Hertz Corporation v. United States

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

DOCKET NO.: 283
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

Question

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.

Edgar Bernhard:

Counsel finally answered with a single case, the Cohn case, 259 F.2d 371, but the difficulty is that this is in the same category with Evans and Hertz.

It was decided in 1958.

It’s subsequent to the 1956 regulations, it does not meet the –the real question here, whether the Government is now changing position entirely or is simply following up with its past practice.

Now, I — I wonder what the Government has to say today about its rulings, its repeated interpretations of useful life in case after case, and in its own Bulletin “F”, which came up yesterday and which I should like to bring up again in a moment.

But as to the cases, in Merkle Broom Company and I can — I can do each of these in just a second or two.

In Merkle Broom Company, a 1926 case before the Board of Tax Appeals, the taxpayers’ holding period was two years.

The Government claimed a five-year useful life, the whole physical life of the asset.

The Board of Tax Appeals held four years and the Commissioner officially acquiesced.

In Max Kurtz a year later, 1927, a Board of Tax Appeal case.

The holding period, two to three years.

The Government claimed a five-year useful life.

The Board of Tax Appeals held a five-year useful life.

And, of course, the Commissioner officially acquiesced, the whole physical life despite a shorter period of — a shorter holding period known.

In Sanford Cotton Mills, 1929 case, holding period, two and a half years, Government claimed five-year useful life.

Board of Tax Appeals held four-year useful life and the Commissioner officially acquiesced, to move along to present day or almost present day, 1956, although there other cases and our — our briefs present them, in 1956, Pilot Freight Carriers, 15 CCH T.C.Mem.1027, holding period, 32 to 36 months.

The Government claimed five years and six years useful life, two kinds of assets, tractors and another kind of vehicle.

The other cases were automobile cases.

The Government claimed, holding period 32 to 36 months.

Government claimed five years and six years useful life.

The Tax Court held four years and five years useful life.

Bulletin “F”.

William O. Douglas:

What — what case is that?

I don’t find it in the briefs.

Edgar Bernhard:

Pilot Freight Carriers, Your Honor.

We — we cited in —

William O. Douglas:

I’ll find it.

Yes, I — I found it now.

Edgar Bernhard:

It’s at pages 29 and 62 in our brief.

Potter Stewart:

Mr. Bernhard, I’m — I’m right in thinking am I not, that it is a practical matter in the — in the ordinary case, it would be to the Government’s physical interest to have as long a useful life as possible?

Edgar Bernhard:

That’s right, Your Honor.

Edgar Bernhard:

Without —

Potter Stewart:

The —

Edgar Bernhard:

— without the new 1954 accelerated depreciation —

Potter Stewart:

It would — generally speaking, (Inaudible) the Government’s interest to have each year’s depreciation deduction as small as possible.

Edgar Bernhard:

Exactly.

Potter Stewart:

And that the reason these cases are kind of offbeat, is because of this very high salvage value and the problem is further accentuated by the new deduction method allowed by the 1954 Code, is that it?

Edgar Bernhard:

Well, the — the reason for the salvage value, if Your Honor please, only appears after the 1954 Code allowing accelerated depreciations, so more depreciation could be taken.

And the adjusted basis therefore, reduced.

And then, if salvage value is to be interpreted as the Government interprets it, which we don’t for a moment agree with, then you get the difference, a wider difference, it’s true.

Potter Stewart:

That I —

Edgar Bernhard:

That also — I’m sorry.

Potter Stewart:

Well that I understand that there’s a controversy as to what a salvage value means.

The actual resale that you get under your — under the experience of your business, but that — it’s the introduction of that very high resale experience that —

Edgar Bernhard:

That causes the (Voice Overlap) —

Potter Stewart:

— creates — creates this issue, isn’t that (Voice Overlap) —

Edgar Bernhard:

Well, no, Your Honor.

I — I wouldn’t say that.The — the reason for this controversy is this, that in 1954, the — the Government, in granting our 1954 Code in granted, accelerated depreciation including double declining balance method, restricted it to assets with a three-year useful life.

It didn’t define useful life in the statute, but, of course, you’d pick up the definition that had been standing for all these years.

Now, the Government now becomes interested in changing its definition of useful life to holding period, so as to keep down as many assets as possible into the category of assets with less than a three-year useful life, in order that the taxpayer, owner of those assets, will not be able to claim double declining balance.

Potter Stewart:

That’s the new problem in this case that was not present in the Evans case.

Edgar Bernhard:

That’s right, Your Honor.

And it forsook, we say, its unbroken attitude about useful life and redefined useful life to holding period in order to get down below the three-year limitation and it’s interesting, if the Court please, that in cases where the Government cannot contend for less than a three-year life, because under any definition of useful life, it’s three — it’s a three-year life.

It’s been held for three years and its total useful life is three years, the Government again switches in — in Schaumburg the — the Government has switched back and once it is beyond the three-year life for an asset, it then proceeds to stretch it out and go back to its old concept of full physical life.

Why?

Because it can then, by that method, again reduce the percentage — the percentage rate of depreciation to be applied to those assets.

If it can stay under the three-year limit —

What case it that?

Edgar Bernhard:

It’s Schaumburg.

Your Honor please, Herbert Schaumburg, 33 Tax Court, Number 28, a 1959 case and it’s dealt with at page 43 of our opening brief in this case.

Now, I’d — I’d like to refer to Bulletin “F”, which came up yesterday and was dealt with just in passing.

Edgar Bernhard:

Bulletin “F”, as a matter of fact, if the Court please, was issued first in 1920, it was revived in 1931.

It was last revised in 1942 and has been distributed to taxpayers in all these years from 1920 to at least 1959, I assume 1960 also.

Hugo L. Black:

Is it printed in the record?

Edgar Bernhard:

It is in the Hertz record, Your Honor.

And I have Bulletin “F” here and it consists —

Hugo L. Black:

You don’t know the page — you don’t know the page number?

Edgar Bernhard:

It’s apparently — it’s not printed in the record, I’m — I’m told, Your Honor.

But it — it was offered in evidence in the Hertz case.

In fact, it was offered in evidence by the taxpayer and then — and another copy of it, in evidence by the Government.

It was offered by both to make sure that we have the current Bulletin “F” revision and — and we did.

I’m sorry, I can’t give, Your Honor, the —

Hugo L. Black:

Is it any part of it printed in your brief?

Edgar Bernhard:

Portions are, Your Honor and quotations from it and the — unless I give me a page of that brief.

And is referred to, if the Court please, at — beginning at page 32 in our opening brief here, 33, 34 35 and 36, so that it has dealt with at some length, and with some quotations from it.

And —

Earl Warren:

Are those the quotations that you’re going to quote to us now?

Edgar Bernhard:

Well, it’s beyond what I’m going to quote now, Your Honor, now too, yes.

