Background
Strawberry Bridge was owned by the taxpayer and, after it was discovered that the bridge needed significant repairs, the taxpayer gave the bridge to the City of Philadelphia in exchange for a 10-year extension of the taxpayer's railway franchise in Fairmount Park which was owned by the City of Philadelphia. Since the 10-year extension had no market value, the taxpayer used the depreciating bridge as his new basis, then proceeded to claim overpayment of tax due to his failure to claim any depreciation. The Internal Revenue Service disagreed with the taxpayer's reasoning, and disallowed his claim for a larger depreciation deduction. [1]
Philadelphia, known colloquially as Philly, is the largest city in the U.S. state and Commonwealth of Pennsylvania, and the sixth-most populous U.S. city, with a 2018 census-estimated population of 1,584,138. Since 1854, the city has been coterminous with Philadelphia County, the most populous county in Pennsylvania and the urban core of the eighth-largest U.S. metropolitan statistical area, with over 6 million residents as of 2017. Philadelphia is also the economic and cultural anchor of the greater Delaware Valley, located along the lower Delaware and Schuylkill Rivers, within the Northeast megalopolis. The Delaware Valley's population of 7.2 million ranks it as the eighth-largest combined statistical area in the United States.
In accountancy, depreciation refers to two aspects of the same concept:
The Internal Revenue Service (IRS) is the revenue service of the United States federal government. The government agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States. The IRS is responsible for collecting taxes and administering the Internal Revenue Code, the main body of federal statutory tax law of the United States. The duties of the IRS include providing tax assistance to taxpayers and pursuing and resolving instances of erroneous or fraudulent tax filings. The IRS has also overseen various benefits programs, and enforces portions of the Affordable Care Act.
Initially, a disagreement also arose out of the fact that the Commissioner amortized the original cost of the franchise over the period beginning on the date the franchise was granted, while the taxpayer amortized it over the period beginning on the date the railway began operating. [1] However, this disagreement was abandoned by the both parties and is not mentioned in either parties' brief, nor was there any mention of it during the oral arguments. [2]
The opinion was written by Judge Laramore, with Judges Madden, Whitaker, Littleton, and Chief Judge Jones all concurring. No concurring opinion was published. [1]
Court holding
The court found that both Strawberry Bridge and the 10-year exchange had a value and the contract between the taxpayer and the City of Philadelphia had the proper amount of consideration. [1] Looking to §1012 (then §113) of the tax code, which defines basis as the cost of the property the court found that "one view is that the cost basis of property received in a taxable exchange is the fair market value of the property given in the exchange." [3] The reverse, that one could determine the value of the property given by considering the value of the property received, was likewise true. Thus, the court found that in order to maintain harmonization between the different sections of the tax code, it was necessary that the cost basis of the property received be equal to its fair market value at the time of the exchange. [3]
Though the taxpayer contested that the value of either the extended franchise or the Strawberry Bridge was not ascertainable, the court disagreed. [3] Though the court acknowledged that it was possible that a piece of property's value was not quantifiable (citing Helvering v. Tex-Penn Oil., 200 U.S. 481, 499; Gould Securities Co. v. United States, 96 F.2d 780) it believed that those circumstances were rare. [3] Therefore, the case was remanded back to the Commissioner to determine the price. [1]
Implications
This case implies that almost anything can be quantified, and greatly narrows the cases in which the courts (and the I.R.S.) would accept the premise that the exchange could not be quantified.
There are three implications from the holding in Philadelphia Park: [4]
1) Following a taxable exchange the taxpayer's basis in the property he received in the exchange is always equal to the fair market value of the property received. Therefore, a taxpayer can always determine his or her basis in something exchanged, because it will be the value of the thing it is exchanged for. Philadelphia Park demonstrates that the taxpayers' basis in the thing he/she received must be the fair market value of the thing at the time of receipt.
2) Every taxable year stands alone—the Court uses the idea of basing the current year's tax consequences based on what should have happened in the prior year.
3) Where the taxpayer does not know, or cannot reasonably ascertain the value of the property received in the exchange, all he needs to do is determine the value of the property received as consideration; he will then be able to assume that the value of the property given is equal to the value of property received.
