Opinion
Docket No. 91889.
1964-01-16
ESTATE OF IDA WRAY NISSEN, DECEASED, WACHOVIA BANK AND TRUST COMPANY, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
John M. Minor, for the petitioner. Harvey S. Jackson, for the respondent.
John M. Minor, for the petitioner. Harvey S. Jackson, for the respondent.
The allowable deduction for depreciation of a building owned by an estate is to be apportioned between the estate and the distributees of income of the estate for the years in question, pursuant to sec. 167(g), I.R.C. 1954, despite an allocation to corpus by the executor, pursuant to a provision of the testatrix's will, of additions made in the years in question to a reserve for depreciation of the building.
FORRESTER, Judge:
Respondent has determined deficiencies in the income taxes of the estate of Ida Wray Nissen for the years 1956, 1957, and 1958 in the amounts of $12,497.58, $10,901.39, and $11,531.51, respectively. The issue for our decision is whether said estate is entitled to the entire deduction for depreciation of a certain building owned by it.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Ida Wray Nissen (hereinafter referred to as decedent) died testate on October 25, 1954, a resident of North Carolina. Wachovia Bank & Trust Co. (hereinafter sometimes referred to as Bank) with its principal office at Winston-Salem, N.C., is the executor under decedent's will of her estate (hereinafter sometimes referred to as the estate). The income tax returns for the estate for the taxable years 1956, 1957, and 1958 were prepared on the cash basis and filed with the district director of internal revenue at Greensboro, N.C.
At the time of her death decedent was possessed of various real and personal properties and owned all of the issued and outstanding capital stock of Nissen Building, Inc., a North Carolina corporation formed in 1948, whose principal office and place of business were in Winston-Salem, N.C.
Prior to June 30, 1955, Nissen Building, Inc., was the owner of, and was primarily engaged in operating, the Nissen Building. Said building is an 18-story office and retail store building located in downtown Winston-Salem, N.C. It was built in the late 1920's and was only partially completed, the upper nine floors being left unfinished on the interior. The land and buildings were mortgaged to Metropolitan Life Insurance Co. During the years 1930 through 1944, the building was not economically productive and on several occasions the mortgagee waived default and foreclosure and granted extension.
As of June 30, 1955, Nissen Building, Inc., was dissolved pursuant to the applicable laws of the State of North Carolina. All of the assets of the corporation, real and personal, were transferred to the estate, the sole shareholder. All remaining indebtedness of the corporation, including an unpaid balance of some $325,750 owing on the mortgage note to Metropolitan Life Insurance Co., was assumed by the estate. During the taxable years involved, said mortgage debt continued due and owing in a diminishing amount.
Throughout these years the Nissen Building had approximately 90 to 100 tenants, ranging from the Veterans Administration, occupying some nine floors, to single, small office tenants; included were some eight retail stores and numerous insurance companies, doctors, dentists, attorneys, and miscellaneous other professional and business tenants.
Operation of the building required approximately 41 full-time employees. Additional help was hired at various times for special tasks. The regular employees included the manager, assistant manager, bookkeeper, engineers, maintenance men, maids, janitors, and night watchmen. The building furnished to its tenants decorating, remodeling, and custom building services at additional charges; decorated on a regular schedule; sent out bills for various services; and maintained a crew to keep the building open during two full 8-hour shifts in addition to providing tenants with the services of a night watchman during the remaining 8-hour shift. The normal operation was a 6-day week with a skeleton crew on Sundays to provide necessary services to the public and tenants.
Certain tangible personal property, consisting of such items as office equipment, furnishings, fixtures, shop equipment, tools, cleaning equipment, and plumbing, heating, and maintenance supplies, was also required and used in the operation of the building and was kept and used solely in said building.
The estate remained open during the years in question, and the building had not been transferred from the estate to the testamentary trust by the end of such period.
The estate treated the operation of the building as a separate business, which was conducted under the name of ‘Nissen Building.’ Prior to decedent's death, Bank had assisted her in the overall management and supervision of the building; and after her death there was no change in its operation.
