Burnet v. National Industrial Alcohol Co.

Background

A Louisiana corporation formed in 1911 made and sold beer and then, on November 3, 1919, stopped making alcoholic beer and began producing near beer until 1923. The company owned a brewery and a three‑floor cellar. After prohibition, it used the brewery and one cellar floor for near beer, but two cellar floors and several steel and wooden vats used to age beer were no longer needed and went out of use on November 3, 1919. The Board allowed an obsolescence deduction for the vats but denied any deduction for the two floors; the Court of Appeals reversed on the floors.

Reasoning

The central question was whether the Revenue Act of 1918 permits a tax deduction for loss or obsolescence of physical property caused by prohibition laws. The Government did not dispute that the unused cellar floors had no residual or salvage value. The Court relied on a related decision (the Gambrinus case) holding that §234(a)(7) of the 1918 Act allows an obsolescence allowance when property becomes unusable because prohibition was imminent or took effect. Applying that rule, the Court concluded the brewery is entitled to the deduction and affirmed the lower court’s judgment.

Real world impact

Breweries and similar businesses that lost use of buildings or equipment because of prohibition can claim obsolescence deductions under §234(a)(7) of the 1918 tax law. The ruling affects how tax authorities and courts will treat claims for property made useless by change in law, and it follows the Court’s reasoning in the related Gambrinus decision.