Fribourg Navigation Company, Inc. v. Commissioner

PETITIONER: Fribourg Navigation Company, Inc.
RESPONDENT: Commissioner
LOCATION: South Carolina General Assembly

DECIDED BY: Warren Court (1965-1967)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 383 US 272 (1966)
ARGUED: Nov 10, 1965
DECIDED: Mar 07, 1966

Facts of the case


Media for Fribourg Navigation Company, Inc. v. Commissioner

Audio Transcription for Oral Argument - November 10, 1965 in Fribourg Navigation Company, Inc. v. Commissioner

Earl Warren:

Number 23, Fribourg Navigation Company Incorporated Petitioner versus Commissioner of Internal Revenue.

Mr. Lewis?

James B. Lewis:

Mr. Chief Justice, may it please the Court?

This case, here on petition for writ of certiorari to the Second Circuit presents a simple, but fundamental question of how depreciation should be computed for income tax purposes.

Ever since 1913, the income tax statute has granted us a deduction, a reasonable allowance for the exhaustion wear and tear of property.

This Court has asked in this case to interpret that 42-year-old statutory language on this issue for the first time.

The facts are undisputed and maybe quickly stated.

The taxpayer purchased in December of 1955, one of the old World War II Liberty ships for $469,000 and proceeded to use that ship in its shipping business as a tramp steamer.

Before making the purchase, the Commissioner came down the -- the taxpayer came down to Washington, and asked the Commissioner for a ruling on depreciation and received such a ruling.

The Commissioner, having experience in this field, rule that this Liberty ship was to be depreciated over a three-year useful life that the amount to be depreciated was the $469,000 cost plus a salvage value based on scrap of $5 a dead-weight ton or $54,000.

And that the depreciable amount $415,000 was to be written off over the three-year useful life under the straight-line basis, one-third each year.

The taxpayer followed the ruling letter meticulously.

A year later, something happen that no one could have expected, the Suez Canal crisis erupted.

The canal was blocked for about six months.

And when it reopened, it reopened under Egyptian management that many people then had limited confidence in.

During this brief crisis, the prices of all kinds of ships even Liberty ships rose spectacularly because the necessity of going around Africa caused a brief, but severe, shipping crisis.

During 1957, all of 1957 except the last eight days, the taxpayer operated its ship, produced a gross profit from that operation of almost $300,000 and filed an income tax return on which disclosed that profit and deducted there from its expenses including the depreciation of about $135,000 that had been authorized in the ruling letter.

The taxpayer had a substantial net profit for 1957 roughly $140,000 from the operation of this and a less important ship.

Having received and unsolicited and attractive offer from a competitor during the Suez crisis, the taxpayer sold the Liberty ship in December of 1957 for the price of about $695,000.

Hugo L. Black:

How long did he own it?

James B. Lewis:

For two years.

The dispute here arises from the Commissioner's total disallowance of depreciation for the ship for 1957.

The Commissioner asserts that the depreciation, which he concedes, to have been correctly established by the ruling letter was nevertheless the automatically disallowed for one reason only because the sale of the ship produced a profit.

Potter Stewart:

The rule for which he contends limited to the -- that year, that the year in which the sale was made.

James B. Lewis:


His argument on trade fair is that he here is that he will not touch and should not touch the depreciation allowed for the years prior to the year of sale.

Now, although this was the first time that this narrow but significant issue has been presented to this Court, the Court is not being asked to write on a clean slate.

Year after years since 1913, hundreds and probably thousands of taxpayers every year have sold some sort of depreciable property.

They have reported their gain or loss on the sale.

They have taken their depreciation for the year in which the sale occurred.