Massey Motors, Inc. v. United States

PETITIONER:Massey Motors, Inc.
RESPONDENT:United States
LOCATION:Fleetwood Paving Co.

DOCKET NO.: 141
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 364 US 92 (1960)
ARGUED: Mar 29, 1960 / Mar 30, 1960
DECIDED: Jun 27, 1960

Facts of the case

Question

  • Oral Argument – March 30, 1960 (Part 2)
  • Oral Argument – March 29, 1960
  • Audio Transcription for Oral Argument – March 30, 1960 (Part 2) in Massey Motors, Inc. v. United States
    Audio Transcription for Oral Argument – March 29, 1960 in Massey Motors, Inc. v. United States

    Audio Transcription for Oral Argument – March 30, 1960 (Part 1) in Massey Motors, Inc. v. United States

    Earl Warren:

    Number 141, Massey Motors, Incorporated, Petitioner, versus United States.

    Mr. Frazier, you may proceed.

    William R. Frazier:

    Thank you, Mr. Chief Justice Warren, may it please the Court.

    I of course, have — have the opportunity to hear the rather voluminous arguments of my predecessors in the two cases, namely Evans and Hertz.

    And I’m very much interested in it naturally.

    I will attempt not to be repetitious as much as I can.

    Frankly, I think, the issues have been somewhat unduly clouded.

    Firstly, I would like —

    William J. Brennan, Jr.:

    That’s in understatement.[Laughter]

    William R. Frazier:

    First, Your Honors, I would like to make this comment.

    Apparently for some reason there, my client, Massey Motors, has gotten too hot to handle, as far as these three cases can — are concerned, but I would like to point out Your Honors that I — my case was a first of these cases won by a taxpayer.

    And my colleagues, Mr. Bernhard here, was very, very willing to cite my case both in the Hertz case, before the lower court and it was — and it was commented on, with approval, by the Ninth Circuit in the (Inaudible) case.

    I have other of these cases too, Your Honor, which they also cite in their brief.

    Namely, of Lynch-Davidson cases which are now on appeal before us — Fifth Circuit and Davidson versus Tomlinson.

    To be in with Your Honors, it seems to me that this whole point involved here today, is as much a pure question of tax law as can be brought before a court.

    You can’t completely, as I understand it, divorce the facts from the lawsuit.

    But in this situation, we come down to almost a pure question of law.

    And I’ll try to state it once again.

    The question, as I understand it, is for the purposes of depreciation.

    What?

    The term, “useful life” under the 1939 Code, met the physical or economic life to the asset as we, the taxpayer, contend or whether as the Government contends, it is the useful life as shown by the particular trade practices of a particular individual taxpayer.

    Now, the question of salvage value, of course, is a reciprocal of the definition of useful life.

    It follows like day from night or night from day.

    Once you determine the proper legal definition of the term, useful life for purposes of depreciation under Section 23 (l) of the 1939 Code, the reciprocal factor, namely, salvage value, will follow.

    And I mean by this, if the Court should agree with the Government that for this purpose, the term useful life means the useful life in the taxpayer’s business is undisputed that in the Massey case, our actual use was one year.

    That Your Honors is a trade practice in the automobile industry.

    All that you know, from your own common knowledge, that automobile dealers keep their personnel in current model cars and if that the manufacturers change these models approximately once each 12 months, sometimes a little more frequently, sometimes less frequently, but approximately one year.

    In this rental car business, it’s clear that they do likewise.

    They must, as a matter of competition, keep their units that they’re offering for rental, new cars.

    They gain operating advantages by way of expenses that way.

    William R. Frazier:

    They also, as a matter trade practices, make higher recoveries on the resale of those units.

    And it has become almost universal practice in both the rental car business as well as the new car sales operation to use these cars one year.

    Now, if the Court should agree with the Government that that useful life is one year, then we lose because the salvage value would necessarily have to be the amount that we received on the sale of the units.

    On the other hand, if the Court —

    William J. Brennan, Jr.:

    May I ask, Mr. Frazier?

    William R. Frazier:

    Yes, sir.

    William J. Brennan, Jr.:

    Sometimes, am I correct that — that salvage value maybe greater than the original cost?

    William R. Frazier:

    Yes, Your Honor.

    And — and my situation and I will touch on that briefly.

    Would Your Honor like me to comment on the point?

    William J. Brennan, Jr.:

    No, as your — your own —

    William R. Frazier:

    On the other hand, if the Court, sees fit under the 1939 Code, to agree with us that useful life means as inherent or abstract or potential useful life, then it would seem to me, on this record that we are — that the judgment of the Fifth Circuit should be reversed.

