DB Corp. tax case for "obsolescence depreciation" of the 4-cylinder car

[22touring]

After most of the Dodge Brothers Corporation's assets were sold to Chrysler, it continued in existence and tried to depreciate, after the fact and as a matter of obsolescence, "the model and design of the Dodge 4-cylinder automobile".  DB claimed a large tax overpayment and demanded a refund thereof. The IRS held that DB was impermissibly trying to depreciate business goodwill in violation of the IRS's rules, and the U.S. 4th Circuit Court of Appeals ruled on the case in 1941, agreeing with the IRS and disallowing the claimed depreciation. The case contains an interesting historical narrative of the corporation.

 

Dodge Brothers v. United States, 118 F.2d 95 (4th Cir. 1941) :: Justia

Edited May 15, 2023 by 22touring
correction (see edit history)

[nearchoclatetown]

Sure wish I was smart enough to understand all that. Very interesting find. THANKS.

[30DodgePanel]

There for a second, I got excited thinking the club was due something... (  ) until I read this:

 

In income tax accounting, the issuance of bonds at a discount is regarded as an assumption by the issuing corporation of additional interest payments. It therefore becomes incumbent upon us to look to the substance of a given transaction to see whether a discount, in the nature of additional interest, has actually been given by the issuing corporation, thus determining whether such discount comes within the amortization regulation. In New York, Chicago & St. Louis R. R. Co. v. Commissioner, 1931, 23 B.T.A. 177, 196, affirmed in 1933, 62 App.D.C. 29, 64 F.2d 152, the Board of Tax Appeals aptly stated:

 

"Discount is a variable term, but the meaning which is clearly intended in this connection is, the difference between the face amount of the debt which, it is assumed, will be paid at maturity, and the actual lower amount which is received from the lender at the time of the creation of the debt. Colloquially, it is the difference between the face amount of the bonds and the lower cash sale price. The amortization of this discount imports a theory that the discount is an adjustment of the difference between the interest prescribed and the going market rate for money. It is sometimes metaphorically called deferred interest. To a taxpayer on the cash basis, amortization is not deductible, Chicago & Alton R. R. Co. v. United States, 53 Ct.Cl. 41; Baldwin Locomotive Works v. McCoach [D.C.], 215 *104 F. 967, [Id., 3 Cir.] 221 F. 59, because whether this quasi-interest be treated as if paid at the time of the issuance of the bonds or at the time of their maturity, there is no room for a non-cash deduction at any other time when no actual disbursement takes place. On the accrual basis, the theory being that the discount is quasi-interest on a loan, it is treated as if accruing ratably year by year in enlargement of the actual interest expressed in terms in the bond. It seems plain, therefore, that this amortization is but a concept devised for accounting convenience and is limited by the resemblance to interest. Were the discount regarded as a variation in the amount of the principal of the loan either at the time it was made or at the time of repayment, it may be questioned whether even an accrual system could recognize it at intermediate times. It is only as quasi-interest that its amortization is given deductibility."

 

Under this limited interpretation of the meaning of "discount", we are not able to sustain the contentions of appellant.

 

Can someone summarize?
After reading this, my understanding is since the IRS was able to draw a distinction between prior case law and the fact that discount is a variable term, the judge ruled in favor of the IRS and they kept the over payment which was essential due to the DB legacy. Is that a good summarization or am I way off?