It — so far as automobiles are concerned, first of all, the Bulletin “F” provides — and Bulletin “F” is, first of all, 67 pages long, pamphlet — 67 pages long of which 66 pages are lists of depreciable assets, showing the useful life of each asset.

Now, is the Government really contending that those 66 pages don’t represent total, physical, functional lives but represent the length of time that the asset will be held for the taxpayer before he sells it?

If — if Bulletin “F” represents holding periods, it could’ve been produced in a — a half of page because the Government had simply have said in its Bulletin “F”, “If you have depreciable assets, your holding period is the useful life.”

Now, are you —

Edgar Bernhard:

Certainly be no need to —

Hugo L. Black:

So it’s your contention, I’m — I’m just asking because I don’t know.

The Bulletin “F” sets out an inflexible decision of the Government?

Edgar Bernhard:

No, Your Honor.

Hugo L. Black:

One that you can follow and depend on?

Edgar Bernhard:

No, Your Honor, not inflexible.

But it is described by the Government as a guide to taxpayers.

There’s a realization that there maybe heavy usage as in taxicabs which are on the street for 16 hours for instance or more, or in two shifts of — of more than 8 hours each.

It is also, of course —

Felix Frankfurter:

Those are specifically dealt with in — in “F”?

Edgar Bernhard:

Yes, Your Honor.

Felix Frankfurter:

Denying that this which is you’ve just gave.

Are they (Voice overlap) —

Edgar Bernhard:

Oh, for taxicabs?

Felix Frankfurter:

Yes, or — or other instances of heavy use — excessive use of —

Edgar Bernhard:

Oh, yes, Your Honor.

Felix Frankfurter:

(Voice Overlap) —

Edgar Bernhard:

I guess since other motor vehicles.

Automobiles, passenger, five years, salesman, three years and in our case, we rent cars to salesmen, we rent — we rent cars to other persons, passengers, we took the — it seems that our four-year life fits perfectly with Bulletin “F”, but in addition to that, we had offered testimony.

Testimony in the record, uncontroverted that a four-year useful life is the accepted useful life among accountants, among taxpayers, among business concerns, among renting and leasing companies and has consistently been that.

Evans took a four-year useful life since 1936 and in W.N. Foster, 2 T.C.M. 595 in 1943, when the Commissioner was trying to show what useful life was, he said in Bureau Bulletin “F”, “The average useful life of a passenger automobile used in — of — in business other than by a salesman is five years”.

Petitioners have not proved that the automobile was devoted to such extraordinary uses, Mr. Justice Black, if you please, that — that the petitioner — petitioners, the taxpayers have not proved that the automobile was devoted to such extraordinary uses as to justify a higher rate of depreciation than that determined by respondent.

That is by the Commissioner, so that what the Commissioner is really saying is, “Here is you guide, if you, the taxpayer, want to bring yourself outside the guide for any reason, put testimony onto show that you don’t come within it either because of — of less peruse or because of extraordinary uses.”

And in our case as I — as I said, we only got — the only testimony was as to the four-year life uncontroverted and including —

Hugo L. Black:

I — I understood you to say four-year life, which accountants and taxpayers, has considered.

Did you have any evidence to show that the four-year life was an actual — actual life of your cars?

I’m not talking about potential life or accountants’ life, but the actual life.

Edgar Bernhard:

No, Your Honor.

Except to this extent, we accepted the Government’s Bulletin “F” as a guide.

We have testimony to the effect that, business cars, business automobiles have a useful of four years and there was no testimony offered to bring it outside of the guide.

There was no testimony offered to show that by reason of usage, that that was not before useful life of automobiles.

And we also testified to the fact that we had a reasonable maintenance program, a repair program and that our automobiles therefore, had at least, reasonable if not more than reasonable care and as I say, that was uncontroverted by the Government.

Charles E. Whittaker:

Mr. Bernhard, do I correctly understand however, that your dispute here is over a principle and not over detailed facts.

As I understand, and you correct me if I’m wrong because I want to understand, you contend that the depreciation is to be taken over the useful life of the asset as an asset and you argue that the Government contends that the depreciation should be taken only over the holding period by the particular taxpayer is that it?

Edgar Bernhard:

That’s right, Your Honor.

And I — we went a step far —

Hugo L. Black:

Am I correct in assuming from that, that your argument is that you’re entitled to a greater depreciation and actually a term and that the Government contends that it — you’re only entitled to the depreciation which actually does occur from wear and tear.

Edgar Bernhard:

Well, Mr. Justice Black, if you are saying amount of depreciation, then that it is not the issue, but if you are saying what rate of depreciation (Voice Overlap) —

Hugo L. Black:

Well, out here, I’m here I’m talking about (Inaudible).

Hugo L. Black:

That in your instance — that in your instance, it results and you’re getting greater than actually appears?

Edgar Bernhard:

No, Your Honor, because in a four-year asset, if it is held two years, an asset with a useful life of four years should be depreciated at 25% per year —

Charles E. Whittaker:

Without regard —

Edgar Bernhard:

— and depreciate it —

Hugo L. Black:

— without regard to whether at the end of that four years, it would be worth 90% of its whole value or worth just 10%?

Edgar Bernhard:

At the end of that four years?

Hugo L. Black:

Yes.

Edgar Bernhard:

Yes, Your Honor.

If you’re talking about this specific car, that’s true, because the — the uncontested principle as Mr. Justice Whittaker has indicated, the — the principle is that the whole useful life be taken into consideration and in automobiles, we have already the four-year standard, permitting therefore, a 25% reduction by depreciation in the cost.

Felix Frankfurter:

In fact — in fact, the car doesn’t appreciate equally each of the four years does it?

Edgar Bernhard:

That’s correct, Your Honor.

Felix Frankfurter:

In other words, you’ve taken average of what the Government calls an abstraction, namely, an automobile which is — which is in the hands of the — have an asset for four years is averaged out to be 25 years, but that isn’t what happens, in fact, in nature does it?

Edgar Bernhard:

That’s right, Your Honor, because that’s in the alternative would be to investigate every part actually.

I mean an impossible test.

Felix Frankfurter:

Well, you could get — get the point of de minimis, but I certainly suppose there’s more depreciation in the third year than the first year.

Edgar Bernhard:

That’s right, Your Honor.

And if it —

Hugo L. Black:

And the result — the result is that it’s charged off as a whole within four years time even though it might actually be useful to somebody 15 years.

Edgar Bernhard:

Well, that’s right, Your Honor.

And it could happen.

Hugo L. Black:

And it’s charged off — it’s charged off, so that at the end of four years, you start from nothing as its value, although it might be worth a $1000.

Edgar Bernhard:

Yes, Your Honor.

That’s true.

