1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-8-1995

Liddle v Comm IRS

Precedential or Non-Precedential:

Docket 94-7733

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Recommended Citation

"Liddle v Comm IRS" (1995). 1995 Decisions. Paper 248.

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1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

No. 94-7733 

 

 BRIAN P. LIDDLE; BRENDA H. LIDDLE 

v. 

COMMISSIONER OF THE INTERNAL REVENUE SERVICE, 

 Appellant 

 

ON APPEAL FROM A DECISION OF 

THE UNITED STATES TAX COURT 

(No. 92-2126) 

________________________________ 

Argued June 15, 1995 

Before: STAPLETON, McKEE, Circuit Judges, 

and ROSENN, Senior Circuit Judge

(Opinion filed: September 8, 1995 ) 

 

 LORETTA C. AGRETT, ESQ. 

 Assistant Attorney General 

 GARY R. ALLEN, ESQ. 

 RICHARD FARBER, ESQ. 

 EDWARD T. PERELMUTER, ESQ. (Argued) 

 Attorneys 

 Tax Division 

 Department of Justice 

 P.O. Box 502 

 Washington, D.C. 20044 

 Attorneys for Appellant

 DAVID LYLE SEGAL, ESQ. (Argued) 

 JEFFRY H. HOMEL, ESQ. 

 121 South Broad Street 

 Suite 1700 

 Philadelphia, PA 19107 

 

 Attorneys for Appellees

 

 
2 

OPINION OF THE COURT 

 

McKEE, Circuit Judge

 In this appeal from a decision of the United States Tax 

Court we are asked to decide if a valuable bass violin can be 

depreciated under the Accelerated Cost Recovery System when used 

as a tool of trade by a professional musician even though the 

instrument actually increased in value while the musician owned 

it. We determine that, under the facts before us, the taxpayer 

properly depreciated the instrument and therefore affirm the 

decision of the Tax Court. 

 I.

 Brian Liddle, the taxpayer here, is a very accomplished 

professional musician. Since completing his studies in bass 

violin at the Curtis Institute of Music in 1978, he has performed 

with various professional music organizations, including the 

Philadelphia Orchestra, the Baltimore Symphony, the Pennsylvania 

ProMusica and the Performance Organization. 

 In 1984, after a season with the Philadelphia Orchestra, he 

purchased a 17th century bass violin made by Francesco Ruggeri 

(c. 1620-1695), a luthier who was active in Cremona, Italy. 

Ruggeri studied stringed instrument construction under Nicolo 

Amati, who also instructed Antonio Stradivari. Ruggeri’s other 

contemporaries include the craftsmen Guadanini and Guarneri. 

These artisans were members of a group of instrument makers known 

as the Cremonese School. 
3 

 Liddle paid $28,000 for the Ruggeri bass, almost as much as 

he earned in 1987 working for the Philadelphia Orchestra. The 

instrument was then in an excellent state of restoration and had 

no apparent cracks or other damage. Liddle insured the 

instrument for its then-appraised value of $38,000. This 

instrument was his principal instrument and he used it 

continuously to earn his living, practicing with it at home as 

much as seven and one-half hours every day, transporting it 

locally and out of town for rehearsals, performances and 

auditions. Liddle purchased the bass because he believed it 

would serve him throughout his professional career -- anticipated 

to be 30 to 40 years. 

 Despite the anticipated longevity of this instrument, the 

rigors of Liddle's profession soon took their toll upon the bass 

and it began reflecting the normal wear and tear of daily use, 

including nicks, cracks, and accumulations of resin. At one 

point, the neck of the instrument began to pull away from the 

body, cracking the wood such that it could not be played until it 

was repaired. Liddle had the instrument repaired by renown 

artisans. However, the repairs did not restore the instrument's 

"voice" to its previous quality. At trial, an expert testified 

for Liddle that every bass loses mass from use and from oxidation 

and ultimately loses its tone, and therefore its value as a 

performance instrument decreases. Moreover, as common sense 

would suggest, basses are more likely to become damaged when used 

as performance instruments than when displayed in a museum. 

Accordingly, professional musicians who use valuable instruments 

as their performance instruments are exposed to financial risks 
4 

that do not threaten collectors who regard such instruments as 

works of art, and treat them accordingly. 

 There is a flourishing market among nonmusicians for 

Cremonese School instruments such as Mr. Liddle's bass. Many 

collectors seek primarily the "label", i.e., the maker's name on 

the instrument as verified by the certificate of authenticity. As 

nonplayers, they do not concern themselves with the physical 

condition of the instrument; they have their eye only on the 

market value of the instrument as a collectible. As the quantity 

of these instruments has declined through loss or destruction 

over the years, the value of the remaining instruments as 

collectibles has experienced a corresponding increase. 

 Eventually, Liddle felt the wear and tear had so 

deteriorated the tonal quality of his Ruggeri bass that he could 

no longer use it as a performance instrument. Rather than 

selling it, however, he traded it for a Domenico Busan 18th 

century bass in May of 1991. The Busan bass was appraised at 

$65,000 on the date of the exchange, but Liddle acquired it not 

for its superior value, but because of the greater tonal quality. 

 Liddle and his wife filed a joint tax return for 1987, and 

claimed a depreciation deduction of $3,170 for the Ruggeri bass 

under the Accelerated Cost Recovery System ("ACRS"), I.R.C. 

§168.1 The Commissioner disallowed the deduction asserting that 

the "Ruggeri bass in fact will appreciate in value and not 

 

1 Because the bass viol was placed in service in 1984, the 

Internal Revenue Code applicable to that year governs this case. 

