Appeal from the District Court of the United States for the District of New Jersey; Guy L. Fake, Judge.
Before BIGGS, CLARK, and JONES, Circuit Judges.
In these sad days one does not have to stress the price of glory. Even in the narrow financial field of the case at bar that price has been exceedingly high. A Senate Finance Committee Report estimates it at $400,000,000 in tax refunds, 74th Cong. 2nd Sess. Senate Report 2337, p. 17. This diminution in revenue has, perversely, occurred as a result of a statute enacted to finance our national activities in World War No. 1. It reads: "In the case of buildings, machineary, equipment, or other facilities, constructed, erected, installe,d or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosection of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. * * * " Revenue Act of 1918, § 234(a)(8), 40 Stat. 1077.
We say as a result of the statute - we should rather say as a result of administrative and judicial activity and inactivity in its interpretation. For that interpretation, such as it is, has proceeded for more than twenty years in at least partial disregard of one of the salient standards by which the application of the stature is limited.
The standard is subjective, and is inherent in the woring of the measure. The deduction is not allowed on the cost of "facilities for the production of articles contributing to the prosecution of the present war, constructed, erected, etc." The prepositional phrase follows and so modifies the participles "constructed, erected, installed or acquired". Verbs denote action and when that action is by a person it reflects the mental processes of the actor. "For", as used in the statute, can only describe those processes. Accordingly, both the courts and the Board have on occasion measured the applicability of the statute in temrs of the taxpayer's state of mind, see Merchants Transfr & Storage Co. v. Burnet, 4 Cir., 49 F.2d 56; Id., 17 B.T.a. 290, and cases there cited. So, too, the grammatically analogous phrase "transactions entered into for profit" (occurring in a cognate*fn1 section of the statute) has received a like construction. Paul, Motive and Intent in Federal Taxation, Selected Studies in Federal Taxation, Second Series, p. 280.
The word "for" does not, of course, define the requisite state of mind with controlling precision. Need the corporate taxpayer merely construct war-suited facilities intentionally during the war period, or must it do so with a motive of constructing such facilities "for the prosecution of the present war?" In Weir v. Commissioner, 3 Cir., 109 F.2d 996, we recently undertook a similar inquiry into the meaning of "for" as used in the "for profit" section above cited. Though the legislative history of that enactment was inconclusive, we were able with the assistance of a clear cut declaration of statutory intendment by the Supreme Court to deduce that mere intention and not motive was requisite. Here, we think the opposite is true, and that motive not intention is the criterion. This variance is necessatated by the peculiar and distinctive purpose of the statute at bar, a purpose amply evidenced by its legislative history.
That history is perfectly plain. It appears succinctly in the introductory statement of the Chairman of the House Committee on Ways and Means which frarmed the bill, Mr. Kitchin: "We allow them now to make deductions for depreciation and depletion, as in the case of mines and oil and gas wells. I think the amortization provision will apply largely to corporations that will go into making real war material for the governement. Take ferromanganese, for example. The War Trade Board has been appealing to different individuals and corporations to make it. One man came to me and said 'I am willing to put $200,000 in a plant to produce it, but the war might end at any time, and my contract would then end, and although I mgiht make $50,000 or more the first year I would have $200,000 invested in a plant that would be worthless. I would lose on the transaction, and therefore can not afford to put up or expand my plant unless I can be sure of a reasonable amortization provision'. The amortization provision is intended mostly to take care of cases of that kind. The department sdealing in war contracts are very anxious that we should incorporate such a provision in this bill." 56 Cong. Rec., Part 12 (Appendix p. 666), September 6, 1918. A leading tax expert's contemporary summary is in much the same vein: "After our entry into the war an abnormal activity took place. Men actuated by patriotic motives and disregarding sound business judgment entered upon extended enlargement of plants, or the creation of new plants, in order to supply the needs of the country. Production was encouraged everywhere. It was evident that demand for the articles produced would cease or materially diminish when the war ended. Costs were abnormally high and their ordinary effect on business was ignored. Speed was the essence, and adding to the high costs due to inflation were the bonuses for prompt delivery, extra overtime pay and extra cjarges for rapid transportation. A futher deterrent to expansion was the abnormally high war-profits tax. Under ordinary conditions the cost of plant and equipment would be charged off over the useful life of the property. But such conduct would have been ruinous in the case of those who put up plants for the specific purpose of assisting in the carrying on of the war. It was necessary, therefore, to allow the extraordinary cost of special plants and facilities to be charged against the income produced by the extraordinary effort which necessitated their construction before assessing an abnormally high was tax." Holmes, Loss as a Factor in the Determination of Income, Columbia University Lectures, The Federal Income Tax, 137, pp. 154, 155.