Hugo L. Black:

And you say that the Government is committed to that by reason of its practices and the regulation.

Edgar Bernhard:

And pronouncements over all this period and I say, of course, that if the Government were contesting that in any case, it could put testimony on the stand.

It could offer testimony to show that with this particular taxpayer, his — the useful life of these automobiles are to be six years or are to be three years, instead of four by reason of his maintenance program, by reason of usage for a shorter time per day or by reason of excessive use.

May I (Voice Overlap) —

Hugo L. Black:

You say that the Government could do that, could offer proof to show that.

But it hasn’t — is that what I understand?

Edgar Bernhard:

That’s right, Your Honor.

Edgar Bernhard:

It has not.

It offered no such no testimony.

William J. Brennan, Jr.:

Mr. Bernhard, many things about this case is about which I need enlightenment, but I haven’t heard you say anything yet about double declining balance method.

Edgar Bernhard:

That’s correct, Your Honor.

And I — I am very anxious to — to hold time for rebuttal, if I may.

And —

William J. Brennan, Jr.:

Well, that’s in the —

Edgar Bernhard:

— I — I take it with counsel will — will describe double declining balance.

If he does, I’ll be happy —

William J. Brennan, Jr.:

Someone will.

Edgar Bernhard:

What’s that?

William J. Brennan, Jr.:

I hope someone’s going to.

Edgar Bernhard:

Well, I — I’m sure they — they will and if that’s satisfactory to you Mr. Justice Brennan, I would like withhold my time if (Voice Overlap) —

William J. Brennan, Jr.:

It’s your (Voice Overlap) —

Edgar Bernhard:

Thank you very much.

Earl Warren:

Mr. Heffron.

Howard A. Heffron:

Mr. Chief Justice, may it please the Court.

I’d like to first advert to the touchstone in this area and that is cost.

The whole purpose of the — of the depreciation deduction is to ascertain what the cost of the use of the physical asset has been to the taxpayer during the year, because by using that asset, he has produced income.

The taxes imposed are net income and so, we must deduct his cost from his income.

We are not dealing here with wear and tear in the air or in the abstract.

We are dealing with the financial figure to be ascribed to wear and tear for the purposes of computing the taxpayer’s net income.

Felix Frankfurter:

But for auditing that we do know for other reasons, for simplicity reasons, Congress might do what it did in (Inaudible) Oil.

Maybe all wrong, but I’ve always assumed that I’ve read so much — but that does — that’s an abstraction.

Sort of a hypothetical, whatever it is.

As no — may have no relation to actuality.

So Congress, for its physical reasons, or for administrative convenience, or for some other reasons, may do this — what you call unreal or abstract thing.

Howard A. Heffron:

Well, Congress might have —

Felix Frankfurter:

(Voice Overlap) is abstracting.

You got to argue it with reference to treasury practice, treasury regulations, which make you or not to be unreal as this appears to be.

Howard A. Heffron:

Well, I intend to get to the regulations and the practice.

The basis for my statement that cost is the touchstone here is the statute which this — which states that depreciation shall be based upon cost.

Cost is the basis of the asset which is used as the measure of the depreciation.

Felix Frankfurter:

But you’ve just stated an absolute — you yourself — and thus stated an abstraction.

We’re still going to contradict the argument, if that’s the basis on which —

Howard A. Heffron:

No, no —

Felix Frankfurter:

— the depreciation has been — by which the depreciation has been governed.

Howard A. Heffron:

We would conceive that if Congress said give depreciation without recourse to cost, without any relevance to cost as it is done in the field of percentage depletion, that then, of course, cost would be an irrelevant factor, but Congress hasn’t done that.

Felix Frankfurter:

So —

Hugo L. Black:

But what is the —

Felix Frankfurter:

— and how did you say it’s unrelated and said, you take the course and later spread it on the four years although as a matter of business practice you only hold it for two years.

Howard A. Heffron:

Well I — I was going —

Felix Frankfurter:

You are not in crossed out the adjustments.

The — the question is the — the baseline on which you allow the depreciation when in fact there never —

Howard A. Heffron:

Well —

Felix Frankfurter:

–is a four-year period.

Howard A. Heffron:

I think that’s right, but we’re talking — if we’re talking simply in terms of a rate and we’re talking about a rate which when applied aggregates cost, what point is it to base that rate upon factors which are wholly unrelated to the period the taxpayer will use the asset or what he receives when he finishes with the asset.

Why would a rate be meaningful?

We would suggest if that rate is predicated on a period of years, the asset is used in the taxpayer’s business, if among the factors to be ascertained in determining the rate is the mode of operation of the taxpayer, how hard he uses the machine, the climate.

Why would we base the period of time which is in terms, the measure of the rate on all this factors which are personal to the taxpayer’s operating situation, if we’re not concerned that that period of time be — produce such a rate that when aggregated, cost will be recovered.

I mean that is — that is essentially our point here.

It doesn’t make any difference to say that the asset will be used 10 years by someone and therefore, the rate should be 10%, if, in fact, you know the taxpayer will only use the asset five years —

Felix Frankfurter:

But that —

Howard A. Heffron:

— because then the aggregate 10% only equals 50% and we’re looking for a rate which when aggregated equals a 100% of the taxpayer’s cost.

Felix Frankfurter:

Is there any reference in the regulation to that fact, Mr. Bernhard stated from the regulation, variations as to the kind of — the kind of vehicles, three years, four years, five years?

Is there any reference in the regulation to the holding periods or is that — does that all have to be spelled out from your conception of the relation of these factors to cost?

Howard A. Heffron:

The regulation states in terms that the proper allowance for depreciation is an amount which when aggregated over the useful life of the property in the business, equals cost.

Felix Frankfurter:

Well then, that it brings on what useful life means, whether useful life as a thing or useful life as an asset for the particular holder?

Howard A. Heffron:

Now, we say useful life there means just what the regulation says, useful life of the property in the business, because if it meant anything else, you would not be recovering cost and the purpose of the deduction is to enable the taxpayer to recover cost, if the rate is based on factors which have no bearing and no relationship to the taxpayer’s business, there is no guaranty, there is no probability.

There is no likelihood that the imposition of the rate when aggregated during the term the taxpayer holds the property will result in 100%.

Howard A. Heffron:

As where the taxpayer determines, 10% to be the rate, because this abstract model is 10 years, but he using it five years.

You add five-10% equals 50%.

And we say when you know the taxpayer will only hold it five years, you cannot use a 10% rate.

You have to use a — such a rate which will give back cost to the taxpayer.

But there is a dispute between you as to what the significance of — in the business is.

They say as I understand it that that simply is a description of the character of assets and they’re subject to 117 jail, whatever it is, treatment and you say it means holding period as descriptive of useful life.

Your arguments, it seems to me, completely bypass each other.

