Margaret Lamb UNIVERSITY OF WARWICK

DEFINING “PROFITS” FOR BRITISH INCOME TAX PURPOSES: A CONTEXTUAL STUDY OF THE DEPRECIATION CASES, 1875-1897

Abstract: Seven British income tax disputes over depreciation (1875-1897) are analyzed in this contextual study. The legal cases reveal how uncertainty over meanings for “depreciation,” “profits,” and “capital” reflected social and political tensions which had commercial accounting implications. Case analysis yields evidence of how judicial support reinforced the Inland Revenue’s technical authority over a competing tax administration institution and enabled its modern regulatory control over taxpayers to be constructed. The British example illustrates the ways in which technical and administrative practices may emerge from the contestation of meanings that takes place both in a wide political context and within particular institutional settings.

INTRODUCTION

This paper is a contextual study of seven British income tax cases reported between 1875 and 1897. Each case concerns a dispute between tax officials and taxpayers over the treatment of depreciation in the calculation of taxable profits. Not only does the problem of “depreciation” represent a significant theme in early income tax history, but the tax treatment of depreciation is a focus of accounting historians as an influence on the develop-

Acknowledgments: I am grateful to colleagues who commented on earlier versions of this paper: Rob Bryer, Keith Hoskin, Richard Macve, Barbara Merino, Chris Nobes, Marianne Pitts, Alan Roberts, and participants at the Accounting, Business & Financial History Conference [Cardiff, September 1999], the 6th Interdisciplinary Perspectives on Accounting Conference [Manchester, July 2000], and the Socio-Legal Studies Association Conference [Bristol, April 2001]. I also thank Steve Walker and an anonymous referee for their support and comments. Responsibility for errors in or omissions from the paper remains, of course, with me. I acknowledge a Warwick Business School research grant for this research.

ment of commercial accounting practices. In 1881, the Coltness case established the leading tax principle that amounts incurred in the acquisition of a capital asset, even when allocated over the useful life of the asset, are not deductible in computing the profits of a trade [Tiley and Collison, 1999, p. 427]. Cases before 1881 reveal the development of the judicial principle, and cases after 1881 reveal how distinctive tax rules were applied.

The purpose of the paper is to consider how the decisions in the tax depreciation cases affected tax practice and an emergent accounting measurement practice. In these cases, we find evidence of how the Inland Revenue used the support of the courts to reinforce its regulatory control over taxpayers and technical authority over a competing tax administration institution, the local General Commissioners of Income Tax. In addition, the cases provide evidence of alternative meanings for and measurement practices associated with “depreciation,” “profits,” and “capital.” As Parker [1994] points out, the meanings of these words for other purposes were unsettled and changing in this period. No consensus existed that depreciation was a measure of the cost or valuation of the economic benefits of tangible fixed assets consumed during an accounting period, and, as such, that depreciation represented a writing off of capital in the annual calculation of profits. An analysis of the institutional politics of the tax depreciation cases also lends support to an explanation why the judiciary abjured precise definition of “profits” for income tax or dividend distribution purposes. Judges left themselves flexibility to change regulatory concepts of calculation when judicial definitions were abstract and not defined in much detail. Thus, they were better able to avoid the creation of regulatory conflicts between income tax and other areas of their jurisdiction. The paper concludes that, with judicial support, the Inland Revenue was able to construct de facto regulatory control of the income tax. Judicial decisions reinforced taxing practices based on writing, interpretation, and examination of texts, and extended calculation. Such practices formed the basis for the disciplinary power of the modern Revenue and supplanted taxation based on the exercise of sovereign power.
The political, legal, and institutional context for the tax de-preciation cases is developed by reference to related cases and documentary sources, including reports of Parliamentary Select Committee (SC) and Commissioners of Inland Revenue (CIR). In the depreciation cases themselves, we can find evidence concerning processes of accounting for taxable profits, as well as “the court’s narration of … particular accounting principle[s]

. . . buried in the dicta” or to be inferred from other details [Mills, 1993, p. 766]. Close examination of court judgments and consideration of the wider context suggest how the courts might have intervened to support particular social, political, or economic outcomes [French, 1977; Reid, 1987; Bryer, 1998].
Hopwood and Johnson [1986] challenged accounting historians to study accounting practices in the social, economic, and institutional contexts in which they operate, and Hopwood [1983] urged researchers to explore how accounting shapes the way in which organizations function. Taxation is an arena for accounting that has not been studied in much detail from these perspectives. A few studies [Preston, 1989; Boden, 1999] research taxation as a social and institutional practice, but modern practice is their focus. Lamb [2001] begins to redress the taxation gap in the “new accounting history” literature [Miller et al., 1991] with a study of accountability in mid-19th century British tax assessment practices. The present paper continues this analysis of accountability in the late 19th century. It is also a response to calls for more studies of accounting and the law [Bromwich and Hopwood, 1992; Freedman and Power, 1992]. It considers “issues such as how and why accounting and the law intersect, whether this is due to certain fundamental limits that law encounters in seeking to regulate certain practices, and what happens to both accounting and law when such intersections take place” [Miller and Power, 1992, p. 230].

This paper reflects upon how concepts of “profits,” “capi-tal,” and “depreciation” emerged in the legal practices of “in-come” taxation, starting from a recognition that these concepts are not and never were self-evident [Hopwood and Johnson, 1986, p. 39]. It supplements prior accounting history studies of “the nature and significance of legal interventions in accounting processes” [Mills, 1993, p. 765] and seeks better understanding of the common law on accounting, broadly defined to cover commercial accounting, accounting for distributable profits, and accounting for taxable profits.

Contestation of meanings: As Martin Daunton [2001, p. 389] argues, “the language of taxation permeates the history of Britain” in the 19th century, and taxation was “a central element” in important political debates concerned with the ordering and conduct of society, economy, the State, and its institutions. By the 1870s many of the debating positions, claims, and institutional characters could be recognized. In 1875 representatives of the Glasgow Chamber of Commerce petitioned the Treasury and the Inland Revenue in London for a change of law to permit trading concerns an income tax deduction for depreciation. Many examples were catalogued, including several court cases, where businesses had been denied an equitable deduction for depreciation. By early 1877, the lobby to introduce the depreciation allowance had become a “movement” [CIR, 1878b, p. 64]. The prominent accountant, company promoter, and Member of Parliament David Chadwick supported the change. During the 1877 budget debates, Chadwick “submitted that the incidence of the income tax and the mode of assessment were most unjust and inconsistent” because of the absence of a depreciation al-lowance [Hansard, 12 April 1877, col. 1029]. In committee, he repeated his claim: “[Income tax was] a very good and very

honest tax; but as one most unjustly and inequitably levied

Take trade. The mine owner had to pay on his capital as well as his income. So also had the cotton-spinner, neither being al-lowed anything whatever for the annual depreciation of their property” [Hansard, 16 April 1877, cols. 1242-1243].

An attempt to introduce a depreciation allowance through the 1877 Budget Bill was rejected by the House of Commons [CIR, 1878a, p. 54]. The Chambers of Commerce made further representations to the Chancellor of the Exchequer. The Revenue took steps to clarify the position. This agency, which represented the interests of the Exchequer in income tax administration, argued that existing tax law already gave taxpayers the equivalent of the depreciation allowance that the Chambers sought and the issue was one of lack of uniformity of practice by tax authorities across the UK. In June 1877 the Revenue sent a circular letter to all local Commissioners of Income Tax that made clear the Revenue’s belief that the lobby for the change in tax legislation “must have arisen from the provisions of the Income Tax Acts not being clearly understood” [CIR, 1878b, p. 64]. The statutory allowance for repairs, it argued, could be interpreted to cover a provision for depreciation, narrowly interpreted as “wear and tear”. The letter was one of numerous instances in which the Revenue attempted to demonstrate its technical authority over the local Commissioners who had formal legal authority to administer the income tax.

Notwithstanding the Revenue’s efforts at clarification, further representations were made in 1878 and Parliament agreed to change the law. Income tax law thereafter officially sanctioned allowances given by the Commissioners for “wear and tear”. The new law was limited in scope, and not a comprehensive allowance for depreciation. The judicial case law reviewed in this paper confirms this. “Depreciation” was not a word that appeared in the Taxes Acts, but the contentions of taxpayers and the tax authorities before the courts sought to establish a relationship between this measurement concept and words that did appear in the Acts: “income,” “profits” and “capital”. The depreciation tax cases created meanings for these terms that were essentially different from their meanings in commercial accounting and other areas of judicial law.

The paper proceeds as follows. The first part develops the theoretical and historiographic underpinnings of this study. An outline of the legal basis for and practices of calculation of taxable profits in the mid- to late-19th century comes next. Then, the tax depreciation cases and their implications are examined. Finally, the arguments and evidence presented in the paper are discussed and summarized.

THEORY AND PRIOR LITERATURE

Regulatory Control of the Income Tax: 19th century income taxes were unpopular because they required “vexatious inquisition” into taxpayers’ personal affairs and they incorporated features that were often labeled “inequitable”. Early income taxes were tolerated as war taxes. In England, the income tax was an important, temporary part of the fiscal system during the Napoleonic Wars (1799-1815), but was rescinded in 1816 as soon as the wars ended. The income tax was reintroduced in 1842 as part of wider fiscal reform, and Daunton [2001] argues that it formed a generally accepted, even if never popular, part of Britain’s stable “fiscal constitution” from that time until the 1890s. The relatively high levels of trust in the British fiscal system could be attributed, Daunton argues [2001, Ch. 1] to interactions between four factors. These were the institutional and administrative processes for collecting revenue; the way in which assessed taxable capacity interacted with economic change; the manner in which the fiscal system was reformed; and the patterns of public spending. Relatively high levels of public trust led in turn to a comparatively high level of voluntary compliance to tax. The acceptability and stability of income tax at the macro-level, however, rested in large part on the ability of social, political, and administrative institutions to accommodate complaints, challenges, and negotiation over the details of taxation at the micro-level.

Effective administration was essential to the success of the income tax. Historical studies of income tax make these points clear in a comparative sense [Grossfeld and Bryce, 1983; Daunton, 2001, Chs. 1 and 7], as well as specifically in connection with the US [Samson, 1985] and the UK [Sabine, 1966]. Webber and Wildavsky [1986, pp. 300-301] state that in Britain, as in the US and elsewhere, professionalized, centralized public tax administration and government’s heavy reliance on direct taxation of income and profits necessarily go together, and both features of modern systems of taxation are legacies of the 19th century. It is a paradox that the Inland Revenue did not gain formal authority for tax assessment from the local General Commissioners until the 20th century [Stebbings, 1993, p. 53]. Lamb [2001] argues that it is the de facto regulatory control established gradually by the Revenue during the 19th century that made modern income tax such an effective part of the British tax system. The construction of a web of rules and practices by the Revenue to supplement the written law underlies the modern disciplinary power of the agency [Preston, 1989] and forms an important element of a history of comparatively high levels of public trust in the British taxation system [Daunton, 2001].

This paper is informed by a Foucauldian approach to regu-lation that distinguishes “sovereign” and “disciplinary” modes of power [Foucault, 1975; Hoskin and Macve, 1986, 1994; Boland, 1987; Miller and O’Leary, 1987; Preston, 1989; Miller, 1990, 1994]. Lamb [2001] argues that the overt exercise of sovereign power, essentially unmediated through any “objective” routines of calculation, was the basis for regulatory control in 1855. After 1855 a shift in the mode of regulatory control occurred. A system of governance based on disciplinary power emerged once tax authorities developed ways of obtaining comprehensive knowledge of the taxpayer through writing, examination, and calculation. It was also necessary for the officers of the Inland Revenue to become the lead agents in the exercise of regulatory control, supplanting local Commissioners who had exercised regulatory control based on older traditions of governance [ibid.].
The concept of “regulation” in this paper includes the pro-cess of making and then enforcing legal rules, as well as other processes of intervention and control of the objects of regulation [Hancher and Moran, 1989, p. 3]. As with any political process, regulation involves contests for power, and cultural forces and structures shape it [op. cit., p. 4]. Hancher and Moran emphasize the “impact of cultural influences on the organizational character of regulation” [op. cit., p. 5]. A study of tax regulation involves examination of the processes of making and enforcing formal tax law, as well as the ways in which tax authorities seek to exercise control in micro- and macro-political processes. The interaction of taxation with regulation of commercial accounting (e.g. financial reporting under company law) is well recognized [e.g. Bromwich and Hopwood, 1992; Lamb et al., 1998].

“Regulatory control” is the regulator’s operational purpose for employing legal rules and other processes of control. This state is achieved when the regulator’s power is recognized by regulatees, and sufficient regulatees comply with the regulator’s requirements for the exercise of regulation to be perceived as effective. This outcome is often referred to as “voluntary compliance.” Regulatory control may be seen to be adequate, but it is usually incomplete. Ambiguity and complexity of tax law interact in practice to create space for taxpayer creativity and non-compliance with the intentions of tax law [Miller and Power, 1992]. Tax law is “formalist”1 in nature and, consequently, legal control is elusive [McBarnet and Whelan, 1992]. Tensions arise from the incompleteness of regulatory control.

In this paper we consider some of the tensions surrounding the making and enforcing of tax law that have implications for less formal ways of constructing regulatory control as well. In the analysis of the tax depreciation cases that follows, we seek to highlight elements of legal and accounting practice that assisted the tax authorities in constructing adequate regulatory control. We pay close attention to factors that reinforce the de facto authority of the Revenue. The ways in which the courts approached interpretation of tax law are particularly relevant to the construction of the Revenue’s regulatory control.
Profit Measurement for Income Tax and Commercial Accounting: For businesses, the connection between income tax and commercial accounting is fundamental. Both processes measure profits of the entity, based on the same pool of transactions. A legal distinction between calculations of profit for tax and for commercial accounting purposes became explicit in 1878 when a statutory allowance was introduced to tax law as a (partial) substitute for commercial measures of depreciation [Edwards, 1976; Watts and Zimmerman, 1979]. Before 1878 the Revenue

1 “Formalism” means “‘to be governed by the rigidity of a rule’s formulation’ [and] assumes that law is ‘intelligible as an internally coherent phenomenon,’ that there is consistency, predictability, logical coherence and ultimately autonomy and ‘closure’: a systemic isolation of the legal system from such things as politics and culture” [McBarnet and Whelan, 1992, p. 81].

asserted that such a distinction was implicit in tax law, but the agency’s relative lack of authority meant that its interpretation was not generally accepted. The House of Lords accepted the Revenue’s analysis in Coltness [1881], but within a decade the court institutionalized a reconnection between profit measure-ment for income tax and commercial accounting purposes. This did not represent a dramatic about-face or the loss of regulatory control by the Revenue. Instead, it reflected judicial support for Revenue practices that rested on detailed sequences of regulated calculation that could be documented in written and examinable forms. Such judicial support and sequences of regulated calculation are features of British income tax that emerged during the second half of the 19th century.

Today we take it for granted in a UK context that taxable profits and distributable profits are regulated concepts that are legally distinct [e.g. Edwards, 1976; Freedman, 1987, 1997; Whittington, 1995]. The Gresham [1892] decision provided settled law that a tax computation of profit starts with a mea-surement of profit based on “ordinary principles of commercial trading” [Freedman, 1987; Boden, 1999, p. 46]. Thereafter, adjustments are made in accordance with tax law to arrive at a measurement of taxable profits. The extent to which the com-mercial measurement of profit requires adjustment for tax pur-poses remains a matter of legal and policy debate. One of the biggest problems of tax practice is the extent to which the law, and particularly the courts, will be guided by accountancy practices [Tiley and Collison, 1999, p. 340].2 Freedman [1987] argues that the courts have adopted a “see saw” attitude to the extent to which they are willing to be guided by accountancy practices.