    And that we would be entitled to use an estimated useful life for purposes of computing straight-line appreciation of three years.

    We, of course, would also have a question of salvage value which would necessarily cause the case to be remanded for the taking of testimonial on that point.

    And that arises this way, Your Honors, I think the history of this thing is of some materiality here.

    My case is a fairly early one.

    You will notice from the plaintiff’s Exhibit 5, which is attached to the record.

    The examining agent raise this point on us in April of 1953, rather than go through other administrative procedures and remedies, we elected to pay this tax, forthwith, file the claim for refund, controverting the adjustment of the agent.

    And in due course, institute in our suit in the local District Court, seeking an adjudication of this matter by way of refund suit as opposed to litigation before the Tax Court, as was done in the Evans case.

    The Hertz case went — as ours did before the District Court in Delaware.

    Now, if Your Honors would examine the first page or two, of the plaintiff’s Exhibit 5, you will see that examining agent didn’t raise any issue as to terms of estimated useful life or salvage value, because that wasn’t the practice of the Treasury then, in these cases.

    There affair was that inasmuch as we are admittedly an automobile dealer, namely, operating under a franchise from Chrysler Corporation, in the Jacksonville the Florida area and incidentally one of the largest Dodge and Plymouth dealers in the country.

    Since we were in that business, that these company cars remained at all time, stock in trade that they never changed their character to that of a depreciable asset and hence, we were subject, as a matter of law, to know depreciation and hence, the depreciation claim was disallowed in toto.

    And our capital gain claims under Section 117 (j), were reversed to that of ordinary income.

    And that, Your Honors, was the practice.

    I have a number of these cases.

    One of them that I had was for a corporation known as Duval Motor Company, which is a Ford dealer in the Jacksonville area, which we elected to take the Tax Court.

    In that case, they used a four-year estimated useful life, with no salvage value and the case went up on the issue as to whether or not, these cars were held primarily for sale or primarily for use in the business.

    If they were held primarily for use in the business, they would qualify for capital gains treatment under Section 117 (j) upheld in service for six or more, under its expressed terms.

    If they were inventory property or property held primarily for sale, then the school is out, so to speak for us, we didn’t qualify for Section 117 (j).

    William R. Frazier:

    And from the facts, the Tax Court concluded that the automobiles in question, were held primarily for sale and that was the end of the case.

    Had the Tax Court held the units, held primarily for use in the business, we would have been entitled to our depreciation as claimed, because that was not an issue in the case.

    The first of these cases that arose was the W. R. Stevens Buick Company case which I think was decided in approximately 1951.

    There, a Buick Company, having these executive company cars, claimed depreciation on them in capital gains treatment, it was disallowed.

    Namely, the capital gains element was disallowed, on the same theory, namely, stock in trade.

    They went to the Tax Court.

    The Tax Court agreed with the Commissioner’s determination and they took an appeal, I think, to the Fourth Circuit, wherein a split decision — the decision the Tax Court was affirmed.

    Interestingly enough, for the next years, the same corporation elected to pay the tax and went up through their own local United States District Court, where a contrary finding was made and they received the capital gains treatment and the Government took no appeal.

    The next of these cases was (Inaudible) Chevrolet Corporation, which is the same as our case and they — accept it was Chevrolet dealership in Knoxville, Tennessee.

    There, the Tax Court interestingly enough, following its prior decision in the — in the Stevens Buick case, held that the cars were, in fact, held primarily for use of the business and the depreciation claimed a four-year straight-line with no salvage value, was automatically allowed.

    Now, I point this out to Your Honors, to show and I think almost conclusively demonstrate that this is in the nature of an afterthought.

    This argument is the — with which we are being presented here today.

    I’ll tell Your Honors, frankly.

    I do not think that it was proper for this argument to be made in our case, because it had never, as far as I knew, up to the point that the record was closed in the District Court that we had any such issue.

    The — the case was tried on the theory that it was a (Inaudible) case namely, one of these cars were held primarily for use in the business or whether they were inventory property.

    If used for business, we got our depreciation because they had been no disallowance of our three useful life.

    They didn’t say we should use four or five.

    They didn’t say it was one year.

    They simply disallowed the depreciation in toto on the theory that it was stock in trade.

    Now, as far as rental business is concerned, Philber Equipment Company is a leading decision in this field, is on the same footing.

