Burlington Gazette Co. v. Commissioner

BURLINGTON GAZETTE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Burlington Gazette Co. v. Commissioner Docket No. 40151. United States Board of Tax Appeals 21 B.T.A. 156; 1930 BTA LEXIS 1911; October 31, 1930, Promulgated *1911 DEPRECIATION BASIS. - In 1921 petitioner took over certain assets for which it issued its stock to the transferors in substantially the same proportions as their interests in the assets had been prior thereto. No gain or loss was recognized to the transferors, pursuant to section 202(c)(3) of the Revenue Act of 1921 and section 203(b)(4) of the Revenue Acts of 1924 and 1926. Held that for depreciation of the said assets during 1924 and 1925, the petitioner's depreciation basis is the same as the transferors' basis would have been had the property remained in their hands, section 204(c) and section 204(a)(8) of the Revenue Acts of 1924 and 1926, and, further, that such basis may not be adjusted by prior accumulated depreciation up to the date of transfer. Arnold L. Guesmer, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. TRUSSELL *156 The respondent has asserted against this petitioner deficiencies in its income tax in the amounts of $821.56 and $753.85 for the calendar years 1924 and 1925, respectively, and the petitioner seeks a redetermination thereof. The petitioner assigns as error the respondent's action of computing*1912 depreciation on certain property on a basis arrived at by reducing the cost thereof to the predecessor owners by the accumulated depreciation up to the date of acquisition by the petitioner. FINDINGS OF FACT. The petitioner, an Iowa corporation whose principal office is in Burlington, was organized in the latter part of 1920. At the beginning of 1921 the petitioner took over certain assets for which it issued its stock to the transferors in substantially the same proportions as their interests in the assets had been prior to the said transfer. Among the assets so transferred was a building known as Main Street Building, certain machinery and equipment, and furniture and fixtures. There is no dispute over the rates of depreciation applicable to the said assets during the years 1924 and 1925. The following tabulation sets forth the basis used by the petitioner and that used by the respondent in their respective computations of the deduction for depreciation on the said assets for the years 1924 and 1925: Property Year Predecessors' Basis used by accumulated Basis used by petitioner depreciation respondent up to 1921 [1924] Main Street building [1925] $10,714.00 $1,791.23 $8,922.77 Machinery and equipment [1924] 51,369.09 11,045.50 40,323.59 Do [1925] 51,587.50 11,045.50 40,542.03 Furniture and fixtures [1924] 8,670.23 2,923.09 5,747.14 Do [1925] 9,160.29 2,923.09 6,237.20 *1913 *157 The amounts in the column headed "basis used by petitioner" represent the cost of the said assets to the predecessor owners and also represent their depreciation base, if it be improper to reduce the same by the accumulated depreciation shown in the next column. The last column represents the cost of the said assets minus the prior owners' accumulated depreciation up to 1921. The respondent's computation resulted in deficiencies in petitioner's income taxes for the years 1924 and 1925. OPINION. TRUSSELL: There is no controversy as to the facts in this proceeding, as hereinbefore stated. The parties hereto are also in accord as to the fact that, for income-tax purposes, no gain or loss to the transferors was recognized upon the transfer of the assets in question to the petitioner in 1921 for its stock, pursuant to sections 202(c)(3) of the Revenue Act of 1921 and 203(b)(4) of the Revenue Acts of 1924 and 1926, which provide that no gain or loss shall be recognized if property is transferred to a corporation by two or more persons in exchange for stock in such corporation and immediately after the exchange such persons are in control of the corporation and, further, *1914 if the amount of stock received by each of such persons is substantially in proportion to his interest in the property prior to the exchange. This proceeding presents one issue of law, involving the determination of the correct basis for the depreciation of the said transferred assets during 1924 and 1925. The pertinent provisions of the Revenue Acts of 1924 and 1926 are as follows: SEC. 204. (c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, * * * SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be at the cost of such property; except that - * * * (8) *158 If the property * * * was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 * * * then the basis shall be the same as it would be in the hands*1915 of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. (Italics supplied.) The language employed in the above-quoted sections of the revenue acts is clear and unequivocal. The depreciation during 1924 and 1925 upon the assets in question must be computed upon the same basis as would have been used had the property remained in the hands of the transferors, and that basis must be increased or decreased, i.e., adjusted, by the amount of gain or loss recognized to the transferors upon the transfer made in 1921. The parties are in accord as to the fact that no gain or loss was recognized to the transferors in 1921 and accordingly there are no adjustments to be made to the transferors' depreciation basis. Section 204 of the Revenue Acts of 1924 and 1926 provides for the basis for determining gain or loss, depletion and depreciation, and pursuant to its provisions this petitioner's transferors' depreciation basis would be the cost of the assets in question without any diminution on account of prior accumulated depreciation. *1916 Accordingly, the depreciation basis used by the petitioner in its computation is the correct basis, for such basis would have been the transferors' basis had the property remained in their hands. Cf. ; . The respondent contends that section 202 of the Revenue Acts of 1924 and 1926 applies to the case at bar and he has employed that section as authority for diminishing the transferors' depreciation basis by accumulated depreciation in arriving at what he terms this petitioner's depreciation basis. That section refers only to the determination of the amount of gain or loss and has no application to the determination of the basis, i.e., the starting point, upon which gain or loss is to be determined. The said section provides that the basis shall be determined as provided in section 204(a) or (b) and further that such basis shall be adjusted, inter alia, by accumulated depreciation up to the date of the disposition of the property. The said section 202 has no application to the determination of this petitioner's depreciation basis. We are of the opinion that*1917 the respondent erred in adjusting the transferors' depreciation basis, i.e., cost of the assets, which is also this petitioner's depreciation basis, by accumulated depreciation up to the date of the transfer in 1921. *159 It appears that a portion of the deficienies results from other adjustments made by respondent, but not in controversy and accordingly, Judgment will be entered pursuant to Rule 50.