## Facts

- Fribourg Navigation Co., a shipping company, bought a used Liberty ship in December 1955 for $469,000.
- Before purchase, the IRS issued a ruling accepting straight-line depreciation over a three-year useful life with an estimated salvage value of $54,000.
- Fribourg claimed depreciation for 1955 (partial year) and 1956; the Commissioner did not challenge those deductions.
- During 1956–1957, ship prices rose due to temporary market conditions, and Fribourg sold and delivered the ship on December 23, 1957 for $695,500.
- Before the sale, Fribourg adopted and completed a plan of complete liquidation under I.R.C. § 337, resulting in no corporate-level tax on the ship-sale gain.
- On its 1957 return, Fribourg claimed depreciation for 357½ days and computed gain using an adjusted basis reflecting 1957 depreciation.
- The Commissioner did not challenge the three-year useful life or $54,000 salvage estimate, but disallowed the entire 1957 depreciation deduction because the sale price exceeded the ship’s adjusted basis at the beginning of 1957.
- The Tax Court sustained the disallowance, and the Second Circuit affirmed.

## Issues

1. Whether a taxpayer is barred from taking a depreciation deduction under I.R.C. § 167 for the year of sale when the depreciable asset is sold for more than its adjusted basis at the beginning of that year, absent any challenge to useful life or salvage estimates.

## Decision

- The Supreme Court reversed and held that sale of a depreciable asset for more than its opening-year adjusted basis does not bar depreciation for that year.
- The Court rejected the Commissioner’s theory that depreciation should be denied because the asset’s use during the year imposed no “net economic cost” once appreciation is considered.
- The Court concluded the Commissioner’s position improperly treated market appreciation as a reason to disregard an otherwise proper depreciation schedule based on cost, useful life, and salvage.
- The Court emphasized that the regulations permitted revising depreciation when estimates become unreasonable or inaccurate, but did not authorize disallowance solely due to an advantageous sale price.
- The Court noted the Commissioner’s approach departed from longstanding administrative and judicial practice and that Congress had repeatedly reenacted the depreciation provisions without adopting the Commissioner’s newer view.

## Legal Principles

- Depreciation under I.R.C. § 167 allocates an asset’s cost over its useful life to account for wear and tear or gradual exhaustion, not short-term market value changes.
- A taxpayer may claim depreciation in the year of sale even if the sale price exceeds the asset’s adjusted basis at the start of the year, when the Commissioner does not contest the reasonableness of useful life and salvage estimates.
- The Commissioner may adjust depreciation prospectively when justified by changes showing original estimates are unreasonable, but may not deny depreciation simply because subsequent appreciation produces a gain on sale.
- Longstanding administrative practice, reinforced by congressional reenactment of the relevant statute without material change, carries interpretive weight against abrupt agency reversal unsupported by the statutory scheme.

## Conclusion

The Court held that depreciation for the year of sale remains allowable under § 167 notwithstanding a sale at a price exceeding beginning-of-year adjusted basis, so long as the depreciation method and the useful life and salvage estimates are not shown to be improper.


Fribourg Navigation Co. v. Comm'r, 383 U.S. 272 (1966)