Opinion of the Court.

339 U.S.

Petitioner is a New York corporation which at all times material conducted manufacturing operations in a number of plants located in Illinois, Indiana, Missouri and Tennessee. From 1914 to 1939 petitioner received in seventeen transactions an aggregate of $885,559.45 in cash and $85,471.56 in buildings from various community groups in twelve towns. Except in one instance, each transfer was pursuant to a written contract between petitioner and the respective community group. The contracts were of three types: The first required petitioner to locate, construct and equip, or enlarge, a factory in the community, to operate the factory "continuously so long as it is practicable in the conduct of its business for at least a period of ten years," and to meet a minimum payroll, in consideration of which the community group agreed to transfer land and cash "to be used for the payment of suitable factory building or buildings"; in one instance existing buildings were also transferred and in another instance only buildings and no cash sum. Under this type of contract petitioner was obligated in the event of noncompliance to transfer the building back to the community group or to repay the sum. Under a second type of agreement petitioner in consideration of a cash payment undertook to enlarge an existing factory and to operate it for a period of ten years with a stipulated minimum addition to personnel. A third type of contract called only for the construction of an addition to petitioner's existing factory in consideration of a cash sum. Contracts of the latter type were in the nature of supplementary agreements with community groups and may have involved an obligation on the part of petitioner to continue operation of the additional plant facilities for the unexpired remainder of a period not

The value of the land upon which the buildings were located was not included in petitioner's books and is unimportant for this proceeding.

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Opinion of the Court.

exceeding ten years agreed upon in an earlier contract. No restriction was imposed in any instance as to the use which petitioner might make of the property contributed or acquired with cash, or of the proceeds if the property should be disposed of, after expiration of the required period of operation. The Tax Court assumed performance by petitioner according to the terms of the agreements, and the Court of Appeals did not differ. In the case of eleven contracts the stipulated period for performance had expired prior to the taxable years in question.

The single transaction which was not based upon such contractual obligations involved a $10,000 cash bonus paid in 1914, according to the minutes of petitioner's board of directors, "as a part of . . . organization expenses in starting the factory" in the particular town.

The cash sums received by petitioner from the groups were not earmarked for, or held intact and applied against, the plant acquisitions in the respective communities but were deposited in petitioner's general bank account from which were paid general operating expenses and the cost of all assets acquired, including factory buildings and equipment in the towns involved. The cash payments were debited to cash account on the assets side of petitioner's ledger and were credited to earned surplus either upon receipt or after having first been assigned to contributed surplus. The values of the buildings acquired were set up in a building account on the assets side and were credited to surplus. In every instance the cash received by petitioner from a community group was less than the amount expended by it for the acquisition or construction of the local factory building and equipment.

In computing its normal tax net income for the taxable years in controversy petitioner deducted depreciation on

5 Both courts below and the Commissioner have expressly assumed, as petitioner asserts, that the receipts of property and cash were not taxed as income.

Opinion of the Court.

339 U.S.

the buildings transferred by the community groups and on the full cost of the buildings and equipment acquired or enlarged in the communities from which it had received cash. Petitioner also included the total of $971.031.01 in cash and other property in its equity invested capital. The Commissioner disallowed depreciation deductions with respect to the buildings transferred (in the value of $85,471.56) and the properties acquired with cash to the extent paid to petitioner by the groups (in the value of $885,559.45). In computing the amount of depreciation to be allowed, the Commissioner deducted that portion of the cost of the buildings, land and machinery which was paid with such contributed cash or equivalent funds. The Commissioner in making such reductions allocated the cash contribution to each item, such as buildings, land if any had been purchased, and machinery in the proportion of the total cost of such item to the total cost of the project. The Commissioner also disallowed inclusion in equity invested capital of the total assets transferred, reducing such capital as computed by petitioner by $971,031.01.

The Tax Court reversed the Commissioner's disallowance of depreciation with respect to that portion of the acquisitions paid for with cash. It concluded that these items had "cost" and therefore "basis" to petitioner, since they had been paid for from petitioner's own unrestricted funds in which the cash contributions had been deposited without earmarking; as to the buildings transferred, the Court sustained the Commissioner on the ground that these transfers were not gifts and therefore the trans

6

The Commissioner does not deny that such deductions were disallowed for the first time in 1943, following the decision in Detroit Edison Co. v. Commissioner, 319 U. S. 98 (1943).

The amount thus disallowed on account of depreciation was $22,472.60 for the fiscal year ended 1942 and $24,307.10 for the fiscal year ended 1943. There was no determination by the Commissioner of a deficiency in petitioner's normal tax for either year.

