Report to Congress 

on the 

Depreciation of Clothing Held For Rental 

Department of the Treasury 

August 1989 
ASSISTANT SECRETARY 

Dear Mr. Chairman: 

DEPARTMENT OF THE TREASURY 

WASHINGTON 

AUG 18 1989 

Section 201(a} of Public Law 99-514, the Tax Reform Act of 1986, 

required the Treasury to establish an office to study the depreciation of all depreciable assets, and when appropriate, to 

assign or modify the existing class lives of assets. Treasury's 

authority to promulgate changes in class lives was repealed by 

Section 6253 of Public Law 100-647, the Technical and Miscellaneous Revenue Act of 1988. Treasury was instead requested to 

submit reports on the findings of its studies to the Congress. 

This report discusses the depreciation of clothing held for 

rental. The General Explanation of the Tax Reform Act of 1986 

indicates that such study was to be among the first conducted 

by Treasury. This is thus the first depreciation report 

submitted to the Congress. 

I am sending a similar letter to the Chairman of the Senate 

Finance Committee. 

Sincerely, 

J{___1l GJ. foL--

Kenneth W. Gideon 

Assistant Secretary 

(Tax Policy) 

The Honorable Dan Rostenkowski 

Chairman 

Committee on Ways and Means 

House of Representatives 

washington, DC 20515 
DEPARTMENT OF THE TREASURY 

WASHINGTON 

ASSISTANT SECRETARY AUG 1.8 1989 

Dear Mr. Chairman: 

Section 201(a) of Public Law 99-514, the Tax Reform Act of 1986, 

required the Treasury to establish an office to study the depreciation of all depreciable assets, and when appropriate, to 

assign or modify the existing class lives of assets. Treasury's 

authority to promulgate changes in class lives was repealed by 

Section 6253 of Public Law 100-647, the Technical and Miscellaneous Revenue Act of 1988. Treasury was instead requested to 

submit reports on the findings of its studies to the Congress. 

This report discusses the depreciation of clothing held for 

rental. The General Explanation of the Tax Reform Act of 1986 

indicates that such study was to be among the first conducted 

by Treasury. This is thus the first depreciation report 

submitted to the Congress. 

I am sending a similar letter to the Chairman of the House Ways 

and Means Committee. 

Sincerely, 

~lJ.~ 

The Honorable Lloyd Bentsen 

Chairman 

Committee on Senate Finance 

United States Senate 

Washington, DC 20510 

Kenneth W. Gideon 

Assistant Secretary 

(Tax Policy) 
Table of Contents 

Chapter 1. Introduction and Summary of Findings .. .. ........................ ................ .... ...... .. .. 1 

A. Mandate for Depreciation Studies .. .. .. .. .. .. .. .. .. .. .. .. .... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 1 

B. Principal Findings .......................... ................ ...... .... ............................ ...... .... ....... 2 

C. Organization of the Report .................. .................... .... .......... .......... .......... ...... ..... 2 

Chapter 2. A Brief Description of the Rental Clothing Industry .......... ...... .... ................. 3 

A. The Scope of The Study. ..................................................................................... 3 

B. Characteristics of the Formal Wear Industry ........................................................ 5 

C. Characteristics of Tuxedos .. .... .. .. .... ............................. ..... .. .. .. .. .. .. .. . ..... .. .. ......... ... 6 

Chapter 3. The Results of the Survey Questionnaire ...................................................... 9 

A. Design of the Survey Questionnaire ............ ...... .................................................... 9 

B. The Survey Sample and Response Rates .................................................. ............. 9 

C. Summary of Responses .......................................................................................... 12 

Chapter 4. The Measurement of the Class Life of Tuxedos ............................ ...... .... ....... 19 

A. The tJseful Life of Tuxedos .................................................................................. 19 

B. The Productivity Method .. .. .. .. .. .... .. .. .. .. .. .. .. .. .. .. .. .... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . ... .. 20 

C. illustration of The Measurement of The Economic Life of Tuxedos Using the 

Productivity Method . . .. .. .. . . .. .. .. .. . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . .. .. .. .. . .. . .. .. .. .. .. .. .. . . .. .. .. .. . . .. . 23 

Chapter 5. Conclusions ..................................................................................................... 29 

A. The Class L.ife of Tuxedos .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ............................ 29 

B. Structure of the Asset Classification System ......................................................... 30 

Appendix A. Exhibits Related to the Congressional Mandate .......... ............................... 32 

Exhibit 1. Section 168(i)( 1 )(B) of the Internal Revenue Code as Revised by the 

Tax Reform Act of 1986 ............................................................................................. 32 

Exhibit 2. Section 168(i)(l) of the Internal Revenue Code as Revised by the 

Technical and Miscellaneous Revenue Act of 1988: .................................................. 32 

Exhibit 3. Provisions for Changes in Classification from The General Explanation 

of the Tax Reform Act of 1986 ................................................................................... 33 

Appendix B. The Survey Questionnaire and the Follow-Up Letter ................................. 35 

Appendix C. Technical Issues in the Application of the Productivity Method .. .. .. .... ..... 46 

Section 1. Weighting the Results for the Different Styles ........................................ 46 

Section 2. The Algebra of the Class Life Estimate Using Turns Data Based on 

Delivery Dates ............................................................................................................ 48 

Section 3. Translating Economic Depreciation Into Equivalent Economic Lives .... SO 

Bibliography ....................................................................................................................... 53 

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Table of Figures 

Figure 1: Distribution of Useful Lives .............................................................................. 19 

Figure 2: Average Remaining Turns Per Tuxedo By Age ................................................ 22 

Figure 3: Value-In-Use Per Tuxedo By Age ..................................................................... 23 

Figure 4: Economic Depreciation By Age ........................................................................ 24 

Figure 5: Distribution of Equivalent Economic Lives ...................................................... 26 

Table of Tables 

Table 1: Investment in All Industries and in Rental Tuxedos ........................................... 4 

Table 2: Response Status of Surveyed Firms .................................................................... 11 

Table 3: Surnrnary of Survey Responses ........................................................................... 13 

Table 4: Question 6 Cross-Classified by Questions 2b,2c,5 ............................................. 16 

Table 5: Depreciation for Financial Accounting Purposes ............................................... 17 

Table 6: Measures of Useful and Equivalent Economic Lives ......................................... 25 

Table 7: Sample Statistics for Value-In-Use and Cost ...................................................... 47 

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Chapter 1. Introduction and Summary of Findings 

A. Mandate for Depreciation Studies 

This study of the depreciation of rental clothing has been prepared by the Depreciation Analysis 

Division of the Office of Tax Analysis as part of its Congressional mandate to study the depreciation 

of all depreciable assets. This mandate was incorporated in Section 168(i)(l )(B) of the Internal 

Revenue Code as modified by the Tax Reform Act of 1986 (see Exhibit 1 of Appendix A). This 

provision directed the Secretary of the Treasury to establish an office that "shall monitor and analyze 

actual experience with respect to all depreciable assets", and granted the Secretary the authority to 

change the classification and class lives of assets. The Depreciation Analysis Division was 

established to carry out this Congressional mandate. The Technical and Miscellaneous Revenue 

Act of 1988 repealed Treasury's authority to alter class lives or asset classes, but the revised Section 

168(i) continued Treasury's responsibility to "study the actual experience of depreciable assets and 

report to the Congress on its findings" (see Exhibit 2 of Appendix A). 

The General Explanation of the 1986 Act (the "Blue Book") indicates that the class life of a 

set of assets should reflect the anticipated useful life and the anticipated decline in value over time 

of the assets. The concept of useful life suggested by the General Explanation distinctly differs 

from the useful life concept under prior law. Under the 1986 Act, the useful life is intended to 

reflect the economic life span of the property over all users combined, whereas under prior law the 

useful life was intended to reflect the typical period over which individual taxpayers retained their 

assets. 1 

Resale price data may be used to measure the decline in value, and if such data are used, the 

data should be adjusted to remove the effects of historical inflation. The General Explanation notes 

that the class life derived from such data (which, to avoid possible confusion, is referred to hereafter 

as the "equivalent economic" life) should be determined so that the present value of straight-line 

depreciation deductions over the equivalent economic life (discounted at an appropriate real rate 

of interest) equals the present value of the estimated decline in value of the assets. In order to 

resolve the ambiguity associated with the choice of straight-line method to be used as a standard, 

the equivalent economic life in this report shall be obtained by equating the present value of the 

decline in value to the present value of the depreciation allowances which may be claimed under 

the Alternative Depreciation System (with a recovery period equal to the equivalent economic life). 

This standard differs from the simple straight-line method which ignores the application of the 

half-year convention, as well as the timing of the depreciation tax benefits. 

1 In addition, there is no reference ot the use of the 30th percentile (rather than the mean value) in 

the legislative history of the 1986 Act, whereas the legislative history of the Tax Revenue Act of 

1971, which codified the Asset Depreciation Guideline System, specifically allowed such an 

approach. 

- 1 -
The General Explanation also indicates that other evidence of the assets' useful life, such as 

the depreciation method used for financial reporting, the period of financing or leasing arrangements 

under which the assets are acquired, and the period over which the assets are serviced under contract 

be obtained. Pursuant to this guidance, such evidence as is applicable to tuxedos has been collected, 

together with information relating to the frequency of rental of tuxedos with age from which their 

useful life and decline in value ("economic depreciation") may be inferred. Treasury believes that 

economic depreciation was intended to be the primary measure of depreciation in determining class 

lives. Thus, although each of the observed life measures are reported in this study, primary attention 

is given to the estimation of the equivalent economic life of tuxedos. 

During the debate over the Tax Reform Act of 1986, the formal wear rental industry expressed 

its concern that the proposed depreciation of tuxedos would inadequately reflect the actual economics of these assets. As noted in the General Explanation, Congress responded by requesting that 

clothing held for rental be among the first assets studied by Treasury (see Exhibit 3 of Appendix 

A). This report is submitted to the Congress pursuant to both this request, and the general mandate 

for studies of taxpayer's actual experience with depreciable assets. 

B. Principal Findings 

The principal findings of this study are that the equivalent economic life of tuxedos held for 

rental is 1.9 years, while their useful life, which measures the period over which they provide service, 

is 3.7 years. If Congress were to establish a separate asset class for tuxedos, Treasury would suggest 

that a 2.0 year life be assigned to such class. Treasury recommends, however, that Congress carefully 

consider the implications of dividing existing asset classes into sub-classes to which short.er (or 

longer) class lives are assigned. 

C. Organization of the Report 

The report is organized into five chapters and three appendices. The second chapter provides 

a brief description of the rental clothing industry in general, and the formal wear industry in particular. The third chapter describes the efforts taken by the Depreciation Analysis Division to work 

with this industry on the design of an appropriate survey instrument. It also includes a description 

of the sample selection process and provides descriptive statistics on the responses to the survey 

questionnaire. The fourth chapter describes the methods used to estimate measures of the economic 

life of tuxedos. Chapter five summarizes the results of the study, and discusses some of the 

implications of changing the class life of tuxedos to reflect their economic life. Appendix A includes 

material from various public documents which relate to the Congressional mandate under which 

this study was performed. A copy of the survey questionnaire and follow-up material is included 

in Appendix B. Appendix C describes the tedmical details involved in applying the Alternative 

Depreciation System as the standard against which the equivalent economic life is to be measured, 

as well as in taking the actual dates the tuxedos were placed in service into account. 

