Waterman Steamship Corporation v. United States

PETITIONER:Waterman Steamship Corporation
RESPONDENT:United States
LOCATION:United States Post Office and Courthouse

DOCKET NO.: 245
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 381 US 252 (1965)
ARGUED: Apr 26, 1965 / Apr 27, 1965
DECIDED: May 17, 1965

Facts of the case

Question

  • Oral Argument – April 27, 1965
  • Audio Transcription for Oral Argument – April 27, 1965 in Waterman Steamship Corporation v. United States

    Audio Transcription for Oral Argument – April 26, 1965 in Waterman Steamship Corporation v. United States

    Earl Warren:

    Number 245, Waterman Steamship Corporation, Petitioner, versus United States.

    Mr. Solicitor General?

    Archibald Cox, Jr.:

    Mr. Chief Justice, may it please the Court.

    I move the admission of Paul Bender, Esquire, one of the assistants in my office for the purpose of arguing the next case.

    Earl Warren:

    The motion is granted.

    Archibald Cox, Jr.:

    Thank you.

    Earl Warren:

    Mr. McConnell?

    John W. McConnell, Jr.:

    Mr. Chief Justice, may it please the Court.

    As one of the counsel of record for the petitioner here, Waterman Steamship Corporation, we feel that we have a case with a very limited yet clear issue and result.

    We ought to emphasize the issue because if the issue is kept in proper perspective, we believe then that the result will fall as contended by the petitioner.

    This is a tax case and we maintain that it concerns the application of the usual rules on the Internal Revenue Code and the 1939 code is the one that controls this case by determining the cost or the tax basis of property, the original price of which property was adjusted downward in pursuant to a statute passed by Congress, which had a limited purpose and which did not have anything in the statute specifying the tax effect which is the issue before this Court.

    It is not concerned with a tax statute per se, but rather with a general statute with rather limited applications, but with no specified tax effects.

    However, like any other general statute, it may have tax effects and did have tax effects, but again, it’s concerned as we see it, not having specific or specified tax effects in the statute that it is then to be determined and controlled by the usual rules of determining cost under the 1939 code.

    We do not think that it is concerned with statutory construction.

    We think the statute is rather clear and explicit.

    It does not, we think, involve or need a study of the legislative history or legislative environment again because of the face of the statute the meaning and effect is clear.

    There are two statutes involved in general.

    One, the Merchant Ship Sales Act of 1946 which was enacted or came into effect on March 8, 1946, after a study over about a 2-year period in Congress.

    The statute in general related to the disposition after the war, of the vessels that had been constructed and most of them owned by the government during the war.

    Now a subsidiary question arose and that was, what would be done to those persons or those corporations that had purchased vessels during the war at the war time cost and that these vessels that were going to be sold after the war were going to be sold at less than war time cost, what adjustment would be made to those individuals who had purchased during the war at a higher price?

    Earl Warren:

    To accomplish what purpose?

    John W. McConnell, Jr.:

    To accomplish the purpose Your Honor was to get private shipping or to get shipping back into the private industry in a sense that the conclusion of war most of it would have been owned and in the hands of the government.

    Now the question was, what would be the price at which these vessels would be sold to any prospective purchaser?

    Keeping in mind in our case Your Honor, Waterman had purchased 18 of these vessels from the Government during the war and purchased them at their cost during the war.

    Earl Warren:

    Yes.

    John W. McConnell, Jr.:

    After the war, the so-called statutory sales price as set out in the act, would be a lower price than the cost of construction during the war.

    Now —

    Earl Warren:

    But was it — my point was this, was it to equate the price of those ships that were purchased during the war with those that were purchased after wards?

    John W. McConnell, Jr.:

    It was taken to consideration, Your Honor, the fact that the ones purchased in the war had been purchased at a higher price.

    Earl Warren:

    Yes.

    John W. McConnell, Jr.:

    Now, it did not specify that it would be changed, adjusted to the price at which they would be sold after the war, but rather the statute set out in one section on the Section 9 which pertain to prior sales, section 9B set out the formula to be followed in adjusting the price of those purchased previously during war time.

    Now, we say here that the statute is clear.

    I don’t think there’s any arguing with the Government as to how to apply.

    The issue facing the Court here is the effect of that adjustment provided under the statute on the cost or tax basis of these vessels whose prices were adjusted down.

    Earl Warren:

    But does the question of whether the price of these ships that were purchased during the war and those after the war were the same after the formula was applied or not?

