Opinion
Docket No. 8697.
1947-02-24
WILSON LINE, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
David P. Brown, Jr., Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
Petitioner dismantled its marine railway in 1937 on condemnation of land upon which it was built. Petitioner realized taxable gain at that time measured by the difference between the condemnation award and the costs of the property condemned, including the cost of the marine railway less depreciation and the estimated salvage value of the usable parts which were stored for future use. In 1942 petitioner sold the stored parts, realizing a gain of $5,269.28. Held, in determining excess profits net income the gain realized in 1942 is excludible under Section 711(a), I.R.C. David P. Brown, Jr., Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.
The issue here is whether petitioner, in computing its excess profits net income for the fiscal year ended March 31, 1943, is entitled to exclude gain from the sale of parts of a dismantled marine railway. The respondent denied the exclusion and determined an excess profits tax deficiency of $4,664.97. The facts are in part stipulated.
FINDINGS OF FACT.
Petitioner is a corporation, organized in 1929 under the laws of the State of Delaware and having its principal office in Wilmington, Delaware. It filed its corporation income and declared value excess profits tax return and its corporation excess profits tax return on the accrual basis for the fiscal year ended March 31, 1943, with the collector of internal revenue at Wilmington, Delaware.
Petitioner is and has been engaged in the business of transportation by water and owns steamships used in its business. On December 2, 1937, petitioner owned certain business properties acquired and used for the purpose of servicing its steamships. These properties included a tract of real estate fronting on the Christiana River on which land were located several structures, including a marine railway.
The marine railway had a capacity of 1,000 tons. It consisted of a cradle of timbers resting on rollers placed on rails laid on a foundation of piling driven and cut off to proper length, a winch or windlass, motor, chains, and other tackle. The cradle measured 195 feet in length, 45 feet in width, and 20 feet in depth. The rails extended from the land to a point at a distance under water. The marine railway was used to haul ships from the water to the land in order to paint or repair their hulls.
On December 2, 1937, the Highway Department of the State of Delaware, pursuant to the exercise of the right of eminent domain, acquired title to a portion, some 2.18 acres, of petitioner's real estate.
An award of $208,736.72 was made for the property, which award included reimbursement for tearing down and relocating structures on the land, including the marine railway.
Petitioner dismantled the marine railway and retained some of the parts thereof, storing the cradle intact on the premises of another concern on the river bank, the winch in petitioner's warehouse, and other parts in petitioner's yard, after greasing them to keep them from deteriorating. The underwater piling and the rails under water and a sheave were left on the property condemned.
Petitioner carried the dismantled parts of the marine railway on its books as an asset at an estimated salvage value of $2,500. Petitioner did not thereafter claim depreciation on this property.
Petitioner made no attempt to sell the parts of the marine railway. In May 1942 an unsolicited offer to buy was received and on or about May 21, 1942, petitioner sold the dismantled parts of the marine railway for a net consideration of $9,600. Petitioner incurred expense of $1,830.72 for preparing these parts for shipment. The cost basis to petitioner upon the sale was the book salvage value of $2,500 plus the expense of $1,830.72, a total of $4,330.72, resulting in a gain to petitioner of $5,269.28 on the disposition of this property.
The marine railway, as of December 2, 1937, had a book cost to petitioner of $48,772.96, and book depreciation thereon had been accrued in the amount of $24,073.84, resulting in a net book cost of $24,699.12. In petitioner's corporation income and excess profits tax return for the fiscal year ended March 31, 1938, capital gain of $30,096.55 was reported from the transaction, computed as follows:
+-------------------------------------------------------------------+ ¦Original allowance ¦ ¦$208,736.72¦ +--------------------------------------------+----------+-----------¦ ¦Land ¦$75,900.00¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Railway ¦22,199.12 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Boiler house ¦2,001.21 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Shipyard dock ¦10,868.47 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦New wharf made necessary by loss of shipyard¦ ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦dock ¦13,427.04 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Miscellaneous labor and material, moving ¦ ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦facilities ¦25,530.82 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Compensation for special services ¦14,500.00 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Lunch room for employees ¦522.29 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Steel sheet piling ¦6,126.17 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Shipyard bill for future work ¦2,565.05 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Contingency ¦5,000.00 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦ ¦ ¦178,640.17 ¦ +--------------------------------------------+----------+-----------¦ ¦Balance to surplus 3/31/38 ¦ ¦30,096.55 ¦ +-------------------------------------------------------------------+
The respondent, in auditing petitioner's return, increased the gain to $101,895.61, computed as follows:
+---------------------------------------------------------------------+ ¦12/2/37 cash received from State of Delaware ¦ ¦$208,736.72¦ +----------------------------------------------+----------+-----------¦ ¦Less costs and expenses: ¦ ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Adjusted cost of 2.18 acres of land ¦$15,625.03¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Adjusted cost of marine railway ¦23,215.46 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Adjusted costs of boiler house ¦1,956.27 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Adjusted cost of miscellaneous equipment ¦3,372.98 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Cost of replacing wharf ¦13,427.04 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Expenses of razing equipment and vacating land¦20,386.89 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Compensation of officers for special services ¦14,500.00 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Tearing down expenses ¦5,143.93 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Mess hall-temporary structure ¦522.29 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Labor and materials used ¦2,565.05 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Pilings used ¦6,126.17 ¦ ¦ +----------------------------------------------+----------+-----------¦ ¦Total cost of condemnation ¦ ¦106,841.11 ¦ +----------------------------------------------+----------+-----------¦ ¦Taxable profit on condemnation ¦ ¦101,895.61 ¦ +---------------------------------------------------------------------+
The respondent's determination that gain of $101,895.61 was realized from the condemnation award from the State of Delaware assumed a cost basis of the marine railway of $23,215.46, computed as follows:
+----------------------------------------------------------+ ¦Net adjusted cost ¦$39,141.79¦ +-----------------------------------------------+----------¦ ¦Less depreciation sustained to 12/2/37 ¦13,426.33 ¦ +-----------------------------------------------+----------¦ ¦Depreciated cost at 12/2/37 ¦25,715.46 ¦ +-----------------------------------------------+----------¦ ¦Less “salvage value” thereof after tearing down¦2,500.00 ¦ +-----------------------------------------------+----------¦ ¦Net condemnation cost ¦23,215.46 ¦ +----------------------------------------------------------+
During the fiscal year ended March 31, 1943, petitioner did not realize gain, or sustain loss, on the sale of any other assets.