The building had its own manager, bookkeeper, and clerical staff. The manager was responsible for the operation of the business, the maintenance of the facilities, the performance of services provided tenants, the hiring and firing of employees, and the collection of rent and other income.
A separate bank account was maintained for the building's business. The manger deposited all receipts from the building in said account and paid all expenses in connection with its operation therefrom, signing the checks himself. Bank made charges for services rendered by its personnel to the building's business, and these were paid by the manager, like other expenses, from the said account. The funds of the account were never commingled with the estate bank account.
Separate ledgers and records were maintained for the building and these were audited each year by an independent accountant. The parties agree that the allowable depreciation on the building for the years in issue amounted to $124,020.09, and that no part of such amount was ever transferred to the estate account. Of such amount $123,093.50 was used for capital expenditures during the years in issue as follows: The sum of $60,750 was paid to Metropolitan Life Insurance Co. to be applied against the principal amount of the mortgage note; capital improvements to the building's elevators took another $42,343.50; and $20,000 was invested in a parking garage to provide convenient parking for the building's tenants and their customers.
In computing the net income of the building, the accountant deducted among the other expenses thereof the total amounts allowable for depreciation each year. The net income as thus computed was transferred from the building bank account to the estate account, where it would then be available for distribution pursuant to the provisions of decedent's will.
On the Federal income tax returns on behalf of the estate for the years in question, the net income of the building's business, computed as above, was included as additional income, with schedules attached to the returns showing the total income and expenses (including depreciation).
By her will, executed September 12, 1952, and two codicils of January 1, 1953, and June 20, 1953, respectively, decedent provided for certain outright bequests of specific items of personal property and sums of money. The building, however, comprised a part of the residue and remainder of decedent's estate. The portions of decedent's will which are material to the disposition of this case are as follows:
ARTICLE VIII. I bequeath and devise all the residue and remainder of my property and estate of every nature and wherever situate to my Executor hereinafter named, and I authorize my Executor to pay to or apply from the net income of my estate such sums and at such intervals and in such manner as my Executor in its sole discretion shall from time to time deem requisite or desirable in providing for the reasonable support, maintenance and education of my granddaughter, RICKIE WRAY NISSEN; and I direct that my Executor shall pay to my son, GEORGE WILLIAM NISSEN, such amounts as shall from time to time be necessary to equalize the amounts so paid to or applied for the benefit of RICKIE WRAY NISSEN. Any net income not so paid or applied as aforesaid may be used by my Executor as it shall deem desirable in providing for any bequests contained in this will or any codicil or codicils hereto and in providing for the satisfaction of any costs incidental to the settlement of my estate.
ARTICLE IX. I direct that upon completion of the settlement of my estate my Executor shall deliver and convey all the funds and properties then constituting the residue and remainder of my property and estate of every nature and wherever situate to WACHOVIA BANK AND TRUST COMPANY in trust for the following uses: * * *
ARTICLE XI. The exercise or non-exercise by my Executor or my Trustee of the discretionary powers expressly or implicitly conferred upon it by the provisions of this will shall be conclusive and binding upon all persons and for all purposes.