    There, the question was simply whether the rental cars were held primarily for sales, sets business practice showed that they were sold after approximately one year of use.

    And there, the Third Circuit reversed Judge Ron’s decision from the Tax Court and held the taxpayer was primarily holding those units for rental and hence, was entitled to capital gains treatment.

    Now, the same argument is being made here today.

    It could have been made in the Philber Equipment case, but the fact to the matter is that the Philber case arose earlier than these present cases and hence, this afterthought had not been dreamed up at that point.

    Now, Your Honors — specifically now, with respect to the resale price of these automobiles.

    First, I would like to point out that the taxable years involved in my case for the calendar years 1950 and 1951, bearing in mind also, that my client is an automobile dealer franchised by Chrysler.

    Hence, the units in question are purchased at factory list prices and, of course, are carried in to our depreciation schedules at that cost, which may run as much as 20% to 25% less than the — than the normal retail price for the cars.

    In addition to that, if Your Honors recall, the Korean War was in progress at that time and is common knowledge that economic conditions caused the automobile business to improve greatly, because the supply of cars was diminished and the demand accelerated very similar to the years immediately following World War II.

    Hence, we had a ready market for the cars and that, of course, is true in Evans too, they can’t deny it.

    Their cars were sold at slightly less than cost, but percentagewise, it’s very small.

    William R. Frazier:

    Our cars in the aggregate, for the two years in question, were sold for slightly in excess operational cost without regard to the depreciation.

    And we say, Your Honors, several things in that connection.

    One is — as — a point was made in the record in this case below that at the time the case was tried, that was not the situation.

    That economic condition had changed in the point that they were not recovering that full cost at all.

    I would also like to point out it, Your Honors, that as far as we know, price fluctuations are not to be considered for purposes of depreciation.

    For example, we know of no authority, which — which would prevent a taxpayer from depreciating a building, for example, which happened to have been bought during the depression which today is worth many times its original cost.

    As we understand it, the depreciation that’s properly chargeable it’s — if it’s a 25-year useful life, continues, notwithstanding the fact that the market value of the particular asset maybe great in excess of its cost.

    Depreciation, after all, is – is basically a — an accounting concept, a bookkeeping entry, if you will, where original capital cost are recovered over the estimated useful life of the asset.

    Now, we readily admit, Your Honors, that this creates a rather peculiar economic situation with respect to our case for the years 1950 and 1951.

    But we don’t think that the whole law or practice or administrative procedure, if you will, of the Treasury for 40 years which has been discussed previously, should be upset, just because I have a rather peculiar case here today, going out of the fact that my client is an automobile dealer and gets these cars at somewhat lesser cost and the fact that we were in the Korean sellers market insofar as automobile dealers were concerned.

    Felix Frankfurter:

    Have you established this 40 year practice, for which you just eluded that’s more conclusively than it has enough to this point?

    William R. Frazier:

    Your Honor, that [Laughs] — Mr. Justice Frankfurter, that is rather elusive point.

    I would say —

    Felix Frankfurter:

    (Voice Overlap) —

    William R. Frazier:

    — out or rather elusive matter.

    Felix Frankfurter:

    Elusive?

    William R. Frazier:

    I would say in answer to your question.

    Felix Frankfurter:

    The most interesting adjective, I’ve heard.

    William R. Frazier:

    Yes.[Laughter]

    Felix Frankfurter:

    Fixed on what is called a 40-year practice.

    William R. Frazier:

    Well, Your Honor, I would answer the question this way.

    I think that the opinion of the Ninth Circuit in the Evans case will state that to Your Honor and more expertly than I ever could, because that — that was a unanimous decision and in that case, the Court enumerated from the facts and record before it, that practice and came to that conclusion.

    And it did so, based on primarily on one thing and that’s what I want to discuss, because I think in the prior argument, this has been greatly confused.

    The — as I understand the Ninth Circuit’s opinion, which we are urging the Court to adopt as its own here in derogation of our own Fifth Circuit split decision in my case —

    If you’d ask that —

    William R. Frazier:

    — I think, in reading the Ninth Circuit case, that they were relied principally on the Treasury Regulations.

    And I want to state this —

    Felix Frankfurter:

    As the — the construction be put upon.

    William R. Frazier:

    That is correct, Your Honor.

    Now, I think there’s been some confusion as to what regulations we’re talking about.

    William R. Frazier:

    To begin with, I would like to point out that my case is more nearly a kin to the Evans case than the Hertz case, because as Your Honors know, both the Evans and my case arose under the 1939 Code and the regulations issued there that the Hertz case arose under the 1954 Code and the 1954 Regulations issued in 1956.