There are arguments from the standpoint of administrative practice and what they argue is the law, your argument from what you conceive to be sound economic theory and you haven’t met each other on either premise.

Howard A. Heffron:

Well, I think we’re going to meet directly in the next few minutes.

Good.

Howard A. Heffron:

I have also had trouble in understanding what the taxpayer’s conception of useful life is here.

As a matter of fact, I’ve just called at random, a few of the different terms he uses to describe it and he calls it whole life, overall life, business life, economic life, inherent functional life, normal useful life, inherent physical life, physical life and economic physical life.

Now, those terms can be, I suppose, made to bear any meaning the taxpayer cares to place upon them.

The one concession we have extracted from the taxpayer here, which I think is decisive, is that we’re dealing with economic life.

Now, economic life presumes that there will be factors taken into account other than the engineering factor of physical deterioration of the property.

There will be factors other than physical deterioration, economic factors.

One of those economic factors we call obsolescence.

Other factors, we call inadequacy for use in the taxpayer’s business, supersession by invention or technological changes, changes in consumer demands.

These are — there are a host of economic factors and it is those economic factors to which I should like to make reference now, because it has been quite clear from the outset that economic factors other than wear and tear, economic factors peculiar to the taxpayer’s business are factors which must be taken into account.

Now, in particular —

Potter Stewart:

May I speak, before you go on.

The — in the regulations to which you referred in answering Justice Frankfurter’s question, were you referring to the 1956 regulations, Mr. Heffron?

Howard A. Heffron:

No.

I’m referring to regulations which date back from the earliest times.

Potter Stewart:

Because the 1956 regulations, of course, made some changes in the — and were more specific at least, were they not?

You — I — I understand your position to be that they simply clarify and reinstated the — the long time consistent position of the Government, but at least, they — they were verbally changed, were they not?

Howard A. Heffron:

In 1954, they were changed, yes.

Potter Stewart:

And that is why — and may not be based on the 1954 statute — 1954 Code?

Howard A. Heffron:

Yes.

Potter Stewart:

The regulation is based on the 1954 Code, made verbal changes do they not?

Howard A. Heffron:

Yes.

Potter Stewart:

More specifically —

Howard A. Heffron:

Well I’ve — well, they’re more specifically, the 1954 regulations are clearly and directly in support of the position we’re advocating here, but I was not going to refer to the 1954 regulations, because I don’t think we have to rely on a bootstrap argument.

Potter Stewart:

That’s — that’s why I was trying to get at.

You were not referring to those regulations in answering Mr. Justice Frankfurter’s question?

Howard A. Heffron:

No, I was not.

Felix Frankfurter:

You’ll —

Howard A. Heffron:

And —

Felix Frankfurter:

— return to “F” will you, Bulleting “F”?

Howard A. Heffron:

No.

I — I’ve been accountable at that, but right now my thesis is that he —

Felix Frankfurter:

I need your thesis, but there was answer to my questions.

I was referring to this — the provisions in Bulletin “F”, which Mr. Bernhard read, differentiated three, four and five.

Howard A. Heffron:

Yes, sir.

I have not — I was not referring to that particular segment of Bulletin “F”, but I will make reference —

Felix Frankfurter:

To put another regulation, what other regulation?

Howard A. Heffron:

Well, our regulations which have — which have been with us since the Revenue Act of 1918.

Felix Frankfurter:

Yes, but which one — which one’s significant to our problem?

Howard A. Heffron:

Well, I think all of the — all of the regulations from the time that the depreciation deduction was put in other statute are significant.

And I think that all of them show that from the outset, economic factors other than physical deterioration were all considered as relevant in determining useful life and they are economic factors which are dependent upon an analysis of the taxpayer’s business alone.

Now, the regulations, for example, from the start have said, with respect to depreciation in the case of tangible property, it applies to that which is subject to wear and tear from natural causes and to obsolescence due to the normal progress of the art or the becoming inadequate to the growing needs of the business.

Now, there is an indication that there are economic factors which must be taken into account.

Now, that has always been in the regulations and the Commissioner has always taken the position that economic factors are to be taken into account.

I’d like to advert to Bulletin “F”, if I may for a minute.

And Bulletin “F” says, with respect to depreciation, “Past experience furnishes a reliable guide for the determination of the useful life of the property.

Such a determination should reflect all the peculiar circumstances of the use or operation of the property such as the purpose for which it is utilized.

The conditions under which it used or operated, the policy as to repairs with new rules and improvements in the climatic and other local conditions.”

Now, on the salvage value, Bulletin “F” has said, “Salvage value is the amount realizable from the sale or other disposition of the items recovered when property has become no longer useful in the taxpayer’s business.”

Now, all of these factors are geared.

They are keys to an analysis of economic factors which bear upon the way the taxpayer operates his business.

Hugo L. Black:

Are those the old regulations?

Howard A. Heffron:

Those regulations have been in effect and substantially that form since 1918.

The whole concept of obsolescence has been one which has been adopted by this Court in situations which while precisely the same facts were not presented, this was by analogy, the principle was directly applicable in the case decided by this Court in 1932, U.S. Cartridge Company against the United States.

The taxpayer had built an ammunition plant in 1914 on property which he leased.

The lease ran until 1924 at which time he would have to leave the premises and leave the building there, of course.

He had never been in a business of making military ammunition and did this as part of the war effort.

When the war terminated in 1918, he had no more orders and he sought to take a large deduction for obsolescence of his plant in that year.

There is no question that this plant physically, which had been built new in 1914, as an abstract proposition had many, many years to run both beyond the end of the war and beyond the termination of the lease.

The Commissioner contended not as he would have contended had taxpayer’s theory been correct.

He did not contend that depreciation or — was to be allowed over the period of the abstract model life of a factory, let us say 50 years or 40 years.

He contended that the cost of the plant should be taken over the unremaining period of the lease.

That is until 1924.

Now, why did he choose 1924 as the terminus?

Because that was the period when the taxpayer’s holding period ended and he — he also contended that the taxpayer should not take obsolescence in 1918 because it’s a factual matter.

It has not been demonstrated that he could no longer use the plant for any commercial, whatever.

But the principle was the — the principle which the Commissioner supported was the principle that the holding period of the taxpayer is one of the essential factors in determining the useful life of property to him.

Now, this Bulletin “F”, for example, in another analogous situation, provides with respect to bridges that the useful life of a bridge shall be so many years unless otherwise limited by a franchise.

Now again, the purpose of limiting it to a franchise is because this limits the taxpayer’s holding period of the property and to base a rate of depreciation upon a period which went beyond the franchise, would not provide that the aggregate amounts during the period of the taxpayer’s holding of the property that is, the franchise period, would equal the amount of the cost he had incurred.