Existing literature in accounting and legal history tends to start from an understanding of the modern relationship between tax law and accounting practice and pay little attention to the

2 UK courts currently approach the problem by looking first “to see what accountancy says and then see whether any rule of law contradicts it” [Tiley and Collison, 1999, p. 340]. Recent case law suggests that judge-made law could not override “a generally accepted rule of commercial accountancy which (a) applied to the situation in question, (b) was not one of two or more rules applicable to that situation, and (c) was not shown to be inconsistent with the true facts or otherwise inapt to determine the true profits or losses of the business” [Ibid.]. The Inland Revenue has stated that it “will accept a generally accepted accounting practice which does not violate any rules of tax [Inland Revenue, 1995]. Sect. 42 FA 1998 requires Schedule D Case I and II profits to be computed on an accounting basis that gives a “true and fair view,” and places even more reliance on commercial accounting; see CCH [2000, pp. 952-405].

emergence of a legal and practical understanding of the connection between the two forms of regulated calculation. Further, most literature rests on an acceptance of the “essential difference” between the two measures of profits. As income tax was introduced in 1799 before generally accepted principles of commercial accounting existed, Edwards [1976, p. 302] argues that tax authorities were “obliged” to devise “their own rules” for calculating profits. He goes on to argue that commercial accounting did not follow the lead of income tax accounting because the separate purposes of taxable profit measurement and commercial profit measurement were clearly understood [p. 300]. Freedman [1997, p. 32] argues that “[a] culture was created in which a divergence of taxable profits from accounting profits could evolve without causing any great surprise”. In other words, it became “natural” for tax calculations and accounting calculations to be different. In this paper, it is argued that such divergence was constructed and recognized relatively slowly.

There have been many contextual studies of 19th century profit measurement in the UK [e.g. Reid, 1987; Edwards, 1989; Bryer, 1991, 1993, 1998; Maltby, 1999], but few examine interrelationships between tax and accounting in much detail. Edwards [1976] is an exception, and he studies tax influence on the development of capital expenditure accounting.3 His work considers how tax capital accounting rules influenced commercial accounting profit measurement. Edwards [1976, p. 314] concludes that:

. . . early tax law and practice retarded the development of accounting theory, both directly through the incentive provided to write off capital expenditure to revenue, in the year that the outlay occurred, in order to increase the likelihood of attracting some relief, and indirectly through the implied official approval for the failure to depreciate a wide range of capital assets.

Watts and Zimmerman [1979, p. 45] consider tax influence in some detail and argue that the 1878 tax depreciation allowance was an important cause of the development of depreciation accounting theory. Bryer [1993, p. 657] refutes this by demonstrating earlier use and acceptance of depreciation accounting,
3 Edwards [1976] considers three tax depreciation cases examined in this paper: Forder, Knowles, and Coltness. He seeks to trace the pattern of tax influence on commercial capital accounting from its origins to the modern period.

but in turn highlights another way in which capital accounting interacted with tax practice, viz. valuation adjustments.
Lamb [1997b, Ch. 6; 2001] presents evidence that commercial calculations of profits were accepted as taxable profits for the early British income tax [1799-1816], as well as after the tax was reintroduced in 1842. This is acknowledged by other authors [e.g. Edwards, 1976]. In the paper that follows, it is argued that the introduction of “their own rules” by the tax authorities was problematic and gradual, and the distinction between profits for tax purposes and profits for other purposes was accepted slowly. A distinction of purpose was only gradually confirmed by the judgments of the courts in the late 19th century. Further, it will be argued, this process of changing rules and understandings of the relationships between tax and accounting was an integral part of the construction of modern regulatory control by British income tax authorities.

Dealing with Depreciation in Tax and Commercial Accounting: Depreciation was a significant theme of early income tax cases [CIR, 1878b, pp. liv-lvi]. The tax authorities’ disallowance of depreciation deductions was a major source of grievance among taxpayers. The cases reveal the arguments and forms of analysis employed by taxpayers, the Commissioners, the Revenue officers, and the judges. The concept of depreciation and the practices required to measure it were unsettled in the 19th century [Brief, 1965; Edwards, 1989; Parker, 1994]. No generally accepted concept of depreciation, together with associated practices, existed when British income tax was introduced in 1799. As the income tax developed, so too did accounting for depreciation. It is relevant to examine how regulatory control of income tax was constructed in the context of changing and contested commercial accounting practices.

The nature and significance of depreciation accounting is contentious among accounting historians. It is common ground, however, that accounting practices for dealing with the capital cost of assets were not uniform, but varied between businesses, even businesses in the same trade. Edwards [1989, pp. 114-115] distinguishes between “repairs and renewals accounting”, “replacement accounting”, and “depreciation accounting” — all widely used in the 19th century. The latter is closest to modern generally accepted practices of depreciation accounting based on systematic periodic allocation of fixed asset cost as a charge against profit. One strand of historical analysis links the variability of depreciation practices to a failure to distinguish systematically between capital and revenue expenditure [e.g. Brief, 1965; Baldwin and Berry, 1999].4 Another strand of historical analysis does not explain the variability in the forms of accounting for capital expenditure by reference to a failure to distinguish systematically between capital and revenue. Napier [1990], for example, finds that the changing pattern of depreciation practices is related to the commercial development of the business.5 Elsewhere, Napier [1997] suggests that variability may relate to the extent that the practices of aristocratic landowners persisted in particular lines of business.6 Bryer [1991, 1993] places more emphasis on dividend or profit manipulation explanations for variability in depreciation practices.

4This failure, Brief [1965, p. 14] argues, explains why 19th century British company financial reports have a propensity to contain a degree of “accounting error.” Baldwin and Berry [1999] present some support for this view, but ac-knowledge the contentiousness of size estimates and the nature of errors. They note [p. 93] capital accounting practices for four coal and iron companies: three amortised the capital cost of fixed assets over the estimated useful lives of the particular assets, and a fourth adopted replacement accounting.

5 Napier [1990] notes, in the case of P&O, that “[t]he notion of capital main-tenance adopted . . . cannot … be easily labelled as a physical capital maintenance or a financial capital maintenance one” [p. 42]. The company had an “ambivalence regarding the function of depreciation” [p. 43], and adopted a primary understanding of depreciation as a source of funds for asset replacement and a secondary view of depreciation as a method of dividend smoothing involving the creation of secret reserves.

6Napier [1997, p. 3] explains that some forms of capital accounting practised by aristocratic landowners in the late 18th century persisted a century later: “[M]any companies, particularly those like canals and railways . . . , were accounted for as if they had some of the characteristics of aristocratic estates”.
7Bryer [1991], analysing railway accounting, notes that “by the early 1840s the principle of charging depreciation on rolling stock . . . was widely understood by those professionally interested in railways” [p. 448]. Abandonment of depreciation during the “mania” of the mid-1840s and the hard times that followed led to the payment of dividends from capital. Bryer interprets the change as part of a “swindle” “orchestrated … by the ‘London wealthy’ on the manufacturing and middle classes, who were lured into investing in railways during the ‘mania'” [p. 483]. As the price of stocks fell, the London wealthy invested heavily in the railways. The adoption of replacement accounting rather than depreciation accounting in the last half of the 19th century can be seen as a way of understating disclosed profits and staving off attempts by the state to regulate railway profits any further [pp. 476-477, 483]. Bryer [1993] argues that “cost-based accrual accounting,” which “encompasses both conventional historical cost accounting and replacement cost accounting” [p. 649, fn.] was generally agreed among leading 19th century accountants. Depreciation as the cost of consumption and replacement of the use-values of assets is central to cost-based accrual accounting [p. 655] and systematic depreciation accounting was in widespread use by 1880 [p. 674].

The courts had an important role in articulating capital ac-counting, because they were required to adjudicate disputes under company law of permissible dividend payments. Dividends could be paid out of “profits” but not out of “capital,” and the courts had to consider how “depreciation” affected each of these measures. The company law doctrine of capital maintenance was a judicial construction rather than a specifically enacted rule [French, 1977]. Bryer [1998] argues that a conceptual understanding of the “laws” of accounting (“capital-revenue accounting”) was shared by accountants and judges, and contrasts his conclusions with the prevailing view that “consistent concepts of asset valuation and income determination are not evident” [Reid, 1987, p. 247]. Bryer argues that the judicial capital maintenance rule, underpinned by the requirement to pay dividends from revenue, required capital-revenue accounting. This requirement was enforced by judicial decisions until judges in Lee v. Neuchatel [1888/89] refused to set aside a company’s own constitutional rule that permitted the payment of a dividend to reduce “fixed” capital.

Accounting historians have examined the dividend cases, and in particular Lee, to understand how and why the courts adopted the positions that they did on commercial accounting regulation. Inasmuch as it relied on Adam Smith’s distinction between “fixed” and “circulating” capital [Smith, 1776, Bk. 2, Ch. 1], Napier [1997, p. 3] interprets Lee as a reflection of judicial attitudes “grounded in aristocratic approaches towards capital and income in the context of landowning.” French [1977, p. 306] interprets the court’s behavior as “an exercise of judicial law reform” superimposed on a longstanding pattern of judicial law making with respect to capital maintenance rules. He argues that the judges’ intention was to “create economic freedom for businessmen in dividend matters” [p. 318], but that they did so in a manner that allowed them to respect case precedent: they created “new definitions” and insisted that “each of the old rules said a separate thing”. Bryer [1998] also explains the court’s decision in Lee as an expression of new sensibilities of economic efficiency. He argues that the decision reflected the judges’ awareness that the interests of social capital might be better served if it was free to move to better investment opportunities. Maltby [1999] follows Bryer’s line of argument, but suggests that “it might have been expected that the courts would have provided authoritative and realistic guidance about the determination of profit” [p. 36]. She interprets the courts’ failure to provide such guidance as “a slump in judicial self-confidence when

it came to determining accounting rules” [ibid.].

These accounting historians offer insights into the analysis of the tax depreciation cases. It is possible to relate the courts’ discussion of the appropriate treatment for tax purposes of de-preciation attributable to wear and tear, exhaustion of capital, obsolescence, or other losses in value to the development of such accounting practices in other contexts. The tax cases may also offer accounting historians with new clues to solve persistent puzzles of 19th century commercial profit measurement.

BACKGROUND TO THE DEPRECIATION CASES

Legal Basis of Income Taxation: The 1842 Act “for granting to Her Majesty duties on Profits arising from Property, Profes-sions, Trades, and Offices” [5 & 6 Vict., ch. 35] was the legal basis for income tax in the late 19th century. In most significant respects, this was a re-enactment of the income tax introduced in 1799 to serve as a war tax; modified substantially in 1803 to improve its effectiveness; and retired in 1816 once the Napole-onic Wars were over. The tax applied to individuals and legal persons, such as companies.8 Three technical principles of the tax were decisive for its ultimate success: a source concept, compulsory self-assessment, and tax stoppage at source [Grossfeld and Bryce, 1983, p. 224].

Income tax was a Crown tax, approved by Parliament for a fixed time: initially in 1842 for three years; then seven years; and subsequently, usually one year at a time. By 1875 British income tax was acknowledged to be de facto permanent [op. cit., p. 223; Sabine, 1966, p. 111]. In the early Victorian period this tax was known as the “property tax”. As Sabine [1966, p. 42 fn] noted, “even down to the present day, there has been a certain confusion about the terms property tax and income tax. The title ‘Income Tax Acts’ was not introduced until quite late in the Victorian era”. We will refer to the “income tax” throughout this paper, but its early characterization as a “property tax” echoes through the legal analysis of the depreciation cases.

The source principle of income tax meant that different de-tailed principles of measurement and collection of tax would apply depending on the income source (referred to as a “Sched-ule”) [Boden, 1999; Lamb, 2001, p. 291]. Tax law identified two

8 In 1965 a separate Corporation Tax was introduced to tax the profits of British companies. Under this tax, many of the principles of income tax continue to apply in measuring profits chargeable to corporation tax.

118 Accounting Historians Journal, June 2002
main types of business profits: profits derived from trade (“Schedule D Case I”)9 and profits derived from the exploitation of land (“Schedule A No. III”).10 “Trade” was a term that covered a wide range of enterprises from the great commercial concerns like the East India Company to the new industrial manufacturers to small shopkeepers. Schedule A No. III enterprises included mining companies, most public utilities, and the railroads. In the rest of this paper, the labels “Schedule D” and “Schedule A” will refer to these specific types of businesses.

Deduction of income tax at source operated where possible. This meant that tax was collected “from persons not directly interested in its payment, and evasion was reduced because the tax was deducted before the income reached the ultimate proprietor” [Soos, 1995, p. 49]. Recognition of income and deduction of tax at source were problematic for profits [SC, 1852a, q. 373-386, Pressly; Lamb, 2001, pp. 287-288]. Income tax on profits was ascertainable only after calculation and assessment.

Schedule D and Schedule A businesses had to file tax re-turns. In the words of the legislation, profit-making businesses were obliged to: “prepare and deliver … a true and correct Statement in Writing . . . containing . . . the Amount of the Profits or Gains arising . . . from all and every the Sources
9Under 5 & 6 Vict., ch. 35, s. 100 there were six “cases” of Schedule D. It is Schedule D, Case I that is most relevant to this paper: “Duties to be charged in respect of any Trade, Manufacture, Adventure, or Concern in the Nature of Trade, not contained in any other Schedule of this Act.” The other Schedule D cases were: II “… Professions, Employments, or Vocations . . .;” III “… Profits of an uncertain annual Value . . .;” IV ” . . . Interest arising from . . . Foreign Securities . . . ;” V ” . . . Foreign Possessions . . .;” and VI “… any annual Profits or Gains not. . . charged by virtue of any . . . other [Case or ] Schedule

10There were three types of rules that applied to land revenues. Schedule A, No. I related to land generally — if it did not fall into a more specialised category — and it was assessed as an “annual value,” usually understood to be rent. Schedule A, No. I is the category often referred to as Schedule A [e.g. Daunton, 2001, p. 185], but such description risks missing subtle but important distinctions. There were two specialised Schedule A categories. Schedule A, No. II applied to tithes in kind, ecclesiastical dues, manors, fines, and other profits from land. Schedule A, No. III applied to “commercial enterprises derived from the exploitation of land.” It is this last category of Schedule A that is most relevant to this paper. 5 & 6 Vict., ch. 35, s. 60 deems the “annual Value” for such “Properties” to be “the full Amount for One Year, or the Average Amount for One Year, of the Profits received therefrom within the respective Times herein limited. Of quarries . . ., of mines . . ., of ironworks, gasworks, . . . waterworks, . . . canals, . . . docks, . . . railways and other ways, . . . and other concerns of the like nature, from or arising out of any lands, tenements, hereditaments, or heritages . . . .”

chargeable . . ., according to the respective Schedules” [5 & 6 Vict., ch. 35, s. 52]. To this statement, the taxpayer was obliged to add a declaration that taxable income was “estimated . .. after setting against or deducting from such Profits or Gains such Sums, and no other, as are allowed by this Act” [ibid.].11 Tax law specified rules to calculate assessable profits. One type of rule determined if profits were recognized for a particular one-year period, or if profits were the average profits of a longer period. Schedule D trading concerns were taxed upon “a fair and just Average of Three Years.” Under Schedule A, mining concerns were taxed on the basis of five years’ average profits, while other Schedule A trading companies were taxed on the basis of profits in the preceding year. “Profits” were stated to be taxable, and there were numerous rules listing costs that would not be regarded as acceptable deductions from profits — some very abstract and general, others quite specific [see Figure 1].

Income Tax Practice — Administration: Income taxation was formally a system of self-assessment, but taxpayers were accountable to tax administrators with legal and practical powers to enforce taxation and collection. Two administratively distinct bodies of tax officials had responsibilities for income tax in 19th century Britain. Local Commissioners and their clerks and collectors formed one body, while local Surveyors, their supervisors and other officials12 of the central Inland Revenue formed the other. These were not institutions of equal size. As Daunton [2001, p. 192] notes, “What stands out in the mid-nineteenth century is the small scale of the [Revenue] bureaucracy required by the income tax”. In the 1860s Revenue officers numbered less than 400, whereas the body of local Commissioners and all of their officers numbered more than 50,000 [op. cit., pp. 188, 192]. Lamb [2001, p. 281, Fig. 1 and related text] discusses the responsibilities of and relationships between these officials. Sovereign powers to tax and regulate the taxpayer belonged to local Commissioners who were powerful public officials independent of central government [Lamb, 2001]. Ex post facto, the Revenue is identified as the creator of tax rules and practices [Edwards,

11The tax return required of a mining company in 1878 is reproduced in Coltness, 1881, pp. 302-304.
12 Surveyors were the 19th century equivalent of modern H. M. Inspectors of Taxes. Special Commissioners were central Inland Revenue employees who could act in place of local General Commissioners in certain circumstances if the taxpayer so wished.