    Hugo L. Black:

    I thought both of them in denied kinship with your case?

    William R. Frazier:

    Oh, they — they do, Your Honor.

    I — I [Laughter] — much too hard to handle, but I think in the final analysis, Your Honors will see that we’re on identical footing.

    Felix Frankfurter:

    (Voice Overlap) they may not have realized that they would thereby the stirring sympathy for you?

    William R. Frazier:

    I see, well I’m sorry, now [Laughs]

    William J. Brennan, Jr.:

    That’s too hot to handle because of this —

    William R. Frazier:

    Being an automobile —

    William J. Brennan, Jr.:

    — recovery?

    William R. Frazier:

    Yes, sir.

    William J. Brennan, Jr.:

    Or the part of the excess of recovery and (Voice Overlap) —

    William R. Frazier:

    I think so, Your Honor.

    William J. Brennan, Jr.:

    That’s right.

    And that’s not an appealing case in other words.

    William R. Frazier:

    That’s right, Your Honor.

    To that extent I’m on somewhat weaker grounds in the — to all these.

    But — but basically, the legal point is identical in all these cases.

    Now, Your Honors, with respect to these regulations as the Court in the Ninth Circuit opinion in the Evans case, that went into great detail to point out that the regulations — number one, that Section 23 (l) is very broad.

    It simply provides, by its terms, that in computing that income, there shall be allowed a reasonable allowance for job exhaustion, wear and tear, including a reasonable allowance for — of obsolescence.

    Now, Your Honors, that is very, very general.

    It really doesn’t tell you much.

    Hugo L. Black:

    That statute?

    William R. Frazier:

    Or — that is the statute under which we — these — these Evans and Hertz — or rather Evans and my case, fall Section 23 (l) of the 1939 Code.

    That doesn’t even use the word depreciation as I read it.

    Now, that, of course, statute is intended to permit the depreciation allowance obviously and is certainly is a classic example of a provision of the Internal Revenue Law, under which the Commissioner, under the inherent powers provide Section 3791 of the 1939 Code, was entitled to issue regulations.

    That is regulations which would more make the statute workable and more specific and we think, Your Honors, that those regulations issued under this Section of the law have the full force and effect of law.

    If there ever was a Treasury Regulation which should be given that interpretation, under the decision of this Court in Massey versus Commissioner and Helvering v. the R. J. Reynolds Tobacco Company, we think that the regulations issued under this section are of that character.

    Now, the regulations as it pointed out by the Ninth Circuit which were issued in 1919 and they were Treasury Regulations 45, dealing with this subject, are the ones with —

    Hugo L. Black:

    Is that in your brief?

    William R. Frazier:

    I — we have alluded to them, Your Honor.

    William R. Frazier:

    And they’re more specifically set forth in the Ninth Circuit opinion.

    It was in that — and those Treasury Regulations, Your Honor, remained in full force and effect until 1942.

    Now, in Treasury Regulations 45, with respect to depreciation, may refer to the useful life of property in the business.

    And Your Honors will recall that Mr. Heffron has cited those regulations as his administrative authority in support of his position.

    And they do admittedly use the term, useful life in the business.

    Hugo L. Black:

    Why do you emphasize —

    William R. Frazier:

    I emphasize —

    Hugo L. Black:

    I don’t think it —

    William R. Frazier:

    — it for this reason, Your Honor, that in 1942, Treasury Regulations 111 were issued replacing or repealing, if you will, Treasury Regulations 45.

    And those regulations which were in effect until the adoption of the 1954 Code Regulations dropped the phrase, “useful life in the business,” and instead defined it, as the “useful life of the asset”.

    Now, that phrase is inherent in these regulations which were in full force and effect during the taxable years involved in both the Evans case and the Hertz case.

    Hugo L. Black:

    I don’t like to bother you, but would you mind telling me what you construe that to mean in line with your argument?

    William R. Frazier:

    I construe it, Your Honor, at — as — as was expressly stated by the judges of the Ninth Circuit, they construe that —

    Hugo L. Black:

    I like to view that in your own words.

    William R. Frazier:

    I would do it this way.

    Hugo L. Black:

    I think we like (Voice Overlap) —

    William R. Frazier:

    That those — that the phrase, “useful life in the business,” refers to the inherent very economic and useful life of these assets.