Now, these have always been in Bulletin “F”, the feature with respect to the lease that I mentioned is also in Bulletin “F” when it talks about furniture and fixtures in certain retail businesses, where it says that the normal average useful life shall be so much, unless otherwise limited by the term of the lease.

Now, the purpose again of limiting it to the lease is because that limits the holding period of the taxpayer.

And again, mathematically, you will not aggregate cost if you based the rate on a period which is not coextensive with the actual facts, with the period the taxpayer will be using the property.

The regulations have always provided with respect to the depreciation of mining equipment.

That mining equipment shall be depreciated for their abstract normal useful life, unless the mineral deposit will wear out, will be terminated, will no longer be useful in a shorter period.

If that is so, in that event, the taxpayer will depreciate his mining equipment over the shorter period, over the economic life of the property.

Now, in many of those cases, both the mining equipment is theoretically usable.

An engineer could analyze it and say, “Well, it’s got so many more years of abuse left.”

And the reason we’re not interested in that is because we are solely interested in returning to the taxpayer his cost.

We are not interested in wear and tear in the abstract.

And you can see that in the normal application of straight line depreciation.

Even on the taxpayer’s theory, he takes 25% in the first year.

Howard A. Heffron:

Well now, I’m sure that engineering studies would show that the actual rate of physical wear and tear is much less in the earlier years and increases vastly in the later years.

We’re interested in following the curve of physical depreciation.

We would not use straight line depreciation and a fortiori, we would not use the double declining balance method which accentuates the deductions in the early years running directly contrary to the curve of physical depreciation.

Potter Stewart:

As a matter of fact, the double declining balance method does mark, that they reflect depreciation in terms of market value, so far as automobiles go, is that it?

Isn’t it true?

I don’t — I’m really asking for information.

I’ve always had the idea that this — from the point of view not of physical depreciation, but of market value — the depreciation — that the big depreciation occurs in the first year.

Second year —

Howard A. Heffron:

Well, I think that would normally be so, for most of us who buy on the retail market —

Potter Stewart:

— speaking about (Voice Overlap) —

Howard A. Heffron:

— for a taxpayer here who gets the fleet discount when he buys his new car is, of course, that same pattern is not demonstrated.

Felix Frankfurter:

Mr. Heffron, I do not want to derail you, derail your argument from the course you want to run, but I’d like to put this view.

For me, almost the decisive question in these cases is the claim that the Government is seeking to deviate from a fixed 40 years practice to the contrary of its present contention.

Will you be good enough to leave yourself time now to deal with two questions that I’d like to put to you?

In the first place, is this argument taking out of the air and if isn’t, what is the basis for the argument?

And secondly, what is its demonstrable falsity or false (Inaudible)?

Howard A. Heffron:

I — I had hoped that I was demonstrating its demonstrable falsity in the last few minutes.

Felix Frankfurter:

But you’re doing it argumentatively.

You’re doing it argumentatively.

What I want to know is the establishment of what the Treasury has actually done.

Howard A. Heffron:

Well — and I have referred to the regulations which refer to these economic factors to the —

Felix Frankfurter:

Well, I know regulations of print.

I want to know what the practice of tax levies in this field has been.

Is that an unfair or an irrelevant question?

Howard A. Heffron:

Well, I — I am — I’m trying to refer the Court to the authoritative, administrative pronouncements.

Now, Bulletin “F” to which we referred the Court is the bible —

Felix Frankfurter:

Well, but you (Voice Overlap) —

Howard A. Heffron:

— on depreciation.

Felix Frankfurter:

— but this has been argued.

I hear arguments that — that are respectively, if I may say so, intellectually on both sides and I can draw my inferences from there.

Felix Frankfurter:

What I want to know is as you stand there, what can you say has been actually done as to specific taxpayers in — in this kind of a situation?

Not what the Bulletin says as you interpret it one way, as he interprets it another.

Howard A. Heffron:

We have been advised that in accordance with Bulletin “F”, the practice has been to take into account all of the relevant economic factors concerning the taxpayer’s business which affect useful life.

And I have averted to these many analogous situations, bridges, property held under lease and mining equipment as examples of cases where the authoritative, administrative materials have demonstrated that you do not, you do not follow the abstract physical life where it is clear from the facts that the taxpayer’s period of use of the property will be shorter.

I believe that is so in the mining case.

I believe that it so.

Felix Frankfurter:

May I — may I interrupt you, if I may interrupt you.

I am very — my knowledge is zero on — in this field, but am I wrong in thinking that the Hertz Enterprise isn’t a thing that began yesterday?

Howard A. Heffron:

Yes.

Felix Frankfurter:

It’s been rather an old concern —

Howard A. Heffron:

Yes, sir.

Felix Frankfurter:

— doing the same kind of business.

Well, what actually have been the tax returns to which the Government either has yielded or hasn’t yielded?

Howard A. Heffron:

I can only —

Felix Frankfurter:

(Voice Overlap) find out — find that out?

Or the Massey Company, I don’t know about them.

The Hertz, everybody knows.

Can’t we know that?

Howard A. Heffron:

I can only —

Felix Frankfurter:

The claim is made quite emphatically, isn’t it?

That you’re — the Government is now making a somersault, a legal somersault.

Now, you ought to be able to refute that not by having us agree or disagree with you on your construction of a bulletin or a regulation, but what actually has been done physically year after year.

Howard A. Heffron:

I was attempting to demonstrate that the — the practice has been —

Felix Frankfurter:

By practice, you mean, the returns filed and accepted, is that it?

Howard A. Heffron:

By practice, I mean my own deduction from what the authoritative administrative materials prescribed, shall be done in these cases.

Now, I don’t believe the taxpayers resort to any situation where there has been any deviation and I’d like to say again —

Felix Frankfurter:

That’s the issue.

That’s what I call literature.

But there must have been returns over these years —

Howard A. Heffron:

Well, I’m — I’m —

Felix Frankfurter:

Precisely similar situations, haven’t there been or have been?

Howard A. Heffron:

Well, as we know, the car leasing business is a business which has been a relatively new development.

Felix Frankfurter:

(Voice Overlap) —

Howard A. Heffron:

We cannot refer to the Court.

Felix Frankfurter:

How is it — how is it?

Howard A. Heffron:

Well, I think the testimony was that its major growth occurred probably in the last 10 years, since World War II, in any event.

Felix Frankfurter:

And we can’t find out, can we?

Unless you tell me, my question is irrelevant, (Inaudible) opaque or hasn’t any sense to it.

And I’ll be prepared to accept your answer.

Howard A. Heffron:

Well, I wouldn’t —

Felix Frankfurter:

To further my dividends in this field.

Howard A. Heffron:

I would not —

Felix Frankfurter:

If you don’t tell me that, then there ought to be some way of telling us, what has actually been the tax, the — the concrete tax conduct on the part of the taxpayer and the attitude towards such conduct by the Treasurer?