In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be "tangible book value".
Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and credits. The difference between deductions, exemptions and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.
Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender can seize and sell the collateral, but if the collateral sells for less than the debt, the lender cannot seek that deficiency balance from the borrower—its recovery is limited only to the value of the collateral. Thus, nonrecourse debt is typically limited to 50% or 60% loan-to-value ratios, so that the property itself provides "overcollateralization" of the loan.
Under U.S. federal tax law, the tax basis of an asset is generally its cost basis. Determining such cost may require allocations where multiple assets are acquired together. Tax basis may be reduced by allowances for depreciation. Such reduced basis is referred to as the adjusted tax basis. Adjusted tax basis is used in determining gain or loss from disposition of the asset. Tax basis may be relevant in other tax computations.
In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items.
Accelerated depreciation refers to any one of several methods by which a company, for 'financial accounting' or tax purposes, depreciates a fixed asset in such a way that the amount of depreciation taken each year is higher during the earlier years of an asset’s life. For financial accounting purposes, accelerated depreciation is expected to be much more productive during its early years, so that depreciation expense will more accurately represent how much of an asset’s usefulness is being used up each year. For tax purposes, accelerated depreciation provides a way of deferring corporate income taxes by reducing taxable income in current years, in exchange for increased taxable income in future years. This is a valuable tax incentive that encourages businesses to purchase new assets.
Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation. In other words, because the IRS allows a taxpayer to deduct the depreciation of an asset from the taxpayer's ordinary income, the taxpayer has to report any gain from the disposal of the asset as ordinary income, not as a capital gain.
Under the U.S. tax code, businesses expenditures can be deducted from the total taxable income when filing income taxes if a taxpayer can show the funds were used for business-related activities, not personal or capital expenses. Capital expenditures either create cost basis or add to a preexisting cost basis and cannot be deducted in the year the taxpayer pays or incurs the expenditure.
In tax law, amortization refers to the cost recovery system for intangible property. Although the theory behind cost recovery deductions of amortization is to deduct from basis in a systematic manner over an asset's estimated useful economic life so as to reflect its consumption, expiration, obsolescence or other decline in value as a result of use or the passage of time, many times a perfect match of income and deductions does not occur for policy reasons.
Simon v. Commissioner, 68 F.3d 41, was a decision by the Second Circuit of the United States Court of Appeals relating to the deductibility of expensive items or tools that may increase in value as a collectible but decrease in value if used in the course of a business or trade.
United States v. Davis, 370 U.S. 65 (1962), is a federal income tax case argued before the United States Supreme Court in 1962, holding that a taxpayer recognizes a gain on the transfer of appreciated property in satisfaction of a legal obligation.
Burnet v. Logan, 283 U.S. 404 (1931), was a case before the United States Supreme Court.
Selig v. United States, 740 F.2d 572, is a case decided by the United States Court of Appeals for the Seventh Circuit related to the amortization of intangible property.
Commissioner v. Tufts, 461 U.S. 300 (1983), was a unanimous decision by the United States Supreme Court, which held that when a taxpayer sells or disposes of property encumbered by a nonrecourse obligation exceeding the fair market value of the property sold, the Commissioner of Internal Revenue may require him to include in the “amount realized” the outstanding amount of the obligation; the fair market value of the property is irrelevant to this calculation.
Warren Jones Company v. Commissioner of Internal Revenue, 524 F.2d 788 was a taxation decision by the United States Court of Appeals for the Ninth Circuit.
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Farid-Es-Sultaneh v. Commissioner, 160 F.2d 812 is a United States federal income tax case. It is notable for the following holding:
Early v. Commissioner, 445 F.2d 166 was a United States income tax case, holding that an agreement between taxpayers and heirs of decedent—pursuant to which taxpayers received a joint life interest in income from the trust estate in return for the surrender of stock allegedly given to them by the decedent—was actually a compromise of the taxpayers' disputed right to the stock, and since they claimed the stock as donees, they were to be treated as having acquired their life estate in that capacity for federal income tax purposes.