-2-
Chapter 2. A Brief Description of the Rental Clothing Industry 

A. The Scope of The Study. 

The major types of clothing held for rental include formal wear (both men's and women's), 

costumes, and industrial and commercial clothing. The rental of tuxedos and costumes are both a 

part of Standard Industrial Classification (SIC) industry 7299, Miscellaneous Personal Services, 

Not Elsewhere Classified. The rental of industrial and commercial clothing is classified as part of 

either SIC 7213, Linen Supply, or SIC 7218, Industrial Launderers. For tax purposes, tuxedos 

belong in Asset Class 57 .0, Distributive Trades and Services, which is a very broad class that 

includes assets used in wholesale and retail trade, and in the provision of personal and professional 

services. The current class life of assets in Asset Class 57.0 is 9 years. This implies a recovery 

period of 5 years for regular depreciation (MACRS), and a recovery period of 9 years under the 

Alternative Depreciation System (ADS). 

Table 1 shows some of the activities conducted by establishments whose assets fall into Asset 

Class 57 .0, and the relative levels of 1982 investment by such establishments. About one seventh 

of all equipment acquired in 1982 belongs in Asset Class 57.0, and about one-half of the total 

investment in assets in this class was made by the service sector. Investment by establishments 

providing personal services was not a major component of total service sector investment, however, 

and total investment in tuxedos by formal wear rental firms was itself only a very small (about 

one-twentieth) portion of the personal service sector investment. The Depreciation Analysis 

Division (which was initially referred to as the Office of Depreciation Analysis) announced its 

intent to study the depreciation of rental clothing in the Federal Register on October 2, 1987, and 

in that notice also announced its intention to hold a public meeting with all interested parties. In 

addition, the Depreciation Analysis Division sent copies of this notice to various trade associations 

which it believed might have an interest in the study. At the initial public meeting, which was held 

on October 26, 1987 at the Treasury building, the proposed scope of the study was discussed. 

Representatives from the Textile Rental Services Association of America strongly voiced their 

objection to rental uniforms and other garments rented by their members being included in this 

study. They indicated that industrial and commercial clothing frequently lasts less than one year, 

and provided the Depreciation Analysis Division with statistical information that had been collected 

by the ifldustry to support their contention. They also noted that for tax purposes the cost of such 

clothing is often expensed, rather than capitalized and depreciated, and that the rental of uniforms 

was generally only a portion of their total rental business. 

Although the Depreciation Analysis Division did not seek to independently confirm these 

arguments, both the material presented and considerations of administrative convenience suggested 

that it would make more sense to study the depreciation of the assets of industrial and commercial 

launderers (which generally also includes the laundering equipment) as part of a more general study 

- 3-
of the personal services industry. Thus, no attempt was made to obtain information regarding the 

depreciation of rental uniforms, and the conclusions of this study of the depreciation of tuxedos do 

not apply to such assets. 

Table 1. 1982 Investment in Equipment by All Industries, Industries in Asset Class 57 .0, 

and Investment in Rental Tuxedos 

(in millions of dollars) 

Industry Investment in 

Equipment 2 

All Industries 361,260 

Asset Class 57.0 53,073 

Wholesale Trade 12,924 

Retail Trade 13,098 

Service Industries 27,051 

Business Services 10,033 

Personal Services 1,024 

Rental Tuxedos 60 

All Other Services 15,994 

2 The investment values (except the value for tuxedos) are from: U.S.Department of Commerce, 

Bureau of Economic Analysis, Fixed Reproducible Tangible Wealth in the United States, 

1925-1985. Washington DC: U.S. Government Printing Office, June 1987. These values include 

all investment in equipment by the listed industries including investment in computers, furniture 

and fixtures and other types of equipment that would not ordinarii y be depreciated using the life 

for asset class 57 .0. The value for investment in rental tuxedos was provided by the tuxedo manufacturing industry. 

-4-
Renters of tuxedos have more recently begun to rent formal gowns. Since this is a relatively 

recent phenomenon, there are very few data on which to base estimates of class lives. An attempt 

was made to collect data for formal gowns, but little information on gowns was received. Discussions 

were also held with representatives of the American Costumers Association, as well as individual 

costumers. These discussions revealed that a large majority of firms in this industry did not keep 

records that could be used to determine class lives. In general, these industry experts suggested 

that the rental pattern of costumes was similar to that of tuxedos, but as in the case of formal gowns, 

very little information regarding the depreciation of rental costumes was obtained. This study is 

intended to cover only clothes held for rental, other depreciable assets held by rental clothing firms 

are specifically excluded from the study. 

B. Characteristics of the Formal Wear Industry 

The formal wear rental industry is made up of mostly small firms. The International Formal 

Wear Association (IFWA) estimates that there are some 1,300 firms in the industry that own some 

6,000 retail outlets. These outlets for the most part both rent and sell formal wear. As shown in 

Table 1, the total 1982 investment in tuxedos is estimated to be about 60 million dollars. Rented 

tuxedos are purchased almost entirely from three domestic manufacturers, although the tuxedos 

themselves may carry a variety of designer labels. 

Most rental firms either own or lease the formal wear which they rent. There are some formal 

wear firms that own no stock of rental formal wear, but instead themselves rent formal wear from 

a wholesaler on an individual order basis, and some of these firms even rent the formal wear held 

for display on their showroom floor. Firms with multiple outlets usually keep their formal wear in 

a single warehouse, which often is in a separate location from the rental outlets. For firms operating 

in this manner, good inventory control is a necessity. Firms without computerized inventory control 

keep track of their inventory on large spreadsheets that account for as many as 12 weeks of rentals. 

The size and the style of the formal wear and the date of the rental are recorded on the spreadsheet, 

thus insuring that a given tuxedo is scheduled to be rented only once on a given date. Firms with 

computerized inventory control keep similar worksheets on their computers. Several firms now 

specialize in customizing software packages to provide inventory control for the formal wear 

industry. Some formal wear manufacturers are producing rental formal wear with bar codes that 

identify the style, size and date of purchase of the tuxedo. Prior to 1985 there were very few firms 

with computerized inventory control; since 1985 many firms in the industry have been moving 

towards computerized inventory control. As mentioned above, this study is based upon data for 

tuxedos, which is used as the generic term for all men's formal wear. The basic unit of input is the 

tuxedo jacket. The average rental includes the jacket, pants, cummerbund, shirt, tie, and studs. 

Studs, ties, shirts, and cummerbunds are generally treated as noncapital items for tax purposes by 

- 5 -
the formal wear firms. Pants are usually purchased at the same time as the jacket, although the 

manufacturer may price and sell pants separately. Since pants usually wear out faster than jackets, 

approximately one and a third pairs of pants are purchased for each jacket. 

It was clear from initial discussions with industry representatives that firms are not usually 

concerned about the number of times a specific tuxedo is rented, but rather focus on the rental of 

the entire set of tuxedos that represents a single style. Depending upon the number of tuxedos 

ordered by the firm, a style may contain from 25 to 2,500 individual tuxedos. This is because the 

set typically contains tuxedos in a wide range of sizes, some of which may rent very frequently and 

others of which may rent hardly at all. The latter are nevertheless needed, because rentals are often 

made to entire wedding parties and it is necessary to fit the entire party in order to rent even a single 

tuxedo. Records are frequently maintained such that rentals for a given style of tuxedo can be 

determined, but not rentals for any single tuxedo within that style. 

Likewise, the fact that an entire set of tuxedos constituting a given style is generally acquired 

in a single purchase also suggests that a given style of tuxedo should be viewed as the basic asset 

studied. Thus, in this study, the entire set of tuxedo jackets and pants of various sizes in a given 

style acquired by a firm at a single time (and thus representing a given vintage) is considered a 

single asset (and referred to hereafter simply as a "style"); data on individual tuxedos were not 

sought or obtained. 

C. Characteristics of Tuxedos 

There are two major types of tuxedos: basic black tuxedos and fashion tuxedos. Basic black 

tuxedos generally do not change in style, while fashion tuxedos generally change in style from year 

to year. The basic black tuxedo ceases to rent either because it is worn out as a result of the multiple 

process of wearing and cleaning, or because it is rendered permanently unserviceable as a result of 

a cigarette burn or some other unrepairable damage. Fashion tuxedos are also susceptible to sudden 

unrepairable damage, but usually go out of style (or become obsolete) before they physically wear 

out. Repairs to tuxedos are generally minor and are never capitalized. 

Formal wear rental fmns infrequently sell used tuxedos. Industry representatives noted that 

before the used tuxedos are discarded, they may be spray painted, shredded, or their sleeves may 

be cut off to prevent the tuxedos from being worn when their appearance would no longer suggest 

elegance. There is thus little or no salvage value for retired tuxedos. As a result, the depreciation 

of a style of tuxedo must largely be inferred from the pattern of rentals over the style's economic 

life. The ability of formal wear rental firms to supply such information is related to the way purchases 

of rental tuxedos are made and inventory is controlled. 

- 6-
A given style of fashion tuxedo is generally purchased for delivery at a single point in time. 

The number of rentals of a given style is dependent upon the rental fee, the location of the establishment, the level of advertising, and other factors having to do with the popularity of the style. 

Since different styles are introduced each year, and the popularity of each style tends to decrease 

with the passage of time since its introduction, additional (or replacement) tuxedos of the same 

style are seldom ordered. This allows a given fashion style to be associated with a given year of 

acquisition (or vintage). Thus, if a firm keeps either its rental receipts or its spreadsheet identifying 

the styles that are rented each year, it should be able to associate the number of rentals of each style 

for each year of that style's life (although the ease of extracting this information depends on the 

firm's method of recordkeeping). 

The style of basic black tuxedos does not change much over time. Purchases of basic black 

tuxedos are thus repeatedly made, either to replace worn out stock or to expand the rental stock. 

The inventory information contained in a spreadsheet or a rental receipt may thus not be enough to 

identify the specific vintage of the tuxedo that is rented. Thus, although many firms know how 

many basic black tuxedos they rented in a given year, not all of these firms are able to determine 

the distribution of the tuxedo rentals by year of tuxedo purchase (vintage). However, as discussed 

more fully in the next chapter, a number of firms keep their books or inventory records in such 

manner that they are able to identify rentals by vintage for basic black tuxedos as well as for fashion 

tuxedos. 

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Chapter 3. The Results of the Survey Questionnaire 

There are no published statistics documenting the pattern of tuxedo rentals as a function of the 

age of the tuxedo, or even statistics regarding the levels of tuxedo investments and dispositions. 

The Depreciation Analysis Division thus decided to collect the necessary information through the 

use of a mail survey to be sent to a random sample of firms in the industry. 

A. Design of the Survey Questionnaire 

The design of the survey questionnaire was developed over several months, during which time 

the Depreciation Analysis Division held several meetings with representatives of the formal wear 

rental industry, and engaged in numerous phone conversations with industry representatives. 

Because many issues regarding the design of the survey remained umesolved at the conclusion of 

the initial public meeting, a second public meeting with all interested parties was held on January 

20, 1988. 

As successive proposed drafts of the survey were prepared, copies were sent to the participants 

of the public meetings for their review (as well as to members of the tax press). Through this 

iterative process, a survey questionnaire was developed which sought to minimize the burden on 

the potential respondents as well as to meet the requirements of this study. (The survey questionnaire 

is included in Appendix B). The final survey form, together with the corresponding Survey Justification Form, was sent to the Office of Management and Budget for their review on June 9, 1988, 

and approval to conduct the survey was received on September 4, 1988. 