Howard A. Heffron:

Well, perhaps I can answer it by referring to specific cases which I’ve called from the B.T.A. reports and which are available.

The books are full under the heading of obsolescence of cases where taxpayers and the Government argued over the issue of whether the peculiar economic facts which affected the taxpayers’ business was such as to cut down the life.

Felix Frankfurter:

In calling of businesses, I don’t want to know about bridges and I don’t want to know about other things, because they maybe different, because I don’t know.

Howard A. Heffron:

Well, like I’m unable to refer to the Court to a — to car rental businesses.

I can refer the Court for example, to the Corsicana Gas and Electric case, which was a B.T.A. decided in 1927.

There, a power company had a plant which had not physically deteriorated and had many years of life left in it.

Because there, the local town grew at a pace which exceeded the capacity of this plant, the taxpayer knew that it would have to build a new and larger plant.

It was permitted to deduct the cost of the plant over the shorter period, not because the property had physically depreciated, not because the property in the abstract model sense had reached the end of its life, but because the unique facts affecting the taxpayer’s business made it perfectly clear.

He was not going to hold that property any longer.

And therefore, the necessity arose, if he was to recover his cost to permit deductions over the shorter period.

Now, that’s a case affecting a power plant.

That kind —

Would that kind of a controversy concern what the proper physical useful life is, not the case you have here where you don’t dispute the physical useful life, but claim that the period of useful life in terms of the use in the business of the taxpayers are not shown to them?

Howard A. Heffron:

No.

Believe these were cases where there was also no controversy over the physical life of the property.

The — these were all cases where the question was granted the physical life of the property, are the economic facts surrounding the taxpayer’s business such that we are justified in cutting down the life from that physical life because of these operating facts.

Now, on the power plant case, it was because of facts which were utterly unrelated to the physical rate of deterioration of the property to the growth of the local community requiring the taxpayer to use this plant for a shorter period of time.

Could I put the question that was asked you, if I understand it correctly from Mr. — by Mr. Justice Frankfurter, a little differently.

Until these cases came along, had you previously — had the Government previously claimed — objected to Hertz reporting on a physical useful life basis?

Howard A. Heffron:

In this — in the Hertz’s case?

Yes.

Howard A. Heffron:

I’m unable to answer that question.

I don’t know.

Or on any of the — any of the cases of these three taxpayers.

Howard A. Heffron:

I — I don’t know the answer to those questions.

William J. Brennan, Jr.:

Well, Mr. Heffron, along the same line and that was in 104 of the — page 104 of the record has apparently — or J. Frank Connor which was the predecessor of Hertz before the mergers.

It must have done something about this on its tax returns ending March 31, 1948 to March 31, 1953.

Each cases start from the tax years ending March 31, 1954, 1955 and 1956.

Now, is the — Connor follow the same practice in the earlier years they followed — and the three years we have before us here?

Howard A. Heffron:

I — I don’t know.

I would assume so.

William J. Brennan, Jr.:

And the Government never challenged it from 1948 to — to 1954?

Howard A. Heffron:

I — I don’t know the answer to that question precisely, but I would say that even if that were so, that we — we would not be bound by what a particular agent did in analyzing a particular return.

The course of an audit may develop many problems in connection with a particular taxpayer’s return, depreciation and a host of other issues.

And the — the taxpayer and the agent may swap issues, will you give me that issue and I’ll — I’ll take an adjustment on this issue.

Felix Frankfurter:

How many says —

Howard A. Heffron:

The mere —

Felix Frankfurter:

— how many car rent enterprises are there in the United States roughly, just two or three or 200?

Howard A. Heffron:

Well, of course, the — the Hertz’s Corporation has a great many, quite (Voice Overlap) —

Felix Frankfurter:

— and why does they make returns on — they’ve got — they’ve got subsidiaries all over the place?

Howard A. Heffron:

I believe they do.

Felix Frankfurter:

Well — so, it isn’t just an isolated instance and of course you’re not bound, the Government isn’t bound by this or that particular adjustment.

But if over a course of years, returns are made on one day, which the Government hasn’t made objections, then the Government from time to time, in other cases, urges administrative factors in the sense of what is done.

And if the difficulty is the reason why you can’t answer the question which Justice Harlan rephrased, because these are confidential returns, I suppose they’re open to the Government, why aren’t you in a position to say that it is not true, let’s say for 10 years since this business has become current, it is not true that over the period of a decade, returns have been made on the basis urged by the — by — by the taxpayers here and the Government has acquiesced them in such returns, why can’t you make such analysis?

Howard A. Heffron:

I can give this statement which is what we said in our petition for certiorari in Evans that there are 503 cases now pending before the Internal Revenue Service at various stages in which this issue is involved.

Felix Frankfurter:

In reference to (Inaudible)

Howard A. Heffron:

I believe so.

Howard A. Heffron:

Now, that’s 503 cases which are now in suspense because this — the Internal Revenue Service has raised this issue.

Felix Frankfurter:

But it doesn’t — it doesn’t deal with the question of whether this is — the issue is raised anew in deviation from their — what theretofore, had been accepted for a long stretch of time or not, which seems to me, to be unless you tell me I put the wrong the question.

And to me, it’s important to put the right question.

Would you tell me that’s wrong to assume I can understand, but if you say it isn’t a wrong question, it’s a relevant question that the Government can’t answer, then I have difficulty.

Howard A. Heffron:

Well, I can refer the Court to the — to the brief of the American Automotive Leasing Association which was filed in a related case in the Fifth Circuit and which has been made available to counsel and to the Court.

That association which represents approximately 65% of the long term leasing industry in motor vehicles in this country, represented to the Fifth Circuit that the Government’s position on useful life was precisely what they had understood it to be all along.

Now, that brief is on file with the Court.

Hugo L. Black:

May I ask you, has the other side presented in the evidence of a long practice under which the Government has lead people to believe that the method they wished to use of artificial depletion or depreciation has been carried on by the Government?

Howard A. Heffron:

I don’t believe they have.

They have offered in evidence, testimony of accountants as to what useful life means and these accountants have indicated that economic life is what useful life means without indicating which economic factors are critical and which are not.

(Voice Overlap) —

Hugo L. Black:

(Voice Overlap)

One other question.

The Congress has in the case of oil depletion, allowed what many people considered to be deductions so far wear and tear or depreciation which not actually suffered just on the basis of arbitrary figures.

Has Congress done that in any other emphasis that you know of?

I don’t know.

I’m asking for information.

Howard A. Heffron:

I — I can’t answer the — I’m not aware of other cases where it has been unrelated to cost.

Hugo L. Black:

Has the — has the department any regulation on the books that you know of where they have fixed artificial — artificial — the amount of depletion or depreciation sucked and allowed deductions on it.