ARTICLE XIII. I nominate and appoint WACHOVIA BANK AND TRUST COMPANY as Executor of my will and FRED S. HUTCHINS as attorney for my Executor and my Trustee. And I authorize Wachovia Bank and Trust Company, acting in its capacity either as Executor or as Trustee in the exercise of its sole discretion, to retain any securities or other properties or assets owned by me at the time of my death, or subsequently acquired by my Executor or by my Trustee, so long as the retention thereof shall seem to be advisable and for the best interests of my estate or the trusts herein created; to sell real estate or personal property, either publicly or privately, for cash or on credit, without an order or (sic) court, or to exchange or convert real estate or personal property as and when to do so shall seem to be advisable and for the best interests of my estate or the trusts herein created; to invest or reinvest the funds of my estate or the funds of the trusts in such stock or bonds or other securities and properties as shall from time to time be approved by the Trust Investment Committee or other similar committee of the Wachovia Bank and Trust Company, without being restricted to statutory investments; to hold any investment belonging to my estate or the trusts in bearer from or to register and hold any such investment in the name of any duly authorized nominee of my Trustee; to participate in any plan of liquidation, reorganization, consolidation or other financial adjustment of any corporation or business in which my estate or the trusts shall be financially interested, and to accept and hold any stocks or bonds or other properties resulting from such plan; to compromise, arbitrate, or otherwise adjust or settle claims in favor of or against my estate or the trusts; to determine what is principal and what is income and what expenses or other payments shall be charged against principal and what against income, and all such determination (sic) shall be final and conclusive upon all persons interested in my estate or the trusts herein created; to divide or allot my estate or the trusts herein created, or any part thereof, either in kind or in money or partly in kind and partly in money, and the decision of my Executor or my Trustee respecting the relative values of the properties so divided or allotted shall be conclusive and binding upon everyone interested therein; to renew or extend any obligations on which I shall be bound or to borrow money for the benefit of my estate or the trusts and if required to do so to secure such obligations or loans by mortgage or pledge of any property belonging to my estate or the trusts, without incurring any personal liability on account thereof; and to execute such deeds, leases, notes, contracts, proxies, bills of sale and other instruments as my Executor or my Trustee shall deem desirable or requisite in the businesslike settlement of my estate or the administration of the trusts herein created. I desire and direct that my Executor and Trustee employ GEORGE WILLIAM NISSEN as manager of the Nissen Building as long as a controlling interest in the said Building is retained in my estate or in the trusts and as long as he is mentally and physically able to look after the same. I further desire and direct that the operation of the Nissen Building be made to bear the cost and expense thereof without resorting to other assets of the trusts, so as to protect such other assets from being used or depreciated on account of the cost and expense of the operation of the Nissen Building and, if and when the financial returns from the operation of the Nissen Building shall cease to be sufficient therefor, I prefer a sale thereof rather than to apply other funds or assets to the cost and expense of the operation thereof.
Article IX directed that the trust estate be divided into two trusts. The net income of one was to be paid to George William Nissen for life. The trustee was authorized to pay so much of the net income of the other as it should determine in the exercise of its sole discretion to Rickie Wray Nissen, and was directed to add the unpaid balance of such net income to the principal of this trust. Neither George William Nissen or Rickie Wray Nissen could ever become entitled to any of the principal of the respective trusts.
George William Nissen, who was 55 years of age at decedent's death, was her only surviving child. Rickie Wray Nissen, a girl of 13 years of age at decedent's death, was her only grandchild, and was the daughter of a deceased son of decedent.
Except as those above-quoted portions of the will may be relevant to the matter, decedent's will was silent with regard to depreciation of any property owned by the estate. It contained no explicit direction or instruction as to apportionment, either as regards depreciation, or the income tax deduction allowable therefor.
During the years in question payments were made from the net income of the estate to persons named in decedent's will as follows:
+------------------------------------------+ ¦Beneficiary ¦1956 ¦1957 ¦1958 ¦ +---------------------+------+------+------¦ ¦Thomas S. Wray ¦$1,200¦$1,200¦$1,200¦ +---------------------+------+------+------¦ ¦Katherine Pygate ¦1,200 ¦1,200 ¦1,200 ¦ +---------------------+------+------+------¦ ¦Roscoe McNeil ¦1,200 ¦1,200 ¦1,200 ¦ +---------------------+------+------+------¦ ¦Zanvester Gabriel ¦1,200 ¦1,200 ¦1,200 ¦ +---------------------+------+------+------¦ ¦Rickie Wray Nissen ¦32,650¦25,500¦34,500¦ +---------------------+------+------+------¦ ¦George William Nissen¦32,650¦25,500¦34,500¦ +---------------------+------+------+------¦ ¦Total ¦70,100¦55,800¦73,800¦ +------------------------------------------+
The amounts so distributed to Rickie Wray Nissen and George William Nissen were paid pursuant to Article VIII of decedent's will. Not all of the net income of the estate was distributed in those years.