B. The Survey Sample and Response Rates 

An initial sample of 240 clothing rental firms was randomly drawn from the Dun's National 

Business List (obtained from the Dun & Bradstreet Corporation) for establishments noted as being 

in Dun's industry 7299B, which includes only formal wear rental firms. Although the sample was 

chosen so as to provide information on a cross section of firms in this industry, the primary intent 

of the sampling procedure was to obtain information in an economical manner on a representative 

sample of tuxedos, rather than a representative sample of firms. For this reason, as well as for ease 

of administration, the Depreciation Analysis Division obtained a listing of the "ultimate parent" for 

each of the randomly chosen establishments (if different from the individual establishment chosen). 

The survey forms were sent to the "ultimate parent" (or establishment, if the same), and these forms 

requested'limited information on the firm's entire inventory of tuxedos (even if kept at several 

locations). In particular, each firm was asked to provide information on the number of rentals per 

year ("turns"), by age, for 6 separate styles of tuxedo (see Question 6 of the survey questionnaire 

in Appendix B). 

- 9-
This sample size (240 firms with 6 styles each) was based on an estimate that infonnation on 

the rental of 180 styles of tuxedos would be needed to provide an estimate of the equivalent economic 

life of tuxedos accurate to within 0.1 year at a 95 percent confidence level, and that this information 

could be obtained from 240 finns. 3 Although it was expected that the overall response rate to the 

survey would be high, not all respondents were expected to be able to provide information concerning 

the number of turns by age of various styles of tuxedos. It was, however, expected that each of the 

firms able to do so would provide information on six different styles. 

The level of tuxedo rental information obtained from the initial survey of the 240 firms was 

less than expected. In order to obtain more turns data, 67 additional firms were added to the sample. 

In October 1988, the International Formal Wear Association held its biannual conference in California, at which time 26 members volunteered to respond to the survey. In addition, a major 

franchiser in the industry, provided the names of 41 franchisees which were added to the sample. 

Table 2 displays the response rates for both the initial sample and the additional sample of 

firms, disaggregated by response status. It should be noted that only 174 of the 240 firms in the 

initial sample were able to respond to the questionnaire. Many of the firms in the initial sample 

were no longer in the business of renting tuxedos, or were in business for too short a period to 

provide useful information, or did not in fact represent independent finns (i.e., they were affiliated 

with another finn that was already included in the sample), or were classified incorrectly by Dun's 

into the tuxedo rental industry. Of the 17 4 firms which were able to provide some useful infommtion, 

142 (or 82 percent) ultimately did so. 

The overall response rate for the 67 additional firms added to the sample (65 of which were 

able to respond) is much lower than that for the initial sample, due mainly to the fact that the 

significant follow-up effort which was undertaken with respect to fim1s in the initial sample was 

not repeated for these additional firms. This follow-up effort was initiated by the mailing of a letter 

to all firms in the initial sample that did not respond during the 60 day period which was allowed. 

Those fim1s that did not respond to the follow-up letter were contacted via telephone. (A copy of 

the follow-up letter is included in Appendix B). 

In total, out of the 307 firms to whom questionnaires were sent, 239 firms were able to provide 

useful information, and 161 (or 67 percent) of these firms did so. These 239 firms represent 

approximately 20 percent of the total universe of fmmal wear firms that are estimated to currently 

own and actively rent tuxedos. Despite this relatively high overall response rate, only 38 finns 

provided useful information about the rental frequency of tuxedos (while the remaining 123 firms 

3 As discussed below, the final data set used to estimate the equivalent economic life included 199 

styles of tuxedos. It is estimated that this sample provides an estimate of the economic life of 

tuxedos accurate to within 0.1 year at a 95% confidence interval. 

- 10-
responded to some part of the survey other than Question 6). These 38 firms, which are estimated 

to own about one-third of all rental tuxedos, provided information on the number of turns by age 

for 199 different styles of tuxedos. 

Table 2. Response Status of Surveyed Firms 

Survey Status Initial Additional Total 

Sample Sample Sample 

Surveys Mailed 240 67 307 

Unable to Respond 66 2 68 

No Longer in Business 41 . 41 

New Business With No Turns 

History 8 . 8 

Affiliate of Company Already 

in the Sample 11 2 13 

Incorrectly Classified as 

Tuxedo Rental Business 6 . 6 

Able to Respond 174 65 239 

Surveys Received 142 19 161 

Surveys Providing Turns 

Information 30 8 38 

Number of Styles Provided 157 42 199 

- 11 -
Because the turns data are the primary source of information regarding the depreciation of 

tuxedos, and this information was obtained from only a fraction of the firms able to provide some 

information, the possibility of self-selection bias (i.e., the tendency for only those firms which have 

data supporting a short class life to respond) must be addressed.4 As will be discussed more fully 

in the next section, the recordkeeping practice of the firm appears to be an important factor in the 

relatively low response rate with regard to turns information (i.e., to Question 6 of the survey 

questionnaire). Specifically, firms that are likely to be better able to provide turns information 

(because they reported using a computerized system, or had multiple retail outlets, or stored tuxedos 

in a warehouse) were much more frequent providers of turns information. While some degree of 

self-selection bias cannot be ruled out, it appears that for most of the firms that did not provide turns 

information, the difficulty (though not necessarily the impossibility) of compiling this infom1ation 

h . 5 was t e pnrnary reason. 

C. Summary of Responses 

Table 3 contains a summary of the responses to the survey questions. Information concerning 

the method of depreciation used by the firm for financial accounting purposes and typical lease and 

loan periods was sought in accordance with the guidelines suggested in the General Explanation. 

Other questions were asked in order to obtain some understanding of the nature of the respondent's 

activities. The implications of the information collected with regard to the life measures of tuxedos 

will be discussed in the following chapter. Table 3 shows that the majority of firms participating 

in the survey are retail renters of men's formal wear. Although seven responding firms are involved 

in the rental of women's gowns, only one of them was able to provide data concerning turns. Question 

3 was designed to allow firms that rent tuxedos but do not own any stock (and thus are not an 

intended recipient of the survey questionnaire) to note that fact without having to complete the 

balance of the survey. As discussed in Appendix C, the ending date of the firm's fiscal year as 

provided in the response to Question 4, combined with the delivery date of each style of tuxedo 

reported in Question 6, is useful in determinirlg that part of the finn's first year for which the style 

was available for rental. About two-thirds of the firms that responded to this question are 

calendar-year taxpayers. 

4 One possible source of self-selection bias is the sample of 67 additional firms who volunteered to 

participate in the survey. The equivalent economic life obtained from the turns information provided 

by these additional67 firms is slightly shorter (but not significantly so) than that obtained from the 

turns information provided by the initial sample of firms. Sample statistics for the initial value-in-use 

and the cost of styles for both the initial and additional sample are shown in Table 7. 

5 Indeed, through subsequent telephone contact with firms whose response appeared questionable, 

it was noted that some firms, in their desire to respond, provided turns data that were not based on 

actual records, or provided data for styles of a more recent vintage so that only an incomplete life 

history could be obtained; these responses were dropped and treated as non-responses in Table 2. 

- 12-
Table 3. Summary of Survey Responses 

Total Survey Forms Returned.............................................................................................. 161 

Firms Responding to: Number 

Question 2a: In What Types of Rental Activities 

is the Firm Engaged? 

Responding 

Total Number of Responses.................................................................. 152 

Retail Men's Formal Wear................................................................. 112 

Wholesale Men's Formal Wear.......................................................... 44 

Women's Gowns.................................................................................. 7 

Costumes.............................................................................................. 1 

Question 2b: Does the Firm Own More than One 

Retail Outlet? 

Total Number of Responses.................................................................. 109 

Yes......................................................................................................... 67 

No.......................................................................................................... 42 

Question 2c: Does the Firm Stock Rental Clothes in a Warehouse? 

Total Number of Responses.................................................................. 109 

Yes......................................................................................................... 61 

No.......................................................................................................... 48 

Question 3: If the Firm Maintains No Stock of Rental Clothes, Check the 

Box Below 

Total Number of Responses.................................................................. 24 

Question 4: What is The Date on Which The Firm's 

Fiscal Year Ends? (Responses are tabulated by month of fiscal year end.) 

Total Number of Responses ................................................................ .. 

January· March.................................................................................. 94 

April . June .......................................................................................... 11 

July · September.................................................................................. 8 

October · November............................................................................ 9 

December............................................................................................. 8 

58 

.. 13-
Table 3. Summary of Survey Responses (Continued) 

Firms Responding to: 

Question 5: Does the Firm Use a Computerized System for Inventory 

Control or to Keep its Accounting Records. 

Number 

Responding 

Total Number of Responses.................................................................. 96 

Yes......................................................................................................... 40 

No.......................................................................................................... 56 

Question 6: Enter turns information for six styles of tuxedos purchased 

between 1981 and 1985. 

Total Number ofFirms Responding.................................................... 38 

Average Number of Turns Per Tuxedo by Age: 

Age (in years) 1 2 3 4 5 6 7 

Turns 7.1 7.1 4.5 2.0 .6 .1 .0 

Question 7 and 8: What is the value and the number of units of tuxedos 

in year end inventory for the years 1981-1987, and what is the value and 

number of units of tuxedos purchased for the years 1981-1987? 

Total Number of Responses.................................................................. 16 

Question 9: What is the Life and Method the Firm Uses to Depreciate 

Rental Clothes for Financial Statements? 

Total Number of Responses for Life:................................................... 57 

Life in Months: 

12............................................................................................ 2 20............................................................................................ 1 36............................................................................................ 27 44............................................................................................ 1 48............................................................................................ 3 

50 ....................................................................................... ,.... 1 60............................................................................................ 17 84............................................................................................ 5 

- 14-
Table 3. Summary of Survey Responses (Continued) 

Firms Responding to: Number 

Responding 

Question 9: What is the Life and Method the Firm Uses to Depreciate 

Rental Clothes for Financial Statements? (Continued) 

Total Number of Responses for Method: ............................................. 68 

Depreciation Method: 

Double Declining Balance.................................................... 18 

150% Declining Balance...................................................... 2 

Unit of Production................................................................ 1 

Sum of Years Digits.............................................................. 2 

Staight Line........................................................................... 35 

Other...................................................................................... 10 

Question 10: What is the Average Loan Period Over Which the Firm 

Finances Its Rental Clothes? 

Total Number of Responses:.................................................................. 23 

Loan Period in Months: 

3-6........................................................................................... 10 

9............................................................................................ 2 12........................................................................................... 6 24........................................................................................... 1 36........................................................................................... 1 60........................................................................................... 2 

90........................................................................................... 1 

Question 11: What is the Average Lease Period Over Which the Firm 

Leases its Rental Clothes? 

Total Number of Responses (One Year Lease):.................................. 2 

About half of the firms that responded to Question 9 used a 36-month period to depreciate 

tuxedos for financial accounting purposes, and about half of the responding firms used the 

straight-line method of depreciation. As discussed in the following chapter, this is consistent with 

both the estimated two year economic life and the roughly four year useful life obtained from 

analysis of the turns data. There are also a significant number of firms (about one-fourth of those 

responding to Question 9) that use a 60-month useful life, and a comparable fraction use a 

declining-balance method of depreciation. 

- 15 -
The average loan period for most of those who responded to Question 9 is 12 months or less. 

While this is consistent with the contention of industry representatives that tuxedos lose their market 

value relatively quickly, and have almost no resale value, it may also simply represent general trade 

practice. The average loan period should thus be viewed as a lower limit to the economic life of 

tuxedos. 