FIGURE 1 Rules for the Calculation of Schedule D Profits
Rules for Trading and Professional Profits
1st “In estimating the Balance of the Profits or Gains . . .,”
[i] “no Sum shall be … deducted from . . . such Profits or Gains, for any Disbursements or Expences whatever, not being Money wholly and exclusively laid out or expended for the Purposes of such trade . . .;” [ii] “nor for any Disbursements or Expences of Maintenance of the Parties, their Families or Establishments; …”
2nd Profit and gains arising from property occupied by the trade will be dealt with under Schedule A. …
Rules for Trading Profits Only
1st Tax was “to be charged . . . on a Sum not less than the full Amount of the Balance of the Profits or Gains of such Trade . . ., and shall be assessed, charged, and paid without other Deduction than is herein-after allowed
2nd Tax “shall extend to every Person, Body Politic, or Corporate, . . . Company, or Society, and to every Art, Mystery, Adventure, or concern carried on by them … in Great Britain or elsewhere” except such businesses or properties as were charged under Schedule A,” i.e. income from land and businesses based on the exploitation of land – mines, roads, railways, canals, waterworks, etc.
3rd “In estimating the Balance of Profits and Gains chargeable . . ., no Sum shall be. . . deducted from . . . such Profits or Gains . . .” [i] “on account of
• any Sum expended for Repairs of Premises occupied for the Pur
pose of such Trade . . .,”
• nor for any Sum expended for the Supply of Repairs or Alterations
of any Implements, Utensils, or Articles employed for the Purpose
of such Trade . . . beyond the Sum usually expended for such
purposes, according to an Average of Three Years preceding the
Year in which such Assessment shall be made”;
[ii] “nor on account of Loss not connected with or arising out of such Trade . . .;”
[iii] “nor on account of any Capital withdrawn therefrom;”
[iv] “nor for any Sum employed or intended to be employed as Capital in such Trade . . . ;”
[v] “nor for any Capital employed in Improvement of Premises occupied for the Purposes of such Trade . . . ;”
[vi] “nor on account or under Pretence of any Interest which might have been made on such Sums if laid out at Interest;”
[vii] “nor for any Debts, except bad Debts proved to be such to the Satis-faction of the Commissioners respectively;”
[viii] “nor for any average Loss beyond the actual Amount of Loss after
Adjustment;” …. 4th “In estimating the Amount of the Profits and Gains . . . no Deduction shall
be made on account of any annual Interest, or any Annuity or other annual
Payment, payable out of such Profits or Gains”.
Source: 5 & 6 Vict., ch. 35. sect. 100, italics added.

1976] and capable of governing taxpayers through a nexus of disciplinary technologies [Preston, 1989].

Until the Revenue gained de facto power to assess tax and determine the liability through procedure, local Commissioners were habituated to exercise their sovereign powers to estimate tax liabilities based on local knowledge and their discretion, as well as force a substantial proportion of taxpayers to appear in person before them for judgment and assessment [Lamb, 2001]. Revenue officers were more inclined to gain knowledge of tax-payers through the collection, creation, and analysis of written evidence [ibid.]. In 1848 the Inland Revenue was formed by a merger of the Board of Stamps and Taxes with the Board of Excise [CIR, 1885, p. 95]. The Excise, the model professional department of 18th century tax administration [Brewer, 1989, Ch. 4], was a highly centralized, effective department by the mid-19th century, and its practices helped strengthen central government administration of the income tax. By the 1860s the income tax had been recognized as de facto permanent part of the department’s workload [Sabine, 1966, p. 90]. By 1870 civil service reform had begun to professionalize the Revenue: appointment was by open competition [CIR, 1885, p. 100] but formal exams were still some years away. Thus, by the 1870s the Revenue had the organizational means, skills, and time to devote to asserting its technical authority over income tax. Its technical practice could be characterized as resting on close reading of the law and local officers worked under the sometimes “crushing nature” of supervision by central Inland Revenue officials [Riddell, 1887, pp. 109, 131]. In this specific arena of government, as in a more general sense, administration was becoming “too complicated to be left to part-time and unqualified squires” [Hobsbawm, 1969, p. 203].

In general, the forms of power employed by local Commis-sioners and Revenue officers complemented each other. How-ever, they represented different modes of governance, effectively in a competition for de facto control of the taxing process [Lamb, 2001].13 Revenue techniques and procedures would not
13Daunton [2001, Ch. 7] describes the administration of British taxation, 1842-1914, as dependent “on a hybrid system of lay and professional administra-tors” [p. 188]. His work describes the administrative system in its broader political and comparative context, but he presents the interaction between local Com-missioners and Revenue officials as essentially co-operative. In this paper, we consider the competitive aspects of such interaction somewhat more than Daunton does.

dominate practice until the local Commissioners relinquished de facto control of the taxing process and the judiciary began to reinforce standardized techniques of legal interpretation. The shift of de facto regulatory power from the local Commissioners to the Inland Revenue occurred gradually [Stebbings, 1994, p. 66]. Not until the 20th century was the Revenue recognized as controlling local tax administration, leaving the Commissioners to function as a judicial tribunal [Sabine, 1966, p. 155; Stebbings, 1993].

Income Tax Practice — Recognition of Profits: Local tax authorities had the power to scrutinize and evaluate self-assessments of profits and to make their own assessments in the absence of adequate tax returns. Taxpayers’ concerns about the invasion of their privacy by this process, especially when conducted in their local community by neighbors, led politicians to legislate secrecy provisions for income tax, which were especially generous in protecting the privacy of Schedule D Case I taxpayers; such provisions helped maintain relatively high acceptance of the tax and voluntary compliance [Stebbings, 1998; Daunton, 2001; Lamb, 2001, p. 291]. Taxation of income by source amounted to piecemeal taxation. Local tax authorities had an obligation to assess the profits of businesses located in their jurisdiction, but they had limited rights and occasions for enquiring into or reviewing a taxpayer’s total income. In consequence, tax authorities lacked knowledge of the taxpayer because they could not calculate, nor require the taxpayer to calculate, total taxable income.

The problem was not that calculation per se was impossible nor never done for income taxation, but that a totalizing calculation consistent with the concept of the taxpaying person was not yet generally enforceable or verifiable [Lamb, 2001, p. 294]. Profits were particularly difficult for tax authorities to judge because the outward signs of local profitability — or the lack thereof — were unreliable or inadequate indicators of the taxable entity’s total business profits. During the course of the 19th century, businesses generated profits from an increasingly complex and geographically expansive set of activities. Documentary summaries became increasingly important for the calculation of profits. Although the law included detailed provisions for the calculation of profits, recognition of taxable profits was not a simple matter of applying the law.

The words of income tax legislation suggest a calculative regime that was well defined and precise, in which allowable deductions were carefully, and sparingly, specified. The suggestion is misleading for two reasons. First, tax law treated trading profits as a precisely calculable part of total income, but nowhere was the term “profits” defined [Edwards, 1976; Freed-man, 1987]. Legislation did not make clear if “profits” meant “net profits” or “gross profits”, nor was the relationship, if any, between taxable profits and profits for other purposes made clear. In particular, tax legislation did not itemize which costs were deductible in calculating profits. Second, taxpayers and local tax officials ignored even those rules that were specific and clear [e.g. SC 1861, qs. 2201-2208; Edwards, 1976, p. 303; Lamb, 1997a]. In practice, it was rare for a business to disclose more than the amount of net profits for the relevant accounting period. If the taxpayer swore an oath that the amount was accurate, many General Commissioners felt bound to accept the truthfulness of the statement [SC, 1861, q. 2199 (Welsh)].

The relative invisibility of profits and the vagueness of the law made it difficult for honest taxpayers to know what amounts to report on their returns. Till, Clerk to the Commissioners in London, observed that “it is not every body who understands all the Act; there is not one man in a hundred that reads the enormous paper that is sent round to him” [op. cit., q. 1962]. The Revenue acknowledged that many taxpayers were unfamiliar with the law [op. cit., qs. 2201, 2208 (Welsh)] and reminded its Surveyors that the inadequacy of reported profits “may have arisen either from the return being made upon an estimate instead of on figures taken from books showing the actual profits, or from erroneous views as to deductions claimable, or from some unintentional misstatement” [CIR, 1873, p. 35].

Despite the very detailed income tax law, practice was based on estimation rather than precise calculation. The Revenue designed and distributed return forms to elicit written, examin-able, and standardized knowledge of taxpayers. Many local tax officials judged that getting an equitable approximation of what was intended by Parliament was the more important, and the only feasible, aim. Inland Revenue officials, however, were trained to enforce the letter of the law. There was tension between the two bodies of tax officials, and Revenue officials frequently made clear their belief that income tax administration as a whole could be improved if more authority was given to its officers [Lamb, 1997b, pp. 238-258; Daunton, 2001, Ch. 7].

Income Tax Practice — Political Lobbying: By the mid-19th century, complaints about a broad range of tax problems were referred to Parliament and to the central tax authorities by individuals, as well as by organized groups. Many problems were raised in Parliamentary debates of budget bills. Two Select Committees were established to consider evidence and form an opinion if income tax reform was desirable and feasible.14 The Hume Committee was set up in 1851 to consider the possible reform of income tax, but did not make firm proposals. However, its reports [SC, 1852a, 1852b] document the evidence of lawyers, actuaries, political economists and one accountant. Evidence was presented on the nature of profits, especially the profits of mines, and the extent to which annuities combined a return of capital and income.

In 1861 the Hubbard Committee was given a similar brief, but its more particular purpose was to consider a proposal by the Chairman to tax profits after equitable deductions. Essen-tially, businessmen in some industries asserted that their com-mercial “clear profits” were different, and lower, than the profits that were subject to income tax. Also, Schedule A businesses perceived themselves to be taxed more heavily than Schedule D trading concerns. Hubbard noted two defects of the current tax:

Industrial earnings are taxed to their full extent, al-though their dependence on the life and efficiency of those whose labour is indispensable to their production requires that a considerable portion be annually saved; such portion, when invested as capital, being again taxed on its subsequent products [and], capital, in the course of realisation through the working of mines, is taxed in the assessment of the entire value of their produce [SC, 1861, pp. x/xi-11].
Evidence was presented to demonstrate that mining companies were permitted no allowance for the extraction of mining deposits. This was regarded as taxation of capital, rather than income. Daniel Gooch, engineer to the Great Western Railway Company (GWR), gave evidence to the Select Committee [SC, 1861, qs. 4083-4178]. GWR, which had its head office in London, had interests in Welsh iron and coalmines, and used its railways to convey mined products to markets elsewhere in Britain. Gooch explained that GWR deducted income tax at source from the royalties paid under mining leases. Both this tax and the tax on
14See Daunton [2001, Ch. 4] for a discussion of the context for and issues discussed by the Hume Committee [pp. 69 fn., 91-92] and the Hubbard Committee [pp. 93-94].

the company’s own mining profits had to be paid over to the tax authorities. Under Schedule A No. III rules, tax was payable on the “whole value of the mineral . .. which generally includes the royalty” [q. 4092]: in other words, the value of the annual produce of the mine with no deduction for working charges or royalties paid.

Soon after it had commenced operating one North Wales mine, GWR had made a return to local tax authorities of the “earnings of the colliery, and the actual balance due to the proprietors of that colliery after paying the working charges.” Gooch terms this “a mercantile balance, which we considered a dividend amongst our shareholders” [q. 4093]. The local Commissioners refused to accept the deduction of working charges and royalties. Gooch explained:
[C]laims such as those of the railway company for freight and delivery, and of the corporation of London for dues, must not be deducted from produce; but that the company, as miners, under Schedule A., must pay tax upon an estimate of the value at the pit’s mouth of the coal raised, and not as traders, upon the actual produce, less expenses of conveyance and sale [q. 4094].

The method of calculation of taxable profits was one source of GWR’s grievance, but the process of assessment presented another. Gooch agreed with Hubbard that local officials “seem to disregard any evidence you can produce in the way of your own account keeping, and they levy the tax upon an arbitrary system, and upon the principle of getting as much as they can” [q. 4102]. He went on that they “actually repudiated altogether our accounts, showing the actual sales, which were as clearly and accurately kept as accounts can possibly be kept, and which were open to them if they wished to go through them” [ibid.]. He noted further problems when GWR tried to appeal to authorities outside the Welsh locality. As Gooch explained:

[W]e wished to show our accounts rather to the [Spe-cial] Commissioners in London than to the local Com-missioners, who were simply coal-owners as well as ourselves, or were employed in working collieries; and therefore we preferred exposing our affairs to the Commissioners in London; we were assured that that could be done, but afterwards we found that it could not be done [q. 4094].

If the GWR mining business had been treated as a trade assessable under Schedule D Case I, then there would have been no difficulty in making an appeal to the London Special Commis-sioners. This procedure would have avoided the unwelcome disclosure in the local tax office of the company’s financial affairs to Welsh competitors.

As was the case with the Hume Committee, the Hubbard Committee could agree no recommended action. Its report pro-vides detailed reasons for the differences of opinion that split the Committee. However, evidence before the Committee most likely influenced one change in legislation [SC, 1861, qs. 4169, 4193]: in 1866 Schedule A No. III was “transferred” to Schedule D [29 Vict., ch. 36, s. 8]. Our review of the depreciation cases below reveals that it took 25 years to determine just what this “transfer” meant.

Income Tax Practice — Appeals: Until 1874 taxpayers and local Surveyors possessed rights to appeal against assessments only to the local Commissioners themselves. The local process of assessment and appeal attempted to mediate disagreements and solve problems. If, after an appeal, the taxpayer was dissatisfied, it was not very clear what steps could be taken; the decisions of local Commissioners were final and there was no formal direct right of appeal to the courts. In some cases, taxpayers asked the Treasury or Board of Inland Revenue to consider their cases; such applications were usually refused [SC, 1861 (Pressly)]. In a few instances, the Attorney-General took income tax cases, but only if the subjects were fundamental to taxing practice.

In 1874 a procedure for income tax cases to be stated for consideration by the High Court or Court of Session was intro-duced. Thereafter, a taxpayer or Surveyor who was dissatisfied with an appeal decision by the Commissioners could demand that the matter be considered by the courts.16 Between 1874 and

15 This inference is clear if one considers the pre-1874 income tax precedents referred to in the early income tax cases. See also Grout and Sabine [1976, p.
75].

16 The High Court of Justice had jurisdiction over such appeals in England and Wales, while the Court of Session fulfilled equivalent judicial functions in
Scotland. The right to appeal to the Superior Court of Exchequer had existed for Assessed Taxes, for which there was quite a large body of decided cases [Sabine,
1966, p. 105]. It is assumed that the change was part of the major reform of courts under the Judicature Act of 1873. It involved uniting the jurisdictions of
the existing separate superior courts of law and equity (including the Exchequer); providing for “cheapness, simplicity and uniformity of procedure;” and
“the improvement of the constitution of the courts of appeal” [Manchester, 1980, p. 148].

1878 16 income tax cases were heard by the High Court or Court of Session [CIR, 1878b, pp. liv-lvi]. Full reports of the judgments were circulated to General Commissioners and to officials of the Revenue. These 16 cases were a small fraction of the cases involving a dispute between taxpayers and tax officials.
In 1878, the possibility of further appeals to the Court of Appeals and the House of Lords was introduced. [In Scotland, the Inner House of the Court of Session acted equivalently to the English Court of Appeal.] As with the 1874 change, the specific reasons for the introduction of new appeal rights remain unclear [Stebbings, 1996, p. 616]. Only a very small number of tax cases reached the Lords in the period 1878-1904 [Grout and Sabine, 1976, pp. 77-79]. Appeal was most frequently initiated by taxpayers, but the Crown had a higher percentage of successful cases [ibid.].

Appeals could proceed to the courts on matters of law, not matters of fact. In a modern context, calculation is usually treated as a matter of fact not law, but the distinction can be difficult [McMahon and Weetman, 1997]. In the late 19th century, the tendency to treat calculation as a factual matter was even less clear. When judging legal cases, British courts have a long tradition of formalism. Literal interpretation was the norm, but the “golden rule” of ordinary meaning and grammatical construction, was well established as a rule of interpretation by the mid-19th century.