During all of the years in question, the estate owned two parcels of improved real estate located in Winston-Salem, N.C., in addition to the Nissen Building. One was a one-story frame house, which was held pursuant to decedent's will for Katherine Pygate to occupy as long as she desired. The other was a filling station, which was continued under a rental arrangement originally made by decedent. Two additional buildings were sold by the estate in January and February of 1956, respectively.
The parties are agreed that the depreciation allowable with respect to the buildings owned by the estate is as follows:
+-------------------------------------+ ¦Year¦Nissen ¦Other ¦Total ¦ +----+----------+----------+----------¦ ¦ ¦Building ¦properties¦ ¦ +----+----------+----------+----------¦ ¦1956¦$40,241.99¦$401.25 ¦$40,643.24¦ +----+----------+----------+----------¦ ¦1957¦41,889.05 ¦378.75 ¦42,267.80 ¦ +----+----------+----------+----------¦ ¦1958¦41,889.05 ¦378.75 ¦42,267.80 ¦ +-------------------------------------+
For the taxable years involved, the depreciation allowable with respect to the said other properties was shown on the Federal income tax returns filed on behalf of the estate as divided between the estate and the persons to whom net income was distributed, as found above, in the amounts set forth in the following schedule:
+----------------------------------+ ¦Year¦Estate ¦Beneficiaries¦Total ¦ +----+-------+-------------+-------¦ ¦1956¦$133.11¦$268.14 ¦$401.25¦ +----+-------+-------------+-------¦ ¦1957¦119.33 ¦259.42 ¦378.75 ¦ +----+-------+-------------+-------¦ ¦1958¦67.99 ¦310.76 ¦378.75 ¦ +----------------------------------+
The estate deducted all of the depreciation allowable with respect to the Nissen Building.
Respondent determined that the deduction for depreciation of the Nissen Building should be apportioned between the estate and its income beneficiaries for the years in question on the basis of the income of the estate allocable to each.
OPINION
We are here called upon to decide who is entitled to the deduction for the depreciation of the Nissen Building in the years in question. Petitioner takes the position that the estate is entitled to deduct the full amount of the allowable depreciation in each year, whereas respondent contends that the estate may take only such portions as are ratable to the portions of estate's income in each year, allocable to the estate. The language of the statutory deficiency notice is ‘apportioned between the estate and the estate beneficiaries on the basis of the income of the estate allocable to each.’
Prior to the adoption of the Internal Revenue Code of 1954,
an estate was entitled in all cases to the full amount of the deduction allowable for depreciation of property owned by it. Kathryn Titus MacMurray, 16 T.C. 616 (1951); compare Baltzell v. Mitchell, 3 F.2d 428 (C.A. 1, 1925), and United States v. Blow, 77 F.2d 141 (C.A. 7, 1935). In 1954, however, Congress added a new provision to the Federal income tax law which states, with respect to the depreciation deduction for property of an estate, as follows:
Unless otherwise noted, all statutory references are to the Internal Revenue Code of 1954 as enacted.
In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.
Sec. 167(g), last sentence. Sec. 167(g) has been redesignated sec. 167(h) by sec. 13(c)(1) of the Revenue Act of 1962, 76 Stat. 960.
We have been referred to no decisions involving this provision, and we have found none.
Petitioner contends that the new provision is not to be read as requiring the estate involved in this case to share the allowable depreciation deduction with any distributees of income from the estate. Appreciation of petitioner's argument is predicated on an understanding of certain background information concerning the law with respect to trusts.