Table 4. Response to Question 6 (Turns Information) Cross-Classified by Responses to 

Questions 2b, 2c, and 5 

Number of Responses by Number of Responses by 

Firms Not Providing Turns Firms Providing Turns 

Information Information 

Question: No Response No Yes No Response No Yes 

2b. 

Does the Firm Own More 

Than One Retail Outlet? 

48 36 37 2 6 30 

2c. 

Does the Firm Stock 

Rental Clothes in a 

Warehouse? 48 41 32 2 7 29 

5. 

Does the Firm Use a Computerized System For Inventory 

Control or to Keep its 

Accounting Records? 62 38 21 1 18 19 

In order to examine whether the lack of rental frequency information was due to the difficulty 

of compiling the requested information, an examination was made of the relationship between a 

firm's response to Question 6 and various finn-specific attributes which suggest that the requested 

information is more readily available, such as its having multiple retail outlets, its storage of tuxedos 

in a warehouse, and its use of a computerized record system. The results of this examination are 

shown in Table 4. It may be noted that although a few firms lacking these attributes provided turns 

information (e.g., 14 percent of the firms reporting that they had no warehouse responded to Question 

6), the likelihood of obtaining turns infonnation was much greater if these attributes were present. 

- 16-
Thus, 30 out of the 67 firms which reported storing their tuxedos in a warehouse (or 45 percent) 

provided turns information. Likewise, 48 percent of the firms reporting the use of multiple retail 

outlets, and 48 percent of the firms using a computer, provided turns information. 

Table 5. Depreciation Method Used For Financial Accounting Purposes Cross-Classified 

by Service Life Used 

Number of Firms Using Depreciation Method and Life 

Double 150% Sum of Straight All Other Total, All 

Life in Months Declining Declining Years Digits Line Methods Methods 

Balance Balance 

12 . . 1 1 . 2 

20 . . . 1 . 1 

36 6 1 . 15 5 27 

44 1 . . . . 1 

48 . 1 . 1 1 3 

so 1 . . . . 1 

60 4 . 1 10 2 17 

84 5 . . . . 5 

Total, All Lives 17 2 2 28 8 57 

Because the rapidity with which tuxedos are written off for financial accounting purposes 

depends on both the tuxedo service life and the method of depreciation used by the firm, it is of 

some interest to examine the correlation (if any) which may exist between the choice of these two 

factors. Table 5 presents the distribution of methods chosen by service life. Since the write-offs 

- 17 -
resulting from the use of shorter service lives with a slower method of depreciation can be similar 

(at least in the initial years) to those resulting from the use of longer lives with a more accelerated 

method, both of these combinations were expected. As shown in Table 5, however, the straight-line 

method seemed to be preferred both by firms using a three year service life and by firms using a 

five year service life. 

- 18-
Chapter 4. The Measurement of the Class Life of Tuxedos 

As noted in Chapter 1, the legislative history of the 1986 Act suggests that the class life of 

depreciable assets be based on their anticipated decline in economic value, and that consideration 

also be given to their anticipated useful life. In this chapter, the survey data is used to obtain the 

useful life of tuxedos from their period of rental, and the equivalent economic life of tuxedos from 

their inferred decline in value with age. In Appendix C, an analysis leading to a shorter equivalent 

economic life is presented which takes into account the actual date of acquisition of the tuxedos 

and the timing of the tax benefits received by the taxpayer under the Alternative Depreciation 

System. 

en 

Q) 

60 

50 

.?:" 40 

(f) 

-0 

~30 

cu 

....... 

c 

Q) 

~ 20 

Q) 

ll.. 

10 

0 

43.6 

20.6 

1.5 

2 3 4 5 

Useful Lives (In Years) 

A. The Useful Life of Tuxedos 

6 7 

The turns data obtained from the survey allow determination of the useful life of each style 

of tuxedo, which is taken to be the period between the date of delivery and the end of the last fiscal 

year for which rentals of that style are reported. While firms may not actually dispose of the tuxedos 

at that time, if they no longer rent the tuxedos, that is the point at which the economic life of the 

style of tuxedo may be considered to have terminated. Data for the more recent vintages that clearly 

appeared to provide an incomplete history were expressly excluded. Fig. 1 presents the distribution 

of useful lives based on the rental patterns reported for all 199 styles for which complete turns data 

were obtained. (Fig. 1 should be interpreted in the following way: 1.5 percent of the styles have a 

- 19-
useful life greater than one year and less than or equal to two years, 26.1 percent have a useful life 

greater than 2 years and less than or equal to 3 years, etc.) Most styles ( 182 out of 199) had a useful 

life of approximately three to five years. If the useful life of each style is weighted by the cost of 

the style (i.e., the cost per tuxedo times the number of tuxedos acquired), a weighted average useful 

life of 3.7 years is obtained. 

Although equivalent economic lives are more indicative of the actual depreciation of the assets 

examined than are useful lives, useful life information may nevertheless be helpful. Measures of 

useful life may provide a test of the reasonableness of the class lives as determined from the estimated 

decline in value. 

B. The Productivity Method 

When available, resale prices (adjusted for the fact that retired assets no longer appear in the 

resale market) may generally be expected to provide the best evidence of the decline in value of an 

asset group. Such approach has been used by a number of academic researchers to estimate the 

economic depreciation of a variety of different assets, with the most comprehensive and careful 

work done by Hulten and Wykoff[1981].6 Frequently, however, resale prices may not be available, 

and this is the case for tuxedos. 

An alternative method of inferring the decline in value of an asset is based on an examination 

of the pattern of the income flow which it generates.7 The economic value of any asset to its owner 

may generally be expressed as the discounted present value of the expected future cash flow generated by its use. This value has been referred to as the "value··in-use" of the asset, and it is a 

standard assumption of investment theory that the market price of the asset (if such price could be_ 

measured) would equal the value-in-use of the asset to a marginal purchaser of the asset. 8 It is 

generally recognized that, because many different assets may be used to produce a single product, 

the direct measurement of the value-in-use of any individual asset can be very difficult, and thus 

reliance on resale prices, if possible, is much to be preferred. The current study _of tuxedos appears 

to be a case where economic depreciation may, however, be readily estimated from the pattern of 

income generated from their rental. 

6 See also Ackerman [1973], Biedleman [1973], Ohata and Griliches [1976], Ramm [1970], and 

Wykoff [1970]. 

7 This method has been used by Taubman and Rasche ( 1969) to estimate the depreciation of office 

buildings. 

8 This fundamental assumption has been used by Hotelling [ 1925] in his classic paper on the theory 

of depreciation, and by Samuelson [1964] in his paper on the invariance of asset prices to the tax 

rate in a system in which economic depreciation is used for tax purposes. 

- 20-
Discussions with industry representatives revealed that the rental price of a given style of 

tuxedo rarely depends upon the age of the tuxedo. In addition, many of the costs incurred by the 

rental firm which are either directly associated with the rental of the tuxedos (such as the cost of 

cleaning), or may reasonably be allocated to individual styles of tuxedos on the basis of such rentals 

(such as the cost of advertising), also do not vary with the age of the tuxedo. These are conditions 

which suggest that the decline in the value-in-use of each style of tuxedo can be estimated directly 

from rental information. 

The method used in this study to estimate the class life of tuxedos may be characterized as the 

"productivity" method. As mentioned in Chapter 2 data concerning the number of times that a style 

of tuxedo rents (turns) for each year of its life has been collected for 199 different styles. The 

productivity method for measuring economic depreciation is based on the assumption that the 

number of turns of a given style in a given year is an adequate surrogate (up to an unknown proportionality constant) for the net cash flow generated by the ownership and use of the tuxedos of 

that style for the year. 

This assumption cannot be completely valid if some of the costs incurred by the firm are period 

costs (i.e., costs associated with the passage of time, such as rent or insurance, that are independent 

of the number of rentals of a given style of tuxedo). It is likely that these costs, which should more 

properly be allocated to the individual styles of tuxedos on the basis of the number of tuxedos, are 

independent of the age of the tuxedos. By assuming that these costs are proportional to the number 

of turns, the profitability of each style tends to be understated in the earlier years (when there are 

more rentals) and overstated in the later years (when there are fewer rentals). The decline in value 

of the tuxedos over time is thus somewhat underestimated, and the resulting economic life somewhat 

overestimated. 

Some industry representatives have suggested that owners frequently retain tuxedos even if 

the rental of the particular style is rather infrequent. This suggests that for such firms, period costs 

may not be very significant. In contrast, the turns data suggest that for some styles, the tuxedos are 

retired even though the number of turns in the last year of rental is still a significant fraction of the 

number of first-year turns. This suggests that for these styles rent and other costs which are independent of the age of the tuxedos may be far more significant. However, the fact that the number 

of turns reported for these styles does not decline appreciably over their useful life reduces the 

potential error made by assuming that these costs decline with age in tandem with the number of 

turns. 

Assuming that for any individual style the future annual net cash flow generated by the rental 

of the tuxedos is proportional to the number of turns reported each year, the value-in-use of the 

- 21 -
style for each year of its economic life can be determined.9 By examining the annual decline in the 

value-in-use, the economic depreciation of the specific style can be inferred. Because a number of 

factors complicate the process of obtaining the equivalent economic life of tuxedos from the productivity method, it is helpful to first illustrate the application of this method using a simplified 

analysis. The more complex analysis, which takes account of these factors (the proper weighting 

of the information obtained from the individual styles, the fact that the tuxedos are not generally 

placed in seivice at the beginning of the year, the timing of the tax benefits under the Alternative 

Depreciation System, etc.), will be discussed in Appendix C. 

25 

C/) ~1 0292 

c 

I- 20 

:::1 

1-

0> 

c 

c 15 o171 

"ffi 

E 

CD 

a: 10 

CD 

0> 119 

C'O 

ICD 5 > <( 

00076 OoOO 

0 

0 1 2 3 4 5 6 

Age of Tuxedo (In Years) 

9 If discounts were offered for rental of older tuxedos or premiums charged for rental of newer 

tuxedos, and costs remained constant, this assumption would be incorrect. Industry representatives 

however, have reported that the rental price of a given style of tuxedo rarely depends upon the age 

of the tuxedo. 

-22-
C. Illustration of The Measurement of The Economic Life of Tuxedos Using 

the Productivity Method 

The application of the productivity method can be illustrated by treating the average number 

of turns per tuxedo reported at each age for all styles combined (noted in Table 3 under the response 

to Question 6) as the number of turns at each age of a single "generic" style of tuxedo. The remaining 

average number of turns per tuxedo at each age, as obtained from the survey data, is shown in Fig. 

2.10 

25 

20 9.585 

Cl> 

:g 15 I 

c: 

I 

Cl> 

:J (ij 10 

> 

5 

0 

....o~~~~~:---- Equivalent Straight-Line Depreciation Pattern 

2 3 3.3 4 5 6 

Age of Tuxedo (In Years) 

For this illustration, it is assumed that tuxedos are placed in service in the beginning of the 

year, and the cash flow generated by their rental is received at the end of the year. The value-in-use 

per tuxedo is thus proportional to the discounted sum of the remaining number of turns. From the 

pattern ofturns shown in Fig. 2, a pattern of decline in value may be obtained by setting the constant 

10The values in Fig. 2 are obtained by dividing the number of turns reported for each age of the 

style, aggregated over all styles, by the total number of tuxedos acquired, also aggregated over all 

styles. On average, each tuxedo "turned" about 21 times over its useful life. 

-23-
of proportionality equal to unity, and using a 4% discount rate. The resulting value-in-use per 

tuxedo (as shown in Fig. 3), is somewhat less (due to discounting) than the average remaining 

number of turns per tuxedo for each year of their useful life (shown in Fig. 2). 

