Earl Warren

“ If a depreciable asset is sold for less than its adjusted basis, it would seem to follow from the Commissioner's construction that the asset has 'cost' the taxpayer an additional amount and that further depreciation should be permitted. However, Revenue Ruling 69-92 does not extend to such a case and the Commissioner had expressly refused to make it do so. ”

“ The Commissioner attempts further to explain away the authority aligned against him by stating that most of the cases and rulings prior to 1942 (when capital gain treatment was provided for sales above adjusted basis) are irrelevant since the gain on sale was taxed at the same ordinary income rate that would have been applied had depreciation been disallowed. This contention does not explain away the Commissioner's sudden decision that allowance of such depreciation involves a fundamental error in the basic concept of depreciation. ”

“ The Commissioner takes the position here and in a Revenue Ruling first published the day before the trial of this case in the Tax Court [1] that the deduction for depreciation in the year of sale of a depreciable asset is limited to the amount by which the adjusted basis of the asset at the beginning of the year exceeds the amount realized from the sale. ”

“ However, if there is a redetermination of useful life * * * salvage value may be redetermined based upon facts known at the time of such redetermination of useful life.' Useful life may be redetermined 'only when the change in the useful life is significant and there is a clear and convincing basis for the redetermination.' Treas.Reg. ”

“ The letter ruling also advised that the Service would accept a salvage value on the Feuer of $5 per dead-weight ton, amounting to $54,000. Acting in accordance with the ruling the taxpayer computed allowable depreciation, and in its income tax returns for 1955 and 1956 claimed ratable depreciation deductions for the 10-day period from the date of purchase to the end of 1955 and for the full year 1956. The Internal Revenue Service audited the returns for each of these years and accepted the depreciation deductions claimed without adjustment. ”

“ The court below admitted that the increase in the value of the ship resulted from circumstances 'normally associated with capital gain.' The intended interplay of § 167 and the capital gains provisions is clearly reflected in Treas.Reg. ”