Since the enactment of the 1928 Revenue Act there has continued to be in effect a provision of Federal income tax law dealing with the allocation of the depreciation deduction in the case of trusts, as follows:
In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. * * *
This provision was reenacted in the 1954 Code as the sentence of section 167(g) preceding that quoted above dealing with the deduction in the case of an estate.
Part of the legislative history of the 1928 Revenue Act with respect to the apportionment of the depreciation deduction between trusts and their beneficiaries has often been quoted. See, e.g., Sue Carol, 30 B.T.A. 443 (1934). In relevant part it states:
In the case of property held in trust, the allowable deduction is to be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the will, deed, or other instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income which is allocable to the trustee and the beneficiaries, respectively. For example, if the trust instrument provides that the income of the trust computed without regard to depreciation shall be distributed to a named beneficiary, such beneficiary will be entitled to the depreciation allowance to the exclusion of the trustee, while if the instrument provides that the trustee in determining the distributable income shall first make due allowance for keeping the trust corpus intact by retaining a reasonable amount of the current income for that purpose, the allowable deduction will be granted in full to the trustee. The bill contains similar provisions as to the deduction for depletion. * * *
Conf.Rept. No. 1882, 70th Cong., 1st Sess., pp. 11-12 (1928).
It was thus established that a trust created pursuant to an instrument providing for depreciation by way of a requirement that funds be set aside in the nature of a depreciation reserve, before income could be distributed to income beneficiaries, was entitled to the entire deduction for depreciation of property owned by it. See, e.g., Newbury v. United States, 57 F.Supp. 168 (Ct.Cl. 1944), certiorari denied 323 U.S. 802 (1945). The present regulations provide that the same result should apply where depreciation is allocated to corpus rather than income, in the trust accounting sense, pursuant to requirements of the applicable local law as well as where the governing instrument so directs. Sec. 1.167(g)-1(b), Income Tax Regs.
It is petitioner's contention that the reserve for depreciation of the Nissen Building set aside by the executor in this case was maintained pursuant to mandatory provisions of decedent's will and State law, that the same language as that appearing in the sentence of section 167(g) dealing with allocation of the depreciation deduction in a trust situation must be taken as being applicable to this case, and consequently that petitioner is entitled to the full amount of the allowable deduction.
We are not persuaded to petitioner's view that the executor of this estate was required to maintain a depreciation reserve either by the terms of decedent's will
or by the relevant North Carolina Law.
Petitioner argues that the last sentence of Article XIII thereof requires the executor to maintain a reserve for depreciation, citing Mollie Netcher Newbury, 26 B.T.A. 101 (1932), and Newbury v. United States, supra. But even if we should otherwise be willing to extend those cases to apply to the aforesaid language of decedent's will in a proper circumstance, the care taken by decedent to refer to both her estate and the trusts to be created pursuant to her will throughout the rest of Article XIII, coupled with her reference only to the trusts in the last sentence thereof, leads us to conclude that said sentence was intended to apply only after the trusts had been funded upon the settlement of decedent's estate.
Petitioner cites N.C.Gen.Stat. secs. 37-1 through 37-15, being North Carolina's enactment of the Uniform Principal and Income Act, for the proposition that State law required the maintenance of a depreciation reserve in this case. The Uniform Act has been held not to be applicable to estates under probate, In re Feehely's Estate, 179 Or. 250, 170 P.2d 757 (1946); and petitioner's citation of a North Carolina case which says that an administrator is in some senses a trustee, Pearson v. Pearson, 227 N.C. 31, 40 S.E.2D 477 (1946), does not satisfy us that the law is otherwise in North Carolina. Regardless of the North Carolina rule on this however, N.C.Gen.Stat. sec. 37-2 provides that any requirement of the Act is to give way to express directions or discretionary authority granted to a trustee to ascertain principal and income in a way that may contravene the apportionments provided by the Act. Article XIII of decedent's will provided her executor or trustee with just such discretionary authority.
