Unpublished Disposition, 916 F.2d 716 (9th Cir. 1990)

MEMORANDUM^* 

Appellant Maier Brewing Company, now known as the S & P Company ("taxpayer"), appeals the tax court's denial of its claim for a special deduction pursuant to 26 U.S.C. § 1341 and disallowance of an obsolescence deduction for its Lucky Lager brewery. We have jurisdiction pursuant to 26 U.S.C. § 7482 and affirm.

"We review the Tax Court's interpretation of the Internal Revenue Code de novo." Orvis v. Commissioner of Internal Revenue, 788 F.2d 1406, 1407 (9th Cir. 1986). Additionally, " [t]he Tax Court's application of law to undisputed facts is reviewable de novo." Manocchio v. Commissioner of Internal Revenue, 710 F.2d 1400, 1402 (9th Cir. 1983). Accordingly, we review the Tax Court's decision that Sec. 1341 is inapplicable to the payment here de novo. We also review de novo the Tax Court's ultimate conclusion that an obsolescence deduction is not warranted. Nonetheless, we must review under the clearly erroneous standard the Tax Court's factual finding that the useful life of the Lucky Lager brewery was equal to its physical life. See Watson Land Co. v. Commissioner of Internal Revenue, 799 F.2d 571, 577-78 (9th Cir. 1986).

* Section 1341 applies if an item was previously included in the taxpayer's gross income under a claim of right but a deduction exceeding $3,000 is allowable in the current taxable year because it was established after the prior year that the taxpayer did not have an unrestricted right to the item or a portion thereof and indeed had to give the amount back. If these conditions apply, the taxpayer's liability need not be computed in the normal way, with a deduction for the restoration taken in the current year. Indeed, if the amount would be smaller, the taxpayer's liability will be the current year's tax without the deduction, but reduced by the amount that the tax in the year of receipt would have been decreased had the amount restored been excluded from income in that prior year. See United States v. Skelly Oil Co., 394 U.S. 678, 682 (1969) ("Whenever Sec. 1341(a) (5) applies, taxes for the current year are to be reduced by the amount taxes were increased in the year or years of receipt because the disputed items were included in gross income."); Shipley v. United States, 608 F.2d 770, 774 (9th Cir. 1979).

Taxpayer argues that an amount it paid to the Keller Street Development Company ("Keller") pursuant to a California state court judgment effectuating a rescission of Keller's sale of its brewery to taxpayer¹  qualifies under Sec. 1341 as an amount it had previously included in its gross income under a claim of right. The Tax Court disagreed, on the basis that the payment to Keller had already been characterized as akin to interest or rent for purposes of Keller's tax liability, see Keller St. Dev. Co. v. Commissioner of Internal Revenue, 688 F.2d 675, 682 (9th Cir. 1982). The Tax Court ruled that " [b]ecause it was akin to interest or rent, the $ 2,432,175.45 paid to Keller was an ordinary and necessary business expense deductible under section 162," not an amount previously included in gross income. Maier Brewing Co. v. Commissioner, 54 T.C.M. (CCH) 46, 52 (1987). We agree with the Tax Court's reasoning and adopt it as our own.

II

Taxpayer additionally argues that the Tax Court erred in denying it the benefit of an obsolescence deduction under 26 U.S.C. § 167(a) (1) for its subsidiary's Lucky Lager brewery. The Tax Court maintained that appellant had failed to meet its burden of establishing that the brewery had either become or was becoming useless for the purpose to which it was being used. We agree with the Tax Court's analysis here as well. Taxpayer makes much of the fact that its obsolescence deduction turned out to be prescient: its estimation that the plant had four remaining years of useful life turned out to be true. Yet such hindsight evidence is clearly irrelevant, see Western Terminal Co. v. United States, 412 F.2d 826, 826-27 (9th Cir. 1969) (per curiam), as is the testimony of taxpayer's expert witness that the plant was obsolescent at the time it closed. Indeed, the record appears to reveal that taxpayer's expert witness on obsolescence was never asked his opinion about the plant's obsolescence in the critical year 1974.

The expert witness also improperly equated obsolescence, at least in part, with unprofitability. See Ames v. Commissioner of Internal Revenue, 626 F.2d 693, 697 (9th Cir. 1980). And although he did give a highly pessimistic view of recent trends in the brewery industry, it was very generalized, not explicitly tethered to the critical year 1974, and counterbalanced by two rather damaging admissions. First, despite the aforementioned gloom, the expert said that an enterprising businessman might attempt to revitalize the closed plant. This testimony militates against a finding that the Lucky Lager brewery had become useless as a brewery. Second, in the same year that it claimed an obsolescence deduction for the Lucky Lager plant, taxpayer reached an agreement with the General Brewing Corporation (makers of the Falstaff brand) to produce Falstaff beer and ale at the Lucky Lager plant. This is surely inconsistent with a determination by taxpayer in the same year that the plant had only four remaining useful years of life.

Finally, taxpayer's contention that the Tax Court's disallowance of an obsolescence deduction for the Lucky Lager plant is inconsistent with its allowance of such a deduction for the Maier Brewing plant is not persuasive. Plenty of evidence supported the finding of obsolescence with regard to the Maier Brewing plant. As the Tax Court concluded:

Petitioner has met its burden of proving that the Maier Brewing plant was useless as a brewery in 1974. Beer production at the plant had ceased in 1973, and operations there were discontinued in 1974. The plant was built in 1875, was falling apart, could not be dismantled without closing the Santa Ana Freeway, and could not be used for any other commercial purpose because it was full of equipment. Since the brewery was closed in 1975, there has been no offer to purchase the property.

Maier Brewing Co., 54 T.C.M. (CCH) at 59.

III

The judgment of the Tax Court is AFFIRMED.