THE DEPRECIATION CASES

As Daunton [2001, p. 19] argues in relation to 19th century British taxation: “The definition of income itself was socially constructed”. The courts — as arenas for the negotiation of meanings by other actors and where judges were actors themselves — were important sites for the construction of meanings. In the seven depreciation cases considered below, we can obtain an understanding of how the meanings of “income” as distinct from “capital,” as well as of “profits” and “depreciation,” were contested and how authoritative meanings within particular contexts emerged. These seven include all cases reported

17Pollock, C. B.’s judgement in the case of Attorney-General v Hallett [1857] 2 H&N 368 at 375 established the precedent that “[t]he court will depart from a literal interpretation where to keep to such an interpretation would lead to a result which is so absurd that it cannot be supposed, in the absence of express words which are wholly unambiguous, to have been contemplated” [Tiley and Collison, 1999, pp. 17-18].

between 1874 and 1878 [Addie, Forder, Knowles] where issues of depreciation are considered in the context of a Schedule D or Schedule A profit-making business [see Lamb, 1997b, Table 7.1].18 The fourth case [Coltness, 1879, 1881] is the first reported case with similar content and context to be taken beyond the High Court level. The remaining cases [Caledonian Railway, Burnley Steamship, and Leith Steam Packet] are those reported after the introduction of a new law in 1878 that purported to settle the matter of depreciation, and that concerned the interpretation of similar content and context as in the earlier cases. No 20th century cases have been included in the analysis below because Coltness [1881] and Gresham [1892] provided authoritative meanings for the general taxing word “profits” and made clear its relationship to other words — “capital” and “depreciation.” After the depreciation cases considered in this paper [see Table 1], most changes in tax law were initiated by explicit new legislation. Also, after 1900 income tax and the “fiscal constitution”, as Daunton [2001] puts it, went through a period of significant reform.

In the 1870s the income taxation of Schedule D and Sched-ule A businesses was contentious, but there was insufficient po-litical will to make significant changes to its form or incidence [Daunton, 2001, Ch. 6]. The evidence presented to the Select Committees and the political propositions debated within them reveal the heated reactions to the income tax despite the fact that in 1875 rates were lower than they had been in any year since the tax was introduced. At 2d. per pound (0.83%), the 1875 rate was trivial compared with levels reached in the 20th century; by 1879 the rate had more than doubled, but still stood at only 5d. (2.08%); and in 1897 the rate was 8d. (3.33%) [Lamb, 1997b, Fig. 5.3]. Economic development and changing organizational forms for commercial and industrial enterprises meant that Schedule D and Schedule A businesses were growing sources of income tax [Lamb, 1997b, Ch. 6 and Fig. 6.1; Daunton, 2001, Table 6.1]. These changes and the emerging distinctions between accounting and tax calculation, between practices in different parts of the UK, and between different types of

18 Full reports of these judgements were circulated to General Commissioners and to officials of the Revenue, and they were published in volume 1 of the Tax Cases [TC] series. The rest of the 16 reported cases in the period concerned other issues of “capital” vs. “revenue” expenditure [1]; the nature of profits and allowable deductions [4]; the geographical scope of UK income tax [4]; procedure [2]; the nature of income [1]; and appropriate schedular categorisation [1].

TABLE 1 British Income Tax Depreciation Cases

Case [Year decided] Court Business/Tax category Substance of depreciation claims Outcome of claims/Tax rules used for measurement
Addie & Sons, Re [1875] Court of Session -Exchequer – Scotland Mining/ Schedule A
No. Ill • Allocation of original cost (less residual amount) of mine buildings and plant over the useful life of the mine (called ‘depreciation’) • Allocation of the cost of pit sinking over the useful life of the mine Not allowed/
Schedule D Case I rules/
Forder v. Andrew Handy side and Co., Ltd. [1876] High Court – Exchequer – England Iron foundering/ Schedule D Case I • Depreciation of buildings, fixed plant and machinery over the useful life of the works Not allowed
/Schedule D Case I rules/
Knowles (Andrew) and Sons Limited v. McAdam [1877] High Court – Exchequer – England Mining/ Schedule A
No. Ill • Allowance for amount shown as ‘depreciation’ in accounts, but used to show shareholders the deterioration in the value of mines ‘by reason of the coal gotten’ Allowed on the basis that the claim was necessary to calculate ‘profits’ and it was not ‘depreciation’ in the same sense as other cases /Schedule D Case I rules/ [NB Overruled by Coltness (1881) below]
Coltness Iron Company v. Black [1879] Court of Session -Exchequer – Scotland Mining/ Schedule A
No. Ill • Allowance for pit sinking in arriving at ‘profits’ • Wear and tear allowance under 1878 law for structures Not allowed under precedent, as the 1878 statutory wear and tear allowance applied only to plant and machinery /Schedule D Case I rules/
Caledonian Railway Company v. Banks [1880] Court of Session -Exchequer – Scotland Railway/ Schedule A
No. Ill • Depreciation of rolling stock and machinery claimed in addition to repairs and renewals Not allowed because this company had maintained the value to the business of the relevant assets by way of repair and renewal. Wear and tear allowance or repair and renewals were seen as alternatives. Only if the value to the business was not maintained through repair and renewal would the 1878 allowance be relevant /Schedule D Case I rules/

TABLE 1

British Income Tax Depreciation Cases (continued)

Case [Year decided] Court Business/Tax category Substance of depreciation claims Outcome of claims/Tax rules used for measurement
Coltness Iron Company v. Black [1881] House of Lords Mining/ Schedule A
No. Ill • Restated claim emphasised systematic write off over useful life of pit workings exhausted by extraction of minerals from mines Not allowed because the law gave no allowance for exhaustion of capital and overruled Knowles (1877) above /Schedule A No. Ill rules/
Burnley Steamship Co. v. Aikin [1894] Court of Session -Exchequer – Scotland Shipping/ Schedule D Case I • Depreciation of ship due to obsolescence Although ships fell into the category of plant and machinery, the part of the claim that exceeded ‘physical depreciation’ was’not allowed

/Schedule D Case I rules/

Leith, Hull, and Hamburg Steam Packet Co. v. Bain [1897] Court of Session -Exchequer – Scotland Shipping/ Schedule D Case I • Taxpayer claimed a higher rate of wear and tear allowance than had been allowed by the General Commissioners • The Commissioners accepted calculations designed to create a fund that would permit the owner ‘to keep up his plant and replace it when it is worn out’ The higher claim was not allowed on the basis that the Commissioners had made a ‘fair and reasonable’ allowance on a matter of fact. /Schedule D Case I rules/

businesses created tensions within the taxing system and com-peting claims for how to interpret the taxing words. Through examination of the tax depreciation cases, we can see how some of these tensions were relieved and how meanings were constructed.
THE FIRST THREE CASES, 1874-1878

The variety of tax practice meant that there were real differences of interpretation of taxing words to resolve. The judgments in these three cases make clear that “depreciation” could not be deducted as an expense “expressly enumerated” in the taxing act, but it might be deductible if it fell to be treated as an essential component of the calculation of the “profits” of the enterprise. The cases confirmed, to an extent, the Revenue’s view that income tax law modified the concept of “profits” used for other commercial and legal purposes.

Re Addie & Sons [1875]: The first income tax case was heard in the Court of Session in Scotland and was brought under the new appeal procedures. It concerned the depreciation provided by an ironstone mining concern and revealed the characteristic arguments of both parties to the appeal — the taxpayer and the Surveyor — and the judges. Addie also reveals the application of tax rules following the 1866 “transfer” of the Schedule A trading concerns to Schedule D: Addie was assessed under the rules of Schedule D Case I [see Figure 1], and expenditure on its property was classed as disallowable capital.

Addie & Sons, Coal and Iron Masters, appealed against an 1874 decision of the General Commissioners in Lanark. The firm had calculated its taxable profits after deducting “a per-centage . . . for pit sinking and for depreciation of buildings and machinery”: “[T]hey contended that the share of the gross annual receipts corresponding to the proportion of the cost of sinking the pits [appertaining] to the current year . . . was in no sense a profit, and that, therefore, it ought to be deducted from the gross annual receipts in arriving at the assessable profit” [p. 2]. Equally, they contended, the difference between the original cost of pit buildings and machinery and the “price or value obtainable” when the pits were exhausted “is in no sense a profit, and that consequently in arriving at the profits upon which they are assessable there ought to be deducted from the gross receipts of each year a sum corresponding to the share of that difference [appertaining] to such year” [ibid.]. “In no sense a profit” was a phrase used regularly by taxpayers in this and subsequent cases.
In the original appeal the Surveyor had argued that neither deduction was acceptable because (1) “the Income Tax is an annual tax existing for one year only” and (2) “it is not lawful . .. to make any deductions except such as are expressly enumer-ated” [ibid.]. As the deductions claimed were “not enumerated in the Acts”, the Surveyor argued, using the words of the tax legislation, that they were “expressly forbidden” [p. 3].19
The Scottish court dismissed the appeal because the deduc-tions were claims for capital expenditure:

[T]he machinery and building connected with a pit ap-pear to me to be just part of the pit itself. It is one compound structure, necessary for the working of the mine, and the question comes to be … [are] they en-titled to deduct something on account of … an expen-diture of capital. It is an investment of money, of capi-tal, and must be placed to capital account in any properly kept books applicable to such a concern [p. 3].

The reference to “one compound structure” emphasizes the na-ture of the pit as capital or “property”. The Lord President of the First Division then disallowed the expenditure: “[a]s soon as you ascertain that this is an expenditure of additional capital, there is an end to any proposal to deduct anything in respect of it” [p. 4]. In the absence of any specific legislative provision to the contrary, the fact that there was an “expenditure on additional capital” determined that there would be no income tax deduction calculated by reference to that expenditure, at the time of the expenditure or in the future. The court appears to have believed that once expenditure was made on capital account, there it should remain.

Forder v. Andrew Handy side and Company, Limited [1876]: The first English depreciation case to reach the High Court reveals

19″. . . [I]n the Computation [of income tax, whether done by the taxpayer or the tax official], it shall not be lawful to make any other Deductions therefrom than such as are expressly enumerated in this Act; nor to make any Deduction on account of any annual Interest, Annuity, or other annual Payment, to be paid to any Person out of any Profits or Gains chargeable by this Act; . . . nor to make any Deduction from Profits . . . on account of Diminution of Capital employed or of Loss sustained in any Trade, Manufacture, Adventure, or Concern . …” [5 & 6 Vict., ch. 35. sect. 159, italics added].

the contrast between the commercial attitudes of the Commis-sioners and the Surveyor’s insistence on looking no further than legal words for meaning. The court’s judgment makes clear the principle that there is no equity in a taxing statute, despite the judges’ evident sympathy with the arguments of the taxpayer. The description “depreciation” in Handyside’s accounts was enough to taint the expense as “capital” and bring it within the disallowances of Schedule D Case I.

Handyside, a firm of iron-founders, was assessed in 1874/75 to £8,642 “the amount taken from their own report, and therein specified at nett profits” [p. 65]. “Their own report” was a “balance sheet for the year ended on 31st July 1874, being their first year of trading” [ibid.]. The Surveyor appealed against an 1875 decision of the General Commissioners, which confirmed the assessment, on the basis that it permitted Handyside to deduct depreciation of buildings, fixed plant, and machinery in calculating its “nett profits.” The Surveyor argued that depreciation was a deduction in respect of capital and therefore, disallow-able. Further, as depreciation was not an expense expressly enumerated by the act, he argued, it was not allowed. He went on to say that repairs would have been allowed if Handyside had claimed them instead.

Handyside contended that it would be wrong to tax them on an amount equivalent to the depreciation charge: “inasmuch as such sum had no real existence, but was written off in the ac-counts in accordance with the articles of association, as the works must of necessity depreciate from year to year, and as the sum expended in repairs could not entirely replace such depreciation” [pp. 65-66]. The General Commissioners agreed with the taxpayer. In the case stated for the High Court, it was noted that: “[t]he majority of the Commissioners . . . being of [the] opinion that persons in trade were equitably entitled to write off from their profits each year a sum of depreciation, and that the amount claimed was fair and reasonable, decided in favour of the company” [p. 66; italics added].

In the High Court, the Chief Baron of Exchequer, unlike the General Commissioners, found no room for equity in the taxing act: “Whatever we may think of the justice and fairness as regards commercial or manufacturing interests … it is perfectly clear that … as regards Schedule D., the . . . traders, are not entitled to this deduction [for depreciation]. . . . The Act is quite explicit, and can admit of no doubtful or difficult construction . . .” [pp. 66-67]. His colleague Pollock, B. concurred [pp. 68-69]. Although the matter of the income tax deduction was settled as far as he was concerned, he went on to consider the nature of depreciation:

It appears that by the articles of association . .. that a reserve fund is to be formed, and before recommending a dividend, and of course therefore before paying a dividend, the company, perhaps, very prudently and properly, agree to set aside a sum from the nett profits of the company, and bear in mind that . . . they are nett profits before . . . being … set … aside, and this is merely the mode in which they think fit to apply a portion of … their nett profits … as a reserve fund for the purpose of. . .” meeting contingencies, or of purchasing, improving, . . . restoring, … or maintaining the . . . property of the company, or for equalizing dividends [pp. 66-67].

Although Pollock, B. noted that repairs would be an allowable deduction, he expressed his concern that the reserve fund, to which depreciation had been transferred under Handyside’s ar-ticles of association, covered a number of purposes and he could not determine which it was in the particular case. He distrusted the description “depreciation” and believed it to be indeterminate. “[T]he question remains whether the Respondents are entitled to deduct this entire sum of [the depreciation charge], which may be applied anywhere or at any time they please for a great variety of purposes which are actually forbidden, directly as well as indirectly, by [the income tax law]” [p. 68].

Pollock, B. also tried to sort out the depreciation account-ing:

Now there are three modes to which this fund to meet the depreciation of machinery may be dealt with — one is by adding to the company’s original capital what is called a depreciation fund; the second is by laying aside out of the annual profits which would be otherwise divisible among the shareholders a certain sum to meet the estimated depreciation; and the third is by waiting until the depreciation occurs, and then either repairing or reinstating the machinery so as to make it of equal value and efficiency to what it before was [p. 69].
Huddleston, B. added his comments on the accounting:

[The amount of the depreciation change] is a sum which a prudent person . . . would put by or lay aside for . . . meeting what might be called the expenses of renewal. The articles of association clearly contemplate that it should be carried into the capital account as a reserve fund. The articles . . . contemplate that the company might make use of this money, but if they did it would be in the capital account . . . and it is quite clear that it would be treated for all purposes of book-keeping and for all usual purposes as capital. The Scotch case [Re Addie & Sons] . . . clearly includes that view [p. 70].

Kelly, C.B. addressed the problem of lack of precise information. Normally, a company would be allowed a deduction for repairs based on the average of three years. Handyside was to be taxed in respect of its first year of trading. Kelly, C.B. expressed the view that in such circumstances “you must get the best information that you can, and must judge from what has been done during that one year what will be the probable amount expended in the ensuing year” [p. 68].
The Forder case confirmed for the English courts that de-preciation was a disallowable deduction in arriving at taxable profit because it related to capital expenditure. The case was notable for the judges’ attempts to understand what deprecia-tion meant in a particular business and in its accounts. Also, it articulated for income tax the court’s opinion that there is no room for equity in the interpretation of the law; interpretation is of the words that are written in the legislation. Such judicial views about interpretation were used by the tax authorities as the basis for authoritative interpretations and instructions to local officials and officers, which in turn buttressed the growing disciplinary power of the central taxing authorities.

Knowles and Sons Limited v Mc Adam [1877]: The third depreciation case was heard by the English High Court in January 1877. It illustrates the willingness of the court to be persuaded by commercial arguments, provided the traps of legal meanings established through case precedent could be avoided. From earlier cases, “depreciation” had acquired a meaning linked to “capital,” which was disallowable under certain express words of the Act. In this case, the courts preferred a commercial calculation of “profits” to the idea of “profits” as an abstraction distinct from other types of profits.

The company, which traded as proprietors of freehold and leasehold coal mines, appealed against an 1875 decision of the Special Commissioners that disallowed the company’s claim for depreciation on the grounds that it was a deduction in respect of capital expenditure. At the appeal hearing before the Special

Commissioners, the company was represented by one of its di-rectors, David Chadwick MP. In the case stated for the High Court, it had been noted that:

. . . Mr. Chadwick [urged the Commissioners] that a sum of 10,424l. 15s. 3d. should be deducted on the ground that in estimating the amount of assessable profits the Commissioners ought to allow as a deduc-tion that sum which was claimed by the [Company] as “depreciation,” and which, as stated in the annual report for the year ending 31st December 1874, “is based on a calculation of the extent of coal available and the duration of existing leases, but it may be modified as future circumstances require;” and he further explained that the term “depreciation” in the balance sheet was used to show to the shareholders the deterioration or difference in value of their property at the end of the year and after the working out of a year’s coal and the expiration of a year of their leases, as compared with the value of such property at the beginning of the year; in other words, that a re-valuation of the property showed that it was worth, at the end of the first year, 10,424l. 15s. 3d. less than at the time of the purchase 12 months before [pp. 161-162].

