Hertz Corporation v. United States

PETITIONER: Hertz Corporation
RESPONDENT: United States
LOCATION: Federal Reformatory for Women in West Virginia

DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Third Circuit

CITATION: 364 US 122 (1960)
ARGUED: Mar 30, 1960
DECIDED: Jun 27, 1960

Facts of the case


Media for Hertz Corporation v. United States

Audio Transcription for Oral Argument - March 30, 1960 in Hertz Corporation v. United States

Earl Warren:

-- the Hertz Corporation, Petitioner, versus United States.

Mr. Bernhard, you may continue your argument.

Edgar Bernhard:

Mr. Chief Justice and may it please the Court.

The issues in this Hertz case are similar to those in Evans.

This case arises under the 1954 Code and involves the double declining balance method of depreciation, permitted under this Code, but before we get into that method and how it operates, I'd like to pick up counsel's answers to questions put late yesterday by Mr. Justice Harlan and Mr. Justice Douglas.

I know that the counsel for the Government, when asked whether the elimination of capital gains, was the real issue here, answered that it was not.

But he's apparently unaware that the Government has, on three different occasions, admitted that the elimination of capital gains was its objective.

First of those, that I do want to call the Court's attention to, appears in the Government's brief in Evans.

The Government stated at page 11 of that brief, the question, in this case, bears upon the proper computation or determination of capital gain.

In the Government's opening brief in the Third Circuit below, in the -- in this Hertz case, the Government said at page 40 of that brief, “The simple fact is that the profit is taxable at capital gains rates and taxpayer, under its view, receives the benefit of a deduction at a 52% rate and pays tax on the profit resulting from the increased deduction at a 25% rate."

This result can be avoided by defining useful life for purposes of depreciation as meaning, the period during which an asset is useful to the taxpayer together with a reasonable computation of salvage value.

This has been done by Section 1.167 (a)-1 (b) of the regulations referring to the 1956 regulations under the 1954 Code.

Potter Stewart:

Mr. Bernhard, what were you reading from this time?

Edgar Bernhard:

I was reading from the Third Circuit brief by the -- filed by the Government below in this case.

Potter Stewart:

All right, thank you.

Edgar Bernhard:

Third, the Government admits the same point in its brief in this Court.

At page 49, it lays stress on the point that the deductions are taken at a 52% rate, whereas, the capital gain rate established by the Congress is 25%.

And fourth, the Undersecretary of the Treasury, this month, appeared before the House Ways and Means Committee, in behalf of new legislation in this area.

He was asking, he said, for legislation which would “eliminate the opportunity which now exists of converting ordinary gain into capital -- ordinary income into capital gain”.

He told about the workings of depreciation, particularly under the double declining balance method and the fact that, as he said, under present law, taxpayers were entitled to take capital gains on the sale of depreciable assets.

And on that basis, he asked for statutory change to eliminate capital gains on the sale of depreciable property at least, to the amount of the depreciation taken.

Just prior to that and the letter which was -- and the -- the incident which was responsible for the calling of those hearings at which the Undersecretary appeared and said what I've just accounted, was a letter dated February 12, 1960, which appears in our brief in this Court at page 53 in the appendix, Appendix A -- our reply brief, I'm sorry, our reply brief in this case.

And at the foot of -- of page 53 of -- of the brief, towards the end of the letter, the Secretary of the Treasury, who has, in this letter, asked for special legislation says “The proposed statutory change which would require the gains from sale of depreciable personal property be treated as ordinary income to the extent of depreciation previously claimed, would make it possible for agents of the Internal Revenue Service to accept more readily, taxpayer judgments and taxpayer practices with respect to depreciation rates on salvage value.”

In other words, the Secretary of the Treasury is really saying to the Congress, “If you will just give us this legislation to cut off capital gains, we can be much more lenient about our definition of useful life.”

What he really means is that he would then be willing, if capital gains can be eliminated by new legislation, to go back to the 40-year practice and the 40-year definition of useful life, not broken until the 1956 regulations were issued.

Now, in view of all that, counsel's answer to that question and I want to take up another answer for just a moment, counsel's answer yesterday is simply not understandable, in view of these forthright statements from the Government that its real purpose is to eliminate capital gains by redefining these basic, long standing concepts of useful life and salvage value.

Now, the Government also stated to this Court, yesterday, that its practice in the past, in response to a question, its practice in the past was consistent with its position here in these cases, the Evans and Hertz cases.

Now, as opposed to all our citations in our briefs to show that this is not the case, the Government's briefs, first of all, answered actually with only one case, the Ludey case, with one sentence from that case which actually is dictum, because the Ludey case, as Your Honors are probably aware, does not deal with useful life, how useful life is to arrived at, the measure of depreciation and the sentence quoted which -- which the -- is the only part of the case that can be quoted at all, that seems at least to have some connection here, is pure dictum as we pointed out in our briefs.

And yesterday, in response to a question, counsel for the Government when pressed to name a -- a single case, as we have been asking for the Government to do, a single case prior to the promulgation of the 1956 regulations under the 1954 Code.

Not in which, it established the -- its new definition of useful life, but in which it contended for and -- in which it contended for any other definition except the one we are espousing in the Evans and Hertz cases.