Opinion
No. J-389.
June 1, 1931.
Suit by the Bryant Detwiler Company against the United States.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. The plaintiff is a corporation engaged in the construction business. On December 30, 1915, the Ferro Stamping Manufacturing Company, a corporation, which will be hereinafter referred to as the Ferro Company, leased two buildings from the plaintiff to be used in the manufacture of metal stampings for automobiles.
2. On January 12, 1918, a contract was entered into by and between the Ferro Company and the United States of America whereby, in consideration of the sum of $51,000, the Ferro Company undertook to manufacture and, prior to April 27, 1918, deliver to the United States 5,000,000 clips for cartridges.
On August 17, 1918, a further contract was given to the Ferro Company by the United States for 1,000,000 magazines for automatic pistols, at a price of $.50 each or a total of $500,000. The contract provided that delivery should begin not later than January 1, 1919, and should continue at the rate of 500,000 magazines per month until completed, the date of completion to be not later than April 1, 1919.
3. The buildings leased by the Ferro Company from the plaintiff were not adapted for carrying out the January contract for cartridge clips, or the August contract for magazines, and a suitable building with proper machinery and facilities was required. The Ferro Company had no funds with which to put up such a building and it was arranged that the plaintiff should construct a building designed for the performance of the war material contracts which the Ferro Company had made with the government. In March, 1918, the plaintiff began and in August or September of that year completed and turned the building over to the Ferro Company, pursuant to a written lease for five years at a rental of $13,875 a year for the building so constructed and the other two buildings to which reference has heretofore been made. The cost of construction of the building was $77,362.13. The government contributed $6,000 towards the cost, which was paid to the Ferro Company and turned over to the plaintiff.
4. Neither of the two contracts was completed, work on the first one having been interrupted by instructions from the War Department to the Ferro Company to devote all of its facilities to the fulfillment of the second contract, and work on the second contract having been terminated by cancellation immediately after the Armistice.
On November 17, 1918, work on the magazine contract was terminated and on January 8, 1919, the Ferro Company made and filed a claim against the United States for damages arising out of the cancellation of its contract. The claim was not settled until April 11, 1919, and pending its settlement the United States did not permit anything in the building to be disturbed. Following the settlement, the United States began the sale or other disposition or removal of the special machinery, equipment, and materials involved in the settlement contract, and a year elapsed before the building was again made available to the Ferro Company.
Efforts were thereafter unsuccessfully made to sublease the building and when in the latter part of 1922 no tenant had yet been found, the Ferro Company, finding itself with a need for more space than it had in the other two buildings, began to use it for the manufacture of automobile hardware.
5. The new three-story building was not economically adapted to the peace-time manufacturing needs of the Ferro Company, and when that company again began to use the building in 1922 it secured a reduction of $4,875 a year in rental under that which it had previously paid. A two-story building of mill type construction having the same cubical content as the three-story building would have been much more suitable to the Ferro Company's requirements, and could have been constructed at a cost of $30,890.
6. The Ferro Company was organized by three officers of the plaintiff corporation. John A. Bryant and Ward A. Detwiler owned or controlled all but one share of the stock of the Ferro Company, and almost 85 per cent. of the stock of the Bryant Detwiler Company.
7. The plaintiff filed its corporation income and profits tax return on June 14, 1919, for the period from February 1, 1918, to December 31, 1918, and showed a tax liability of $21,906.63. The taxes shown as due on the return were paid. The dates of payment and the amounts thereof are as follows: March 15, 1919, $5,689.44; June 14, 1919, $5,262.38; September 15, 1919, $5,475.90; December 15, 1919, $5,475.91. The plaintiff in its return omitted any claim for deduction for amortization of any portion of the three-story building erected by the plaintiff on property owned by it to afford additional factory capacity required by the Ferro Stamping Manufacturing Company for the purpose of manufacturing cartridge clips contracted for by the United States government and used or to be used in the prosecution of war against Germany.