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Opinion of the Court.

feror's basis was not available to petitioner. It held that the petitioner was in error in recording the contributions in equity invested capital as "contributions to capital" because only stockholders could make such contributions." The Court of Appeals, reversing the Tax Court as to the allowance of depreciation deductions with respect to property acquired with cash, held that to the extent of the contributions there was no cost to petitioner."

We think the assets transferred to petitioner by the community groups represented "contributions to capital" within the meaning of § 113 (a) (8) (B) and required no reduction in the depreciation basis of the properties acquired. The values which the taxpayer received were additions to "capital" as that term has commonly been understood in both business and accounting practice; "

11

8 The Tax Court relied at this point upon McKay Products Corp., 9 T. C. 1082 (1947), which followed Frank Holton & Co., 10 B. T. A. 1317 (1928) and A. C. F. Gasoline Co., 6 B. T. A. 1337 (1927), decided under earlier excess profits tax laws, and Liberty Mirror Works, 3 T. C. 1018 (1944), involving I. R. C. § 718. The opinions in Frank Holton & Co. and Liberty Mirror Works regarded LaBelle Iron Works v. United States, 256 U. S. 377 (1921), as controlling.

9

For this result the Court of Appeals cited Detroit Edison Co. v. Commissioner, 319 U. S. 98 (1943); Commissioner v. ArundelBrooks Concrete Corp., 152 F. 2d 225 (C. A. 4th Cir. 1945); and its own prior decision in C. L. Downey Co. v. Commissioner, 172 F. 2d 810 (C. A. 8th Cir. 1949). In affirming on the invested capital issue the Court of Appeals relied in part on LaBelle Iron Works v. United States, note 8 supra, and on the Detroit Edison case.

10 See O'Meara, Contributions to Capital by Non-shareholders, 3 Tax L. Rev. 568, 572 (1948).

No suggestion is made by the Commissioner that because the transfers were the subject of contract they were not "contributions" within the statute.

11 See, e. g., Current Problems in Accounting-Proceedings of the Accounting Institute, 1941, p. 20 (Revised Statement by American Accounting Association of Accounting Principles underlying Corporate Financial Statements); Guthmann and Dougall, Corporate Financial Policy 525 (1940); Harvey, Some Indicia of Capital Transfers under the Federal Income Tax Laws, 37 Mich. L. Rev. 745, 747,

339 U.S.

Opinion of the Court.

conformably with this usage the pertinent Treasury Regulations have consistently recognized that contributions to capital may originate with persons having no proprietary interest in the business." That this interpretation is in harmony with broad congressional policy as to depreciation deductions was emphasized by the Third Circuit when considering the similar situation presented in Commissioner v. McKay Products Corp., supra, 178 F.2d at 643:

"... the assets received . . . are being used by the taxpayer in the operation of its business. They will in time wear out, and if [the taxpayer] is to continue in business, the physical plant must eventually be replaced. Looking as they do toward business continuity, the Internal Revenue Code's depreciation provisions and especially those which provide for a substituted rather than a cost basis-would seem to envision allowance of a depreciation deduction in situations like this. . . ."

n. 6 (1939); Marple, Capital Surplus and Corporate Net Worth 12, 136–137 (1936). Cf. Magill, Taxable Income 389 (rev. ed., 1945); 1 Mertens, Law of Federal Income Taxation § 5.14 (1942); Teras & Pac. R. Co. v. United States, 286 U. S. 285, 289 (1932); Lykes Bros. S. S. Co., Inc., 42 B. T. A. 1395, 1401 (1940), aff'd 126 F. 2d 725, 727 (C. A. 5th Cir. 1942); Helvering v. Claiborne-Annapolis Ferry Co., 93 F.2d 875, 876 (C. A. 4th Cir. 1938).

12 Treas. Reg. 86, Art. 113 (a) (S)-1; Treas. Reg. 94, Art. 113 (a) (8)-1; Treas. Reg. 101, Art. 113 (a) (8)-1; Treas. Reg. 103, §19.113 (a) (8)-1; and Treas. Reg. 111, § 29.113 (a) (8)-1 have read in part: "In respect of property acquired by a corporation after December 31, 1920, from a shareholder as paid-in surplus, or from any person as a contribution to capital, the basis of the property in the hands of the corporation is the basis which the property would have had in the hands of the transferor if the transfer had not been made...." The provision of § 113 (a) (5) (B), Revenue Act of 1932, in which the term "contribution to capital" first appeared in federal revenue legislation, was reenacted without change in the Act of 1934 and, following the above interpretation in the regulations, in the Acts of 1936 and 1935 and in the Internal Revenue Code.