Inflexible rules, I don’t know.

I’m asking you.

Howard A. Heffron:

No.

There are no inflexible rules.As a matter of fact, Bulletin “F” says on its first page as a caveat to taxpayers.

The estimated useful lives and rates of depreciation indicated in this bulletin are based on averages and are not prescribed for use in any particular case.

They are set forth solely as a guide or starting point from which correct rates maybe determined in the light of the experience of the property under consideration and all other pertinent factors.

Hugo L. Black:

Now, outside of the oil statute, do you know of any statute or — I’m asking you this for information.

I do not know.

Any statute or regulation or practice under which Government has allowed depreciation and — and a wear and tear which is not actually suffered so that people get depreciations and deductions in a greater amount than the amount actually sustained.

Howard A. Heffron:

I’m not aware of it and I should think a taxpayer would have to make a very great showing based upon their legislative history and the language of the Act to justify a situation where he is entitled to deduct on his income tax return as they saw it here.

From the income, he realizes through use of an asset more than the cost of the use of that asset to him during the year.

Howard A. Heffron:

As a matter of fact here, the statute says very specifically that it shall be a reasonable allowance for depreciation and we would say that it is not a reasonable allowance for depreciation when you depart from the fundamental principle of returning to the taxpayer his cost.

Charles E. Whittaker:

Mr. Heffron, is it not essential here in this matter to bear in mind the distinction between depreciation and depletion in answering Mr. Justice Black’s question?

Or, he spoke about the 27% depletion of oil?

You do have other depletion statutes with respect to stumpage, coal, other things, do you not?

But they do not apply to depreciation and that’s your answer?

Howard A. Heffron:

That is correct.

No, the depreciation statutes make it very clear that cost is the ultimate goal of the deduction, the return of cost to the taxpayer in a reasonable way.

Earl Warren:

Mr. Bernhard.

Felix Frankfurter:

Would you be good enough before you get on the way to answer the question that Mr. Justice Black thus, questioned?

The question that interest me so much, what is the basis for saying as you have been saying that this is a deviation of the clutch up from the federal practice, (a) state what the certain practice is.

And (b), how can I find out, I, an innocent lamb trying to find out what is the truth about this business?

Edgar Bernhard:

Your Honor, the record show in the evidence in Hertz cases, that Evans filed its returns on the basis of the physical life, a four-year basis for automobiles, irrespective of holding periods since 1936 and that Hertz has been filing its returns since 1918 on the basis of four-year life, physical life, irrespective of holding periods.

In — in Evans, the year 1955, it says at record page 114, was specifically reviewed and approved except in a — in a — with respect to an item that has no pertinence here and so the —

Felix Frankfurter:

Since 1936, up to —

Edgar Bernhard:

I beg your pardon?

Felix Frankfurter:

Did you say since 1936 in Evans?

Edgar Bernhard:

Yes, Your Honor.

And since 1918 in Hertz.

Felix Frankfurter:

Since 1918?

Edgar Bernhard:

Since 1918 in Hertz.

These income tax returns year after year showed the four-year life for automobiles and if that was not the practice and the consistent practice over all those years, it seems to me that the Government would surely have put someone on the stand to answer, for example, what the — one of the accountants said in the Hertz case, record page 46.

He said he had under his supervision, an informal review of the practice of industry not solely that of a rent-a-car business, but general businesses in many lines.

And just as rough example, we had accumulated companies, whose gross sales were about $5 billion and in those cases, the average life was four years and a preponderant use by these companies was four years.

I — have you referred to page 115 I thought in the Evans case, did you not?

In the — in the Evans, I think at record page —

Hugo L. Black:

I thought you referred to that as the one that would show that they had been making these reports over a certain period of years.

I must have gotten the page wrong.

Edgar Bernhard:

No.

That was — no, the page is — the record page in Evans at 114.

Hugo L. Black:

114.

Edgar Bernhard:

That indicates that the 1955 return was specifically reviewed and the — a record page on Hertz’s practice is 50, that it has filed these returns (Voice Overlap) —

Hugo L. Black:

What page — what page is that?

What page —

Edgar Bernhard:

Record page 50 in the Hertz.

Oh, the business since 1958.

I see.

I’m sorry.

That — that Hertz has been in business since 1950 — I mean since 1918, I’m sorry —

Hugo L. Black:

What year?

Edgar Bernhard:

— at record page 50.

Hugo L. Black:

But where is the evidence to which you referred they’d been making this same kind of return and has been accepted?

Edgar Bernhard:

Your Honor, I’m pretty sure that Mr. Jacobs testified that they’ve transferred.

Tom C. Clark:

In the finding of page 129 in Hertz, to that effect?

Edgar Bernhard:

I beg your pardon, Mr. Justice Clark?

Tom C. Clark:

Page 129 of Hertz, the Court’s opinion, was that clear that the right dollar return amounts (Inaudible) long continued interpretation of his own regulations and he was on?

Edgar Bernhard:

Yes, Your Honor.

Tom C. Clark:

Was that there?

Edgar Bernhard:

That’s correct, Your Honor.

And — and the long and continued interpretation of its regulations was to permit, in fact, to contend for the four useful life for depreciation purposes.

William J. Brennan, Jr.:

Mr. Bernhard, at page 111 of the Hertz statute, as part of Judge Leighton’s opinion, there’s a table preceded by the statement of Judge Leighton on its income’s tax returns for its tax years and so forth, Connor claimed the following amounts computed as indicated that he has a table and that he — has this some reference to the way they return themselves who have filled out in that year?

Edgar Bernhard:

Yes, Your Honor.

William J. Brennan, Jr.:

In other words, on each return that there appear in that column, four-year life using rates of and so forth?

Edgar Bernhard:

That’s right.

That was the method of computation which he used.

William J. Brennan, Jr.:

No, no.

But my point is did the Hertz’s return or the Connor return have a table which shows the — that method of computation, namely, the expressed reference of the four-year life?

Edgar Bernhard:

Oh, no, Your Honor.

This is a summary.

This is a summary made up of those three returns, the three returns and the three — for the three years in question here.

William J. Brennan, Jr.:

Well, then, if — if that is not so, do you know whether the returns themselves indicated that the computation was based —

Edgar Bernhard:

On four-year life?

William J. Brennan, Jr.:

— so notified the —

Edgar Bernhard:

Oh, yes, Your Honor.

William J. Brennan, Jr.:

— review on a four-year life basis?

Edgar Bernhard:

Oh, yes, Your Honor.

I — I’m satisfied.

I’m (Voice Overlap) —

Hugo L. Black:

Where is — where is that?

Edgar Bernhard:

Now, I — I’d like to — I’d like to find that record and perhaps I can have someone search for it because the consistent custom of the rent-a-car companies in these two cases —

William J. Brennan, Jr.:

No, but — if I may, and supplementing what Mr. Justice Black has asked you.