    John W. McConnell, Jr.:

    We maintain that they’re not the same Your Honor.

    Earl Warren:

    They’re not the same?

    John W. McConnell, Jr.:

    That’s right.

    Earl Warren:

    Alright.

    John W. McConnell, Jr.:

    We can show that and we feel that that’s the heart of this issue, is that we can show that under the normal code rules, the basis of property for depreciation purpose, and that’s the question here, is the cost of that property to the taxpayer, the taxpayer’s economic investment.

    Now, that’s the normal code rule.

    Now, there’s nothing specific in the statute that says that that normal code rule will not apply here.

    There’s nothing specific in the statute that says, the price after the adjustment is the statutory sales price.

    The statute simply sets out a formula for determining an adjustment in price.

    There’s no argument about this adjustment.

    Now, we say that thereafter it’s a simple matter of mathematics.

    It was stipulated here and agreed what the basis of the property was prior to the adjustment.

    It is stipulated and agreed here what the adjustment was.

    It’s stipulated and agreed here what is the basis after the judgment except on the tax basis.

    Now, we say though applying the normal 1939 Internal Revenue Code Rule that you will come up here with a basis of approximately $26 million as contended by petitioner as against the approximately $17 to $18 million contended by the Government.

    Earl Warren:

    Then we can approach the case as far you’re concerned on the basis that the relative cost of the ships that were purchased during the war and those that were purchased after wards is immaterial?

    John W. McConnell, Jr.:

    We — that’s right sir.

    We maintain that the statute does not provide though the prices of the vessels purchased during the war and whose prices are adjusted are adjusted to the statutory sales price, that’s correct sir.

    Our contention is they are not adjusted to the statutory sales price.

    Byron R. White:

    Mr. McConnell, do you agree that this transaction has to be unwind?

    John W. McConnell, Jr.:

    No, sir.

    We do not believe that this is an unwinding transaction.

    We believe that’s an adjustment transaction that an unwinding —

    Byron R. White:

    How much depreciation did you take on all — the total depreciation that you take on these 18 vessels up until the time of the price adjusted?

    It is about $10 million or $11 million somewhere in —

    John W. McConnell, Jr.:

    I think the figures that were quoted in the Government’s brief are correct because they’re taken except for the final from the record here which indicated some $11 million at one time.

    That — that we do not contend that we had not taken that amount of appreciation prior to the adjustment.

    However, we say this that the adjustment under 9(b) is one adjustment.

    Byron R. White:

    Well, do you think you should have gotten the income taxes back that you paid before this, before the adjustment or not?

    John W. McConnell, Jr.:

    We don’t think that we got them back Your Honor.

    Byron R. White:

    Well, do you think you should have?

    John W. McConnell, Jr.:

    Well, we think this that we had to follow the conditions as outlined in the act in order to get the adjustment —

    Byron R. White:

    Which requires you to get them back, get the tax back, isn’t it?

    John W. McConnell, Jr.:

    No, sir.

    We do not interpret Your Honor that it requires us to get the tax back or that we got the tax back.

    It is simply —

    Byron R. White:

    Do you think it requires you to get the return of charter hire?

    John W. McConnell, Jr.:

    No, sir.

    We don’t think that.

    Byron R. White:

    Do you think it requires you to be paid for your — what you would have earned on all these vessels if you —

    John W. McConnell, Jr.:

    That is a part of the credits and —

    Byron R. White:

    You don’t think you are entitled any credits before the Act went into effect?

    John W. McConnell, Jr.:

    Entitled any credits before that or you mean for transaction?

    Byron R. White:

    Up to the period of the time you bought the vessels up to the price adjustment statute, are you entitled to any credits at all –?

    John W. McConnell, Jr.:

    Yes, sir.

    We entitled to all the credits that the Section 9(b) gives us.

    Byron R. White:

    What are they?

    John W. McConnell, Jr.:

    Alright.

    The first credit is the one for the excess cash payments over 25% that’s sub paragraph one.

    Another credit is for 3 1/2% interests on that excess cash payments from the date of payments.

    Byron R. White:

    Why is that Mr. McConnell?

    John W. McConnell, Jr.:

    That’s the statutory formula which the —

    Byron R. White:

    Yeah, but why is it?

    Why — why do you suppose that is the formula?

    John W. McConnell, Jr.:

    Well, I think now undoubtedly Mr. Justice White that the original legislation intended that this go down to the statutory sales price.