The economic depreciation per tuxedo is given by the annual decline in the average value-in-use 

per tuxedo. To obtain the equivalent economic life, only the pattern of economic depreciation, and 

not its absolute level, is relevant. Thus, the unknown constant of proportionality may be eliminated 

by dividing each year's value-in-use by the initial year's value-in-use. The result may be viewed 

as the economic depreciation per dollar of investment, and is shown in Fig. 4. 

0.4 

003236 

003331 

c 

0 0.3 

~ ·u 

CD 0.2184 '-

c.. 

CD 

0 0.2 

.2 

E 

0 

c 000946 0 

(.) 0.1 

w 

000267 

0.0003 

0 

2 3 4 5 6 7 

Age of Tuxedo (In Years) 

Assuming again for this illustration that the tax benefits associated with each year's depreciation· allowance are recognized at the end of the year, the present value of economic depreciation 

per dollar of investment can be calculated by simply discounting and summing the values for 

depreciation shown in Fig. 4. The result is a present value of depreciation of 0.919. 

The equivalent economic life can now be determined from economic depreciation as measured 

by the productivity method. If the present value of straight-line depreciation is calculated under 

the same assumptions noted above (i.e., tuxedos are placed in service at the beginning of the year, 

-24-
and the depreciation tax benefits are recognized at the end of the year), the resulting equivalent 

economic life of3.3 years is obtained. The straight-line decline in value corresponding to this class 

life is shown in Fig. 3. 

Table 6. Measures of Useful and Equivalent Economic Lives 

Measure of Life Life 

(In Years) 

Useful Life 3.7 

Equivalent Economic Life· Without the half-year convention and 

without the adjustments for delivery date and realization of tax 

benefits. 3.211 

Equivalent Economic Life • With the half-year convention and 

without the adjustments for delivery date and realization of tax 

benefits. 2.7 

Equivalent Economic Life • With the half-year convention and 

with adjustments for delivery date and realization of tax benefits. 

All Tuxedos 1.911 

Fashion Tuxedos 2.0 

Basic Black Tuxedos 1.8 

Because the calculated value-in-use falls during the first few years of useful ~ife of this" generic" 

tuxedo, the 3.3 year equivalent economic life is shorter than the average useful life of 3.7 years 

noted in the previous section. In Appendix C, the simplifying assumptions of this illustration are 

replaced by somewhat more realistic assumptions. In particular, the fact that the tuxedos are 

generally available for rental for only a portion of the first year has a significant impact on the 

estimated economic life. Moreover, the method of translating the estimated decline in value into 

an economic life is modified to reflect the half-year convention allowed under the Alternative 

11 Based on a weighted average using the cost of tuxedos as weights. When weighted by initial 

value-in-use, the equivalent economic life is 3.3 years. 

12 Based on a weighted average using the cost of tuxedos as weights. When weighted by the intial 

value-in-use, the equivalent economic life is 2.1 years. 

-25-
Depreciation System and the timing of the tax benefits. The information provided on tuxedo delivery 

dates and the fiscal years of tuxedo rental firms suggests that a mid··quarter convention would seldom 

be used. 

Table 6 summarizes the several measures of the economic life of rental tuxedos which are 

noted in both this chapter and in Appendix C. This table shows that, as the additional calculational 

refmements described in Appendix C are introduced, the resulting estimate of equivalent economic 

life is reduced.After all refmements are made, an equivalent economic life of 1.9 years is obtained 

if the information from the turns data is weighted by cost (and 2.1 years if weighted by initial 

value-in-use). 

Just as the individual styles have differing useful lives, so also do they have differing equivalent 

economic lives. Fig. 5 shows the distribution of the individual equivalent economic lives for each 

style of tuxedo obtained when all of the refmements noted in Table 6 have been taken into account. 

(Fig. 5 should be interpreted in the following way: 46.1 percent of the styles have an equivalent 

economic life greater than one year and less than or equal to two years, 33.2 percent have an 

equivalent economic life greater than 2 years and less than or equal to 3 years, etc.) 

(/) 

CD 

50 

ti 40 

0 

CD 30 

g> 

....... 

c:: 

~ 20 ,_ 

CD 

c.. 

10 

46.1 

33.2 

0.5 

2 3 4 5 6 7 

Equivalent Economic Lives (In Years) 

When this figure is compared to Fig. 1, it is apparent that although the equivalent economic lives 

are generally much shorter than the useful lives, the variability in these two measures are comparable. 

-26-
Treating all of the turns information as if it refers to a single type of "generic" tuxedo, as was done 

in the illustrative analysis above, is one way of obtaining an average class life. This approach 

effectively weights the individual styles by their initial value-in-use. Because there is some reason 

to believe that the proportionality constant differs across styles in an unknown manner, the decline 

in value of the individual styles should more properly be weighted by their cost. The choice of the 

different weighting methods (which have a very modest impact on the final results) is also discussed 

at greater length in Appendix C. 

-27-
Chapter 5. Conclusions 

A. The Class Life of Tuxedos 

The empirical results of this study of the depreciation of tuxedos are readily summarized. The 

useful life of tuxedos, which in the context of this study is essentially the average period over which 

tuxedos are rented, is 3.7 years. The equivalent economic life of tuxedos, which in the context of 

this study is that recovery period under the Alternative Depreciation System which generates 

depreciation allowances whose present value equals the average present value of the economic 

depreciation of tuxedos, is 1.9 years (2.1 years if the results for the individual styles of tuxedos are 

weighted by initial value-in-use, rather than cost). Treasury believes the equivalent economic life 

is more indicative of the actual depreciation of tuxedos, and if a separate asset class for tuxedos is 

to be established, recommends that it be assigned a class life of 2.0 years. 

The General Explanation notes that a change in the class life of an asset group is to reflect the 

anticipated useful life and the anticipated decline in value over time of the assets in the group. 

Although the results noted above are based on historical infommtion about assets acquired a number 

of years ago, industry representatives did not anticipate changes in the economics of tuxedo rental 

which might cause the depreciation of tuxedos acquired in the future to differ from the observed 

depreciation. 

The disparity between the estimated useful life and the much shorter equivalent economic life 

of rental tuxedos is an important result of this study. Treasury believes that when, as in the present 

case, adequate information is available to reliably estimate the decline in economic value with age 

of the asset studied, such information should be used to detennine the asset's class life. For assets 

whose productivity tends to decrease with age (as is true for rental tuxedos when productivity is 

measured by the number of turns), the equivalent economic life will usually be shorter than the 

useful life, and the faster the decline in productivity with age, the greater the disparity between the 

equivalent economic life and the useful life. 

In general, focusing on the useful life tends to bias the analysis towards an excessively long 

class life. By contrast, reliance on the equivalent economic life does not give undue weight to the 

latter year's of an asset's life, when it may be retained primarily to perform an infrequently needed 

task. Although these considerations do not appear to be relevant in this study of tuxedos for which 

actual rentals, rather than retention, was reported, the decline in the frequency of rental of a given 

style of tuxedo with age leads to an average economic life for tuxedos which is much shorter than 

their average useful life. This may, in part, reflect the rapidity with which the attractiveness of any 

style of fashion tuxedo may change, or the increasing impact of wear and tear with age on the firm's 

ability to rent a complete sef of basic black tuxedos. Regardless of the reasons for the relatively 

-29-
rapid decline with age in the imputed value-in-use of rental tuxedos, this decline is not reflected in 

their useful life, which is simply a measure of the period over which they provide some service to 

the firm, however small. 

A similar disparity between the useful life and the equivalent economic life is expected to be 

observed in the case of many, but not all, depreciable assets. Although resale price data should be 

available to estimate the decline in value of many assets, the productivity method can also be used. 

If the productivity method were used, the focus of the analysis would very likely have to change. 

Rather than focusing on individual assets (as would be natural under the resale method), it would 

generally be necessary to focus on the entire collection of assets which are typically acquired as 

part of a major investment project. By studying how the output and cost of operation of the acquired 

facility changes over time, the decline in value of the entire set of assets can be inferred, whereas 

it may be impossible to disentangle the net income contributed by any single machine. 

B. Structure of the Asset Classification System 

The ultimate structure of the asset classification system is a difficult issue. In particular, the 

number and scope of the separate asset categories which characterize the system should be considered by Congress. The Treasury Department does not wish to imply that the current Asset 

Depreciation Range (ADR) classification system is perfect, nor is the Treasury Department reluctant 

to recommend changes in class lives if the evidence suggests that such changes are merited. Treasury 

is concerned, however, that if Congress were to continually subdivide existing asset classes so that 

those assets that happen to have somewhat shorter (or longer) class lives than the average for all 

assets in the class were placed in separate subclasses, the resulting asset classification system would 

soon become far too complex. 13 

A change in the class life of rental tuxedos results in a shift in recovery period under the regular 

depreciation system from five years to three. While equity and efficiency considerations might 

thus favor the establishment of a new asset class for rental tuxedos, investment in rental tuxedos is 

a very small portion of total investment in all business equipment, as noted in Table 1. There is 

currently no asset class that encompasses such a small amount of investment. The establishment 

of a special asset class for rental tuxedos may thus be taken as a precedent for the establishment of 

asset classes of very small size. A classification system that distinguishes among the assets owned 

by sectors of the economy each as small as the tuxedo rental industry would be an extremely detailed 

and complex system. Such a system would be much more difficult to administer than a system 

with broader asset classes. 

13 Moreover, if one subset of assets is given a shorter (or longer) class life, the class life for the 

remaining assets in the class would have to be lengthened (or shortened), assuming that the existing 

class life approximately reflects the average economic life of all the assets. 

-30-
In principle, a classification system with very detailed asset classes can allow for a neutral tax 

treatment of assets. There are, however, only a few recovery periods for regular depreciation, each 

encompassing a range of class lives, so that assets with different class lives falling within the same 

recovery period have different effective tax rates. Some degree of non-neutrality is thus a feature 

of the current depreciation system. Conversely, unless the taxpayer is subject to the Alternative 

Depreciation System, "fine nming" of the asset classification system generally need not have any 

tax consequence. 

Eventually, Congress will have to determine where the line should be drawn between a complex 

and more neutral system, and a less complex, but also less neutral, classification system. The 

establishment of a separate asset class for tuxedos may be inconsistent with the structure ultimately 

desired. 

- 31 -
Appendix A. Exhibits Related to the Congressional Mandate 

Exhibit 1. Section 168(i)(l)(B) of the Internal Revenue Code as Revised by the 

Tax Reform Act of 1986 

Code Sec. 168 (i) Definitions and Special Rules. 

For purposes of this section--

(1) Class Life. 

(B) Secretarial authority. The Secretary, through an office 

established in the Treasury--

(i) shall monitor and analyze actual experience with respect to 

all depreciable assets, and 

(ii) except in the case of residential rental property or 

nonresidential real property--

(!) may prescribe a new class life for any property, 

(ll) in the case of assigned property, may modify any 

assigned item, or 

(lll) may prescribe a class life for any property which 

does not have a class life within the meaning of 

subparagraph (A). 

Any class life or assigned item prescribed or modified under the preceding sentence 

shall reasonably reflect the anticipated useful life, and the anticipated decline in value 

over time, of the property to the industry or other group. 

Exhibit 2. Section 168(i)(l) of the Internal Revenue Code as Revised by the 

Technical and Miscellaneous Revenue Act of 1988: 

Code Sec. 168(i) Definitions and Special Rules. 