In presenting the company’s case to the Barons of Exche-quer, counsel contended that 10,424l. 15s. 3d. “fairly represented the diminution in [the value of the coal mines], by reason of the coal gotten . . ., and which sum, for the purposes of such balance sheet, was technically, but perhaps incorrectly, referred to as depreciation” [p. 163]. Counsel argued that “capital withdrawn [which was disallowed under the act] is a different thing to capital used up” [p. 164]. He went on to describe how taxable profit must be recognized:

The first element to be determined is the full amount of the profits or gains. . . . You must, before you arrive at the profits at all, not merely be able out of your receipts to pay your expenses, but to replace your exhausted capital; before that is done profit does not begin. There is no difference in principle between the case of a colliery proprietor with a stock of coal under ground and a coal merchant with his stock above ground. . . . [T]herefore so much of the receipts as represents the diminution in the value of the mine by the exhaustion of the coal is not profit at all in any true sense of the word [pp. 164-165].

Pollock, B. intervened at that point to say “You cannot take the word profit alone” and counsel replied:

I should deny that it was gain from this particular adventure, trade, or concern; it is only your property converted into another form. Would not the Court of Chancery interfere if the company were going to pay a dividend when, though it had made a sum of money, it had exhausted an amount of coal more than representing that sum of money? Would not the Court of Chancery stop the payment of the dividend because there had been no profit? … In no proper sense of the word can you say that a man has made a profit when he has only that in another shape which he had before, namely, money instead of coal [p. 165].

The company’s argument rested, therefore, on the fact that ex-haustion of its capital in the form of coal stocks would be taken into account when calculating normal commercial profit, as evidenced by the analogy to a trading concern and by reference to profits that would be available for the payment of dividends.
The Attorney-General (Sir John Holker) presented the Revenue’s case. He started with the familiar argument that the income tax was temporary “and a man has to pay on the amounts of profits which he may realise in any particular year” [p. 164]. He then presented “income” and “capital” as abstractions that must be kept away from each other in order to work: “[t]he idea of capital is kept separate from income, and it is upon the income that he has to pay” [ibid.]. He acknowledged that “[t]he argument of the other side [of diminution in value] may be right, upon the principles recognized in political economy; but the very aim and object of the Income Tax Acts seem to have been to prevent the principles which a political economist would apply from applying to cases under those Acts” [ibid.]. His colleague, Albert Venn Dicey, added that given that “the Act [was] only yearly, it would be extremely difficult [to treat Schedule D. businesses as a political economist would]” [p. 166]. The basis of the Revenue’s case was, therefore, that taxable profits could not be the same as those profits calculated for other commercial purposes or as calculated by an economist. The Crown representatives argued that their interpretation was the same as what “the very aim and object of the Income Tax Acts seem to have been” [p. 164, italics added].

Dicey introduced an argument that suggests that the 1866 “transfer” of Schedule A No. III businesses to Schedule D was not as complete as the judges in Addie and Forder had treated it.

He argued that the issue was not a calculation of “profits” under Schedule D, but a calculation of “annual value” under Schedule A [see Figure 2]. He presented the Revenue’s view that the taxable income of concerns, such as mining, that had been transferred “for purposes of convenience of assessments” from Schedule A to Schedule D continued to be calculated according to the rules of Schedule A. Notwithstanding this point, he argued that the expense would be disallowed as a “withdrawal of capital” even under Schedule D rules.

Kelly, C.B. delivered the court’s judgment in favor of the company: “looking to the nature of the Income Tax Act, and looking to the plain and simple, but clear and undoubted meaning of the word “profits,” I do not think this case admits the smallest doubt” [p. 166]. He dismissed the Revenue’s claim that Schedule A rules continued to apply by reference to the “comprehensible expression” that such a mining case was “transferred” from Schedule A to Schedule D [ibid.]. His colleague Pollock, B. could see no “inconsistency between Schedule A and those rules [of Schedule D]” [p. 175].

Kelly, C.B. distinguished Knowles from Forder on the basis that the exhaustion of the coal stocks was deductible in arriving at net profits and that there was no express provision in Schedule D that disallowed such expenditure. In other words, he accepted the company’s contention that it was not really depreciation and that coal mining is a trade no different in essence from that of a coal merchant. The exhaustion of coal was not a “withdrawal of capital” because it was not a sum taken out of the business and applied for another purpose; it was not a “sum employed or intended to be employed as capital in such trade” because it was not something “additional to the capital which has been actually employed in realising the profit that has been acquired during the year;” and it was not “a diminution of capital” because it is a “purchase of an article which afterwards you sell at a profit” [p. 172].

Kelly, C.B. argued that the case of a mining lease for a single year was essentially the same as a lease for a multiple of years to the businessman. “His profit is that which remains to him and which he can put into his pocket and spend, if he has not already spent it, as part or the whole of his year’s expendi-ture” [p. 169]. If he were considering a mining lease for one year, the judge made clear that “profit” would equal the difference between revenue from the sale of coal in the market and the sum of amounts paid for the mining lease, labor, and machinery.

FIGURE 2 Rules for the Calculation of Schedule A No. III Profits

Taxation of Annual Value

“The annual value of all the properties [of Schedule A, No. III] shall be understood to be the full Amount for One Year, or the Average Amount for
One Year, of the Profits received therefrom within the respective Times herein limited.” . . .

1st “Of Quarries . . . , on the Amount of Profits in the preceding Year:”
2nd “Of Mines of Coal, . . . Iron, and other Mines, on an Average of the Five preceding Years, subject to the Provisions concerning Mines contained in this Act:”
3rd “Of Iron Works, Gas Works, . . . Waterworks, . . . Docks, . . . Railways, and other Ways, . . . and other Concerns of the like Nature, from or
arising out of any Lands, Tenements, Hereditaments, or Heritages, on the Profits of the Year preceding:”

“The duty . . . [shall] be charged on the Person, . . . whether Corporate or not Corporate, carrying on the Concern, . . . on the amount of the Produce or Value thereof, and before paying, rendering, or distributing the produce or the value either between the different Persons or Members of the Corporation, Company, or Society engaged in the Concern, or to the owner of the Soil or Property, or to any Creditor or other Person whatever having a Claim on or out of the said Profits ; and all such Persons . . . shall allow out of such Produce or Value a proportionate Deduction of the Duty so charged, and the said Charge shall be made on the said Profits exclusively of any Lands used or occupied in or about the Concern”.
Deduction of Tax at Source on Distributions of Profit in the Form of Annual Charges

“. . . [U]pon all Annuities, yearly Interest of Money, or other annual Payments, . . . there shall be charged for every Twenty Shillings of the annual Amount thereof the Sum of Sevenpence, without Deduction, according to and under and subject to the Provisions by which the Duty in the Third Case of Schedule (D.) may be charged; provided that in every Case where the same shall be payable out of Profits or Gains brought into charge by virtue of this Act, no Assessment shall be made upon the [recipient of] such Annuity, Interest, or other annual Payment, but the whole of such Profits or Gains shall be charged with Duty on the Person liable to such annual Payment without distinguishing such annual Payment, [who] shall be authorised to deduct [tax] out of such annual Payment . . . , and the Person to whom such Payment liable to Deduction is to be made shall allow such Deduction. …”
Charge and Assessment under Schedule D Rules

“The . . . concerns described in No. III. Schedule (A.) of [5 & 6 Vict., ch. 35, sect. 60] shall be charged and assessed to the Duties hereby granted in the manner in the said No. III. mentioned according to the Rules prescribed by Schedule (D.) of the said Act, so far as such Rules are consistent with the said No. III, . …”

Cleasby, B. concurred but was careful to state that he did not wish “to generalise so as to appear to include different cases.” He was persuaded by counsel for the company because “how can you get at the balance of the profits of trade without stock-taking?” He noted that the case turned on whether or not any provision of Schedule D Case I, 3rd Rule applied:

No doubt there are some of these rules which are in-consistent with economics. No doubt there is some rea-son why in dealing with the Income Tax it was thought that it should not go by the ordinary rules. .. . But I can find nothing in Rule 3 to call upon us in this case not to have [a] stock-taking . . . for the purpose of arriving at the balance of profits. . .. The proper description of it is “capital consumed in making the profits.” There is not the idea of capital withdrawn … in it [p. 174].

He went on to make clear that he did not see the circumstances of Knowles as at all similar to those of Forder. Exhaustion of coal stocks was not “depreciation”, which was money “put by.” “[Y]ou cannot put by a sum of money for the purpose of meet-ing depreciation. All you are allowed to do is to deduct your own repairs and things of that sort which belong to the year. … It seems . . . obvious that if you do more than that you depart from the principle of the Income Tax Act, which forbids it” [ibid.].

Pollock, B. pointed out the confusion attributable to lan-guage: “the case seems to me really to have arisen, from a sort of misapprehension which often unfortunately arises, not only in matters of law, but still more perhaps, in matters of commercial accounts, by the nomenclature which is used” [p. 175]. He referred to the fact that the company had used the phrase “depreciation” in its first accounts and concludes that the Commissioners failed to apprehend the true facts of the case as a result:

That seems to have landed the Commissioners in the idea that that was necessarily in diminution of the sum of the balance of profits or gains. When they get before the Commissioners, Mr. Chadwick, who thoroughly understands this matter, explains . . . that “. . . depreciation … is based on a calculation of the extent of coal available, and the duration of existing leases . . .” and he further explained that the term depreciation “in the balance sheet was used to show to the shareholders the deterioration or difference in the value of their property . .. after the working out of a year’s coal. . . .” That was explained by [their counsel] as meaning that . . . they had overworked the proportion of the whole quantity of coal as compared with the whole number of years [ibid.].
Pollock, B. then likened depreciation in this context to rent, calculated partly by reference to annual rent payable and to an apportionment of the lease premium payable in respect of a number of years. He went on:

I do not think that there can be any doubt that when these facts are apprehended, and when we ask ourselves what is the profit or gain of this adventure, we must consider that term [depreciation] and estimate it, and therefore deduct it from the gross receipts of the sale of the coal before we can arrive at the balance of profits or gains. . . . [I]f [the case] had been done originally [as it was presented to the High Court], it would have never come to us at all [pp. 175-176].

Consequences of First Three Depreciation Cases: Agitation and Legislative Change: The first three judgments were based on literal interpretation of statutory words, but certain words re-mained difficult to interpret. Schedule D taxed “the balance of profits and gain.” If the place to start was “profits,” then how did express provisions of the act adjust this sum? Expenditure on “capital” was not permitted to be deducted, but what was “capital”? “Depreciation” was sometimes a deduction of capital; on other occasions “depreciation” arose from a revaluation of capital, but was not capital itself.

The first two judgments suggest that the courts saw “depreciation” as a provision for depreciation, rather than an accrual itself of the consumption of capital over time. Depreciation could be realized only at some future point in time when a loss in value occurred in a market transaction or repairs were incurred to restore use-values. How was disallowable depreciation for a part of the compound capital of a mine [Addie] different from allowable exhaustion of coal stocks in the third case, Knowles? The English High Court did not need to resolve that dilemma because Addie was Scottish precedent and the Barons of Exchequer had convinced themselves that “depreciation” was something entirely different from the exhaustion of coal through mining.

In the same year as Knowles, 1877, the absence of a statu-tory industrial depreciation allowance was the focus of agita-tion for change. Agitation took the form of direct lobbying of the Treasury, Inland Revenue, and Parliament. The introduction to this paper outlined the efforts by Chambers of Commerce and politicians such as David Chadwick aimed to introduce a depreciation allowance in the 1877 and 1878 budget bills. This problem came up in other contexts, too. The Companies Act Select Committee, 1877 heard testimony concerning the statu-tory disincentive in the income tax act to the provision of depreciation [Bryer, 1993, p. 675]. Chadwick was a member of the Committee and co-author of the Companies Acts Amendment (No. 2) Bill to reform company accounts presentation. He proposed to omit any requirement to show depreciation in the balance sheet or profit and loss account “. . . because to enforce the putting of it in is to enforce the payment under the present state of the law of the amount for income tax on the depreciation” [SC, 1877, qs. 744, 1306-1308]. Because of the tax treatment, Chadwick preferred revaluation to depreciation as a way of arriving “at the value of the properties forming part of the assets of the company” [q. 1980].

Bryer [1993, p. 675] interprets Chadwick’s comments to mean: “Prior to 1878 there was a strong tax disincentive against charging depreciation on wear and tear because it was only deductible for taxation if based on losses in “value””. The situa-tion was not this clear-cut. Based on the High Court and Court of Session depreciation cases, it would have followed that no taxpayer who referred explicitly to “depreciation” would obtain tax relief. However, adjustments for losses in value (i.e. “depre-ciation” in the Knowles accounts) made in arriving at net profits had obtained relief. Bryer’s analysis would have been more accurate if he had said, “there was a strong tax disincentive against saying you were charging depreciation”. Along similar lines, Edwards [1976, pp. 306-307] suggests that one way tax-payers obtained relief for capital expenditure was “losing” items in the accounts. Bryer [1993, p. 676] concludes “that systematic depreciation was usually charged, . . . even if … it was not al-ways published”.

In 1878 Parliament agreed to introduce a “wear and tear” allowance to the law. There was some optimism that the 1878 law would deal with the inequitable absence of a depreciation allowance for income tax purposes. The new law stated:

20 Chadwick’s testimony to the Select Committee may help explain some of the accounting policies of his other companies. Baldwin and Berry [1999] consider the capital accounting practices in three Chadwick coal and iron companies. In the accounts of all three they observe “a considerable reduction in the published information provided” in connection with depreciation from about 1870: “Depreciation was no longer mentioned in either balance sheet or directors’ report, nor did the balance sheet identify separately additions and disposals of fixed assets, as had been past practice” [p. 86].

Notwithstanding any provision to the contrary con-tained in any Act relating to Income Tax, the [tax authorities] shall, in assessing the profits or gains of any trade, manufacture, adventure, or concern in the nature of trade . . . allow such deduction as they may think just and reasonable as representing the dimin-ished value by reason of wear and tear during the year of any machinery or plant used for the purposes of the concern . . . [41 Vict. ch. 15. s. 12].
As subsequent cases make clear, taxpayers did not understand how narrowly the Revenue and the courts would interpret the phrases “any trade” and “any machinery or plant used for the purposes of the concern”.

CASES AFTER THE STATUTORY DEPRECIATION ALLOWANCE, 1878

The Significance of Schedule A No. III: For the Revenue, A. V. Dicey argued in Knowles that the 1866 transfer of Schedule A No. III businesses to Schedule D only applied to matters of procedure and was intended to give those businesses the same degree of privacy as Schedule D Case I taxpayers enjoyed. In Knowles, the judges did not accept his argument; in Coltness, they did. Dicey [1835-1922] was an eminent legal scholar,21 and the line of his reasoning left its mark on income tax law and practice. In Coltness and later cases, judicial interpretation turned to older calculative principles associated with property taxes to deal with Schedule A No. III businesses. Through historical interpretation, the court abstracted the meanings of taxing words away from their contemporary commercial context. In doing so, the court made clear that neither “depreciation” nor “valuation adjustments” to reflect the consumption of capital had a place in the calculation of taxable profits of a mining company.

21Dicey served as Inland Revenue counsel from 1876-90. At the time, he was already a prominent legal scholar and public commentator on matters of law and government [Ford, 1985]. From 1882 he was Vinerian Professor of English Law at Oxford. Daunton [2001, p. 202] notes that he was “a leading opponent of ‘collectivism’ . . . [and] hostile to ‘officialism,’ arguing that lawyers should not become means to an administrative end of applying complicated statutes.” Daunton goes on to associate Dicey with the “strong professional ideology” of lawyers “as defenders of individual rights, linked with an ad hoc approach and resistance to general principles, which gave considerable significance to informal understandings between the revenue authorities, accountants and lawyers” [ibid.].

Coltness Iron Company v. Black [1879-1881]: This Scottish case was the first depreciation case to be heard by the courts after the law changed to permit appeal to the House of Lords and after the inclusion of the wear and tear allowance in the income tax law. Coltness, a large coal mining and iron-mastering business, appealed against an 1878 decision by General Commissioners that denied a £9,027 deduction for the cost of pit sinking. Before the Commissioners, the company claimed that “whatever might have been the interpretation of the law prior to [the 1878 change to permit the wear and tear allowance], they were entitled, under [that law] to the deduction they claimed” [p. 288]. The company cited the English case [Knowles] to support its claim that “sinking the pits was expenditure in winning the minerals” and argued that in the cost of “wages expended in sinking, there is nothing … to represent capital, and the money so expended cannot be an investment, because it can never be recovered” [ibid.]. The Surveyor of Taxes contended that the wear and tear allowance only applied to plant and machinery and earlier case law [Addie] had established that the expense of pit sinking was a disallowable “charge upon capital”.