The gain of $5,269.28 realized on the sale of the dismantled parts of the marine railway is to be treated as capital gain for purposes of section 711(a) of the Internal Revenue Code.
OPINION.
ARNOLD, Judge:
The issue is whether the gain to petitioner realized upon the sale of the dismantled marine railway is subject to excess profits tax. Respondent concedes on the brief that the amount of the profit was $5,269.28, instead of $6,169.28, as originally determined.
In computing excess profits net income, gains or losses from sales or exchanges of capital assets held for more than six months are excluded, pursuant to section 711(a)(1)(B), or 711(a)(2)(D), of the Internal Revenue Code, as amended. The applicable regulations (sec. 35.711-(a) 2, Regulations 112) provide that, for the purpose of making this adjustment, gains and losses from sales or exchanges of capital assets are determined under the definitions and in the manner provided in chapter 1 of the code. The term ‘capital assets‘ is defined for the purpose of chapter 1 of the code in section 117(a).
SEC. 117. CAPITAL GAINS AND LOSSES.(a) DEFINITIONS.— As used in this chapter—(1) CAPITAL ASSETS.— The term ‘capital assets‘ means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(l), or an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, or real property used in the trade or business of the taxpayer;
provides that certain gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than six months. This applies to gains from involuntary conversions or from the sale of property used in the business of a character which is subject to the allowance for depreciation provided in section 23(l), held for more than six months, if it is not property of a kind includible in the taxpayer's inventory or property held primarily for sale to customers in the ordinary course of the taxpayer's business.
(j) GAINS AND LOSSES FROM INVOLUNTARY CONVERSION AND FROM THE SALE OR EXCHANGE OF CERTAIN PROPERTY USED IN THE TRADE OR BUSINESS.—(1) DEFINITION OF PROPERTY USED IN THE TRADE OR BUSINESS.— For the purposes of this subsection, the term ‘property used in the trade or business‘ means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Such term also includes timber with respect to which subsection (k)(1) or (2) is applicable.(2) GENERAL RULE.— If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For the purposes of this paragraph;(A) In determining under this paragraph whether gains exceed losses, the gains and losses described therein shall be included only if and to the extent taken into account in computing net income, except that subsections (b) and (d) shall not apply.(B) Losses upon the destruction, in whole or in part, theft or seizure, or requisition or condemnation of property used in the trade or business or capital assets held for more than 6 months shall be considered losses from a compulsory or involuntary conversion.
The property here involved was held for more than six months and there were no other sales of capital assets in the taxable year. The petitioner's contention is that the gain is to be treated as long term capital gain under section 117(j), since the property was removed involuntarily and held in storage for future use and was therefore property used in petitioner's business, and was of a character subject to the allowance for depreciation and was not includible in inventory or held for sale to customers in the ordinary course of petitioner's business. Petitioner contends, in the alternative, that the marine railway, in its dismantled state, constituted a capital asset held for more than six months, the sale of which in 1942 gave rise to long term capital gain, since it was not stock in trade, nor held for sale to customers in the ordinary course of petitioner's business, nor property of a kind which would properly be included in the petitioner's inventory. The petitioner says that under either alternative in computing its excess profits net income it is entitled, under section 711(a) of the code, to exclude this gain.
The stored parts of the marine railway were not stock in trade of the petitioner, nor property held primarily for sale in the ordinary course of the petitioner's business, which was transportation by water. The property was not of a kind which would properly be included in the petitioner's inventory. Either the property constituted a capital asset or it was property, used in the trade or business, of a character which is subject to the allowance for depreciation, held for more than six months, and under section 117(j), supra, the gain upon its sale is to be considered as gain from the sale of capital assets held for more than six months. This property does not come within any provisions of section 117 which would exclude the gain upon its sale from treatment as capital gain.