For purposes of this section--

(1) Class Life. Except as provided in this section, the term "class life" means the class 

life (if any) which would be applicable with respect to any property as of January 1, 

1986, under subsection (m) of section 167 (determined without regard to paragraph ( 4) 

and as if the taxpayer had made an election under such subsection). The Secretary, 

through an office established in the Treasury, shall monitor and analyze actual experience with respect to all depreciable assets. 

- 32-
Exhibit 3. Provisions for Changes in Classification from The General Explanation of the Tax Reform Act of 1986 

The Secretary, through an office established in the Treasury Department is authorized to 

monitor and analyze actual experience with all tangible depreciable assets, to prescribe a new class 

life for any property or class of property (other than real property) when appropriate, and to prescribe 

a class life for any property that does not have aclass life. If the Secretary prescribes a new class 

life for property, such life will be used in determining the classification of property. The prescription 

of a new class life for property will not change the ACRS class structure, but will affect the ACRS 

class in which the property falls. Any classification or reclassification would be prospective. 

Any class life prescribed under the Secretary's authority must reflect the anticipated useful 

life, and the anticipated decline in value over time, of an asset to the industry or other group. Useful 

life means the economic life span of property over all users combined and not, as under prior law, the 

typical period over which a taxpayer holds the property. Evidence indicative of the useful life of 

property, which the Secretary is expected to take into account in prescribing aclass life, includes 

the depreciation practices followed by taxpayers for book purposes with respect to the property, 

and useful lives experienced by taxpayers, according to their reports. It further includes independent 

evidence of minimal useful life -- the terms for which new property is leased, used under a service 

contract, or financed -- and independent evidence of the decline in value of an asset over time, such 

as is afforded by resale price data. If resale price data is used to prescribe class lives, such resale 

price data should be adjusted downward to remove the effects of historical inflation. This adjustment 

provides a larger measure of depreciation than in the absence of such an adjustment. Class lives 

using this data would be determined such that the present value of straight-line depreciation 

deductions over the class life, discounted at an appropriate real rate of interest, is equal to the present 

value of what the estimated decline in value of the asset would be in the absence of inflation. 

Initial studies are expected to concentrate on property that now has no ADR midpoint. 

Additionally, clothing held for rental and scientific instruments (especially those used in connection 

with a computer) should be studied to determine whether a change in class life is appropriate. 

Certain other assets specifically assigned a recovery period (including horses in the three-year 

class, qualified technological equipment, computer-based central office switching equipment, 

research and experimentation property,certain renewable energy and biomass properties, semiconductor manufacturing equipment, railroad track, single-purpose agricultural or horticultural 

structures, telephone distribution plant and comparable equipment, municipal waste-water treatment 

plants, and municipal sewers) may not be assigned a longer class life by the Treasury Department 

if placed in service before January 1, 1992. Additionally,automobiles and light trucks may not be 

reclassified by the Treasury Department during this five-year period. Such property placed in 

service after December 31, 1991, and before July 1, 1992, may be prescribed a different class life if 

- 33-
the Secretary has notified the Committee on Ways and Means of the House of Representatives and 

the Committee on Finance of the Senate of the proposed change at least 6 months before the date 

on which such change is to take effect. 

-34-
Appendix B. The Survey Questionnaire and the Follow-Up Letter 

-35-
DEPARTMENT OF THE TREASURY 

WASHINGTON 

Dear Sir or Madam: 

The Depreciation Analysis Division of the Treasury Department's 

Office of Tax Analysis has randomly selected your firm to participate in 

its survey of the depreciation of rental clothing. As mandated by the 

Tax Reform Act of 1986, this office has the responsibility for studying 

the depreciation of all assets. At the request of Congress, rental 

clothing is one of the first assets to be studied. 

The information obtained in this survey will enable Treasury to 

recommend a class life for tax depreciation purposes for rental clothing. 

The International Formal Wear Association has endorsed this survey, and 

encourages your response. The design of the attached survey form 

reflects the many comments and suggestions made by rental clothing 

industry representatives at a series of meetings held during the last 

several months. 

This survey is designed for firms that rent men's or women's formal 

wear or costumes. The questions refer to tuxedos because the rental of 

tuxedos is the largest component of the rental clothing industry. If you 

rent women's formal wear or costumes, please provide separate responses 

for such rental clothing, as noted on the first page of the form. 

All data collected in this survey will be treated as strictly 

confidential. We will, therefore, not report the names of the firms 

included in this survey, nor the firm-specific information obtained, to 

the Internal ~evenue Service or any other agency, enterprise, or 

individual. Any report on the results of this study will contain only 

aggregate statistical measures, or information which cannot be identified 

as to source. 

Please return the completed form in the enclosed postage paid return 

envelope by October 14, 1988. If you have any question regarding the 

survey, please write or call the persons responsible for administering 

the survey, as noted on the first page of the survey form. 

Sincerely, , 

'f-H<~ _bo.rnUA 

Lowell Dworin 

Director for Depreciation Analysis 

Enclosure 

- 36 -
w 

-J 

* 

* 

* 

* 

* 

* 

* 

Survey of Depreciation of Rental Clothing 

General Instructions 

OMB Approval No.: 

1505-0114 

Expires 12131/88 

The responses to the questions in this survey should be based on information relating to all of the wholesale and retail outlets owned by or affiliated 

with the firm identified in question 1. 

In responding to the questions asked, please refer to the information in your accounting or property records. If these records are not adequate to 

allow you to respond to a specific question, enter the letters "NA" (for "not available") in the space provided for the response. 

The responses should not include information relating to clothing which you lease on a long-term basis to other firms, but should include information 

relating to clothing which you have obtained through a long-term lease. 

The responses should include only information relating to clothing that is a permanent part of your inventory. Information relating to clothing that you 

obtained temporarily to meet a specific customer's needs should be excluded. 

Firms that rent women's gowns in addition to tuxedos should submit separate survey forms for tuxedos and women's gowns. The responses for 

tuxedos should be entered on this form. and the responses for women's gowns should be entered on a copy of questions 6, 7, and 8 of this form. 

Please label the copy "women's gowns". 

Firms that rent costumes in addition to tuxedos should submit separate survey forms for tuxedos and costumes. The responses for tuxedos should 

be entered on this form, and the responses for costumes should be entered on a copy of questions 6, 7, and 8 of this form. Please label the copy 

"costumes". 

November 21 

Please return the completed form in the enclosed postage paid envelope by Oeteber 14, 1988. 

If you have any question regarding the survey, please write or call the persons responsible for administering the survey: 

Gerald Silverstein 

Depreciation Analysis Division 

Room 4217, Main Treasury Building 

Washington DC 20220 

(202) 786-8373 

Paperwork Reduction Act Notice 

Michael J. Walsh 

Depreciation Analysis Division 

Room 4217, Main Treasury Building 

Washington DC 20220 

(202) 535-6992 

Thrs form rs rn accordance wrth the paperwork reduct ron act of 1980. Its purpose rs to collect data that will allow 

the Treasury Department to estrmate the class life for rental clothing. Authority for 1nformat1on collection IS 

contarned rn Sect ron 168(i)(1 )(B) of the Internal Revenue Code. 

The estimated average burden associated wilh the collection of ir:'formalionls 9 hours per respondent or recordkeeper. Actual response 

time can vary greatly. Co~ments concermn~ the accuracy of this burden estimate and suggesllons for redu?lng the burden should be 

directed Ia Gerald Silverstein at tho address listed above, and to !he Office of lnformallon and Regulatory Affairs, OHlce of Management 

and Budget, Washrngton DC 20503, Anention: Treasury Depanment Desk Officer. 

U.S. Department of the TreasL>_rY_ Office ofT ax Poli"Y_ Office of Tax An~ is Depreciation Analysis Divtsion 

TO F 90-21.3 (06-88) Control No.: 

Deprec1at1on Analysis Oiv1s1on Page 1 ol6 Rental Clothing Survey 
w 

CXl 

r~::~~nerallnformation - --- --~---- ~------------------- ---------] 

Question 1: Please enter the name and the address of your firm, and the name and telephone number of the person to be contacted 

regarding the responses entered on this survey form. This will allow us to contact you in the unlikely event that questions 

arise regarding the information provided on this form. 

Firm Name: Contact Person's Name: 

Firm Address: 

Contact Person's Phone Number: 

Question 2a: Please check the boxes next to each type of rental activity in which the firm is engaged. 

Retail rental of men's formal wear 

Wholesale rental of men's formal wear 

Retail rental of women's gowns 

Rental of costumes 

[ ] 

[ ] 

[ ] 

[ ] 

If you are engaged in retail rental activity, please answer questions 2b and 2c below, otherwise continue with question 3. 

Question 2b: Do you own more than one retail outlet? 

Yes [ ] 

No [ ] 

Question 2c: Do you stock rental tuxedos in a warehouse? 

Yes 

No 

Deprec1alion AnalysiS Div1s1on 

[ ] 

[ ] 

Page 2 of 6 

Control No.: 

Rental Clothing Survey 
w 

\.0 

Section I Continued: General Information 

Question 3: 

Question 4: 

Question 5: 

Depreciation Analysis Div1s1on 

It your firm maintains no stock of rental clothes. please check the box below, but do not respond to questions 4-11. Simply 

return the form in the enclosed postage paid envelope. 

This firm maintains no stock of rental clothes [ ] 

What is the date on which your fiscal year ends? 

Month ___ _ Day 

Do you use a computerized system for inventory control or to keep your accounting records? 

Yes 

No 

[ ] 

[ ] 

Page 3 ol 6 

Control No.: 

Rental Clolhmg Survey 
""' 0 

Section II: Number of Turns By Age of Tuxedo 

Question 6: Starting with those styles purchased in 1981 (or for the earliest year after 1980 for which you have such information) and continuing until 

you have listed no more than 6 distinct styles, please enter the style of tuxedo acquired, the season and year the style was purchased 

(that is, the season and year the style was delivered), the number of units purchased, and the number of rentals ("turns") in each year of 

the style's life. The number of units is equal to the number of jackets even if you purchase more than one pair of pants for each jacket. 

Exclude styles purchased in 1986, 1987, and 1988. Make one entry for all "basic black" tuxedos purchased at a single date, regardless of 

slight differences in style. If you have purchased the same style at two different dates, report the purchases separately, only if you have 

information on the number of turns for each hurchase. Treat the time between the purchase of the style and the end of your fiscal year as 

the first year of the style's life (even if the de ivery took place late in the fiscal year). Every succeeding year should coincide with your 

fiscal year. Before responding to this question, please refer to the example and the sample responses that are shown on the last 

two pages of this survey form. 

Number of Turns 

Season and 

Year of Number 1st 2nd 3rd 4th 5th 6th 7th 

Style of Tuxedo Purchase of Units Year Year Year Year Year Year Year 

1. 

2. 

3. 

4. 

5. 

6. 

I 

Control No.: 

Depreciation Analysis Division Page 4 ol6 Rental Clothing Survey 
*"" f-> 

Section Ill: Purchases and End of Year Stock of Tuxedos. 

Question 7: Please enter the number of units and total cost of tuxedos purchased for each of the years listed below. The number of units is equal to the number of 

jackets even if you purchase more tha~ one hair of pants for each jacket: (Number of units should be entered in units. so !hat10 units would be entered as 

10. Dollar amounts should be entered 1n dol ars, so that $700.00 would oe entered as 700.) Use the "total" columns only tf you do not have separate 

information for "basic black" and "all other" tuxedos. 