Is there anything in the record, if this is what appeared on each annual return namely, expressed notice that you are using a four-year life basis?

Is there anything in the record to show that this was done for tax years before 1954?

Edgar Bernhard:

I’m — I am very sure that’s true, Your Honor, because I — I am satisfied that both these companies followed this practice for many, many years.

William J. Brennan, Jr.:

Well, whether they followed it or not, what I’m —

Edgar Bernhard:

On the returns?

William J. Brennan, Jr.:

— what I am interested in this —

Edgar Bernhard:

Yes.

William J. Brennan, Jr.:

— is whether it —

Edgar Bernhard:

On the returns, Your Honor.

William J. Brennan, Jr.:

— appeared affirmatively on the returns that the computation was based on four-year life.

Edgar Bernhard:

I am satisfied that’s true, although I cannot give, Your Honor, the record page at this time and —

William J. Brennan, Jr.:

Well, can you give it to us later?

Edgar Bernhard:

I would like —

William J. Brennan, Jr.:

I’m just completely have to see in these cases.

Edgar Bernhard:

I would like very much to send the Court a memorandum, if I may, on — on this (Voice Overlap) —

Hugo L. Black:

Can you give us later, if you can find it?

Edgar Bernhard:

I beg your pardon?

Hugo L. Black:

Can you give us later if you can find it, references to the kind of interpretation which have been mentioned here, not using the word, “useful life”, but which showed that the Treasury has had the practice of allowing people whether what you call a useful life for four years, even more of that with wholly charge off something it left them who had paid probably of 50% value.

Can you refer us to such interpretations you say there have been?

Can you refer us to them, when you send them the other information?

Edgar Bernhard:

Sure, Your Honor.

I — I’ll do that (Voice Overlap) —

Earl Warren:

You may respond to it Mr. — you may respond to it Mr. Heffron to (Voice Overlap) —

Felix Frankfurter:

And as I understand the Government’s argument — as I understand the Government’s argument, it isn’t of the holding of less than four years, but that the practice of the business was not to hold it for four years, namely that the sales were usually made within whatever the period is, two years is it, Mr. Bernhard?

Edgar Bernhard:

It’s — it’s something over two years, two years and three months —

Felix Frankfurter:

So that whatever —

Edgar Bernhard:

— so as what the average contended for by the Government.

Felix Frankfurter:

Must be — must be accepted practice of the business is at the outset, not longer than four years?

Edgar Bernhard:

Now, Your Honor, the testimony — the clear testimony in Hertz and in Evans uncontroverted, is that there is no practice.

There is no rule and that the — the selling of automobiles, the time of selling the automobiles is dependent upon unpredictable factors.

It is no part of wear and tear.

It is dependent upon such factors as strikes and lockouts in automobile factories, in the companies which delivered the cars.

What our competitors do, war or peace, weather conditions even, new demands, new compact cars for instance, shall they sell their cars and buy compact cars or will that compact car not be accepted.

It’s easy to hindsight, to use hindsight, but most difficult to say in 1948 what you ought to do in 1950.

Now, whether you are going to sell your cars in 1950, 1949 or 1952 and what the conditions will be which will permit you to sell and buy new ones or whether they will not be available.

Felix Frankfurter:

Well then, why is there this — why is there this uniformity to which I understood you to exceed a minute ago, if knowing the holdings are not for four years, but are for two years or a few months?

Edgar Bernhard:

Well, Mr. Justice Frankfurter, what I said was that in the years in review here, the years in issue here, it is true and we would not contest that we did not hold the cars for four years.

Felix Frankfurter:

Well —

Edgar Bernhard:

But actually, the — the figures in the record show a wide variation because of these unpredictables.

May I just say —

Earl Warren:

May I ask you one more — one more question, during these years of practice that you have just told us about, so far as depreciation is concerned, did you also claim, as capital gains, the difference?

Edgar Bernhard:

Where we had a —

Earl Warren:

Where you had a sale?

Edgar Bernhard:

Where we had a gain?

Earl Warren:

When you had a gain, you — you —

Edgar Bernhard:

(Voice Overlap) —

Earl Warren:

— have that’s why you practice also?

Edgar Bernhard:

Yes, sir.

May I just say —

Earl Warren:

Well, you may have just one minute to — we’d take from there.

Edgar Bernhard:

I — I would like to say in just that one minute, if the Court please, that — that I think we have clearly shown and I think the record in both cases clearly shows that until the Treasury’s regulations of June 1956, there were no definitions of useful life and salvage value in the regulations and the consistent interpretation of the courts and the Commissioner himself was our way.

I — I want to add only this much with reference to Massey, the — the case which the Court will hear next.

I — I just want to remind the Court again that we do not represent Massey.

We are — we consider it the form to in — in certain respects, to our two cases, Evans and Hertz and it is not contained in the case.

Potter Stewart:

I gather (Voice Overlap) —

Earl Warren:

All right.

Potter Stewart:

— its very hard to find, to understand double declining balance, I will have to get it out of your sleeves.

Edgar Bernhard:

I would be happy to recite the double the declining balance arrangement now and I’m awfully sorry that we did not get to it.

If — if I could have lived to extend my time just a couple of minutes for that purpose, I would be glad — in fact anxious —

Potter Stewart:

Well, is that a crucial element in the Hertz case?

Edgar Bernhard:

No, Your Honor.

Actually, I — I do not believe it is necessary to understand double declining balance in order to arrive at the — at the answer to that basic question here, which is, is physical life the full — is useful life, the full physical life as interpreted consistently for 40 years or is the Government now espousing an old concept instead of a brand new one?

Felix Frankfurter:

Well, if it isn’t relevant, then it will help me at least, not to be told what it is.[Laughter]

Charles E. Whittaker:

Mr. —

Edgar Bernhard:

Thank you very much.

Charles E. Whittaker:

— Bernhard —

Earl Warren:

Very well.

Charles E. Whittaker:

Mr. Bernhard, might — might I ask you, sir, why is it you — that you feel you want to distinguish your cases from Massey?

Edgar Bernhard:

Yes, Your Honor.

In the — in the Massey case, the — the record, I believe, shows that Massey was a dealer in cars, not through of Evans or Hertz, that he, from time to time, shifted cars, which he owned as a dealer, into car renting or leasing.

And then shifted them back or sold them, let’s say after a six-month period or shortly thereafter and there is no such indication in either Evans or Hertz, plus the fact that he consistently sold the cars.

I think the Court will find consistently sold the cars for more than his cost and the — the dealer question is very much in the — in the Massey case as it is now.

It’s not at all in the — in the Evans or Hertz case.

Earl Warren:

Very well.

Edgar Bernhard:

Thank you very much.