After the Court of Session affirmed the decision of the Commissioners, the Company appealed again. In presenting its case for consideration by the House of Lords, new evidence was introduced, including detailed schedules of pit sinking costs, pits exhausted over a long period, and a derivation of the £9,027 claimed. The revised information clarified that the amount claimed:

. .. does not represent the cost of pit-sinking during the year, but is a sum . . . estimated [to] properly represent the amount of capital expended on making bores and sinking pits which has been exhausted by the year’s working. . . . The working charges deducted and al-lowed in ascertaining the profits for assessment include the whole cost of getting and raising the minerals, after the pits are sunk, and of manufacturing the metal and selling the iron and coal, and the general expenses of the concern [pp. 295-296].

The revised case emphasized the company’s claim that the deduction was for capital exhausted during the year in question. The case was reconsidered by the Court of Session, but it af-firmed its earlier decision. In the course of his judgment, the Lord President made clear that there was a difference between the calculation of profits for tax purposes and “the amount of the net profits of the year which would appear in the ordinary annual balance sheet of a trading company” [p. 307]. When ascertaining net profits for the purpose of paying dividends, “the state of the capital account necessarily affects the balance sheet” [p. 308]. However:

. .. the [tax] statute refuses to take an ordinary balance sheet, or the net profits thereby ascertained, as the measure of the assessment, and requires the full balance of profits, without allowing any deduction except for working expenses, and without regard to the state of the capital account or to the amount of capital employed in the concern, or sunk and exhausted, or withdrawn. Any other construction of the statute would . . . be inconsistent with the leading principle on which it is based and with its express words. . . . [T]he statute is not concerned with the failure or success of his speculation, and looks only to what is the income derived from the business year by year [ibid.; italics added].

The statutory phrase “the full Amount” [see Figure 2] was interpreted to modify “profits”. “The full balance of profits” emphasized that “profits” in taxation had a nature different from other forms of “profits”.

The House of Lords heard the case in 1881 and affirmed the decision of the lower court that no tax allowance was available for the exhaustion of capital. In doing so, the Lords reviewed the English High Court decision in Knowles and overruled it. The Lords also sought to interpret the relevant legislation of Schedule A and Schedule D in its historical context and, in so doing, presented a persuasive explanation for the divergence of taxable profit measurement from commercial accounting profits. This analysis was significant for the development of judicial doctrines of “capital” versus “income” in taxation.
The Lords confirmed the lower court’s view that net profits for tax purposes were not net profits as disclosed in a set of accounts presented to shareholders. This was a contradiction of the decision in Knowles, in which the High Court interpreted the phrase “balance of profits or gain” to mean normal commercial profits adjusted only if any of the matters “expressly enumerated” applied in the particular case. Earl Cairns said:

It may be proper for a … trading concern to perform in . .. their books an operation [to deduct mine depreciation] every year in order to judge of the sum that can in that year be safely taken out of the trade . . . but I am clearly of the opinion that the owner of a mine cannot . .. thus manipulate his accounts when the question is

. . . what is the amount of [taxable] profits received from the mine [p. 312].

Lord Blackburn further distinguished taxable profits from the profits that would be calculated by a political economist. He quoted a passage from “McCulloch on Political Economy”:

Profit must not be confounded with the produce of in-dustry primarily received by the capitalist. They really consist of the produce on its value remaining to those who employ their capital in an Industrial undertaking after all their necessary payments have been deducted, and after the capital wasted and used in the undertak-ing has been replaced. If the produce derived from an undertaking after defraying the necessary outlay … is merely sufficient to replace the capital exhausted, there is no surplus, there is no loss, but there is no annual profit [quoted at pp. 315-316, italics added].

Lord Blackburn went on to say: “I do not feel at all inclined to dispute the sufficiency of this definition . . . [b]ut that is cer-tainly not the scheme of the income tax” [p. 316].

Lords Penzance and Blackburn took the argument further and made clear, unlike the Barons of Exchequer in the Knowles case, that they found legal significance in the fact that mining concerns were strictly subject to tax under Schedule A, No. III rather than Schedule D.23 The analogy in Knowles to trade in cotton or tea had not “elucidated but rather confused” the analysis of the case [p. 314]. Therefore, the Lords supported an argument that had been made by the Surveyors in these cases that the transfer to Schedule D only applied to the process of assessment.

After noting that in “a strict and logical sense” the “actual profit obtained by the Company out of the entire adventure” would be calculated by reference to the “prime cost of the min-eral bed”, Lord Penzance stated that he did not think that this was the sense in which the word “profit” was used in the income tax act: “[t]he intention of the Act, it is abundantly clear, was in Schedule A to tax property” [p. 313]. As far as a mine was

22See Daunton [2001, Ch. 6] for a discussion of the leading role played by economists, including McCulloch, in debates over tax policy and practice, and for introducing relevant language and concepts to political debate and public discourse. Counsel for the ordinary shareholder attempted, with no apparent positive effect, to use this passage from McCulloch to support his contentions about the proper meaning of “profits” in Lee v Neuchatel [1888/89] at p. 12.
23 Earl Cairns, on the other hand, was of the view that “the thing to be assessed” was the same whether under Schedule D or Schedule A [p. 313].

concerned, “[t]he only question is how shall the annual value of this species of property be ascertained” [ibid.]:

The words “profit received therefrom” are here intro-duced to define the annual value of the thing which is to be taxed, which is the “mine,” and it could not I think be intended that for the purpose of calculating “the annual value” of a “mine,” the original cost of the “mine” itself, or any part of it should be first deducted. . .. [T]he words “profits received therefrom” . . . mean . .. the entire profits derived from the “mine,” deducting the cost of working it, but not deducting the cost of making it [p. 314].

“Property” was the “thing” to be identified, because it gives rise to the taxable income, the “annual value”. This case reminds us that the original income tax was charged by virtue of the Property and Income Tax Act [39 Geo. 3. ch. 13], and subsequent acts retained references to “property” along with “income” as objects of the tax.

Lord Penzance distinguished the case of a Schedule D trader from that of a Schedule A mine-owner:
For the . . . trader is taxed . . . not in respect of any “property” which he possesses and of which he enjoys the fruits, but only upon the profits which he realises annually in his trade, whereas the owner of a “mine” is taxed in respect of that “mine” as a fixed and realized “property,” which belongs to him and from which he reaps an annual benefit; and the words “annual value” or “profit received” from that “property” are introduced into the Statute, not as the subject of taxation, but only as the measure of the taxation to which the “property” shall be subjected [p. 314].

Lord Blackburn continued by saying that “the only safe rule” was to interpret the “words of the enactments” in what he be-lieved to be its historical context. The origin of the particular tax definition of profits was related to the object of taxation, i.e. “to grant a revenue at all events, even though a possible nearer approximation to equality may be sacrificed in order more easily and certainly to raise that revenue” [p. 317]. He pointed out that the words of the legislation in question resembled the poor laws:

24 Under 43 Eliz. ch. 2 parochial officials were permitted to tax inhabitants of the parish on tithes, coalmines, and woodlands. This power to “rate” ended by virtue of 3 & 4 Vict. ch. 96 and subsequent legislation.

148 Accounting Historians Journal, June 2002
. .. [L]ong before any income or property tax was im-posed for general revenue, the parochial authorities in England raised a revenue . . . which was very much in the nature of an income and property tax; and the lan-guage used in the Income Tax Acts is such as to con-vince me that the legislature had in their contemplation what had been done in this branch of the law [p. 317].

He cited case law that disallowed deductions for “planting” coalmines when calculating “the net annual value” of the pro-duce of the mine for parochial poor law purposes. He does not present the case as an authority for income tax, but as an indication of a matter that “must have been well known to that large proportion of the legislators who habitually acted at quarter sessions” [p. 318].

Lord Blackburn then turned to the history of the income tax to support his argument. In defining Schedule A in the 180325 act, the legislature had:
. .. classed together in one schedule properties, such as agricultural land, which from their nature will continue permanently to exist, and properties, such as quarries, which will certainly come to an end within a period . . . which can be generally calculated, and properties, such as iron works, which are real property, deriving their annual value from being ancillary to a trade [pp. 318-319].

On all such property, the legislation imposed the rule that the “annual value” should be taxed and charged on an amount not less than the property rating at the last poor rate. A deduction for repairs was not generally available. To Lord Blackburn, this cross-reference to the poor rate proved that the parochial tax was in the legislators’ minds at the time. (The reference was dropped in the 1806 and later acts.) On the basis of the historical link”, Lord Blackburn concluded that the requirement of Schedule A, No. III to tax the annual value of mining properties to be “understood to be the full amount for one year … of the profits received therefrom” must mean “that which is produced from them” [pp. 320-321].

Lord Blackburn then went on to link the idea of “annual value” as calculated without any deduction in respect of “capi-tal” to the taxation of “annual profits” under Schedule D:
In the [1842 act] the different schedules were kept apart and complete in themselves, but I think wherever there was any provision in any one of the schedules that throws light on what is meant by annual value or annual profits or capital, it may be very material in construing the meaning of those words used in other parts of the Act [p. 322].

Although subsequent cases supported Lord Blackburn’s view that the Coltness case had significance for Schedule D,26 he focused on those concerns specified in Schedule A No. III which were “transferred” to Schedule D in 1866. He believed the purpose of the transfer was to give the Schedule A concerns the benefit of “all the anxiously devised provisions for keeping the returns under Schedule D. secret and confidential”. He argued why he believed the principles of Schedule A calculation still applied to these concerns. As pit-sinking expenses would be regarded as capital expenditure under general Schedule A principles, there was no need to interpret the Schedule D Case I, 3rd Rule concerning particular types of capital expenditure. He made clear, then, that he regarded the Addie case as correctly decided, but for the wrong reason. The Knowles case as wrongly decided, he said, because it rested on a misinterpretation of the transfer of mines from Schedule A to Schedule D and a misunderstanding of the interpretation of a mine’s profit for the year in the context of the tax law.

The House of Lords decision in Coltness moved the tax treatment of mining and other Schedule A No. III businesses away from the treatment of trades and further still from the practices of commercial accounting. This development was counter to proposals advocated by politicians and popular pro-testers in the 1870s. Nonetheless, subsequent judicial decisions confirmed the Coltness interpretation. In Mersey Docks and Harbour Board v. Lucas [1883], the House of Lords confirmed that the 1866 “transfer” of Schedule A No. III businesses to

26 The Alianza Company, Ltd. v. Bell [1904]; Court of Appeal, Master of the Rolls (MR). See also Findlay, J. in the High Court and in the Court of Appeal, MR in Golden Horse Shoe (New) Ltd. v. Thurgood [1933]. Also, in the Court of Appeal, MR in Stow Bardolph Gravel Co., Ltd. v. Poole [1954], see the confirma
tion that there was no distinction between Schedule D and Schedule A No. III in distinguishing “capital” from revenue expenses.

27 Lord Blackburn referred to the Forder case, but — strangely — as a repairs case and did not review it further since he assumed it to be covered by the 1878
legislation concerning wear and tear.

Schedule D only applied to the process of income taxation, not the principles or substantive calculation of taxable profits. In the same case, the Lords made clear that the “profits” of Schedule A No. III businesses should be defined in terms of the property, not the trade or enterprise.28 This case also cited the idea that “profit” could be used “in the legal sense of the word, as meaning the profits of land” [p. 440], or, in the words of the Master of the Rolls, “the net produce of the land” which was “the meaning to be attributed to the word in the . . . 3rd [rule] in Schedule A” [pp. 461-462].

The Limitations of the 1878 Statutory Depreciation Allowance: Use of abstraction and historical interpretation to assign mean-ings to taxing words permitted the courts in Coltness to drive a wedge of time between the meanings of “profits” for tax purposes and commercial “profits.” Once these concepts were separated in time, it became easier for the courts to recognize the essential difference between “profits” measured for the different purposes. In the transport depreciation cases discussed below, the courts revealed their unwillingness to make calculations themselves. In addition, the Caledonian Railway, Burnley Steamship, and Leith Steam Packet cases can be interpreted as revealing the courts’ unwillingness to adopt a liberal interpretation of the 1878 allowance. Because of Coltness and the transport depreciation cases, the authority of the Revenue to distinguish taxable profits from commercial profits increased, as did their authority to make calculations.

Caledonian Railway Co. v. Banks [1880]: In 1880, prior to the House of Lords decision in Coltness, the Scottish Court of Session heard a case that involved interpretation of the 1878 legislation as it applied to plant and machinery. In a hearing before the Special Commissioners, representatives for the Company,
28 See, in particular, Lord Fitzgerald, who said “profit” in the context of Schedule A No. III referred to “income acquired from the estate, of whatever character it may be, over and above the costs and expenses of receipt and collection.” The Lords accepted the judgement of Lord Blackburn, M.R., in the Court of Appeal, and, effectively, Dicey’s argument for the Crown in Coltness. Lord Blackburn said that he had based his argument “upon the similarity . . . between the rules as to income tax and rules as to poor rate” and he went on to say that “in estimating whether there are profits you are to look not at whether a particular person derives profits, but whether the concern is a thing that brings in an excess of receipts.”

including an accountant, had argued that the company was en-titled to allowances of £253,389 for repairs and renewals to locomotive power, carriages and wagons:
“Renewals” means the substitution of new locomotives . .. for those worn out; … 24 new locomotives .. . were better quality, and more expensive, than those of which they were renewals. . . . [A] sum of 20,837l. [was] set aside out of profits for renewals and repair [but] not yet applied for that purpose. … By this expenditure . . ., according to the certificates of the Company’s locomotive superintendent, the Company’s property and plant have been maintained in good working condition and repair [p. 488].

In addition, the company claimed £185,391 for depreciation of rolling stock, machinery, etc. Before the court, company counsel argued that it was “impossible to keep the value of the plant up to cost price;” annual repairs and renewals “only keeps it up to 75 per cent. Of cost price, therefore 25 per cent. has been consumed” [p. 492]
.
The court supported the decision of the Special Commis-sioners. The 1878 legislation, they said, permitted the Commis-sioners to find as a matter of fact that there had been a diminu-tion in the value of plant and machinery due to wear and tear. In this case, it was decided that the Commissioners had been entitled to decide that there was no wear and tear to be compensated for by way of an estimated wear and tear allowance (the depreciation). As Lord Gifford said, it was “fair and reasonable” for the Commissioners to have permitted the company an allowance for the actual cost of repairs and renewals as an alternative to an estimate of the wear and tear suffered during the year. However, he thought it “quite clear . . . that the Railway company cannot get deduction for deterioration twice over — first, by deducting the actual expenses of repair and renewal, and then by deducting an additional estimated sum for the same thing” [pp. 499-500]. The court did not accept that wear and tear allowance should be given by reference to cost-based accrual accounting; “diminution in value” of plant and machinery was to be estimated by reference to value to the business, and if that value was said by the company to be maintained then there was no case for a wear and tear deduction beyond the value of the repair and renewals required to maintain the value of produc-tive capital. This view was consistent with the argument of the Board of Inland Revenue in 1877 when the circular to General Commissioners was issued [CIR, 1878b, p. 64]. However, the court argued that the purpose of the 1878 change in legislation was to permit a business to claim wear and tear allowances for a diminution in value to the business that was not restored by expenditure on repairs and renewals.

In the Caledonian Railway case, the court made its decision with no apparent reference to the other depreciation cases; its judgment rested on its interpretation of the words of the relevant legislation and it created its own interpretations for key passages. For example, the “assessable value of the income for the year” was equated with “clear profit realised” after “all the outgoings which are necessary to attain the sum of gross profit [are] deducted” [the L. J. Clerk, p. 493]. For a business, such as the railway company, “value” of plant meant “capacity to earn income,” not “value of the plant as merchantable or marketable articles”; the first was “the only quality contemplated” under income tax law [p. 496]. The Second Division saw no reason why taxable profits should not equal accounting profits:

[T]he assessment has been made in entire accordance with the Railway Company’s own accounts. … I see no reason why the income tax . . . should not be fixed upon the same principle as that which determines the dividend to the proprietors. . . . Surely no complaint can be made if the Railway Company pay income tax only upon what they themselves divide as dividend or net profit [Lord Gifford, p. 500].