    John W. McConnell, Jr.:

    In fact, the Senate Bill, the amendment of this would have adjusted this down and any taxpayer taken an adjustment would have received the difference between the purchase price before the Act and the statutory sales price.

    He would have gotten that completely without giving any credits, tax or otherwise, although he would have it returned to the government everything over 15% of the statutory sales price as far as charter had, but that was not the act that was passed.

    Now, this was amended and they set up this morning.

    Byron R. White:

    So the Act — the Act expressly requires that the party goes through some adjustment procedures with regard to the period prior to the price of yesterday?

    John W. McConnell, Jr.:

    One adjustment Your Honor, it requires an adjustment in price, that’s what all of the Section 9 (b) speaks off is an adjustment in price.

    Now, we say that any sale or any purchase, who purchases property by certain price, he gets an adjustment.

    Now, that adjustment maybe based on a thousand different computations, but he ends up with an adjustment in price which he applies to the original price and then he gets his adjusted price.

    Now that’s what we say here.

    You start out with the original price.

    You have an adjustment in price.

    Byron R. White:

    What’s the statutory, is the statutory sales price under the new Act you were supposed to pay something like how much?

    John W. McConnell, Jr.:

    Well, these vessels statutory sales price of the 18 vessels would have been slightly less than $18 million.

    Byron R. White:

    $18 million.

    John W. McConnell, Jr.:

    Yes.

    Byron R. White:

    That’s a statutory price.

    John W. McConnell, Jr.:

    That’s a statutory price.

    Byron R. White:

    And prior to the time of the establishment of this price you would have taken approximately $11 million worth of depreciation?

    John W. McConnell, Jr.:

    That’s right sir.

    We had also paid approximately $16 million in cash and still that — oh, after the adjustment.

    Byron R. White:

    Just a minute, you say you took $11 million for depreciation prior to the establishment of this price and you want your basis to remain at 26, so that in the long run you want to say that you could take $26 million plus $11, the $38 million in depreciation against vessels which cost you $18 million.

    John W. McConnell, Jr.:

    Your Honor, we think that —

    Byron R. White:

    Is that right or not?

    John W. McConnell, Jr.:

    Well of course, the $11 million is actual depreciation as I recall and the $26 million would still be whatever the tax rate of that amount.

    Byron R. White:

    That’s right, well I know, but you still want to be able to take $26 million of depreciation, that’s what this fight is all about.

    John W. McConnell, Jr.:

    We would take depreciation on a basis after the adjustment of $26 million, that’s right.

    Byron R. White:

    And you’ve already had 11.

    John W. McConnell, Jr.:

    We had taken approximately 11 prior to the adjustment that’s right, but as — along that line, I would like to emphasize this fact as to what we think the cost of these vessels and what we think the record indicates clearly is the cost of these vessels to this tax player and the economic investment of this taxpayer in these vessels.

    Now, prior to the enactment of the act, prior to the adjustment, it is stipulated that the basis of these 18 vessels, the cost to this taxpayer was slightly in excess of $47 million dollars and I believe that there has been distributed to Your Honors two computations here, single sheets, asked the clerk to, to indicating this breakdown.

    First, it shows that total cash payment and the trade in allowances on these 18 vessels up to the day before the Act, the day preceding that.

    Now, the adjustment was made many years later, but as other day to the Act.

    John W. McConnell, Jr.:

    This taxpayer had paid in cash or trade in for these vessels $16,411,000.

    Now, the remaining mortgage and indebtedness on date, this is before the adjustment, was $30,737,000.

    Now, we applied to the commissioner for an adjustment in price, an adjustment in price on 18 vessels.

    Now, the adjustment was branded under Section 9 (b), an adjustment price.

    This adjustment reduced that mortgage indebtedness from $30 million to $10 million, a $20 million reduction and price all in the mortgage indebtedness.

    Now we say that you subtract that $20 million from the $47 million basis prior to the adjustment and the cost of this taxpayer is the $16 million odd paid prior to the adjustment, the $10 million odd mortgage indebtedness remaining after the adjustment or as I said, taking the original cost subtracting the adjustment, leaves a basis of $26 million.

    Now we say that that follows not because we necessarily want it that way, but because that’s the way the statute prescribes, that’s all the statute prescribes.

    The statute did not prescribe that the basis would be the statutory sales price.