    Useful life in —

    Hugo L. Black:

    You mean the — the length of time they can be economically (Voice Overlap) —

    William R. Frazier:

    That is correct, Your Honor.

    Now, the Ninth Circuit judges construe that to mean simply referring to the class of assets, namely, depreciable assets which is a reasonable construction to place on this matter.

    But at least the regulations under which you could come to this rather tenuous conclusion were not in a — force and effect, during the tax years involved in this case of the Evans case.

    Now, I thought at that point, perhaps had not been strong enough brought to Your Honors attention.

    Now, I think —

    William J. Brennan, Jr.:

    Now, in that change in the regulations in 1942 is reasonably explainable isn’t it, by a statutory amendment in that year allowing depreciation on certain on business product?

    William R. Frazier:

    That, Your Honor, was the conclusion of Judge Tuttle in the opinion of this Circuit.

    William J. Brennan, Jr.:

    Now —

    William R. Frazier:

    He — he — it was necessary to — to make some such remark as that because there was an actual change.

    William J. Brennan, Jr.:

    In the statute?

    William R. Frazier:

    That’s right Your Honor and he refers to — that is Judge Tuttle, refers to a — a legislative history of the regulations.

    William R. Frazier:

    We point out in our brief, we don’t really understand what he is referring to because we don’t know of any legislative history regulations and we — we conclude —

    Potter Stewart:

    But if —

    William R. Frazier:

    — that part of the Commission — excuse me.

    Potter Stewart:

    Excuse me, is — I — I am right, am I not, I — I’m correct —

    William R. Frazier:

    Yes, you are.

    Potter Stewart:

    — I’m right when — factually correct in thinking that in 1942, the statute itself was amended to —

    William R. Frazier:

    Yes.

    Potter Stewart:

    — for the first time deduction of certain non-business property?

    William R. Frazier:

    Yes.

    Property used in the production of income.

    Potter Stewart:

    In depreciation deduction?

    William R. Frazier:

    Yes, sir.

    That is correct.

    And yes, they — well, that property of the change, we don’t know.

    But it’s our position that as a taxpayer, bear in mind that these regulations is supposed to be read and understood by a layman, businessmen, as well as lawyers and accountants and judges for that matter.

    Potter Stewart:

    And not quite —

    William R. Frazier:

    They, we contend, that the Treasury either advertently or inadvertently, by amending those regulations in 1942, gave us the support for our construction of the term, “useful life”.

    It would mean just like Congress writes a law which gave us that right.

    Maybe they did it inadvertently.

    But if it’s there and clear, then we’re entitled to it until it changed.

    And that —

    Felix Frankfurter:

    But when he’s determining whether they gave it — gave by inadvertent, may not be just or unjust if those words maybe used for reference to tax matters though I believe, most inapplicable to any form of sanitation.

    May not — the consideration of the consequences be relevant in the construction of a regulation as much so as in the construction of the statute.

    William R. Frazier:

    Yes, sir.

    I think so.

    Felix Frankfurter:

    And if you emphasize the taxes may have by inadvertence, maybe it wasn’t done at all.

    William R. Frazier:

    Well, that is — of course, is the point.

    Felix Frankfurter:

    I mean the words maybe susceptible of the old (Inaudible).

    William R. Frazier:

    Yes, sir.

    Felix Frankfurter:

    But — but you’re not imprisoned in the words —

    William R. Frazier:

    No, I — I agree, Your Honor.

    In fact that, of course, is the crux of the case.

    Felix Frankfurter:

    That’s the crux, indeed.

    William R. Frazier:

    As we say it.

    And of course, we are — urge the adoption of the Ninth Circuit’s in view of this matter, as opposed to the view of the Fifth Circuit and the Sixth, which incidentally, the Sixth Circuit as I read it in the Hertz case, was largely influenced by the decision of our case in the massive situation.

    I would like to suggest, Your Honors, that along this line as to Treasury Regulations and their validity and — and effectiveness on this problem, what’s having assumed that the Treasury have the right to issue these regulations and that they are valid, it would seem to me that they have the right in 1956 to amend them again.

    And that’s where I have difficulty in seeing how you can make the same argument for a case arising under the 1954 Code, on these identical facts, as you can under the 1939 Code.

    It seemed to me, the Commissioner under the 1954 Regulations has with great particularity, specified that he is now construing the term, “useful life,” first — the first time defining incidentally, as the useful life in a particular taxpayer trade of business, and the salvage value equals the amount that he is reasonably calculated to recover.

