Continental
also paid the taxpayer $100,000 in cash and transferred to it stock in another
corporation worth $6,000 and the land, buildings, machinery and equipment
comprising Continental's so-called Island Division Plant at Rumford, Me.,
which then had a fair market value, exclusive of the land, of $350,000.1 The
taxpayer included the cash and the value of part of the property received2 in its
gross taxable income for 1936 but actually paid no taxes thereon because its
allowable deductions for that year exceeded its income. While it did not deduct
depreciation on the buildings and machinery, hereinafter called the Plant, in
computing its taxes for the years involved, it filed claims for refunds which put
in issue the right to such deductions.
4
The majority of the Tax Court held, and the taxpayer here argues that, since the
fair market value of the Plant was includible in its gross income for the year in
which it was acquired, the same value is the base upon which depreciation
deductions are to be computed. Salvage v. Commissioner, 2 Cir., 76 F.2d 112,
affirmed sub nom. Helvering v. Salvage, 297 U.S. 106, 56 S.Ct. 375, 80 L.Ed.
511. Were the premise of this argument sound, we would agree with the
conclusion. However, as we view the transaction, the acquisition of the plant
and other property did not result in income to the taxpayer in 1936.
It seems to this court that the correct analysis of the entire transaction is that the
property the taxpayer received was acquired by way of purchase for which it
paid the obligations it assumed under the lease less the $100,000 cash received.
Oxford Paper Co. v. United States, D.C., 86 F. Supp. 366. Since cost, computed
in accordance with 26 U.S.C.A. 114, 113(a) and (b), with certain exceptions
not here relevant, is the proper basis for depreciation deductions, the taxpayer
must show what part of the assumed obligations, which were its cost,
Consolidated Coke Co. v. Commissioner, 3 Cir., 70 F.2d 446, is allocable to the
Plant. This it has not done on the present record and, since the assumed
obligation consisted of what was shown to be a low rent, it may turn out that
the Plant cost little, if anything. But, whatever amount is properly allocable to
the Plant is the basis for depreciation, not the Plant's fair market value at the
time of acquisition.
The taxpaper has urged that the property received was income in 1936 by
analogy to Hort v. Commissioner, 313 U.S. 28, 61 S.Ct. 757, 85 L.Ed. 1168;
where payments received by a lessor to obtain cancellation of a lease were held
to be income. However, in view of the rationale of the Hort case that the
payments received were mere substitutes for what would be plainly income, i.
e. rent, 313 U.S. at page 31, 61 S. Ct. 757, while here the same cannot be said
because the taxpayer was not the lessor, nor was the lease cancelled, we think
the analogy untenable. Furthermore, the parent-subsidiary relationship between
the taxpayer and Power does not, alone, permit the two to be considered the
same taxpayer since Power, doing business as a separate corporation, is to be
treated, for tax purposes, as a different entity. National Carbide Corp. v.
Commissioner, 336 U.S. 422, 69 S. Ct. 726, 93 L.Ed. 779.
7
Reversed and remanded.
Notes:
1
However difficult it may be to understand why Continental paid the taxpayer
so much for relieving it of the obligation to paylow rent on the lease, the
transaction was unquestionably one at arm's length on a business basis and
precludes, therefore, any notion that this additional property was a gift.
Only $461,000 was included as income in the 1936 tax return. On the basis of
the above figures, which were stipulated, nothing was included for the value of
the land which was part of the Island-Division Plant property received by the
taxpayer