Bas1c Black All Other Total 

Number ol Uni!s T alai Cost of Units Number ol Units Total Cost of Units Number of Units T alai Cost of Units 

Year of (units) (dollars) Purchase (units) (dollars) (units) (dollars) 

1981 

1982 

1983 

1984 

1985 

1986 

1987 

Question 8: Please entsr the number of units and total cost of tuxedos in inventory at the end of the years listed below. Number of units is equal ot the number of 

jackets even if you purchase more than one j.air of pants for each jacket. (Number of units should be entered in units, so that10 units would be entered as 

10. Dollar amounts should be entered in dol ars, so that $700.00 would be entered as 700.) Use the "total" columns only if you do not have separate 

information for "basic black" and "all other" tuxedos. 

BasiC Black All Other Total 

Number of Units Total Cost of Units Number of Units Total Cost of Units Number of Units Total Cost of Units 

Year of (units) (dollars) (units) (dollars) (units) (dollars) Inventory 

1981 

1982 

1983 

1984 

19[?5 

1986 

1987 

Control No.: 

Oepreciallon Analysis Divis1on Rental Clothing Survey 
~ 

N 

l Section IV: Additional Information I 

Question 9: 

Question 10: 

Question 11 : 

If you prepare financial statements for stockholders, creditors, etc., what is the life and method you use to depreciate rental clothing for 

those statements? 

Life (in months) ___ _ 

Method: 

Double Declining-Balance .......... . 

150% Declining Balance ............ . 

Unit of Production ...................... . 

[ ] 

[ ] 

[ 1 

Sum of Years Digits ........ . 

Straight Line ................... . 

Other. ........ . 

[ ] 

[ ] 

[ 1 

If other, specify _______ _ 

If your rental clothes have been financed, what is the average loan period? 

Loan Period (in months) ___ _ 

If you lease your rental clothes, what is the average term of your lease? 

Lease Term (in months) ___ _ 

Control No.: 

Oeprecmllon Analysis Oiv1s1on Page 6 ol6 Rental Clothing Survey 
~ 

w 

I -~mpi~~:-Question 6 ·1 

Question 6: 

Starting with those styles purchased in 1981 (or for the earliest year after 1980 for which you have such information} and continuing until you have listed no more than 6 

distinct styles, enter the style of tuxedo acquired, the season and year the style was purchased (that is, the season and year the style was delivered), the number of units 

purchased, and the number of rentals ("turns") in each year of the style's life. The number of units is equal to the number of jackets even if you purchase more than one pair 

of pants for each jacket. Exclude styles purchased in 1986, 1987, and 1988. Make one entry for all "basic black" tuxedos purchased at a single date. regardless of slight 

differences in style. If you have purchased the same style at two different dates, report the entries separately only if you have information on the number of turns for each 

purchase. Treat the time between the purchase of the style and the end of the fiscal year as the first year of a style's life (even if the delivery took place late in the fiscal year}. 

Every succeeding year should coincide with your fiscal year. 

Example: 

Your fiscal year ends on Ja~uary 31. In Spring, 1981 you purchased 100 Bill .Blass Pearl Gr~y tuxedos, 80 After Six Gray Baron tuxedos, and 30 Basic Black tuxedos. In Fall, 

1981 you purchased an addttional40 Baste Black tuxedos. Your records mdtcate the following history of rentals: 

The 100 Bill Blass Pearl Gray tuxedos purchased in the Spring of 1981: 

Turned 400 times between the Spring of 1981 and January 31, 1982. 

Turned 200 times between February 1, 1982 and January 31, 1983. 

Turned 100 times between February 1. 1983 and January 31, 1984. 

Turned SO times between February 1, 1984 and January 31, 1985. 

Turned 5 times between February 1, 1985 and January 31, 1986. 

The 80 After Six Gray Baron tuxedos purchased in the Spring of 1981: 

Turned 320 times between the Spring of 1981 and January 31, 1982. 

Turned 80 times between February 1, 1982 and January 31, 1983. 

Turned 20 times between February 1, 1983 and January 31, 1984. 

:rurned 5 times between February 1. 1984 and January 31, 1985. 

The 30 Basic Black tuxedos purchased in the Spring of 1981: 

Turned 150 times between the Spring of 1981 and January 31, 1982. 

Turned 110 times between February 1. 1982 and January 31, 1983. 

Turned 90 times between February 1, 1983 and January 31, 1984. 

Turned 80 times between February 1, 1984 and January 31, 1985. 

Turned 70 times between February 1. 1985 and January 31, 1986. 

Turned 50 times between February 1, 1986 and January 31, 1987. 

The 40 Basic Black tuxedos purchased in the Fall of 1981: 

Turned 77 times between the Fall of 1981 and January 31. 1982. 

Turned 208 times between February 1, 1982 and January 31, 1983. 

Turned 165 times between February 1, 1983 and January 31, 1984. 

Turned 154 times between February 1, 1984 and January 31, 1985. 

Turned 123 times between February 1, 1985 and January 31, 1986. 

Turned 46 times between February 1, 1986 and January 31, 1987. 

You would enter this information as shown on the sample form on the following page. Additional information for other purchases would be entered in the same way until no 

more than 6 entnes were made. 

Depreciation Analysis Div1s1on Page 1 of Example Rental Clothing Survey 
.e. """ 

Sample Question 6 With Responses For The Example Shown On The Previous Page 

Question 6: Starting with those styles purchased in 1981 (or for the earliest year after 1980 for which you have such information) and continuing until 

you have listed no more than 6 distinct styles, enter the style of tuxedo acquired, the season and year the style was purchased (that is, the 

season and year the style was delivered), the number of units purchased, and the number of rentals {"turns") in each year of the style's 

life. The number of units is equal to the number of jackets even if you purchase more than one pair of pants for each jacket Exclude 1 

styles purchased in 1986, 1987, and 1988. Make one entry for all "basic black" tuxedos purchased at a single date, regardless of slight , 

differences in style. If you have purchased the same style at two different dates, report the purchases seprately only if you have information on the number of turns for each purchase. Treat the time between the purchase of a style and the end of the fiscal year as the first 

year of the style's life (even if the delivery took place late in your fiscal year}. Every succeeding year should coincide with your fiscal year. 

Number of Turns 

I 

Season 

I 

and Number 1st 2nd 3rd 4th 5th 6th 7th 

Style of Tuxedo Year of of Units Year Year Year Year Year Year Year 

Purchase 

1. Bill Blass Pearl Gray Spring '81 100 400 200 100 50 5 

2. After Six Gray Bmon Spring '81 80 320 80 20 5 

3. Basic Black Spring '81 30 150 110 90 80 70 50 

4. Basic Black Fall '81 40 77 208 165 154 123 46 

5. 

6. 

Depreciation Analysis Division Page 2 ol Example Rental Clothing Survey 
DEPARTMENT OF THE TREASURY 

WASHINGTON 

October 19,1988 

Dear Sir or Madam: 

This notice is to inform you that the Treasury Department's 

Office of Tax Analysis has not yet received your response to the 

survey of depreciation of rental clothing that was sent to you 

last month. It is important that you respond to this survey in 

order that estimates of the depreciation of rental clothing be as 

accurate as possible. The International Formal Wear Association 

has endorsed this survey, and encourages your response. 

Enclosed is another copy of the survey material, including a 

cover letter which provides additional information regarding this 

survey. Please return the completed form before November 21, 

1988. If you have any questions regarding the survey, please 

call the individuals listed in the cover letter. 

If your survey form was mailed within the past several days, 

we thank you, and ask that you disregard this notice. 

Enclosures 

Sincerely, 

~PUJ~ Lowell Dworin 

Director for Depreciation Analysis 

Office of Tax Analysis 

- 45 -
Appendix C. Technical Issues in the Application of the Productivity Method 

In this appendix, an algebraic framework for estimating the equivalent economic life for 

tuxedos from productivity data is developed, and several technical issues are discussed. The 

technical issues discussed include: the choice of weighting factors to be used to obtain a single 

average life measure from the information obtained for each individual style of tuxedo; the utilization 

of the infom1ation collected on the period within the first year during which each style of tuxedo 

is available for service; the actual timing of the depreciation tax benefits; and the implications of 

using the Alternative Depreciation System, with its required half-year convention, as the standard 

against which the equivalent economic life is measured. 

Section 1. Weighting the Results for the Different Styles 

As noted in Table 7, when the initial value-in-use per tuxedo for each style of tuxedo for which 

turns data have been obtained is examined, it is found that these individual values differ. Under 

the standard assumption of investment analysis, the expected value-in-use per tuxedo should equal 

the cost per tuxedo. If the calculated value-in-use differs from the true value-in-use by the same 

factor for each style, the coefficient of variation of the calculated values-in-use per tuxedo would 

be comparable to the coefficient of variation observed for the cost of tuxedos. These coefficients 

of variation are noted in Table 7, and it is seen that the two values are not comparable. 14 The 

disparity between the coefficient of variation for the cost per tuxedo (about 13%) and that for the 

initial value·-in-use per tuxedo (about 62%) may be explained in several ways. 

First, the measured value-in-use per tuxedo for a given style may be in error. In particular, 

although the profitability of any style may be directly related to the number of times that style 

"turr1s", not all firms may charge the same rental fee, or incur the same operating costs, or benefit 

from the same level of imputed managerial services. If the constant of proportionality linking the 

net income generated by a style to the number oftimes it is rented is not likely to be the same for 

each style, and carmot be adequately measured, it is useful to reduce the importance of these factors 

by nonnali?:ing the calculated value-in-use per tuxedo for each style. More specifically, by dividing 

the calculated value-· in-use per tuxedo at each age by its initial value, a pattem of economic decline 

which is independent of the proportionality factors may be obtained. Since the normalized 

values-in-use per tuxedo no longer reflect the relative importance of the various styles to the industry, 

it is appropriate to weight the present value of the decline in the normalized value-in-use for each 

style by the cost of the tuxedos acquired (i.e., the product of the cost per tuxedo for the style and 

the number of tuxedos in the style). 

14 The cost of tuxedos was obtained from the manufacturers of tuxedos, rather than from the survey 

respondents, and converted to constant dollars. 

-46-
Table 7. Sample Statistics for Value-In-Use Per Tuxedo and Cost Per Tuxedo, for the 

Total, Initial, and Additional Samples and for Fashion and Basic Black Styles 

Value-In-Use Per Tuxedo Mean Variance Coefficient 

(Measured by Turns/Tuxedos) of 

Variation 

(Percent) 

Total Sample of 199 Styles (from 307 firms) 19 141 62 

Initial Sample of 157 Styles (from 240 firms) 20 156 62 

Additional Sample of 42 Styles (from 67 firms) IS 59 53 

Basic Black Tuxedos (25 styles) 28 159 44 

Fashion Tuxedos (174 styles) 17 125 63 

Cost Per Tuxedo Mean Variance Coefficient 

(In Dollars) of 

Variation 

(Percent) 

Total Sample of 199 Styles (from 307 firms) 113 211 13 

Initial Sample of 157 Styles (from 240 rrrms) 113 207 13 

Additional Sample of 42 Styles (from 67 rrrrns) 109 216 13 

Basic Black Tuxedos (25 styles) 118 344 16 

Fashion Tuxedos (174 styles) 112 188 12 

-47-
Second, the measured value-in-use may differ from the true value by a constant which is the 

same for all styles, but the variance in value-in-use per tuxedo may be attributable to random 

differences in demand for the individual styles. That is, although the anticipated demand for tuxedos 

may be nearly the same for all styles (as reflected in the relatively low coefficient of variance for 

the cost of tuxedos), the actual demand for tuxedos of different styles may be quite different. Some 

styles may prove to be "winners", while others may be "losers", but the winning styles may not be 

easily distinguished from the losers at the time the orders are placed. If this feature is the source 

of the disparity, the observed disparities in value-in-use per tuxedo convey useful information. If, 

it is assumed that the turns data contain a representative sample of "winners" and "losers", and that 

this distribution of winners and losers is stable over time, the average decline in economic value 

may in this case more properly be obtained by simply averaging these realized values. By not 

normalizing the values-in-use per tuxedo, but by simply aggregating the turns data (as in chapter 

4), the individual styles are effectively weighted by their initial value-in-use. 