    The statute simply prescribes an adjustment in price.

    This taxpayer received that adjustment.

    We maintain then that you look back to the usual 1939 Code Provisions to then see what is the cost of the property.

    Byron R. White:

    Arriving after the adjustment, however, would you apply this $20,468 million in arriving at that adjustment, that’s the result — that’s the net result of a computation, isn’t it?

    John W. McConnell, Jr.:

    The formula has several computations.

    Byron R. White:

    Do you take exception to the figures on page 7 of the Government’s brief.

    John W. McConnell, Jr.:

    Very much so.

    We think that there is no basis in the language or the structure.

    Byron R. White:

    Well, how do you arrive at the $20,468 million?

    You just don’t pick it out of the air, you must calculate it somehow?

    John W. McConnell, Jr.:

    Yes, sir.

    It’s calculated.

    Byron R. White:

    Where is that calculation in your brief?

    John W. McConnell, Jr.:

    In our brief — it’s not in the brief, it’s in the appendices and in records though Your Honor.

    Byron R. White:

    Well where?

    John W. McConnell, Jr.:

    If Your Honor will turn in the appendices to appendix E, the computations that are there and if you look on E2 under number 6, total mortgage adjustments which is taken as indicated there from the page 48 of the record, which is a stipulation between the parties.

    Byron R. White:

    Yes, but what I want to know is that adjustment in mortgage indebtedness that 24.68, where does that 24.68 come from?

    John W. McConnell, Jr.:

    Alright, if you’ll look there Your Honor at E2 at Computation 6, it gives a balance of the original mortgage indebtedness as of March 7, 1946, that’s the day before the act.

    This is stipulated in the record page 41.

    Byron R. White:

    We understand that, but now how about — where do you get the 17 up there?

    John W. McConnell, Jr.:

    Alright sir.

    That is taken right out of sub paragraph 2 of the act on the adjustment which reads as follows.

    John W. McConnell, Jr.:

    The applicant’s indebtedness under any mortgage of the United States with respect to the vessel shall be adjusted.

    And the next sub paragraph says, the adjusted mortgage indebtedness shall be an amount equal to the excess of the statutory sales price of the vessel as of the day of enactment of this act over the sum of the cash payment retained by the United States under paragraph one.

    Now paragraph one says, you’ll pay 25% statutory sales price.

    So if you didn’t have any trade in, the mortgage would be 75%.

    Now if you — then we get to $17 million by the fact of looking at what the — let me just turn to the record here, Justice White if you’ll turn to page 68 in the record.

    This is a schedule which was attached to the agreement between the government and the petitioner.

    Actually if you look at page 67 that’s a double page there, if you’ll notice at the top, original purchase price, line one last column is total all vessels, it has $49 million.

    Then the next line, less there is no trade in allowance, then, the next line reads less balance of original mortgages up to 03/08/46, that’s the day before that shows that the mortgage balance on that day was $30 million.

    Now, when you take — then next, you notice, it says less 25% of adjusted statutory sales price, that’s the cash you’re supposed to pay, then that next line three leaves the excess cash payments.

    Now if you turn over on 68, it gives the mortgage adjustment, starting with line 13 at the top.

    Adjusted statutory sales price so forth less 25, then line 16 adjusted mortgages as of 03/08/46.

    Then line 20 says reduction in mortgage indebtedness $20 million.

    Now that’s where we get, if you take the $13 million adjusted mortgage in line 16, subtract it from your mortgage indebtedness over on the third line on the preceding page of $30 million, that’s where you get to $17 million and it’s in accordance with a statutory point.

    Byron R. White:

    Well, this involves then on page 67, the United States returning income taxes and the applicants are the returning charter hire.

    This is all figured in?

    John W. McConnell, Jr.:

    We do not — there’s no return of charter hire, Your Honor, it’s a credit.

    Byron R. White:

    I understand that, it’s an offset.

    John W. McConnell, Jr.:

    It’s a credit.

    That’s the language of the statute.

    Byron R. White:

    That’s right.

    John W. McConnell, Jr.:

    And that’s what in other words in Section 9 (b) you have several credits which must be netted together.

    Now that’s a reason we disagree with —

    Byron R. White:

    I understand that and you think that the United States in the whole process shouldn’t demand back the new depreciation [Inaudible]

    John W. McConnell, Jr.:

    Mr. Justice White, we stand that on this premise that the statute allowed us these credits and Section 9(c)(1), which has limited effect said that you would take that adjustment from the original purchase price and the result would be the adjusted purchase price and we say the tax basis.