8. On June 13, 1922, the plaintiff filed a claim with the Commissioner of Internal Revenue for amortization of war facilities in the amount of $71,362.13, and on February 18, 1925, the Commissioner of Internal Revenue, without making any allowance for amortization of the building constructed and leased to the Ferro Company to enable it to perform its war contracts, notified the plaintiff of an additional assessment for the period from February 1, 1918, to December 31, 1918, in the sum of $14,050.13. The plaintiff appealed from this additional assessment to the Board of Tax Appeals. On November 12, 1925, the Board rendered a decision adverse to the plaintiff, and plaintiff paid the additional assessment in the sum of $18,654.26 on February 1, 1926.
9. On March 19, 1926 the plaintiff filed a claim for refund of $27,068.18 with the collector of internal revenue for the First district of Michigan. The following statement was attached to the said claim for refund as a basis upon which the said claim was predicated:
"1. In April, 1918, the taxpayer erected a building for the production of articles contributing to the prosecution of the war against the German Government.
"2. In accordance with the provisions of section 234(a)(8) of the Revenue Act of 1918, the taxpayer in due time made a claim for the allowance of a reasonable deduction from its gross income for the 11 months ended December 31, 1918, for the amortization of such part of the cost of the said building as had been borne by it, the perfected claim having been filed in June, 1922.
"3. This claim for amortization was denied by the Commissioner of Internal Revenue in a letter (IT:CA:2441-6; 60D) dated February 18, 1925.
"4. On April 17, 1925, the taxpayer filed with the United States Board of Tax Appeals a petition, appealing from the decision of the commissioner.
"5. On November 12, 1925, the Board of Tax Appeals denied the aforesaid appeal.
"6. The amortization deduction now claimed by the taxpayer is $40,472.13. * * *"
The said claim for refund was rejected by the Commissioner of Internal Revenue on July 3, 1926.
10. On January 28, 1924, the plaintiff filed an income and profits tax waiver with the Commissioner of Internal Revenue, which was duly signed both by the plaintiff and the said commissioner.
Thomas G. Haight, of Jersey City, N.J. (Robert H. Montgomery and J. Marvin Haynes, both of Washington, D.C., and Roswell F. Magill, of New York City, on the brief), for plaintiff.
Ralph C. Williamson, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and WHALEY, WILLIAMS, LITTLETON, and GREEN, Judges.
This is an action to recover an alleged overpayment of income and excess profits taxes for the year 1918 in the amount of $26,879.85. The action arises out of the refusal of the Commissioner of Internal Revenue to allow any deduction for the amortization of a building erected in 1918 as part of a plant for the manufacture of magazines for automatic pistols, pursuant to a contract made with the United States and used for that purpose until shortly after the Armistice. The building cost $77,362.13, of which the defendant contributed $6,000, paid to the company which used the building and turned over to the plaintiff. The contract was canceled after the Armistice and the building was then not worth to the plaintiff in excess of $30,890. In an application for a refund of part of the taxes for said year, the plaintiff claimed to be entitled to a deduction of the difference between the net war-time cost, $71,362.13, and the net worth after the war, $30,890. The deduction claimed was therefore $40,472.13.
It is conceded by defendant that the building was erected for the production of articles contributing to the prosecution of the World War, and the decision to be rendered turns upon the construction of the statute with reference to the amortization of war facilities in the computation of income of a corporation as applied to the facts in the case under consideration, which are practically undisputed.
This statute, among other things, provides in section 234(a) of the Revenue Act of 1918 ( 40 Stat. 1078): "(8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war * * * there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities * * * as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income."
More specifically the point is whether, under the statute, amortization can be granted to a corporation which constructs a building and does not use it for the production of war material, but leases it to another concern.
The evidence shows that the plaintiff constructed the building for another corporation, the Ferro Stamping Manufacturing Company, which used it in the manner stated above. The Ferro Company had contracted with the government for the production of war material but had no building suitable for the performance of its contract with the government. It was therefore arranged between the Ferro Company and the plaintiff that plaintiff should construct a suitable building and lease it to the Ferro Company, which it did, the lease being for a period of five years and including two other buildings which had theretofore been used by the Ferro Company.