From the coefficients of variation shown in Table 7, it is seen that the dispersion in initial 

value-in-use per tuxedo is somewhat less for basic black tuxedos (where the distinction between 

"winners" and "losers" may be expected to be much less pronounced) than for fashion tuxedos. 

However, it is still much greater than the dispersion in the cost per tuxedo. This suggests that both 

sources of dispersion are present. Both weighting methods have thus been used, leading to the 

results shown in Table 6 (these results will be discussed more fully in the following section). As 

shown in Table 6, the fully adjusted equivalent economic lives are not very different: 1.9 years 

when the average decline in economic value is based on the decline in the normalized value-in-use 

per tuxedo weighted by the cost of the tuxedos, and 2.1 years when the average decline in economic 

value is based on the decline in value-in-use per tuxedo weighted by the initial value-in-use. 

Section 2. The Algebra of the Class Life Estimate Using Turns Data Based on 

Delivery Dates 

The starting point for estimating the class life for tuxedos by the productivity method is the 

turns data provided by the respondents to the survey questionnaire. In the analysis of Chapter 4, it 

was assumed that all tuxedos are equivalent, are placed in service at the beginning of the year, and 

all cash flows and depreciation deductions are recognized at the end of the year. In this section, 

the analysis will be revised to take account of the actual timing of these events and, as discussed in 

the previous section, to more properly combine the results for the individual styles into a single 

measure of the class life of tuxedos. The turns data for the first year of the style's life reflects the 

availability for rental for the period from the date of delivery of the style to the end of the firm's 

fiscal year. (The distribution offiscal year ends are noted in Chapter 3.) The Depreciation Analysis 

Division was infom1ed by industry representatives that most deliveries of fashion tuxedos are made 

in the spring in time for the wedding and prom season, while deliveries of basic black tuxedos may 

-48-
be made at any time of the year. It was anticipated that turns for the first year of the style's life 

might reflect the differing period of their availability during the first year, and therefore the survey 

respondents were asked to indicate the season of purchase for each style of tuxedo for which turns 

data was provided. To adjust for the fact that each style oftuxedo may be placed in service earlier 

or later in the acquiring firm's fiscal year, it is assumed that the first year's cash flow generated by 

the rental of the tuxedos is received in the middle of theperiod between the date of delivery and the 

end of the firm's fiscal year, whereas all future years' cash flows are assumed received in the middle 

of the fiscal year. 15 Likewise, the initial value-in-use is calculated with respect to the date the style 

is delivered, while the values-in-use for all subsequent years are calculated with respect to the 

beginning of the year. Therefore, in calculating the present value of the decline in the value-in-use 

(i.e., the present value of economic depreciation), the initial decline in value-in-use covers the period 

between the date of delivery and the end of the fiscal year, whereas all subsequent year's differences 

are for a full fiscal year. Algebraically, the discounted present value of the future cash flow taken 

to be directly proportional to the number of remaining turns for each style: 

(1) r-1 (a+l) PV(t).= L, ------ 1 (l )(a +L.(t)G(a)-M(a)) a=t +r J 

(t=l,T-1) 

where Nj(a+ 1) is the number of turns reported for style j in year a+ 1, T is the last year for which 

any turns are reported for this style, r is the discount rate, Lj(t) equals the period between the date 

of delivery and the end of the fiscal year for style j (expressed in fractions of a year) for t=O and 

equals -(t-1) otherwise, G(a) = 1/2 for a= 0 and equals 1 otherwise, and M(a) = 0 for a= 0 and 

equals 1/2 otherwise. 

The present value is calculated using an interest rate of four percent, which represents an 

estimate of the real rate of interest facing the formal wear rental industry. A real, rather than nominal, 

rate of interest is used because the turns data represent physical quantities of output which are not 

affected by overall changes in prices. Although in principle the real rate of interest used in equation 

(1) can have an impact on the calculated equivalent economic life, because most of the service 

provided by tuxedos occurs in the first few years, the choice of a real interest rate has very little 

irnpact.16 

It is initially assumed that the disparities in the measured value-in-use per tuxedo are due to 

measurement error (i.e., the presence of different, and inadequately measured, constants of proportionality for each style). The calculated value-in-use per tuxedo for each style is thus normalized 

such that the initial value-in-use per tuxedo equals unity: 

15 The specific delivery date is assumed to be the middle of the quarter (season) in which delivery 

is made. 

16 Changing the discount rate from 4 percent to 8 percent reduces the resulting class life by 0.1 years. 

-49-
(2) PV(t)j NPV(t)=--

1 PV (O)j 

where NPVj(t) is the normalized present value in year t of the assets life. Economic depreciation 

for style j in year t, Dj(t), is calculated as the difference between consecutive normalized present 

values: 

where it should be noted that Dj(l) generally represents only a partial year's depreciation. 

The depreciation flow is then discounted (also at a 4 percent real rate) to obtain PVDj, the 

present value of economic depreciation for style j: 

(4) r-1 D/a + 1) 

PVD. = I,------

; a= O ( 1 + T) (a +L/O)G(a) -M(a)) 

The real interest rate r chosen to discount the calculated economic depreciation has even less 

impact on the resulting class life than does the rate used in equation (1), since the same real rate of 

interest is used (in equations (7) and (8)) to determine the present value of the straight-line depreciation from which the class life may be inferred. For any reasonable real rate of interest, the actual 

rate used has very little impact on the calculated class life. 

The present values of depreciation for each style of tuxedo are then averaged to obtain a present 

value of economic depreciation for the entire sample using as weights CSj, the cost of tuxedos of 

style j (which in turn is equal to the product of the number of tuxedos of style j and the cost per 

tuxedo for style j): 

(5) N PVD. 

AVGPVD =I, CS1

. C 0

1 

1=1 T T 

where 

(6) N 

CTOT =I, CS. 

. 1 ) j= 

Section 3. Translating Economic Depreciation Into Equivalent Economic 

Lives 

The General Explanation provides a formula for translating economic depreciation as obtained 

from resale data into a class life. In general, the translation consists of determining that period L 

such that the discounted present value of economic depreciation (per dollar of investment) equals 

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the discounted present value of straight-line depreciation over period L. This period is the specified 

class life (which, in order to indicate that it is only one of the measures of depreciation which we 

have examined, is referred to in this report as the equivalent economic life). 

While it may be assumed that Congress intended this formula to be used to translate economic 

depreciation into equivalent economic lives even when economic depreciation is inferred, as in the 

productivity method, rather than obtained from direct examination of the decline in resale prices, 

the application of this formula requires more detailed specification. Treasury believes that it was 

the intent of Congress in proposing this formula that a taxpayer using the Alternative Depreciation 

System (ADS), which requires the use of a straight-line method of depreciation, obtain the same 

present value of depreciation allowances that he would obtain if economic depreciation were allowed 

for tax purposes. The present value of economic depreciation (discounted to the date the asset is 

placed in service) is thus to be equated to the discounted present value (discounted to the same date) 

of straight line depreciation over the class life, using the required ADS half-year convention, and 

taking note of the actual realization of benefits resulting from depreciation deductions. For a 

calendar-year taxpayer who anticipates the acquisition of the tuxedos, and earns sufficient income 

from operations during the year to take full advantage of the depreciation deductions, the benefits 

of these deductions are realized by the taxpayer on average (through their effect on estimated tax 

payments) on August 9 of each year. 

Thus, the initial year's straight-line allowance will be taken to be one-half of a full year's 

allowance and will be discounted for the portion of the year between the date of delivery and August 

9. This implies the following equation for the class life L: 

(7) l-(1/(1+r/- 1

) 1 0.5+X -----+- + --- r 2 (l+r)(Y) L = --------'----'---

AVGPVD 

if X<l/2, and 

(8) 1-(1/(1+r/) 1 X-0.5 _ __;_______:__:_ +- + --- r 2 (1 +r)(Y+l) 

L = --------- AVGPVD 

if X> 1/2, where Y is the integer part of the equivalent economic life and X is the decimal part 

(L=Y+X). The resulting class life (1.9 years) is noted in Table 6. Also noted in Table 6 is the 

equivalent economic life calculated from equations (7) or (8), without the adjustments for delivery 

date and realization of tax benefits. The fact that this equivalent economic life is approximately 

one-half year shorter than the equivalent economic life obtained in Chapter 4 may be attributed to 

the use of the half-year convention required under the Alternative Depreciation System. 

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The cost of each style was used in the above calculation on the premise that the calculated 

differences in value-in-use per tuxedo reflect measurement error. If it is instead assumed that 

measurement error is not present, so that the observed differences represent useful information on 

the ex-post demand factors for each style of tuxedo, the average present value of economic 

depreciation should be obtained from the decline in the aggregate value-in-use per tuxedo for all 

styles. Substituting this average present value (A VGPVD) into equation (8) yields an equivalent 

economic life (as noted in Table 6) of3.3 years without the adjustments for the half-yearconvention 

and delivery date, and 2.1 years with those adjustments. 

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Bibliography 

Ackerman, Susan Rose. "Used Cars as a Depreciating Asset." Western J ournalll (December 1973 ), 

pp. 463-474. 

Biedleman, Carl R. "Economic Depreciation in a Capital Goods Industry." National Tax Journal 

29 (December 1976), pp. 379-390. 

Hotelling, Harold S. "A General Mathematical Theory of Depreciation." Journal of the American 

Statistical Society 20 (September 1925), pp. 340-353. 

Hulten, Charles R. and Wyckoff, Frank C. "The Estimate of Economic Depreciation Using Vintage 

Asset Prices: an Application of the Box -Cox Power Transformation." Journal of Econometrics 15 

(April1981), pp. 367-396. 

Ohata, Makato and Griliches, Zvi. "Automobile Prices Revisited: Extensions of the Hedonic Price 

Hypothesis." National Bureau of Economic Research, Studies in I nco me and Wealth 40 ( 197 6), pp. 

325-390. ' 

Ramm, Wolfhard. "Measuring the Services of Household Durables: The Case of Automobiles." 

Journal of the American Statistical Association 63 (1970) pp. 149-158. 

Taubman, Paul and Rasche, Robert. "Economic and Tax Depreciation of Office Buildings." National 

Tax Journa/22 (September 1969), pp. 334-346. 

Wyckoff, Frank C. "Capital Depreciation in the Postwar Period: Automobiles" Review of Economics 

and Statistics 52 (May 1970), pp. 168-172. 

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ACKNOWLEDGMENTS 

This report was prepared by Gerald Silverstein and Lowell Dworin of the Office of Tax Analysis. 

David Horowitz helped with the design of the survey and collection of the data. William Chen 

assisted in the sample design process. Paul Dobbins provided data processing support, and Connie 

Haftman provided secretarial assistance. 

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*U.S. Govctnmcnt Printing Office : 1989 - 242-752/07324