Although these views represented no lasting precedent after the House of Lords decision in Coltness, they re-emphasize the scope of interpretation of taxing words during the first fifty or so years of income tax. It was not immediately evident to all parts of the judiciary that there were large differences between taxable and commercial profits. The Second Division of the Scottish Court of Session had apparently not paid close atten-tion to the income tax decisions of their First Division brethren, such as Addie and how it was referred to in the higher courts.

Burnley Steamship Company v. Aikin [1894]: Another depreciation case was heard by the First Division of the Court of Session in 1894. The company had claimed a deduction in respect of depreciation of a ship because of loss of earning power and market value due to the obsolescence of the ship. All the company had been allowed was a wear and tear allowance calculated as 5 per cent of cost on the reducing-balance basis. In order to reflect the other causes of diminution in value, the company argued that the rate should be 7.5 per cent.

The court rejected the arguments of the company. Lord McLaren summarized the reasoning:

It seems to me that [if] the depreciation which is claimed [for loss of earning power] means . . . that the vessel through competition with other vessels is less able to earn freight during the remainder of its existence, then I think on the principle of the case of the Coltness Iron Company … no deduction can be made . .. because [income tax] assessment is not made upon capital but upon income, and the principle of the Act is that you pay Income Tax upon a subject which may be continually diminishing in value, and when it is exhausted you have no longer any tax to pay because the income ceases [p. 277].
Lord McLaren concluded that “wear and tear means nothing more than the physical depreciation of the subject apart from its being rendered less useful by the discovery of better machinery or better models of doing the same thing” [ibid.].

Leith, Hull, and Hamburg Steam Packet Company v. Bain [1897]: This final depreciation case also concerned allowance for wear and tear. The company had calculated depreciation at 7.5 per cent, whereas the General Commissioners considered that 5.5 per cent was adequate:

[T]he Commissioners by a majority found as a fact that the normal life of a steam vessel may be reasonably taken as at least 22 years, and that [it] followed as a matter of arithmetical calculation that an annual allowance of 5 per cent. on the reducing value, with compound interest at the rate of 3 per cent., will recoup the original capital expenditure; or in other words, meet the depreciation of wear and tear [p. 562].

The company contended that the allowance calculated by the Commissioners did not conform to the 1878 legislation. Based on its own evidence and that of “eleven other principal shipowners of Leith,” the company mustered a number of alternative calculations that were more favorable in its view, and, of course, larger.

The Surveyor countered by saying that an allowance spread over a “considerable number of years” and was consistent with the judgment in Caledonian Railway [1880] which “permitted the trader to keep up his plant and replace it when it is worn out”. Further, he argued that sinking fund calculations of the sort were “in ordinary use” for depreciation as “shewn by reference to the published evidence of Mr. Lass, F.I.C.A., London, in the Falkirk Gas Arbitration case” [pp. 563-564].

Despite (or perhaps because of) the large amount of evi-dence placed before it, the court decided that it would confirm the Commissioners’ decision because it seemed that the allowance given had been judged to be “fair and reasonable” as a matter of fact. However, the court made it very clear that it found the case to be “abominably badly stated” and that they could find no “question . . . raised which we can entertain” [p. 567]. Calculation, therefore, was a factual matter for others to decide, not the courts.

DISCUSSION

The depreciation tax cases reveal conflicting views of the principles, practices, and meanings for taxing words that should govern calculation. The ways in which conflict was resolved and the institutional politics underlying the process had lasting consequences for the development of modern depreciation accounting, clarification of distinctions between tax and commercial accounting concepts of profits, and the emergence of modern regulatory control of taxpayers. Each of these themes is developed below.

Accounting for Depreciation: Bryer [1998] argues that a capital-revenue theory of profit measurement and capital maintenance was widely accepted by accountants and judges. His view is supported by the systematic distinction between capital and revenue made by taxpayers in the depreciation cases. (The depreciation claims made in the tax depreciation cases are summarized in Table 1). We find evidence that some companies adopted more than one method of accounting for capital at a time. Some cases mixed repairs and renewals, replacement, or depreciation accounting. Confusion between depreciation as an allocation of cost or as a provision for replacement is evident in these cases, just as it is evident in commercial accounting [Napier, 1990].
The cases emphasize different aspects of accounting for capital. In Addie, depreciation was conceptualized as an allocation of cost, adjusted for residual value, over the useful life of assets. A range of detailed methods for estimating the portion of cost consumed were presented, expressed as “deterioration” in or “exhaustion of” the “value” of capital in some cases [Knowles, Coltness]. Depreciation was integral to maintenance of financial [Caledonian Railway] and operating capital [Burnley Steamship] through the provision of the cost of eventual replacement of capital assets. In Knowles, the businessmen recognized that “exhausted capital” required provision for replacement, and the company’s counsel argued that capital should be recognized as it circulated from one form (coal deposits) into cash and then back into the original form (coal deposits) again [see Knowles, 1877, pp. 164-165]. Depreciation was not a simple matter of allocating historic cost to the time periods in which the asset was used, but it had to include an element to recognize the problems of obsolescence and technical improvements in capital assets [Burnley Steamship]. Businesses recognized the inability of repairs to maintain “cost price” [Caledonian Railway].

Companies could be quite flexible in how they explained the need for depreciation. In Coltness [1879, 1881] the company tried three separate explanations before the courts. The Leith Steam Packet case reveals that local officials were prepared to go into great commercial and arithmetical detail to find “fair and reasonable” deductions, rather than arbitrary measures for depreciation. It is also clear from that case, that the company’s preferred method of depreciation considered the commercial circumstances of each of its steamships individually.

The problems of profit measurement, capital accounting and depreciation were matters that judges in the Court of Ap-peal or the House of Lords would have encountered from corporate cases referred from other divisions of the High Court of Justice, such as the dividend cases from Chancery. These issues were, however, relatively unfamiliar to the lower courts. The Exchequer courts in England and Scotland did not deal with dividend and insolvency cases. As a preamble to his decision in the Caledonian Railway case [1880], the Lord Justice Clerk noted that questions of measuring railway profits and depreciation were questions “with which we are not generally familiar, and that fact has rendered the discussion and the consideration of it somewhat difficult” [p. 493]. Judges expressed appreciation when cases were “divested of arithmetical details, which do not affect the matter” and reduced to “simple propositions” [Caledonian Railway]. Reflecting the court’s confusion concerning the Leith Steam Packet case [1897], the Lord President said: “It is one of the characteristic peculiarities of this Case that no one can tell with confidence what is the question raised, or indeed what the Commissioners decided, beyond the arithmetical results” [p. 567]. After three days of hearings that covered the minutiae of depreciation calculations, the Lord President found the case to consist of “a farrago of facts, evidence, opinion, argument, authority, and illustration” and to be “so egregious a failure” that he could do nothing else than dismiss the taxpayer’s appeal [p. 568].

The ease with which judges were able to conceptualize depreciation varied considerably. In Forder, Pollock, B. indicated that he thought the purpose of the recognition of depreciation in commercial accounts was indeterminate. In his view, depreciation was something that occurred or was realized at a point in time. He could understand how coal capital was consumed in a mine, but calling the consumption “depreciation” created a problem of “nomenclature” [Knowles]. Huddleston, J. equated depreciation with a provision for expenses of renewal [Forder]. Although judges sometimes expressed themselves as understanding why a commercial man needed to recognize the consumption of capital, they associated this practice with an economic concept of depreciation [Coltness, Blackburn, L.].29

Some judges displayed difficulty in understanding the principles and practices of depreciation, while others evidently saw the commercial and economic point. Meanwhile, the depreciation concept that emerged for tax purposes was very narrowly defined and tied to words of law written at the start of the 19th century. The express words of Schedule D law permitted deductions for “repairs,” but disallowed capital costs defined in various ways. The way in which the 1878 wear and tear allowance was interpreted made it an extension of the “repairs” allowance that already existed. Thus, Lord McLaren defined acceptable tax “depreciation” (i.e. the allowance for wear and tear) in terms of the maintenance of physical capital [Burnley Steamship] rather than by reference to the maintenance of financial capital, operating capital, or realizable capital, which are all capital maintenance concepts touched upon in the cases.

Business had changed between the time income tax was introduced and the 1880s when Coltness was decided. Trade and industry had grown in importance to the economy, while agriculture had experienced relative decline. Businesses were increasingly complex and geographically expansive. Mining and other Schedule A businesses operated and were organized in a manner much more akin to general trading concerns. From the detail presented in the cases, it seems clear that businesses were adapting to their changing commercial environment by developing detailed, thoughtful, and systematic methods of providing depreciation in the last quarter of the 19th century. When it came to details, Surveyors were just as capable as businessmen of using sophisticated methods of calculation. The Edinburgh Surveyor supported the case for standardization of sinking-fund method depreciation, based on broad industry averages, for purposes of granting tax relief to the taxpayers in the particular industry. Standardized percentages for wear and tear allowances, calculated on a reducing balance basis appear, therefore, to have been favored by the Revenue [viz. Leith Steam Packet]. While the tax depreciation cases reveal that commercial depreciation was provided to cover diminution in value from four causes — wear and tear, exhaustion, loss of earning power, and obsolescence — tax authorities and the courts were prepared to give depreciation allowances only for the wear and tear portion.

Several accounting studies emphasize the influence of the tax treatment of depreciation on the development of accounting theory and practices [Edwards, 1976; Watts and Zimmerman, 1979]. The tax depreciation cases provide some evidence of tax influence on depreciation reporting [viz. SC, 1877 (Chadwick) cf. Baldwin and Berry, 1999]. However, what is most evident is that commercial depreciation accounting developed despite the emergence of a tax system of depreciation which was quite limited and predicated on quite distinct principles. Bryer’s [1993, p. 657] argument that depreciation accounting developed for reasons other than the 1878 wear and tear allowance seems convincing. Cases after 1878 indicate that businesses continued to charge depreciation despite their shrinking hopes of obtaining tax allowances. This evidence is consistent with Bryer’s contention [1993] and Baldwin and Berry’s [1999] evidence that depreciation was usually charged, even if it was not reported.

Cases like Caledonian Railway highlighted the problem of treating depreciation as an allowance for “wear and tear.” If operating capital could be maintained by repair, then, the tax authorities asked, why is depreciation necessary? “For the eventual replacement of capital” was not an acceptable answer. Undoubtedly, the emerging distinctions between the two will have sharpened the nature of the depreciation debates as Watts and Zimmerman [1979] suggest.
Concepts of profit: Many General Commissioners continued to regard “nett profit” or “clear profit” as calculated for purposes of commercial accounting as the basis for taxing businesses on their profits. The courts and the Surveyors gradually enforced their interpretation of “profits” in tax law as something quite distinct. Residues of late-18th century conceptualizations of business guided income tax rules, given the way the Revenue and the courts chose to interpret the taxing words. In practice, these residues limited the scope of subsequent tax statute and case law changes.

The amount taxable was an “annual amount.” Tax legisla-tion made clear that the Schedule D taxable amount was “profits” for a particular year or average of years, adjusted for the specific injunctions contained in the legislation, such as the disallowance of “any capital withdrawn”, “any sum employed or intended to be employed as capital”, or “any capital employed in improvement of premises” [see Figure 1]. The early depreciation cases [Addie, Forder] made clear the necessity of recognizing “profits” and then making adjustments in accordance with tax law. Later cases [beginning with Coltness] made clear that the concept of “profits” underlying the taxing acts was essentially different from the concept applied in commercial accounting practice or in the dividend cases under company law. In Mersey Docks a distinct legal concept of “profits of land” was recognized. This principle at first applied only to Schedule A No. III businesses. However, subsequent case law extended the prin-ciple of essential difference to Schedule D Case I businesses [e.g. Alianza, 1904].

In the tax depreciation cases the essential difference be-tween the concepts of profit was established first through literal interpretation of the law and then by construing words in what was deduced to be their historical context and the intention of Parliament. Well-established practices of legal interpretation, reinforced by the provision in the income tax act that “it shall not be lawful to make any other deductions . . . then such as are expressly enumerated in this act” [fn. 19 supra], focused Revenue attention on the words of the act. They used these words as weapons to make taxpayers and General Commissioners conform to their understanding of how the income tax should operate. Once income tax appeals could be taken to the courts, judges dissected and combined words and meanings. Pollock, B. in Knowles, understood the “balance of profits and gains” as the commercial profits available for appropriation. In Coltness, judges added the word “full” to get “full balance of profits” which placed the relevant concept of profits for income tax firmly in the historical context of property taxes.

Elements of the principle of strict interpretation were evi-dent in these judgments: in a taxing act one has to look at the “express words” [Coltness, High Court, Lord President] and there is no equity in a taxing statute [Forder]. Tiley and Collison [1999, pp. 15-16] write:

The literal interpretation . . . had . . . two consequences. The first is that it is for the Crown to establish that the subject falls within the charge. This means that if the words are ambiguous the subject is entitled to the benefit of the doubt. But the principle is not that the subject is to have the benefit if, on any argument that ingenuity can suggest, the Act does not appear perfectly accurate but only if, after careful examination of all the clauses, a judicial mind still entertains reasonable doubts as to what the legislature intended:… if there is no ambiguity then words must take their natural meaning (italics added).

Historical interpretation was part of the “ingenuity” by which judicial minds could overcome ambiguity. Lord Blackburn employed these practices in Coltness. In that case, he also signaled the extension of the judgment to apply to Schedule D Case I. This involved another principle of interpretation: that words used in the same context in different statutes may be construed in the same way [Tiley and Collison, 1999, p. 18].

Judicial practices of interpretation were adopted as Inland Revenue practices. Revenue representatives argued that allow-ances for capital were disallowed because the income tax was a “temporary tax”. The court decisions examined in this paper did not directly support the Revenue’s historical interpretation. Instead, judges were concerned to determine which concept of “profits” legislators must have had in mind when they drafted the relevant words of legislation. The historical interpretation in Coltness rested on the House of Lords’ understanding that the profits taxed by the income tax were the annual return on property or reward for effort. The annual return on property was conceptualized as it had been for much older British property taxes (e.g. parochial rates). It was probably significant that the concepts and practices of accounting for capital as it was consumed were not well developed or consistently applied in the late 18th century when the original principles of the income tax were developed. Instead, the concepts found by the courts were more consistent with aristocratic accounting operated in the context of agricultural estates [cf. Napier, 1997].

Interpretation of income tax law in its historical context, as was done in Coltness, firmly tied late 19th century income tax concepts to the concepts that courts believed had applied to the words at the end of the 18th century. This allowed them to disassociate the broad categories of costs for the year that could be deducted to arrive at profit from the then current commercial practices or the actual practices of the particular taxpayers. A distinction between “income” and “capital” was regarded by the courts as fundamental to the taxing acts, and a distinction that must be created by judicial means, rather than natural under-standing, when dealing with property which derived value from being affiliated with a trade. The “fruit” of agricultural land could be seen to follow the “planting” of seed. The “fruit,” or coal, of a mine was visible when brought to the surface, even if the process of “planting” the “tree”, the underground mine, was obscure. Property as the “tree” generating an annual “fruit” was an old idea, but still in circulation owing to the popularity of Adam Smith’s The Wealth of Nations.

Regulatory control of income taxation: The distinctive tax meaning of “profits” led to larger tax assessments than a commercial meaning would have. Revenue officers had strong motivations for enforcing the distinction. Inland Revenue officers seemed to taxpayers to be intent on “getting as much as they can” in tax revenue [SC, 1861, q. 4102, Gooch]. Revenue officers expressed impatience with local Commissioners who collected less tax than they should or could [e.g. SC, 1861, Welsh] and “performed no function which they could avoid” [Riddle, 1887, pp. 118-119]. They complained about their lack of “control” over the Commissioners and their subordinates [SC, 1861, q. 2161, Welsh]. Surveyors, the Revenue officers working in local tax offices, fell under the supervision of traveling supervisors and accountants [Lamb, 2001, p. 282]. The “crushing nature” of pressure to be effective from Somerset House in London was a feature of a rigid regime of accountability on local officers under which “the

30 Adam Smith’s description [1776, Bk. 1, Ch. 6] of capital as the “tree” and income as its “fruit” became a metaphor used by politicians, judges, and others to describe the tax distinction [Boden, 1999; Daunton, 2001, p. 206]. Smith uses agricultural metaphors to describe mining [1776, Bk. 1, Ch. 11, part II]. In Coltness Lord Blackburn cites the words “planting the mine” from eighteen century statute, but he is wary of applying the agricultural land metaphor to land that does not “grow” crops in a literal way. Later cases were less scrupulous in applying the metaphor and it came to be used in a very general sense. In Pool v Guardian Investment Trust Co. Limited [1921], Sankey, J. refers to the concept, as developed in the US Supreme Court case Eisner v Macomber [1919].

