Prettyman,* Senior Circuit Judge, and McGowan and Robinson, Circuit Judges.
UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE ROBINSON
These two cases, consolidated in this court, present similar fact patterns and similar issues for our consideration. In each, the assets of a dissolved corporation, consisting chiefly of an apartment building, were distributed, subject to outstanding corporate debts, to its stockholders who promptly discharged the indebtedness and continued, through the medium of a newly-formed partnership, the pre-existing corporate business of operating the facility. In each, deductions for depreciation on the apartment property, taken on partnership returns filed under the District of Columbia Income and Franchise Tax Act of 1947, *fn1 were administratively disallowed, almost totally, as resting upon an improper depreciation basis. In one case, the property's alleged fair market value on liquidation and, in the other, what essentially was its book value at that point, were rejected as appropriate bases; in both, the depreciation base administratively substituted excluded the amount of corporate indebtedness existing at the time of liquidation. The courts whose reviews preceded ours have substantially upheld the administrative determinations.
So, once again, we are called upon to construe provisions of the Income and Franchise Tax Act, but perhaps for the very last time. During the pendency of this appeal, *fn2 the Act was amended to important respects *fn3 and the problems now posed will not recur. *fn4 During the same period, the course of judicial review of District Tax assessments was legislatively altered, *fn5 and such reviews no longer come to this court. *fn6 Since, however, these changes are inapplicable to the litigation at hand, *fn7 we proceed to our task. I
While factually these cases share much in common, there are differences which must be accounted for in any decision of the questions raised. Our review accordingly begins with a summary of the relevant developments in each.
Lencshire House, Inc., a Maryland corporation, was organized on March 21, 1949, and for the next 15 years it ran an apartment building in the District of Columbia. On March 24, 1964, the corporation dissolved and Lencshire House Company, a partnership, was formed. The partners were the corporation's three stockholders at dissolution, and their interests in the partnership coincided with their shareholdings at that time. The corporate assets were distributed, subject to the corporate liabilities, to the stockholders, who took conveyance of the apartment property as tenants in common and thereafter continued its operation as partners. *fn8
On liquidation, the corporation had assets of $756,892.31 and liabilities of $809,751.83, and so a net deficit of $51,859.52. *fn9 The principal asset was the apartment property, which had book valuations of $42,529.04 for land and, for building and maintenance equipment, $1,070,640.38 less a depreciation reserve of $448,772.29, or a depreciable net of $621,868.09. *fn10 The corporation's books also recorded paid-in surplus of $1,500.00 -- the shareholders' capital stock investment -- which, in conjunction with an accrued deficit of $64,997.78 as reduced by undistributed profits of $11,638.26 to $53,359.52, produced the net deficit of $51,859.52 referred to. *fn11 The corporation's main liability was a balance of $795,948.76, principal and accrued interest, on a corporate promissory note secured by the lien of a first deed of trust on the apartment premises. *fn12 That indebtedness remained outstanding when the corporation dissolved and the conveyance of that property occurred. *fn13 Thereafter, the partners obtained refinancing and paid the note in full.
On their franchise tax returns for the taxable periods ending at the close of calendar years 1964 and 1965, *fn14 the partners listed deductions for depreciation on the apartment property. The deductions were predicated upon a fair market valuation of $966,273.37 at inception of the partnership, of which $884,742.45 was allocated to improvements. The District's assessing authorities disallowed the deductions, practically in their entirety, *fn15 on the theory that property received as a dividend -- ostensibly the apartment property -- could not enter the depreciation base, *fn16 and assessed tax deficiencies accordingly. On appeal therefrom, *fn17 the District of Columbia Tax Court *fn18 sustained the assessment with but a very minor adjustment. *fn19 The matter is here on the taxpayers' petition for review. *fn20
Crestwood Apartment Corporation, a Delaware entity, owned and operated an apartment building in the District from its inception in 1950 until its dissolution in January, 1962. On the latter date, its assets were $1,679,222.26, including the apartment property valued on the corporation's books at $1,630,848.12 net of depreciation, *fn21 and its liabilities were $1,576,763.37, of which $1,763.37 was the residue of the corporation's accounts payable and $1,575,000.00 was the unpaid principal balance of an unsecured corporate note. *fn22 Net worth was then $102,458.89, of which $1,200.00 was paid-in surplus -- the capital stock investment -- and $101,258.89 was earned surplus. *fn23
After dissolution, the corporate assets were distributed ratably to the stockholders, *fn24 who immediately formed a partnership, Crestwood Apartment Company, and continued the operation of the apartment building. Appellants, the distributees, have maintained throughout that on distribution they assumed the corporation's liabilities proportionately to their stockholdings, and that the distribution and assumption were in complete cancellation and redemption of their stock. *fn25 In any event, it appears without controversy that the distributees within a matter of days after distribution, paid the corporation's note and accounts payable in full.
Each of the partnership's franchise tax returns for the four calendar years 1962-65 claimed a deduction for depreciation on the apartment building. The deduction was predicated upon an assumed period of useful life and a formulated cost basis. *fn26 Cost was computed at $1,630,848.12, the aggregate of paid-in surplus, earned surplus and corporate liabilities, minus the aggregate of the distributed assets other than the apartment property. *fn27 This method of computation, it will be noted, set the cost figure for that property at precisely its value on the books of the corporation. *fn28
The District's assessing authorities disagreed, however, and fixed the basis for depreciation at $66,222.87. Their standard for measuring basis seemingly was cost to the partnership; and their computation involved aggregation of the $1,200.00 in paid-in surplus and the $101,258.89 in earned surplus and subtraction therefrom of the $36,236.02 in cash distributed on the corporate dissolution. The factor thus chiefly differentiating the partnership's and the District's calculations of basis was the corporate indebtedness of $1,576,763.37 outstanding at liquidation, which the former included, but the latter disallowed.
Tax deficiencies were assessed for each of the four years and were paid under protest, and suit was then filed in the District Court seeking recovery of the excess payments. *fn29 On the taxpayers' motion for partial summary judgment on the main issue -- the inclusions of the corporate liabilities in the depreciation base -- the court concluded in the District's favor. *fn30 The ...