It is contended on behalf of plaintiff that the law does not require that the taxpayer who constructs the building shall personally have been engaged in the production of war material in order to be entitled to the benefit of the amortization provision, but that the only requirement is that the building shall have been constructed for such purpose. It is said also that no such requirement need be implied in order to protect the government. On behalf of the defendant, it is contended that the words "production of articles contributing to the prosecution of the present war" refer only to production by the taxpayer, and that unless the building was used by the taxpayer for such production no allowance can be made.
The language of the statute is ambiguous, and we shall have to look to the circumstances under which the statute was enacted and to which it was intended to apply in order to determine the intent of Congress in enacting it. The Revenue Act of 1918 was passed shortly after the Armistice had been declared. It is a matter of common knowledge that the war ended much sooner than was generally expected. As a consequence, a large number of contractors found themselves with buildings and machinery on hand acquired or constructed for the purpose of manufacturing war material, but which was of little value after the war. Under the law as it stood at the time of the Armistice, there was no provision for an allowance on account of this situation. The contractors were unable to use the property as they had expected and intended, and under the circumstances would sustain a loss against which the law had made no provision, although the act which brought about the loss was required by their contracts with the government. But it was the corporations which contracted to produce war material which as a rule sustained this loss. If they arranged with some other party to construct a building to be leased for the purpose of enabling them to perform their contracts, presumably the party that constructed the building would prescribe such terms in the lease as would protect him from loss. At least there was no reason why he should not do so, as he could construct a building or refuse to build it, at his pleasure, not having made any contract with the government. In this particular instance the lease was made for five years, and regardless of whether the contract of the Ferro Company was terminated by reason of the ending of the war the rent had to be paid. The plaintiff and other parties who constructed buildings to be so used took no risk upon the termination of the contract with the government or upon its being profitable or otherwise. It made no difference to them whether the war was terminated before their leases expired, except as it might make to the public generally. We can see no good reason why those who merely constructed buildings and leased them should receive this allowance for amortization, and in view of the situation, as stated above, we do not think Congress intended that they should.
In this view we are supported by the opinion of the Board of Tax Appeals in Appeal of Bryant Detwiler Co., 3 B.T.A. 15, being the same case when it was heard before the board, and also by Appeal of Moore Investment Co., 2 B.T.A. 579, in which it was said: "The purpose of the taxpayer in erecting the building in question was not to produce articles contributing to the prosecution of the war, but to rent it to a concern which was engaged in manufacturing or producing such articles. In other words, it was an investment proposition."
It was not only an investment proposition but one in which the profit could be clearly determined from the start. The plaintiff's situation was very different from those who had made contracts with the government, and in order to perform them were obliged to construct or acquire buildings upon which they sustained a loss. In such case, the loss was sustained by reason of the contract to manufacture war material for the government. Even where the buildings were leased for this purpose, the loss, as a rule, would fall upon the lessee who used them, and not upon the lessor.
We do not find it necessary to determine whether the case of Belfast Investment Co. v. Commissioner, 17 B.T.A. 213, conflicts with the holding of the Board in the case last cited and that of Bryant Detwiler Co., supra, as our conclusion in any event is that its decisions in the Bryant Detwiler Co. Case and the Moore Investment Co. Case were correct.
We think that if a corporation constructed a building and sold it outright to another corporation, which used it to produce war material, no one would contend that the corporation constructing the building could be allowed amortization. On the contrary, it would be allowed to the corporation which purchased and used it. It is true that the statute is specific as applied to an instance of this kind, but we think the principle is the same. It is the risk and expense resulting from taking a contract to produce war materials for which Congress intended to allow compensation when new buildings were required for the performance of the contract, and we do not think it intended to make allowances on account of matters which, although they may have resulted indirectly from the war, were not brought about by taking a contract to produce war materials.
Our conclusion is that the plaintiff's petition must be dismissed, and it is so ordered.