Fribourg Navigation Co., Inc. v. Commissioner, 383 U.S. 272 (1966)

Fribourg Navigation Co., Inc. v. Commissioner

No. 3

Argued November 10, 1965
Decided larch 7, 1966
383 U.S. 272

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

Prior to acquiring a used Liberty ship for $469,000 in December, 1955, petitioner obtained a letter ruling from the Internal Revenue Service that it would accept straight-line depreciation of the ship over a useful economic life of three years, with a salvage value of $54,000. Petitioner claimed ratable depreciation deductions from date of purchase to the end of 1955 and for the year 1956 in its income tax returns, which were not challenged by respondent. After Egypt seized the Suez Canal in 1956, ship prices rose, and petitioner sold the ship, which it delivered to the purchaser on December 23, 1957, for $695,500. Prior to the sale, petitioner adopted a plan of complete liquidation pursuant to § 337 of the Internal Revenue Code of 1954, which it carried out within 12 months, and thus incurred no tax liability on the gain from the ship’s sale. By December, 1957, the shipping shortage had abated, and Liberty ships were being scrapped for the predicted salvage value. Petitioner’s 1957 income tax return showed a deduction from gross income of depreciation for 357 1/2 days of 1957, and computation of capital gain by subtraction of the adjusted basis, including 1957 depreciation, from the sales price of the ship. Respondent did not question the original ruling as to useful life and salvage value of the vessel, but disallowed depreciation for 1957. Respondent argued that depreciation deductions are meant to give deductions equal to the taxpayer’s "actual net cost" of the asset, and, since the sales price exceeded the adjusted basis at the start of the year, the ship’s use during 1957 "cost" the petitioner "nothing." Respondent’s position was sustained by the Tax Court, and the Court of Appeals.

Held: The sale of a depreciable asset for an amount in excess of its adjusted basis at the beginning of the year of sale does not bar deduction of depreciation for that year. Pp. 275-288.

(a) Respondent has commingled two distinct and established concepts of tax accounting: depreciation of an asset through wear and tear or gradual expiration of useful life, provided for in §167 of the Internal Revenue Code of 1954, and fluctuations in valuation through market appreciation. Pp. 275-277.

(b) The Commissioner’s regulatory scheme provides no basis for disallowance of depreciation when, as here, there has been no challenge to the original estimates of useful life and salvage. Pp. 278-279.

(c) Respondent’s position represents a sudden and unwarranted about-face from a consistent administrative and judicial practice followed until 1962. Pp. 279-283.

(d) The Commissioner’s practice must be deemed to have received congressional approval by the repeated reenactment over the same period of the depreciation provision without substantial change. P. 283.

(e) Respondent’s position is not consistent: under his theory, depreciation for 1955 and 1956 would also be disallowed, since the use of the asset "cost" the taxpayer "nothing" in those years as well; nor will respondent permit additional depreciation to be taken where an asset is sold for less than its adjusted basis. Pp. 286-287.

335 F.2d 15 reversed.