CH530 However, we note that the executor and trustee were given incontrovertible discretionary authority by Article XIII of decedent's will ‘to determine what is principal and what is income and what expenses or other payments shall be charged against principal and what against income,‘ and that the executor did in fact make principal mortgage payments on, and capital additions to the Nissen Building out of income in total amounts, for the 3 years in issue, roughly equal to the total allowable depreciation for those years.
This Court has not had occasion to rule on the question of whether such actual use, as above, or the setting aside of additions to a depreciation reserve by a trustee pursuant to discretionary authority to allocate between income and corpus granted by the instrument creating the trust, will entitle the trust to the full amount of the allowable deduction for depreciation;
but section 1.167(g)-1(b)(2), Income Tax Regs., takes the position that such result would follow, at least to the extent an addition to a reserve is in an amount as great as the allowable deduction, and we have indicated that we might so hold if faced directly with the issue. See Estate of Mary Jane Little, 30 T.C. 936(1958).
In the only case we have found that has decided the question, the Ninth Circuit has ruled that apportionment of the deduction would be required in such a situation. Little's Estate v. Commissioner, 274 F.2d 718 (C.A. 9, 1960), reversing on other grounds 30 T.C. 936 (1958). This is a depletion deduction case, but trust depletion cases are relevant to depreciation deduction cases involving trusts since the history of the comparable depletion deduction provisions has been identical, as is the critical statutory language. See sec. 611(b)(3).
See footnote 5.
We need not decide this issue here, but for the sake of disposing of petitioner's arguments, we shall assume that such an addition to a depreciation reserve pursuant to discretionary authority would be as sufficient to entitle a trust to the full depreciation deduction under that sentence of section 167(g) dealing with trusts as in the case where the governing instrument creating a trust requires such an addition to a reserve. As will become apparent we could not hold same result to apply where an estate is involved rather than a trust.
It is clear that this case is to be decided under the last sentence of section 167(g), dealing with estates, rather than the sentence dealing with trusts. Kathryn Titus MacMurray, 16 T.C. 616, 622 (1951). There is a crucial difference between that language of section 167(g) dealing with trusts and that dealing with estates. In the case of a trust the depreciation deduction is to be apportioned ‘in accordance with the pertinent provisions of the instrument creating the trust,‘ or, absent such, ‘on the basis of the trust income allocable to each.’ But in adding a provision with respect to estates to the tax law, Congress omitted the first of the operative phrases used in the trust provision and merely said that the deduction is to be apportioned ‘on the basis of the income of the estate allocable to each.’
Petitioner argues that the omission from the estate provision of part of the language used in the trust provision is of no significance. He asserts that the legislative history of the Internal Revenue Code of 1954 compels us so to hold.
The provision providing for allocation of the depreciation deduction in the case of an estate was added to the House version of what was to become section 167(g) of the 1954 Code by the Senate Finance Committee. The portion of the Finance Committee's report dealing specifically with this addition is not only of no assistance in determining the significance of the omission, but is clearly erroneous. At S.Rept. No. 1622, to accompany H.R. 8300 (Pub.L. 591), 83d Cong., 3d Sess., p. 206 (1954), it was stated that ‘No substantive changes are made’ to the provisions of the 1939 Code with respect to allocation of the depreciation deduction; whereas in fact the provision concerning allocation of the deduction in the case of an estate was added by the very same committee whose report is quoted.
However, petitioner points to that part of the Senate Finance Committee Report which states, with regard to section 642(e),
Deduction for Depreciation and Depletion.— An estate or trust shall be allowed the deduction for depreciation and depletion only to the extent not allowable to beneficiaries under section 167(g) and 611(b).
Under the amendments made by your committee to section 167 and 611 of the House bill, the allowable deductions for depreciation and depletion are apportioned between an estate and its heirs, legatees, or devisees in accordance with the pertinent provisions of the governing instrument or, in the absence of such provisions on the basis of the income of the estate allocable to each. (S.Rept. No. 1622, to accompany H.R. 8300 (Pub.L. 591), 83d Cong., 3d Sess., p. 342 (1954).)