See, also, 57 Cong. Rec. Pt. 1, p. 549; 65th Cong., 2nd Sess., House Report 767, p. 10; 65th Cong., 2nd Sess., Senate report 617, pp. 7, 8; Hearings before the Senate Committee on Finance, 65th Cong., 2nd Sess., on H.R. 12863, Pt. 2, pp. 3-18; Klein, Federal Income Taxation, pp. 670, 671. In addition a sort of ex post facto legislative history may be gathered from the proceedings of the Select Senate Committee (Couzens Committee) which investigated the Bureau of Internal Revenue in 1925. According to its Report: " * * * it is obvious that the purpose of this provision was to stimulate the production of articles contributing to the prosecution of the war by encouraging the construction, erection, installation, and acquisition of the facilities required for that purpose * * * It was manifestly the purpose of Congress to deny this privilege with respect to facilities which had been acquired prior to our entrance into the war for the purpose of participating in the huge profits being realized from the manufacture and sale of articles to the Allies." 69th Cong., 1st Sess., Senate Report 27, p. 135.
Finally, insofar as regards the broader aspects of tax policy and economy, it is reassuring to notice the role assigned to amotization in recent congressional graplings with the problem of war revenues. All agree that the crux of that problem is the stimulation of production in the face of high taxation, inflated costs, and apprehended peacetime obsolescence. As the Special Senate Committee (Nye Committee) on the Investigation of the Munitions Industry puts it: " * * * However, during wartime, when the erection of new plants and additions to plants is vitally necessary to furnish the needed increased production called for by wartime demands, amortization takes on added significance. If some return on investment is necessary to secure expansion of industry, it is clear that some assurance that the investment itself will not be lost must also be furnished. And the mere fact that war calls for new facilities indicates that without the war demand those faciliites may be useless. The prospect of tax avoidance increases industry's natural wartime demand for liberal amortization allowances and the Government's desire to encourage expanded production conflicts with its need of revenue." 74th Cong., 1st Sess., Senate Report 944, Pt. 2, p. 30. See, also, 74th Cong., 2ns Sess., Senate Report 2337, p. 16.
The sources above quoted and cited make quite clear the object of the amortization section. Its aim was to quicken the industrial pulse of a country then undergoing the crisis of war. Stimulation was necessary because industrialists, however patriotic, must be reluctant to subject the capital entrusted to them to the evils of over-expansion - either in the creation of war specialities, or in the stepped-up production of goods suited to war and peace alike. Such reluctance is, by definition, a state of mind; and that state of mind, by hypothesis, is repugnant to an unaltered pre-war resolve to increase the pre-war output of "war facilities". Hence, what is demanded of the taxpayer is a purpose of wartime, not pre-war, expansion. That purpose, furthermore, falls into the category of motive rather than intent. For wartime expanision may be intentional though reluctant. But it cannot be motivated by factors giving rise to a pre-war desire for identical expension, and still be reluctant. So an accurate elimination of the mischief sought to be remedied by the amortization provision (reluctance to expand) can only be achieved by inquiry into the taxpayer's motive.
Let us then examine the "motive" of this plaintiff-appellant. In doing so, we assume the validity of several findings on which the former opinion of this court seems to have been based.*fn2 That a certain violence inheres in that assumption appears, we may say, from the most cursory reading thereof. A comparison of the language of these findings with the Record discloses that they are a fairly close transcription of the testimony of the witness Brown (see Record, pp. 170-216), a former vice president of the appellant company. They hardly, therefore, come within the rule of judicial notice. If they did, we should seriously question extending the rule to include the mental state of a democracy faced with the cataclysm of a World War. In those days, Dr. Gallup was still in short pants and our own poor judicial notice would indicate an election won on the premise of keeping us out of war. The cases certainly go no further than to notice a public sentiment implemented by some official manifestation such as an election. See Jones Hollow Ware Co. v. Crane, 134 Md. 103, 106 A. 274, 3 A.L.R. 1658; 20 Am.Jur. § 63, p. 84, and § 64, p. 86; 15 Iowa Law Review 210.
Leaving psychology for facts, what do we find? We may say at the outset that we do not commend the form of the record on the first appeal. The case was tried in the District in January and February, 1933. It was decided in February, 1934. The appeal was taken and allowed the following April. Thereupon the testimony seems to have been abandoned and instead a series of 46 special findings of fact and conclusions of law as adopted by the court were filed. They are to some extent internally inconsistent, and contain exceptions on which an appellate court cannot pass because of the absence of the actual evidence. These handicaps do not, in our judgment, justify this court's earlier lack of concern (Kelly-Springfield Tire Co. v. U.S., 3 Cir., 81 F.2d 533) with the learned trial judge's discussion of the legislative intent (conclusions Nos. 43, 44, 45 and 46) and with his findigns of fact. Obviously in the entire absence of any testimony, it should have been bound by the latter. At any rate, those findings (First Record, pp. 27-70) again before us in the instant appeal (Record, pp. 97-136) present this picture.
The plaintiff-appellant, Kelly-Springfield Tire Company, a New Jersey corporation, an automobile tire manufacturing company, grew out of an earlier organization, the Consolidated Rubber Tire Company, a New Jersey corporation (incorporated April 15, 1899). In its growth it acquired the stock of the Kelly-Springfield Company, a New York corporation, in 1911. The combined corporations had polants in Buffalo, New York, and Akron and Wooster, Ohio. Soon (November 16, 1915) after their merger, the minutes show: "An extended discussion took place regarding the necessity for building a new factory for the Company, and it was the opinion of all those present ...