    Potter Stewart:

    Do you refer to 1954 Regulations (Voice Overlap) —

    William R. Frazier:

    Yes, sir.

    And course —

    Potter Stewart:

    And as to the 1954 Code, but promulgated 1956 —

    William R. Frazier:

    Yes, sir.

    Potter Stewart:

    — is that it?

    William R. Frazier:

    And as Your Honor knows, the District Court in the Hertz case and I think properly so, construe those regulations as operating prospectively only since they were such a radical departure from law, if you assume they have the four full force and effect of law, which certainly they were.

    That could have — those regulations could have just as well, been written in the statute, by Congress, because of that’s specific and complete.

    And we think they — they are, for all intents and purposes, equivalent from the statute itself.

    And therefore, there might be a difference, a — a logical difference in deciding the Evans and the Massey case one way and the cases arising on the 1954 Code, another.

    I don’t urge that, but I think it would be some logic and basis for it.

    Just a few comments Your Honors, because I would like to reserve a few minutes for rebuttal, if I may?

    (Voice Overlap) —

    William R. Frazier:

    This matter before Your Honors today, even though my case is a small tax wise involves not too much money, it’s mostly a matter of principle, has very far reaching implications as a matter of policy, if you will.

    The — by adopting the Government’s theory, the Court will be injecting the subjective test, if you will, for purposes of computing depreciation on ad hoc method, an every man for himself method.

    Now, that’s going to — that’s going to probably result in more loss of revenue than they’re going to pick up out of this rental car companies and my company, and related companies.

    Because the taxpayers will now be able to gain accelerated depreciation on a grand scale by taking assets which normally, under the old concept, carried a 10-year useful life and actually putting him into service for five years and charging them off in five years.

    Of course, the statute of limitations would bar at least a portion of the years on reexamination as far as salvage values is concerned and the — unless the Congress changes Section 1231, which is the present counterpart of Section 117 (j).

    There will be long-term capital gain treatment realized.

    Conversely, it can work against the taxpayer.

    He may, just as well, take an asset that would carry a 10-year useful life and everyone agrees that it did.

    But as a matter of trade practice or business judgment or necessity, he might sell that machine in five years.

    William R. Frazier:

    Well, of course, he would report any gain or loss on that as the difference between his cost and the depreciation he’d taken on a 10% basis, if it were straight line.

    The treasury, they say, “Oh, no.

    You can’t do that because the useful life of five years, and even though you can’t get a tax benefit for some of this, you’ve got to reduce that cost as if it they’d been set up on a 20% basis and hence, your capital gain is much larger.”

    So, it will — it will add a great deal of confusion in bickering and we think, it is a matter which should be properly disposed off after due consideration by the Congress, rather than having the — the Government seek to get a retroactive adjudication, which will hit taxpayers out of the blue, if you will, Your Honors, by — by court decision.

    And it is for these reasons that we honestly urge Your Honors to see, if it all possible, whether you can adopt as the — as the disposition on this matter of the theory and rational, but what I think is excellently recent decision of the Ninth Circuit.

    And I think, the equally well-reasoned decision of the lower court, that is the trial court, in the Hertz case, wherein he held that under the — the judge held, that under the 1939 Code, we would be correct.

    If our case had come before him, he would have held for us, for holding that.

    The regulations on the — that four Code being valid, could operated from their date of promulgation.

    Thank you.

    Earl Warren:

    Mr. Heffron.

    Howard A. Heffron:

    First, there was testimony in both the Evans and Hertz cases, if I may advert to them for a moment, that in the past, the taxpayers had used cars in the rental business for five, six, and as much as seven years.

    So the absence of any — showing here of the disallowance of the claim for depreciation, I think, has no weight whatever, until we know what precisely, the facts were with respect to the practice to any — in any particular year.

    Of course, also, the Government is not contending for a rule which would provide that if, in fact, the taxpayer disposes of a particular asset at a certain time, that fixes its useful life.

    This is a rule based upon experience as all depreciation is and the fact of a disposition at a particular time only if cumulated over a rather lengthy period of time would result in a sufficient showing of past experience to provide a basis for drawing the inference that as a reasonable expectation, this taxpayer will only hold a car for a given period of time.

    Now, with all the — old board of tax field cases, which had been referred to and which is cited in the briefs, it is true that there are some mention made that the taxpayer traded in cars from time to time in two years.

    Although the Commissioner was contending for a useful life of a four years, but there was never a showing in those cases that this practice had reached such dimensions and had continued for such a period of time that the Commissioner would’ve been warranted in saying on the basis of your past experience, we cannot apply four years, we must make it less.