It may be that sections 167(g) and 642(e) are in pari materia, as both parties argue, and thus that the legislative history of one is to be considered relevant to the other. But the fact that the Senate Finance Committee Report on section 642(e) makes one statement concerning the estate provisions of section 167(g) while the same committee report on section 167(g) makes a conflicting statement, does not necessarily mean that we must accept the former and reject the latter.
We may look to the legislative history for assistance in statutory interpretation. Brewer-Fay Investment Co., 39 T.C. 894, 905 (1963). And, as we observed in Max Carasso, 34 T.C. 1139, affd. 292 F.2d 367 (C.A. 2), certiorari denied 369 U.S. 874, ‘it is now established beyond successful challenge that a court may seek out any reliable evidence as to legislative purpose.’ See also Helvering v. City Bank Co., 296 U.S. 85 (1935).
In this case which, like the present one, involved two related provisions of the applicable tax statute, the Supreme Court said it was not at liberty to give effect to certain legislative history indicating the two provisions were in accord with each other where the provisions themselves were patently different.
We have considered the legislative history regarding section 167(g) and found it to be obviously unreliable. The reports of congressional committees merely accompany a statute, which in turn becomes law only after surviving all of the steps of the legislative process. Such reports are to be used as interpretative of the statute, not to substitute for it. Nor is it to be presumed that a committee report has been drafted with more care than the statute itself.
The wisdom as well as the propriety of this approach to legislative history is exemplified by the committee report concerning the matter we are called upon here to resolve. As has been noted above, the report of the Senate Finance Committee is clearly inaccurate with respect to the provision dealing with apportionment of the depreciation deduction at the point where the report treats section 167(g). Does this give us reason to assume with confidence that the report's discussion of section 642(e) was given more careful attention? That it does not is pointed up by the discussion in the same committee's report of section 611(b)(4), the provision that was added by the Internal Revenue Code of 1954 concerning apportionment of the depletion deduction in the case of an estate. The critical language of section 611(b)(4) is the same as that of the last sentence of section 167(g), which was enacted at the same time, and section 611(b)(4) is the other section referred to along with section 167(g) by the words of that portion of the report dealing with section 642(e), quoted above. Significantly, the Senate Finance Committee Report merely says at the point where it treats section 611(b)(4):
Your committee has added to section 611 of the House bill a new paragraph to the effect that in the case of an estate, the depletion deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each. * * *
S.Rept. No. 1622, to accompany H.R. 8300 (Pub.L. 591), 83d Cong., 2d Sess., pp. 329-330 (1954).
Thus, the Finance Committee made directly conflicting statements in its report concerning allocation of the depletion deduction in the estate situation.
It is difficult to imagine any court resolving this conflict by saying that interpretation of section 611(b)(4) is to be governed by the Committee's discussion of section 642(e), when the differing discussion of section 611(b) (4) is consistent with section 611(b)(4) itself. We are equally unable to conclude that Congress intended a different interpretation of section 167(g) (depreciation) from the interpretation to be given section 167(b)(4) (depletion).
A comment by the Supreme Court in one of the cases in which it has found that there could be no question as to the meaning of certain statutory language, and in which it consequently declined to look at the relevant legislative history, seems to be appropriate here. In Wisconsin R. R. Comm. v. C. B. & Q. R. R. Co., 257 U.S. 563, 589 (1922), the Court said that such aids to statutory interpretation as committee reports ‘are only admissible to solve doubt and not to create it.’