    Now, we’re not arguing with the philosophy of the act.

    We just say we take the act as passed by Congress and you apply the act, and we don’t’ argue about the adjustment between us.

    It’s simply on the effect and we say that the act does not specify the basics.

    And therefore, you go to the 1939 Code Provision and there’s a sheet before your justices will indicate, this taxpayer paid $26 million for these vessels after the adjustment and this taxpayer is seeking no more than every other taxpayer and that is to be allowed to depreciate those vessels on the remaining life on that cost and that economic investment.

    Arthur J. Goldberg:

    [Inaudible]

    John W. McConnell, Jr.:

    Well, as we pointed out, Your Honor, if they give them an adjustment that’s up to Congress.

    John W. McConnell, Jr.:

    Congress gave us the adjustment and we say that Congress left to the normal rule how the basis would be computing and the normal rule say that it’s $26 million.

    Arthur J. Goldberg:

    [Inaudible]

    John W. McConnell, Jr.:

    Well, we pointed out in one of the footnotes, a case similar to that, although actually as it turned out that they didn’t adjust it, they wrote a new contract.

    Now, we say that then the net effect of that adjustment would be determined under the normal rules and that would be the basis.

    In other words, if you bought it for $100 and it gave a price adjustment of $20 and the new cost would be $80.

    And it wouldn’t matter, and this is what we think is a key to Mr. Justice White, it wouldn’t matter, how you arrived with the $20.

    You might say now, you earned income of $10, you paid taxes of $2, you had a — you paid property taxes or something else, or you say I will give you $1 for every child you have.

    That’s part of the computation and you end up with $20.

    It doesn’t matter what the factor that you use to measure the adjustment.

    The key thing is the amount of adjustment you apply that to the price and the result is your basis, regardless of how it was computed.

    Now that’s our contingent.

    We say you take Section 9 (b) which has a point made up of several factors of several computations, but it doesn’t’ matter what they are measured by.

    You take them and as a result of the adjustment, one single adjustment.

    You simply either subtract that from the original purchase price to give you a new price or you can do it in a reverse as we we did on this sheet show how much had been paid before, what was the adjusted mortgage indebtedness, the sum of the two would be the basis of property for depreciation.

    Now, we do not think that it has any unwinding involved, that was a statute that was rejected.

    An adjustments is not an unwinding.

    An adjustment confirms the original purchase.

    In fact in the contract itself, this is recognized and in the regulations issued by maritime that they would have to execute an addendum to the original contracts of purchase.

    This adjustment was an addendum to the original contracts of purchase and as we point out in our brief, the original contracts of purchase said that we would have the benefit of any legislation that might be passed after the purchase that allowed the same vessels to be sold as subsequent purchases at lower prices.

    Now, that was an original contract, but we say that there is not unwinding and we say particular that the table as contained in the brief of the government on page 7 has no basis whatsoever in the statute.

    There’s no place to determining a gross price adjustment and as we point out in our reply brief, if they want to use the term gross price adjustment as they’ve done on line 3 on page 7, then they should call the last line the net price adjustment.

    That’s exactly the — that’s the price adjustment that we receive as indicated in their own schedule one $20 million.

    That’s exactly the price adjustment that we receive, you subtract that from the original price and that gives you the adjusted purchase price and the basis here for depreciation purposes thereafter.

    No new mortgages were executed.

    No new notes were executed.

    The same mortgages were simply adjusted.

    The same notes were simply adjusted as the payment in the future, so that there is not either a rescission nor is there an unwinding.

    Now, we also maintain that Section and I might touch on it here, the Section 9 (c) (1) this goes back to Justice White’s question, that 9 (c) (1) explicitly provides that this adjustment will be applied against the original purchase price.

    This is in the condition section.

    The credits that I was discussing with Mr. Justice White are in the adjustment Section, but the condition Section says that you will for federal tax purposes treat as if certain things had not been done.

    John W. McConnell, Jr.:

    That carried us back to the original purchase price.

    You then apply the adjustment on the 9 (b) and you come up with a net result of approximately $26 million.

    The government would contend that the statute says you must come down to the statutory sales price, but that is not in the statute.

    The statute simply contains a formula.

    The result of which is one adjustment in price, and the result of that to this taxpayer is work it either way.