    There’s no showing in the records in those cases that those facts were ever placed in evidence.

    And this whole concept of useful life, as we define it, is based upon a factual showing of past experience.

    Potter Stewart:

    Mr. Hefforn, your statement to us just now, that you’re not contending for a rule which depends upon how long the taxpayer in fact, held this particular asset.

    Howard A. Heffron:

    No.

    Not for purposes of computing the —

    Potter Stewart:

    For purposes of computing (Voice Overlap) —

    Howard A. Heffron:

    — depreciation reduction.

    Potter Stewart:

    — of the rate —

    Howard A. Heffron:

    In depreciation.

    Potter Stewart:

    Right.

    Is that statement to us, intended to answer the last part of Mr. Frazier’s argument in which he anticipated for us various inequitable results, both with the taxpayer and for the Government?

    Howard A. Heffron:

    Yes.

    This is not a rule based on hindsight.

    If the estimate was reasonable to begin with, based upon past experience, it is not changed because in fact, taxpayer disposes of it in a shorter period of time, that this is not changed with respect to prior years, as to which deductions have already been taken.

    Howard A. Heffron:

    We don’t upset the (Inaudible) years later, because the taxpayer in fact, disposed of his asset in a shorter period of time.

    If the reasonable expectation he had, when he acquired the asset, is found that upon past experience and an adequate body of it.

    Now, contrary to what my adversary has argued, useful life had never meant — never meant inherent or abstract useful life or as he calls it, inherent economic life.

    All the regulations, all the administrative materials, Bulletin “F” and it does in different places is key to the circumstances of the particular taxpayer’s operation.

    It says specifically, his repair policy must be taken into account.

    It says specifically, the amount of use he gives it, must be taken into account.

    The needs of his growing business must be taken into account.

    Inadequacy to the needs of his business must be taken into account.

    In short, the concept has never been an abstract one.

    It has always been a very specific detailed inquiry into all of the circumstances, those which affect the physical rate of the decay and those which affect the economic determination of life.

    All of those factors have been taken into account and there is no taxpayer who can state that under the regulations or the administrative materials, or the cases that he could draw the inference that a Government would disregard every part in an economic fact relating to his business in setting the term of useful life.

    That is just not so and I could state that unequivocally to the Court.

    Felix Frankfurter:

    What would you do with the new dealer whose had no experience as to whom there has been no experience.

    Howard A. Heffron:

    Well, in that instance probably, we might have to resort to the experience in the industry.

    But it has never been the case that the abstract concept of useful life applied as I read from Bulletin “F” it is a starting point because you have to have a starting point in these cases.

    And as the starting point based on experience that is true, but one which always has to be modified depending upon the circumstances of the particular case.

    That’s why we modify it for repair policy.

    That’s we modify it for climate.

    That’s why we modify it for operating conditions.

    And we say that is why we modify it because of the conditions of the rental industry, to wit, customers demand new cars or late model cars.

    That’s an economic fact of life.

    No rental car company can disregard.

    They don’t disregard it in fact, because they buy and sell cars on an average of two years.

    Why should they be permitted to disregard it for purposes of depreciation when we are looking for cost?

    Now, Massey Motors is a case which is a kin to the other two cases.

    It simply presents, in exaggerated form, the consequences of this artificial, unreal concept to of useful life.

    Here is the taxpayer who buys a car for $1800.

    He sells it within the year for $1900.

    And he says the cost of using the car to me is in this case, he took one-third.

    It is one-third of $1800 therefore, I may deduct $600, as the cost of using the car to me.

    Howard A. Heffron:

    And if he’s under the 1954 Code and he uses the double declining balance, he doubles the one-third.

    Potter Stewart:

    (Voice Overlap) —

    Howard A. Heffron:

    Yes.

    He doubles it to two-thirds.

    And he says two-thirds of this cost or $1200 is what it cost me to use this asset during this year in my business.

    In fact, he’s made a profit of one year and he’s used it in his business free of charge.

    Now, that’s precisely what this case involves and it’s the Government’s position that all of the materials, all of the materials, when reasonably analyzed, lend themselves to no other conclusion and that all the economic facts of life must be taken into account.

    Hugo L. Black:

    May I ask you that — well, if the contentions of the others are right, do you think this — the contention of this one is right or wrong?

    Howard A. Heffron:

    If the contentions in the other two issues?

    Hugo L. Black:

    Yes.

    Except the argument as to the practice and so forth, for the other two, how should this case be decided?