Board of Inland Revenue made the Surveyors feel the weight of their displeasure when anything went wrong” [Riddell, 1887, pp. 118-119, 131]. Accounting for assessments and the provision of statistical data to head office was a responsibility of Surveyors and involved “wandering through an interminable maze of figures, heaping results on results without any system” [op. cit., pp. 141-143]. In the 1870s practical technical training was gained on the job, and consisted of review of notebooks compiled by officers who were more senior and experienced, and also careful study of the words of statute [op. cit., pp. 86, 87, 109]. All of these factors suggest the accuracy of Gooch’s assertion that Rev-enue officers did their jobs well if they were “getting as much as they can”.
Inland Revenue authority in tax administration was en-hanced once the courts expressed their approval for the quasi-judicial practices of interpretation adopted as Revenue practices. The courts’ approval, however, required judges themselves to confront the ambiguity of meanings for taxing words. In dealing with the ambiguity of tax law by constructing their own distinction between commercial accounting and tax calculations, the courts were in one sense doing nothing more than following their own practices of legal construction. It is argued in this paper that the construction of certainty in judicial minds through practices of interpretation of the historical context in which the words of statute were written suited the courts, and the House of Lords in particular, in the 1870s and 1880s for other reasons. Ambiguous words of statute, as “profits” was, might, alternatively, have been construed according to its ordinary meaning, such as the commercial meaning of profits.

The courts were required to recognize that a taxing act had “to grant a revenue at all events” [Coltness, Blackburn, L.]. This placed a regulatory obligation upon them. A large body of judicial precedent existed in dividend cases [Reid, 1987; Bryer, 1998] by 1878 when the Court of Appeal and the Lords became direct involved in the income tax appeal structure. Therefore, these courts were familiar with ordinary meanings for profits in a commercial context and had developed their own body of precedent for the meaning of the word. Keeping those meanings away from the meaning that would attach to the word for tax purposes was important for reinforcing the literal meaning of the tax law as well as to ensure that the courts could fulfill their regulatory obligations without creating conflicting, but unjustified, meanings for words like “profits” that appeared in both contexts.

The Court of Appeal used historical interpretation to define “capital”, and by extension “profits” available for distribution, in the Lee case [1889]. The judges used Adam Smith’s distinction between “fixed” and “circulating” capital as the route to a new way of interpreting “capital”. Superficially, this was a similar pattern of going backward in time to interpret the words of a contemporary act that we saw in Coltness. What was significant was the fact that by pushing interpretation back into historical time, the Lords could side-step arguments that “profits” needed to be something specified in non-abstract terms or that tax and commercial measurements of profits should be the same.

In Lee, the Court of Appeal went backward not for the same definition of capital that would apply for taxation, but for a different, economic definition. One interpretation of this case is that the court actively sought to support broad social objectives: such as, the interests of social capital [Bryer, 1998] or unfettered rational movement of economic capital [French, 1977]. The court’s wish to create leeway for the definition of “profits” for dividend purposes potentially created conflicts with its obligation to protect the Exchequer, that is, to standardize (and probably maximize) the definition of taxable profits. Literal interpretation in much earlier historical contexts helped create legal meanings that taxpayers and litigants would have difficulty bringing together. Effectively, therefore, historical interpretation was a strategy to avoid the regulatory conflicts that might occur if other principles of statutory interpretation were applied, viz. ordinary meanings, or exporting a meaning for a word from one area of law to another. Especially after Lee, it would not have done at all, given the courts’ responsibility to “grant a revenue at all events”, for the permissive definition of “profits” in the divi-dend cases to migrate to income tax cases.

Judicial decisions across the regulatory range could be more easily reconciled if the courts kept meanings abstract and did not get too specific about particular measurement principles and practices. Therefore, the failure of late 19th century British courts to make detailed accounting rules to define “profits” and “capital” may not reflect a “slump in judicial self-confidence” [Maltby, 1999]. Arguably, this position left room for judicial manoeuvrability. The courts remained free to interpret concepts such as “profits”, “capital”, and “depreciation” in different ways for competing regulatory purposes, maintain the possibility of judicial law reform [French, 1977], and avoid the loss of legal control that tends to go along with reliance on formalist approaches [McBarnet and Whelan, 1992, p. 104]. The courts

reluctance to calculate meant that judges could adopt calcula-tions based on meanings that were defined by other parties who were not bound by case precedent or principles of statutory interpretation. They could also choose to ignore certain meanings and calculations. For example, supporting evidence in Lee on the meaning of “profits” that was derived from Coltness [fn. 22 supra] could be ignored because the abstract concepts were distinct. The judiciary avoided a regulatory conflict in the two spheres of its adjudication by pushing factual calculation onto others (e.g. by acceptance of calculation derived from company articles of association or by income tax calculations to be worked out by Revenue and local tax officials). Thus, they kept the flexibility to avoid inconsistent judgments.

Paradoxically, once the essential difference between “profits” for tax and accounting purposes had been established with the Coltness decision, it was possible for the courts to institutionalize a link between the two practices of profit measurement. This was done in Gresham [1892] which decided that profits should be recognized according to “the ordinary principles of commercial accountancy” [Freedman, 1987]. This “commonsensical approach” [Boden, 1999] constrained a Revenue tendency to define every principle of tax calculation in its own terms, which had been reinforced by the Coltness decision. By then it was accepted in judicial law and Revenue practice that commercial net profits merely represented the starting point of a calculative process of adjustment that dealt with the matters expressly enumerated by legislation — including the 1878 depreciation allowance — and those matters necessary to reflect the essential differences between profit concepts for tax and accounting that had been clarified by case law, such as, the disallowance of accounting “depreciation”. Subsequent debate before the courts extended, and sometimes reversed, the adjustments required to commercial accounting calculations to reflect the essential difference of the tax concept of profits [see Freedman, 1987, 1993, 1995, 1997]. The institutionalized connection created by Gresham, however, has ensured that the profit mea-

31 Of course, it is possible that judges in the dividend cases were accommo-dating their own vulnerabilities or lack of precise understanding of principles and practice. Accounting historians who have studied the dividend cases, and the responses to them, make clear the variability in the judges’ grasp of the detailed accounting issues involved. In that sense, they may just have wished to keep away from complex calculation.

sures, while required to be essentially different, also remain essentially connected.

CONCLUSIONS

Judicial support gave the Inland Revenue the upper hand in tax administration. With this support, it became possible to construct de facto regulatory control of the income tax. Taxing practices based on writing, interpretation, and examination of texts, and extended calculation were reinforced. These practices formed the basis for the disciplinary power of the modern Revenue and supplanted taxation based on the exercise of sovereign power. This change had permanent effects on the way in which tax calculation was conceptualized in the UK and the process by which taxation was extracted from the taxpaying population. Through analysis of the tax depreciation cases we have begun to see the emergence of modern modes of tax governance. The cases also reveal the lingering importance of the historically specific concepts of “profits”, “property” and “capital” that underlie the early income tax.

A shift in the form of regulatory control over British taxa-tion occurred after 1855 [Lamb, 2001]. Following Hoskin and Macve [1986, 1994], the change can be seen as a shift in modes of governance from one based on the exercise of sovereign power to one based on accountability. In this new accountability, the disciplining technologies of managers create self-disciplining subjects, who in turn reinforce and extend the disciplinary power of the managers.32 Hoskin and Macve base their theorizing on organizational and management studies of private sector business, but comparable changes can be discerned in public sector management.33 The construction of accountability for income tax rests firstly on the regulator gaining the power to

32 This part of their theorising is based on an understanding of the nature and emergence of “disciplinary power” based on a reading of Foucault [1975], and as developed by others [including, Boland, 1987; Miller and O’Leary, 1987; Preston, 1989; Miller, 1990, 1994].

33I am grateful to Keith Hoskin for helping to make this point clear. In describing my work [Lamb, 1997a], he writes: “The new tax regime is derived from a new application of the old techne of accounting, to “know” people as subjects in a new way, as income and profit “earners” — a knowledge which (like modern tax) can only be extracted from these subjects by getting them to render an account of their monetary value, which is then done via the accounts which either they keep or which are kept on them, and translated into a tax ‘return'” [Hoskin, 1997, p. 7].

regulate and then on the ability to define routines of regulated calculation. If such calculation becomes “regulating calcula-tion”, or internalized routines of accountability, for taxpayers, then those taxpayers become more knowable and governable and the taxing system becomes more autonomous and less reli-ant on the actual exercise of power by tax officials.34 The shift in the form of regulatory control of income tax accelerates after the Revenue’s de facto authority to define regulated calculation for tax purposes gains the support of the courts. Regulatory control over a large population of geographically dispersed taxpayers is more complete when based on disciplinary technologies than it would be if based on the exercise of sovereign power alone [Lamb, 2001].

The high degree of “voluntary compliance” that was a fea-ture of mid- to- late 19th century British taxation [Daunton, 2001] and late 20th century British taxation [Preston, 1989] is a product, in part, of pervasive “regulating calculation.” Analysis of the depreciation cases in this paper has permitted us to trace some of the ways that Inland Revenue regulators gained the power to regulate and then to define routines of regulated calculation. If accounting is a form of economic calculation with the potential to create disciplinary power [Miller, 1990], then it makes sense for us to investigate and understand how the routines of accounting calculation formed in tax practice. This paper has highlighted the ways that meanings for taxing words, principles, and practices have been contested and constructed in dealing with Schedule D and Schedule A businesses. By the end of the 19th century, British commercial accounting and tax practice had achieved a considerable degree of general acceptance and understanding of the meanings and calculations of “income” vs. “capital, as well as “profits” and “depreciation” in particular contexts.

Essential to the modern disciplinary power of the Revenue is comprehensive knowledge of the taxpayer gained through writing, examination, and calculation. The whole process of tax appeal to the courts is based on writing: first the case stated, then the judgments, next their dissemination, and finally their application as precedent. This process of appeal contrasts with the appeal process based on calling the taxpayer to account and the final judgment of the General Commissioners that previ-ously applied [Lamb, 2001]. The depreciation cases provide evidence that tax calculation was moving away from a reliance on estimation based on what was known and knowable about a business locally, to a reliance on information and calculations presented in written commercial accounts. Assessment in these cases was based on figures for profits and depreciation taken from accounts [Forder, Handyside, Coltness] or derived in col-laboration with experts [Leith Steam Packet]. Although the courts judged the details of calculation to be matters of fact on which they were not required to make judgments, their decisions were used to support Surveyors’ rationalization of what could be regarded as “fair and reasonable” allowance for wear and tear [Leith Steam Packet]. While it was certainly the case that these practices (especially the routine submission of accounts) had not yet become the norm across the wide range of taxpayers [Sabine, 1966, p. 138], it was significant that the general acceptability of the practices was presented in court to and by judges who had the power to define and enforce taxing practices.

The tax cases reveal how the Revenue asserted its technical authority over the commercial principles applied by many Com-missioners. Appeals were brought by Surveyors who disagreed with the commercial basis of the decision by the Commissioners [Forder]. The courts accepted Revenue assertions of technical definitions and tax calculations in preference to taxpayers’ commercial arguments, except in Knowles and Caledonian Railway, cases that created no lasting precedents. The creation of technical definitions, such as those articulated by Revenue counsel Dicey [Knowles, Coltness], transformed “profits” from something that could be estimated on the basis of judgment, local knowledge, and commercial understanding into something that had to be derived with precision. The derivation rested, first, on the close reading of historical texts and, then, careful calculation according to the application of prescribed rules of written legislation, case precedent, and tax returns. These technical practices of taxation were not practices that the General Commissioners were likely to find easy to lead. They were part-time, unpaid laymen, many of whom found it difficult to find the time to attend appeal hearings [e.g. SC, 1852a, q. 2159]. They relied upon their clerks and, increasingly, on the Revenue officers for legal knowledge and skills.

Before the depreciation cases, considerable social and po-litical tension was created by the uncertainty over how profits should be calculated for income tax purposes and the fact that local authorities adopted different practices in different parts of Britain. Grievances also focused on the less generous tax treatment of mining businesses compared with other trading enterprises. The court decisions made it clear that income tax profits would not equal commercial calculations. Reinforcement of Revenue authority and practices by the courts meant that income tax practice could and would become more uniform across Britain. The court decisions meant that mining companies were treated only marginally more harshly than trading companies by tax law. The principles established by the courts were not generous to taxpayers, but the outcomes created greater certainty and their publicity helped standardize and accustom taxpayers to the tax.

While the depreciation tax cases reveal how de facto taxing power began to shift in the direction of the Revenue, they also reveal just how slow the process of creating a new mode of governance over taxation was. The courts did not immediately accept all of the arguments and analyses of the Inland Revenue. In Addie and Forder, the courts accepted that the commercial concept of “profits” was modified by the express words of the Acts, but only in Coltness did the House of Lords accept the argument of essential difference. Legal decisions took time to be absorbed into practice, and might not be noticed if made by courts outside the jurisdiction in which the taxpayers, Commissioners, or judges operated. This was evident from the Knowles and Caledonian Railway cases. Inland Revenue interpretations of new law took a very long time to be understood and supported by the courts, and accepted by local Commissioners and taxpayers as guiding practice. It took 25 years for the Revenue’s interpretation of the scope of the 1866 “transfer” of Schedule A No. III companies to Schedule D Case I to be accepted. In Knowles the court explicitly rejected the narrow interpretation articu-lated by Dicey, but the House of Lords finally accepted it in Coltness. The narrow scope of the 1878 wear and tear allowance took a decade and a half to sort out.

Use of case law for accounting history has been regarded as “particularly formidable” because “accounting principles and practices were discussed in a relatively large number of early business actions [that] span a bewildering variety of different causes” [Mills, 1993, p. 766]. Cutting a swathe of analysis and argument through the multitude of connections and lines of interpretation in these texts necessarily involves a narrowing of focus that risks a failure to notice matters of significance. This paper represents a first attempt to make important links be-tween the histories of accounting, tax practice, and judicial decisions that help explicate the construction of adequate regulatory control over British income tax. Undoubtedly there are many avenues of research left to explore.

CASES CITED

Addie & Sons, Re (1875), 1 TC 1, case no. 1, Court of Session, First Division
(Exchequer – Scotland), 30 January. Alianza Company, Ltd. v. Bell (1904), 5 TC 60, case no. 266, High Court (King’s
Bench Division), July; Court of Appeal, December; CCH British Tax Case
Archive. Burnley Steamship Company v. Aikin (1894), 3 TC 275, Court of Session, First
Division (Exchequer – Scotland), 10 July.
Caledonian Railway Company v. Banks (1880), 1 TC 487, Court of Session, Sec-ond Division (Exchequer – Scotland), 6 July, 4 November, 18 November. Coltness Iron Company v. Black (1879), 1 TC 287, case no. 49, Court of Session,
First Division (Exchequer – Scotland), 6 February. Coltness Iron Company v. Black (1881), 1 TC 292, case no. 49, Court of Session,
First Division (Exchequer – Scotland), reconsidered 29 April 1880; House of
Lords, 7 April.
Eisner v. Macomber (1919), 252 US Reports, Supreme Court. Forder v. Andrew Handy side and Company, Limited (1876), 1 TC 65, High Court
(Exchequer), 29 January. Golden Horse Shoe (New) Ltd. v. Thurgood (1933), 18 TC 280, case no. 905, High
Court, July; Court of Appeal, December; CCH Tax Case Archive. Gresham Life Assurance Society v. Styles (1892), 3 TC 185, House of Lords, 25,
28, 29 May. Knowles (Andrew) and Sons Limited v. McAdam (1877), 1 TC 161, case no. 26,
High Court (Exchequer), 23 January.
Lee v. Neuchatel Asphalte Company (1888/89), LR 41 Ch. D. 1, High Court (Chan-cery Division), February 1888; Court of Appeal, February 1889. Leith, Hull, and Hamburg Steam Packet Company v. Bain (1897), 3 TC 560, Court
of Session (Exchequer – Scotland), 1-2 June and 16 June. Mersey Docks and Harbour Board v. Lucas (1883), 2 TC 25, case no. 64, House of
Lords, 26 and 28 June. Pool v The Guardian Investment Trust Co. Limited (1921), 8 TC 167; case no. 439,
High Court (King’s Bench Division); CCH British Tax Case Archive. Stow Bardolph Gravel Col, Ltd. v. Poole (1954), 35 TC 459, High Court (Chancery
Division), May; Court of Appeal, November; CCH British Tax Case Archive.

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