    Original cost $47 million adjustment and mortgage indebtedness or in price $20 million a little more, the result a basis or a cost or an economic investment of $26 million or I will look at the other way.

    This taxpayer had paid $16 million the day before this act was passed.

    The statutory sales price was only $17 million.

    Now, it’s still old $10 million more after the adjustment.

    Yet the government says you’re going to have a basis slightly in excess of the cash already paid without looking at the remaining obligation.

    So that we say that anyway you look at it on dollars and cents as Judge Patton said in the Court of Claims in Sekone case, Government is saying it’s not a dollars and cents, real actual economic cost, but a hypothetical.

    And we say that the statute does not require that and that the normal code rule justified the basis in fact is the only result of the basis as contended by the taxpayer.

    Your Honor, there’s nothing in the legislative history at all on tax basis, nothing on tax basis and I don’t think the government haven’t come up with any, we haven’t found any.

    We think too that pulling out a context just one phrase in 9(b) about treating the vessel as if it was sold on the date of the enactment of the act and not before.

    The government read that in allowing them to do anything to equalize the price depreciation of what not.

    We simply say no.

    The formula was Congress’ idea of exactly how that was being done by treating the vessel as if it was sold on the date of enactment act and not before and the formula carried that out and it’s not for the government now to try to change the formula to come back to what they call the Congressional intent or legislative intent.

    But to answer your question Mr. Justice Harlan on this age Mr. Justice Harlan, we do not think there’s anything in the legislative history on tax basis, but if there’s a resort to legislative history and we do not think it’s necessary.

    We think that statute is clear and unambiguous.

    There’s no necessity to legislative history, but if it is, it supports petitioner, both legislative history prior to that and the legislative history subsequent to the act supports the position of the petitioner here.

    And I would like to reserve the remaining time if I may unless there’s some other questions at this time for rebuttal after the government’s argument.

    Thank you.

    Earl Warren:

    Mr. Bender.

    Paul Bender:

    Mr. Chief Justice May it Please the Court.

    In the course of my argument, I’m inescapably going to have to refer the figures.

    All of them I think are set out on the chart on page 7 of the Government’s brief except for the depreciation figure which Mr. Justice White mentioned in his question earlier.

    I think it will be easier to follow the argument if you have those figures before you.

    I’ll try to make them as simple as possible and round them out.

    I may have to give some other examples involving different figures in an attempt to make it simple.

    I shall do my best.

    Paul Bender:

    Well, let me start this way in the few minutes remaining, I would like to try to demonstrate to you why the petitioner’s argument as he stated today is absolutely untenable and I would like to do so this way.

    Referring again to the chart on page 7, petitioner argues and he said it several times in the brief and he says it in his argument that the statute should be read as having no tax effect.

    Any mention of taxes in the statute just for the purposes of computing the adjustment, but it has no tax effects and he says that no taxes were returned to him as a consequence of the statute.

    Well, we think that’s wrong and I shall try to demonstrate in the bulk of my argument tomorrow, why the statute does have tax effects and why the fact that the statute has tax effects leads you to the government’s results?

    Well, I should like to take the case first on the assumption that he’s right and that the statute has no tax effects.

    Listen to what his argument is.

    He said he paid and he did pay about $47 million with each ships, that’s on line 1 on page 7.

    He got back in one way or another, either by cash credit or reduction of his mortgage about $20 million, $20,400,000, that’s the net payment on line 10 on the brief.

    He paid $47 million.

    He says he got back $20 million, he says his economic investment, then his $26 million, that’s the last line of the sheet that he gives you here, remember your graph sheet.

    Let’s assume that’s true.

    His economic investment would be $26 million, but he also concedes that he has already taken depreciation on these ships of about $11 million.

    He’s deducted $11 million from his income for income tax purposes in calculating his taxable income, yes.

    William J. Brennan, Jr.:

    How much [Inaudible]

    Paul Bender:

    Well, we say he is allowed for future depreciation of about $17 million, which if you add it to the $11 million would mean that he’d get a total depreciation of $26 million, which he says is just as economic investments.

    $11 plus oh, excuse me about 28, right, which would be more.

    We are not being that general because I’m simply — I’m trying to follow it on his argument.

    I’m trying to demonstrate why his is wrong.

    We don’t agree with —

    William J. Brennan, Jr.:

    I don’t [Inaudible]

    Paul Bender:

    In the future, about $17 million.