    Howard A. Heffron:

    Well, this case, the concept of useful life which would govern in the other two or to govern this case.

    We say that the concept of useful life is the same for all these taxpayers.

    And —

    Potter Stewart:

    Well, there is another issue here, isn’t there, whether this man is a dealer — an automobile dealer and how does that fit into this?

    Howard A. Heffron:

    Well, the petition — the petition which was filed by the taxpayer, he raises the issue in principle of whether our concept of useful life or his, should govern.

    The question of whether the evidence of prior practice and holding period is such as to warrant the conclusion that the three-year period he used was too long or too short, was not considered by the Fifth Circuit and was not alleged as a ground for certiorari in this Court.

    This Court was brought here simply for the purpose of defining the concept of useful life.

    When that is done, the irrelevant evidence can be in adduced below.

    Potter Stewart:

    There is no longer an issue in here as to whether not, this is properly used in the trade or business or anything like that.

    Howard A. Heffron:

    No.

    That is not before the Court here.

    We have conceded it as depreciable property.

    The question is the appropriate measure.

    Now, not only to only administrative materials referred to the economic facts of life here, but the tax — the testimony in the Hertz case and in the Evans case, developed the economic facts of life.

    Why do you hold cars only for two years?

    One of the Hertz officials was asked.

    Well, he said, “Because after two years, it cost too much to repair them, compared to what we can get for them, if we sell them.”

    Well, of course, that’s the reason why they hold them that short of time.

    Why disregard the economic fact of life when all the other economic facts of life must be taken into account, and how could any taxpayer rationally conclude that where all the regulations, where the administrative materials were Bulletin “F” said, time and time again, that you must take into account, all of the facts pertaining to your situation.

    Howard A. Heffron:

    How could he arbitrarily, exclude the fact — the salient economic fact of life in his business, that his customers demand new cars, so he can’t use them longer than two years.

    We say that is — that’s the critical economic fact in this business.

    It is not in other businesses.

    The critical economic fact in the case decided by this Court in Munitions was that the ammunitions industry was no longer needed, the war was over.

    Well, the plant was perfectly good to manufacture.

    In the abstract sense, it had many years of life.

    The reason this Court granted a shorter period was because it took cognizance of the particular economic facts affecting the taxpayer’s business.

    Now, this is not a new concept which was developed for purposes of tax law.

    This is a concept that has appeared in many accounting predecease over long periods of time.

    And I can cite — and any number of them to the Court.

    Or the Accountants’ Handbook, in the 1934 edition, talking about the causes of depreciation, lists as among them inadequacy.

    In general assets become inadequate, when changes in operating conditions and demand for product rendered them unsuited for further service under the particular conditions prevailing.

    Cessation of demand, “A piece of equipment may be entirely adequate for the purpose intended and of the very latest and most improved type, but if service life is gone when the demand for the product has disappeared, well, the demand for rental cars more than two years of age disappears.

    It disappears because the public wants new cars.

    That’s an economic fact of life.

    Now, there are many other references all — all to the same affect in many of the other accounting predecease which I’ve called simply at random, because this is a concept which has been — which was figure in depreciation for a long period of time.

    For example, in a Dictionary for Accountants, published in 1952, before the new code and before the new regulations.

    There’s a — there’s a statement by the author, “Depreciation expense computations are thus based on the assumption that every fixed asset with the exception of land, has a limited life.

    The cost of the asset less whatever can be anticipated in the way of scrap is a prepaid expense that must somehow be spread over its operating life in the hands of its present owner.”

    Now, there is a statement which we submit and directly supports our position.

    Now, there are other statements — there are statements in the opinions of this Court.

    For example, in the opinion in the Virginian Hotel case decided in 1943.

    This Court stated, “The Congress has provided for deductions of annual amounts of depreciation, which along with salvage value will replace the original investment of the property at the time of its retirement.”

    Well, how can you replace the original investment in the property, if you are not computing the time of retirement based upon the economic effects or facts which affect the taxpayer?

    If you based them on some abstract notion of time of retirement, you cannot recover the original investment.

    So that, we say that all of the materials have indicated consistently that every economic fact of life must be taken into account and if they haven’t explicitly stated it with respect to the car rental business, it has been implicit and it follows as a logical deduction.

    And we submit no other conclusion could reasonably be drawn.

    There is no basis for ignoring the economic facts here, which operate to the detriment of the taxpayer and taking all others into account.

    Earl Warren:

    We’ll recess now.