Brown Shoe Co. v. Commissioner
Headline: Local community payments to attract factories count as capital contributions, Court allows companies to take depreciation and include those values in invested capital, easing tax treatment for businesses that receive such subsidies.
Holding: The Court held that cash and buildings given by community groups to induce factory location are contributions to capital, allowing the company to depreciate those assets and include their value in equity invested capital.
- Lets companies depreciate buildings donated by towns for tax deductions.
- Adds community contributions to a firm's invested capital, raising excess-profits tax credits.
- Improves tax treatment for municipal cash and property donations to businesses.
Summary
Background
A New York manufacturing company operated several plants in different states. Beginning in 1914, local community groups in a number of towns gave the company cash and buildings to induce it to locate or expand factories there. The transfers—17 transactions totaling $885,559.45 in cash and $85,471.56 in buildings—were mostly pursuant to written contracts that required the company to operate the plants for set periods, often ten years. The company deposited the cash in its general account and claimed depreciation deductions and included the full value of the transfers in its invested capital for excess-profits tax calculations.
Reasoning
The core question was whether those community payments and property were “contributions to capital” so the company could depreciate the assets and count their value as equity invested capital. The Internal Revenue Code provisions at issue treat property acquired as a contribution to capital as having the transferor’s basis. The Court concluded the transfers were motivated by community purposes, were intended as capital additions, and fit the ordinary business and accounting meaning of contributions to capital. The Court distinguished an earlier case about customer payments for service and rejected the Commissioner’s narrower view.
Real world impact
The Court held that the company may depreciate the property received or acquired with the community cash and include the transfers’ value in equity invested capital under the tax statutes cited. The decision reverses the Court of Appeals and sends the case back for tax computations consistent with this ruling, allowing the company tax relief from those community contributions.
Dissents or concurrances
Justice Black disagreed and would have affirmed the Court of Appeals’ contrary decision, but the majority reversed.
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