    William J. Brennan, Jr.:

    [Inaudible]

    Paul Bender:

    Because the $11 million has been disallowed Mr. Justice Brennan and his taxes for all those years have been recomputed, so that $11 million dollars was not allowable, that’s in Section —

    William J. Brennan, Jr.:

    [Inaudible]

    Paul Bender:

    Well, he once got it, but it was all taken away from him.

    It can actually —

    Byron R. White:

    [Inaudible] why did you take it back?

    Paul Bender:

    Exactly, but he said that that never happens.

    So, what I’m trying to demonstrate is why his is absolutely wrong and why his gives him a terribly unjustifiable tax benefit.

    Coming back to what I said, he says his economic investment is $26 million, but he says his basis now is $26 million, which would mean that in the future he can depreciate $26 million.

    Paul Bender:

    And he also admits that he’s a ready depreciated $11 million and he says that depreciation has never been taken away.

    That would mean that in the future he gets $26 million depreciation, he has already had $11 million depreciation, he gets $37 million — $37 million depreciation on a total economic investment by his own admission of $26 million, now that can’t be.

    William J. Brennan, Jr.:

    How much do you think [Inaudible]

    Paul Bender:

    In the future?

    William J. Brennan, Jr.:

    Aggregate.

    Paul Bender:

    Aggregate depreciation.

    William J. Brennan, Jr.:

    [Inaudible]

    Paul Bender:

    Well, he’s only entitled to aggregate depreciation after you recompute his past taxes, that’s about $17 million.

    The price he would have paid had he bought the ship under the act, right.

    Byron R. White:

    [Inaudible] then the problem isn’t about the $26 million that this economic investment.

    The problem is I suppose that if he has an economic investment of $26 million, how can you say he is entitled to $26 million depreciation?

    Isn’t the fact however, that reason that he only get $17 million from now on in your view rather than $26 million if you thought of the only way you can get the depreciation back on your inner — on your mutual debits and credits is by doing it this way.

    I mean, this is the only way the depreciation is returned to you is he took?

    Paul Bender:

    Right.

    The way he has — the fallacy of what he does is that he has made all his computations on the basis that his basis was at the time of the act $47 million, the amount that he paid for the ships.

    That isn’t true because at that time he has taken $11 million in depreciation and his adjustment basis was not $47 million, it was $47 million minus depreciation he took.

    Now the statute as we point out in the brief and as I shall try to explain more fully tomorrow, the statute in the course of the adjustments makes it quite explicit that he must sign an agreement agreeing to certain tax effects, this is in 9(c)(1) of the statute, One of these tax effects is the dis-allowance of all past depreciation reductions.

    Now when we disallow those deductions and recompute his taxes, as though they hadn’t been allowable, that escalates his basis back up to the amount it was before he took it, that’s why you start [Inaudible] then we say you take from the basis the amount of the purchase price differential which is line 3 on page 7, $29 million and you come out with — and they come out and I would like to emphasize this now, you come out with under our submission, the basis which the taxpayer would have had, had he purchased the ship under the act.

    Now, there’s a very simple way to decide this despite concentrating on that point.

    The act quite clearly says in the beginning of Section 9, which is the only section which is intimately involved with this case, that the adjustment — this is on page 11 of our brief, the adjustment shall be made as here and after provided by treating the vessel as if it were being sold to the applicant on the date of the enactment of this Act and not before that time.

    Now if you apply that alone, you would come out with a government’s answer.

    If you treat this vessel and if it would be sold to the applicant on the date of the enactment to the act and not before, this basis would be the basis he would have in the vessel if he bought the vessel on the date of enactment and the enactment not before, and that basis would have to be the statutory sales rate minus certain minor adjustments.

    For example, for the trading of ships which aren’t important.

    Arthur J. Goldberg:

    $30 million [Inaudible]

    Paul Bender:

    Approximately sir.

    William J. Brennan, Jr.:

    You start all over after washing it all out on previous computations to start depreciation with now the statutory [Inaudible], is that it?

    Paul Bender:

    Right, that’s the only depreciation he gets Mr. Justice Brennan, because the past depreciation has been wiped out.

    William J. Brennan, Jr.:

    And you can’t — and somewhere I don’t see it but I suppose there is somewhere between your items 4 and 9 I guess, is that where you find [Inaudible]

    Paul Bender:

    4 and 9 of where?

    William J. Brennan, Jr.:

    There was [Inaudible] in line 1 and 46.