The respondent contends that when the marine railway was dismantled because of the condemnation of the land upon which it was situated the petitioner sustained a loss in useful value measured by the difference between the cost and the salvage value estimated to be recoverable, and that the amount received on the sale in May 1942 over this salvage value is a recovery of part of the loss which was sustained at the time of the removal and such recovery constitutes ordinary gain. Respondent says the 1937 transaction was the abandonment or scrapping of an asset not then sold, and the 1942 transaction was a recovery of salvage.
In computing gain or loss on the condemnation transaction the basis of the land and demolished structures was offset against the condemnation award. For this purpose the basis of the marine railway, adjusted for depreciation to the condemnation date, was reduced by the estimated salvage value of the preserved parts thereof. The gain reported on the condemnation transaction was reported as capital gain and, while the amount thereof was redetermined by the respondent, it was still treated as capital gain. In so far as the marine railway was concerned, the dismantling was treated as a closed transaction for the purpose of computing gain or loss. This treatment was necessary for the determination of the gain on the condemnation transaction as a whole. The cradle, winch, motor, and other preserved parts were thereafter carried on petitioner's books at an estimated value of $2,500. The respondent accepted this basis in the adjustment of the condemnation transaction.
The respondent cites Industrial Cotton Mills Co., 43 B.T.A. 1007. In that case it was held that, where the taxpayer discarded certain machinery because of changes in business conditions, sold part for salvage value and junked the remainder, the loss sustained was not a loss upon sale of capital assets, but a loss resulting from a loss of useful value of capital assets and was deductible in full as an ordinary loss instead of being limited to $2,000 as in the case of a capital loss. The loss was reduced by the amount recovered from the sale of part of the machinery. The discarded machinery was useless to the taxpayer or to any one else engaged in similar manufacturing.
However, there was no such abandonment in the present case. The marine railway was, prior to December 2, 1937, an asset used in the taxpayer's business and subject to the allowance for depreciation provided in section 23(l) of the Internal Revenue Code. It was, along with other properties, removed when the state condemned the tract of land upon which it was situated. The parts of the railway which were readily removable and could be used again on another location if petitioner chose to re-erect the railway were removed and preserved by the petitioner. The parts which could not be readily removed were abandoned. Other structures on the condemned land, including a wharf, were demolished. The petitioner built a new wharf to replace the one which had been upon the condemned land. Although the retained parts of the marine railway were not thereafter actually used by the petitioner, they could have been used by the petitioner, or any other owner of ships of a size within the capacity of the cradle, as a marine railway if the necessary land was procured and piling was driven upon which to lay the rails. The vice president and general manager of the petitioner testified that he was a member of the petitioner's board of directors and was the officer in charge of matters pertaining to the marine railway; that it was his intention at the time of the condemnation to re-erect the marine railway, but that the petitioner acquired new boats too large to be accommodated by this equipment and was able to have the hulls of its boats painted elsewhere, so that when an offer was received for the equipment the petitioner agreed to sell. The equipment was sold as a dismantled marine railway. This was not an abandonment of property no longer useful, but a careful preservation of property for possible further use by the petitioner, or at least for sale for use by others in its original capacity. There was no intent to abandon or discard this property. See Newlyn Coal Co., 9 B.T.A. 835, and Ewald Iron Co., 37 B.T.A. 798. Even though not actually used by the petitioner, it constituted property ‘used‘ in the trade or business within the meaning of section 117. Yellow Cab Co. of Pittsburgh v. Driscoll, 24 Fed.Supp. 993; Kittredge v. Commissioner, 88 Fed. (2d) 632, affirming B.T.A. memorandum opinion; Independent Brick Co., 11 B.T.A. 862. Also, although no depreciation was taken or allowed, we think it was property which would deteriorate and was ‘of a character which is subject to the allowance for depreciation‘ within the meaning of section 117(j). See P. Dougherty Co., 5 T.C. 791; affd., 159 Fed.(2d) 269. Therefore, the gain was from the sale of ‘property used in the trade or business,‘ as defined in section 117(j)(1), and, under section 117(j)(2), is to be considered as gain from the sale of capital assets held for more than six months.
We do not agree with the respondent that the proceeds of this sale were salvage and hence the gain was ordinary gain. Had the sale occurred before March 31, 1938, the capital gain on the condemnation transaction as a whole would have been accurately determined in the fiscal year of the condemnation, as was the case in White Dental Manufacturing Co. v. United States, 55 Fed.Supp. 117. Where, as here, a part of this gain is realized in a different taxable year, it is not of a different character.
We conclude that the gain on the sale of the marine railway should be excluded from excess profits net income.
Since other uncontested adjustments will require a recomputation of the petitioner's excess profits tax liability,
Decision will be entered under Rule 50.