Entirely apart from our considerations of the enigmatic and conflicting legislative history regarding the last sentence of section 167(g) we observe that deductions, and the identity of those entitled thereto, are matters of legislative grace and that there is a logical reason for the Congress to have adopted differing rules as between trusts and estates, for the term or duration of a trust is usually much longer than that of an estate. Depreciation is the economic wasting away of an asset over a period of years (longer or shorter dependent on the age and character of the asset) and present income beneficiaries of such an asset may, or may not have an interest in whatever remains of that asset, if anything, at the end of the period of their entitlement to income. The allowable deduction for depreciation theoretically replaces what has wasted away, therefore it is apparent that any inequities (as between those entitled to present use or income and those deferred takers of the remainder) resulting from apportionment of the deduction solely on the basis of allocations of present income, would be magnified and aggravated by the length of time such condition existed. It is reasonable to believe that Congress was willing to relieve this aggravation for the longer term trusts but was unwilling to forego the easy, mathematical rule in the case of an estate.
The question to be decided here is narrowed, then, to that of whether the language of the last sentence of section 167(g), omitting as it does the reference to the pertinent provisions of the governing instrument contained in the sentence dealing with the case of a trust, entitles and estate (so distributing income) to the entire deduction for depreciation attributable to an asset if the executor has, by authority of the will, allocated to corpus amounts for depreciation of that asset. This question must be answered in the negative.
Were we interpreting the language ‘on the basis of the income * * * allocable to each’ for the first time we might have some doubt as to whether the allocation of income referred to was intended to have reference to a purely mathematical concept or, in effect, a qualitative concept dependent upon trust accounting. If we were looking as a matter of first impression at the portion of the House Conference Report accompanying the 1928 Revenue Act quoted above, we might not be absolutely certain whether the explanation given there, that a trust is entitled to the entire deduction where the trustee is required to keep corpus intact by retaining an amount of income for that purpose, was intended as an example of the operation of that phrase of the trust provision of the statute referring to the ‘pertinent provisions of the instrument’ or of the phrase ‘on the basis of the * * * income allocable to each.’ But we think any possible confusion over this matter has been resolved in favor of the former by the cases since the 1928 Revenue Act. See John R. Upton, 32 T.C. 301 (1959), affd. 283 F.2d 716 (C.A. 9, 1960), certiorari denied 366 U.S. 911 (1961).
We therefore conclude that an allocation by an executor of a part of the income of an estate to corpus, in the form of additions to corpus or to a depreciation reserve, cannot entitle the estate to the entire depreciation deduction. Petitioner objects that such a conclusion in effect imposes on estates a Federal ‘estate and administration law.’ This is simply not true, however. We are concerned only with a Federal income tax statute, and our conclusion is that there is no necessary correlation, in the case of an estate, for purposes of the issue in this case, between the incidence of Federal income taxation and the allocations provided by the operation of either expressions of testators' intentions or State law for estate accounting purposes.
Petitioner makes the additional contention that the distributees of income from the residue of decedent's estate, of which the Nissen Building was a part, are not ‘heirs,’ ‘legatees,‘ or ‘devisees' within the meaning of section 167(g), and hence that no part of the deduction for the depreciation of the Nissen Building is to be apportioned to them. Petitioner argues that these words were intended to be given the restricted interpretation of their technical meanings under the various State laws. But we conclude that the use of all of these terms by Congress merely evidences an intention to be all-inclusive by including all beneficiaries of an estate, whether the estate be testate or intestate, and whether the beneficiaries be entitled to realty or personalty. No necessary implication is derived from the statute that Congress intended differing State law meanings that may be attributed to these words to govern the effect of section 167(g), and we hold that the use of labels for purposes of State law is not determinative of what is included by words of the section. Burnet v. Harmel, 287 U.S. 103, 110 (1932); Brewer-Fay Investment Co., supra.
The argument that the distributees of income from the residue of the estate were not entitled to any income unless the executor exercised its discretionary authority to make distributions to them raises a matter of no significance. The fact is that the authority was exercised in favor of these individuals in the years in question in the amounts respondent has determined to be allocable to them. The further argument that by a literal reading of Article VIII of decedent's will the executor is the only person who could be described as an ‘heir,’ ‘devisee,‘ or ‘legatee’ merits only our observation that the executor held only a legal title and had no beneficial interest in the estate.
Reviewed by the Court.
Decision will be entered for the respondent.