    Paul Bender:

    What do you refer to?

    The depreciation is washed out by the application of Section 9(c)(1), 9(c)(1) is on 14 and it says in so many words, depreciation and amortization allowed or allowable up to the date of the enactment of this act for Federal tax purposes shall be treated as not having been allowable, that takes care of that and in return for that, his taxes are recomputed and so he hasn’t taken it.

    Byron R. White:

    We’re on page 7 — where on page 7 in the unwinding operations as the government takes back depreciation?

    Paul Bender:

    Oh, it’s hidden.

    Byron R. White:

    That’s it.

    Isn’t it hidden in one?

    Paul Bender:

    No, it’s hidden in A, refund of taxes on return sure to hire [Inaudible] less taxes–

    Byron R. White:

    Unless we want the taxes paid.

    Paul Bender:

    Well, you see if you’re going to the unwinding operation Mr. Justice White, is to have him return to the United States the $13 million in charter hire and that’s line 4.

    Byron R. White:

    I understand that.

    Paul Bender:

    Alright.

    Now in connection with the return of that, we can’t — and we recompute his taxes for those years as though that amount wasn’t an income, that comes 9 (b) (a).

    Well, we couldn’t just do that in enacting the statute because then he might have a loss for that.

    He would have taken this enormous depreciation.

    We’re going to take a large item out of income, he would have a loss which you could carry over to other years?

    Byron R. White:

    What line is that?

    Line 8, a brief of the tax if actually paid [Inaudible]

    Paul Bender:

    Well, the refund is the end result of the re-computation.

    Perhaps the language in that line could be more explicit.

    What I mean by it now and what I would like you to treat it as meaning is the refund after the re-computation.

    Byron R. White:

    The basis is returned in line 1, otherwise we start with the lower basis?

    Paul Bender:

    Line one is just the original purchase.

    Byron R. White:

    Exactly, but as of the time you started the computation the basis is actually lower than that.

    Paul Bender:

    Yes, that’s true.

    Byron R. White:

    And so, you’re taking the basis back.

    Paul Bender:

    Right and we take the basis back.

    Byron R. White:

    On line one.

    Paul Bender:

    Wherever you like.

    William J. Brennan, Jr.:

    [Inaudible][Laughter]

    Paul Bender:

    Coming back to the argument, I was making on the basis of the injunction in the act to treat the taxpayer as though he had bought the vessel after the enactment of the act, if you take that literally and if you apply it and if you apply to tax purposes, obviously the basis you would have is the basis you would have had if he bought the ship under the act and the basis would be essentially the statutory sales price.

    Paul Bender:

    Now that’s very important, because if his basis is higher than that in the years after the statute and he has a competitive advantage over people who bought the ships under the act.

    They would have bought a ship at the statutory price and they would only get depreciation based on the statutory price.

    Petitioner argues that he bought the ship beforehand would be in the same kind of ship would be entitled to depreciation on a much higher basis, in this case about $9 million higher.

    That would mean that if he earned a certain amount of gross income each year, he would have a lower amount of taxable income because he takes the larger depreciation and that would mean comparing him with his competitors on the same amount of gross income, he would have larger after tax then which would be an unfair competitive advantage and it’s quite clear that the general purpose of the statute is inconsistent with that.

    The legislative history which we cite and which petitioner relies on, it says over and over again that the purpose is to put him in the same boat as other people who bought these ships.

    Now under the petitioner’s argument, you can’t do that.

    Well, what I would like to argue in a constructive fashion rather than the destructive fashion tomorrow is that petitioner — the reason why the basis in this case is different from the original purchase price of $47 million minus the net return $20 million, is that it isn’t like the case Mr. Justice Goldberg gave during petitioner’s argument.

    If you bought something for $100 and got $20 back ordinarily your basis would be $80, but in that situation no tax effects are connected with the return of the $20.

    What I should like to demonstrate to you tomorrow is that there’s an entirely different result if tax effect, income tax effects are connected with the return of the $20.

    It’s possible if all that $20 for example was taken into income by the buyer that it wouldn’t have any effect on this basis.

    On the other hand, certain income tax deductions are associated whether you would have a different effect.

    Therefore, our argument our constructive argument rests on the premise if there are taxes effects connected with the statute and that by applying the tax effects, you come out with the statutory sales price.

    I think it would be better if I start with that tomorrow fresh from our show, if I may, I will stop now.