Brown Shoe Co. v. Commissioner

Citations: 94 L. Ed. 2d 1081; 70 S. Ct. 820; 339 U.S. 583; 1950 U.S. LEXIS 2596Docket: 445

Court: Supreme Court of the United States; May 29, 1950; Federal Supreme Court; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The case concerns Brown Shoe Co. Inc. and its challenge to the Internal Revenue Commissioner's determination regarding excess profits tax for the fiscal years 1942 and 1943. The dispute centers on contributions from community groups, including cash and property, which were intended to incentivize the establishment and expansion of the company's manufacturing facilities. 

Petitioner sought to deduct depreciation on contributed property and the total cost of property partially acquired with the contributed funds, which the Commissioner disallowed. The Tax Court partially reversed the Commissioner's decision, but the Eighth Circuit Court of Appeals sided with the Commissioner on all counts. The Supreme Court granted certiorari due to a conflict with a Third Circuit decision.

Two primary questions are addressed: 
1. Whether the petitioner can deduct depreciation on property received from community groups or purchased with their cash contributions, arguing that such properties qualify as 'gifts' or 'contributions to capital' under the Internal Revenue Code.
2. Whether the total value of these contributions can be included in the equity invested capital for calculating the invested capital credit.

The petitioner, a New York corporation, received substantial cash and property through contracts with various community groups, which typically included conditions for factory operation and employment commitments. Contracts varied, requiring construction and operation of factories under specific terms, with stipulations for potential repayment or property return in cases of noncompliance.

Contracts categorized as supplementary agreements with community groups required the petitioner to operate additional plant facilities for a period not exceeding ten years, as stipulated in a prior contract. No restrictions were placed on how the petitioner could use the property or proceeds from its sale after the operational period. The Tax Court and Court of Appeals accepted the petitioner's compliance with these agreements. In eleven instances, the performance period had lapsed before the taxable years in question. A separate transaction involved a $10,000 cash bonus from 1914 classified as part of the factory's organization expenses. Cash received from community groups was not designated for specific plant acquisitions but was instead deposited into the general bank account, covering overall operating expenses and asset purchases. Payments were recorded as debits to the cash account and credited to earned surplus. The cash contributions were consistently less than the total spent by the petitioner on local factory buildings and equipment. For tax purposes, the petitioner deducted depreciation on buildings transferred by community groups and the full costs of acquired or enhanced assets. However, the Commissioner disallowed depreciation deductions for the buildings and properties funded by community contributions, reducing the depreciable basis accordingly. The Tax Court overturned this disallowance for cash-funded acquisitions, affirming that these items had cost and basis to the petitioner. However, it upheld the disallowance regarding transferred buildings, stating they were not treated as gifts. The Court of Appeals reversed the Tax Court's stance on cash-funded property depreciation, ruling that contributions negated the petitioner's cost basis.

Assets transferred to the petitioner by community groups are considered "contributions to capital" under section 113 (a)(8)(B), necessitating no reduction in the depreciation basis of the acquired properties. These assets enhance the petitioner's capital in line with standard business and accounting practices, a view supported by Treasury Regulations that recognize such contributions from non-proprietary interests. The interpretation aligns with congressional policies regarding depreciation deductions, as highlighted by the Third Circuit's ruling in a similar case. The petitioner utilizes these assets in their business operations, which will eventually require replacement due to wear. 

The Internal Revenue Code's depreciation provisions suggest that depreciation deductions are warranted in such contexts. The Commissioner argues against this interpretation based on the Detroit Edison Co. v. Commissioner case, which ruled that certain payments for service construction did not constitute capital contributions. However, this case is distinguished from the current situation, as the contributions from community members were not for a service but aimed at benefiting the community. Thus, these transfers are seen as intentional efforts to enhance the company's working capital.

The regulations interpret "contribution to capital" consistently across tax provisions, with the excess profits tax definition encompassing values treated as part of the taxpayer's investment. The argument that capital contributions should be limited to those from shareholders is rejected, emphasizing that it would be illogical for Congress to base the inclusion of capital on the transferor's stock ownership at the time of contribution. The decision in LaBelle Iron Works v. United States does not contradict this interpretation.

The case pertains to the interpretation of the excess profits tax law of 1917, specifically regarding the definition of 'invested capital,' which includes actual cash paid in, the actual cash value of tangible property paid in for stock, and earned surplus or undivided profits used in the business. The Court determined that unearned appreciation in ore lands and the exchange of old stock for new based on that appreciation do not qualify as 'actual cash value' or 'earned surplus.' The treatment of contributions from outsiders as invested capital was not addressed. Property acquired after December 31, 1920, is eligible for depreciation deductions under specific sections of the tax code. The judgment of the Court of Appeals was reversed, with directions to remand to the Tax Court for further proceedings. The tax in question is imposed under the Second Revenue Act of 1940, with provisions for a specific exemption and a credit for normal profit, which can be calculated based on average income or invested capital. The excess profits tax provisions were repealed in 1945. Relevant sections provide for deductions for property depreciation, with specific rules about property acquired by gift and contributions to capital. The value of land on which buildings were situated was not included in the petitioner's records and was deemed irrelevant. Both lower courts and the Commissioner acknowledged that property and cash receipts were not taxed as income, although deductions were disallowed starting in 1943, following a precedent case.

Depreciation amounts disallowed were $22,472.60 for the fiscal year 1942 and $24,307.10 for 1943, with no deficiency determined by the Commissioner for the petitioner's normal tax in either year. The Tax Court's decision drew on precedent cases such as McKay Products Corp. v. Commissioner and others, which referenced LaBelle Iron Works v. United States as a controlling authority. The Court of Appeals upheld the invested capital issue based on these precedents, including LaBelle Iron Works and Detroit Edison Co. v. Commissioner. The Commissioner did not dispute that the transfers, although contractual, qualified as 'contributions' under statutory definitions. The basis for property acquired by a corporation as a paid-in surplus or contribution to capital is determined by the transferor's basis prior to the transfer. The term 'contribution to capital' first emerged in the Revenue Act of 1932 and has been consistently interpreted in subsequent acts and regulations. The case involving Commissioner v. Arundel-Brooks Concrete Corp. addressed cost basis rather than contributions to capital, despite payments benefiting the supplier of materials. Courts have recognized capital donations from non-stockholders as includable in invested capital, reinforcing the idea that contributions from outsiders should be factored into capital computations.