Thus, our analysis is governed by I.R.C. § 168 as it existed 

prior to 1987. 
5 

depreciate." Accordingly, the Commissioner assessed a deficiency 

of $602 for the tax year 1987. The Liddles then filed a petition 

with the Tax Court challenging the Commissioner's assertion of 

the deficiency. A closely divided court entered a decision in 

favor of the Liddles. 103 T.C. 285 (1994). This appeal 

followed.2 

II. 

The Commissioner originally argued that the ACRS deduction 

under § 168 is inappropriate here because the bass actually 

appreciated in value. However, the Commissioner has apparently 

abandoned that theory, presumably because an asset can appreciate 

in market value and still be subject to a depreciation deduction 

under tax law. Fribourg Navigation Co. v. Commissioner, 383 U.S. 

272, 277 (1966) ("tax law has long recognized the accounting 

concept that depreciation is a process of estimated allocation 

which does not take account of fluctuations in valuation through 

market appreciation."); Noyce v. Commissioner, 97 T.C. 670 (1991) 

(taxpayer allowed to deduct depreciation under § 168 on an 

airplane that appreciated in economic value by 27 percent from 

the date of purchase to the time of trial). 

 

2 Our review of the Tax Court's conclusions of law is 

plenary; however, we review the court's factual findings under a 

clearly erroneous standard. Armstrong World Industries, Inc. v. 

Commissioner, 974 F.2d 422, 430 (3d Cir. 1992); National Starch 

and Chemical Corp. v. Commissioner, 918 F.2d 426, 432 (3d Cir. 

1990), aff'd, 503 U.S. 79 (1992). 
6 

 Here, the Commissioner argues that the Liddles can claim the 

ACRS deduction only if they can establish that the bass has a 

determinable useful life. Since Mr. Liddle's bass is already 

over 300 years old, and still increasing in value, the 

Commissioner asserts that the Liddles can not establish a 

determinable useful life and therefore can not take a 

depreciation deduction. In addition, the Commissioner argues 

that this instrument is a "work of art" which has an 

indeterminable useful life and is therefore not depreciable. 

 In United States v. Ludey, 274 U.S. 295 (1927), the Supreme 

Court explained the depreciation deduction as follows: 

The depreciation charge permitted as a 

deduction from the gross income in 

determining the taxable income of a business 

for any year represents the reduction, during 

the year, of the capital assets through wear 

and tear of the plant used. The amount of 

the allowance for depreciation is the sum 

which should be set aside for the taxable 

year, in order that, at the end of the useful 

life of the plant in the business, the 

aggregate of the sums set aside will (with 

the salvage value) suffice to provide an 

amount equal to the original cost. 

274 U.S. at 300-301. Prior to 1981, Section 167 of the Internal 

Revenue Code, 26 U.S.C. § 167, governed the allowance of 

depreciation deductions with respect to tangible and intangible 

personalty. Section 167 provided, in relevant part, as follows: 

§ 167. DEPRECIATION 

(a) General Rule. -- There shall be allowed 

as a depreciation deduction a reasonable 

allowance for the exhaustion, wear and tear 

(including a reasonable allowance for 

obsolescence) -- 

(1) of property used in the trade 

or business, or 

(2) of property held for the 

production of income. 
7 

26 U.S.C. § 167(a). The regulations promulgated under § 167 

provided that in order to qualify for the depreciation deduction, 

the taxpayer had to establish that the property in question had a 

determinable useful life. Treas. Reg. §§ 1.167(a) and (b). The 

useful life of an asset was not necessarily the useful life 

“inherent in the asset but [was] the period over which the asset 

may reasonably be expected to be useful to the taxpayer in his 

trade or business. . . .” Treas. Reg. § 1.167(b). Nonetheless, 

under § 167 and its attendant regulations, a determinable useful 

life was the sine qua non for claiming the deduction. See, 

Harrah’s Club v. United States, 661 F.2d 203, 207 (Ct. Cl. 1981) 

(“Under the regulation on depreciation, a useful life capable of 

being estimated is indispensable for the institution of a system 

of depreciation.”) 

 Under § 167, the principal method for determining the useful 

life of personalty was the Asset Depreciation Range (“ADR”) 

system. Personalty eligible for the ADR system was grouped into 

more than 100 classes and a guideline life for each class was 

determined by the Treasury Department. See, Treas. Reg. 

§1.167(a)-11. A taxpayer could claim a useful life up to 20 

percent longer or shorter than the ADR guideline life. Treas. 

Reg. § 1.167(4)(b). The ADR system was optional with the 

taxpayer. Tres. Reg. § 1.167(a)-11(a). For personalty which was 

not eligible for ADR, and for taxpayers who did not choose to use 

ADR, the useful life of an asset was determined according to the 

unique circumstances of the particular asset or by an agreement 

between the taxpayer and the Internal Revenue Service. STAFF OF THE 

JOINT COMMITTEE ON TAXATION, GENERAL EXPLANATION OF THE ECONOMIC RECOVERY TAX 
8 

ACT OF 1981, 97th Cong., reprinted in INTERNAL REVENUE ACTS, 1980-

1981, at 1441 (1982). 

 In 1981, convinced that tax reductions were needed to ensure 

the continued economic growth of the country, Congress passed the 

Economic Recovery Tax Act of 1981, P.L. 97-34 (“ERTA”). Id. at 

1391. It was hoped that the ERTA tax reduction program would 

“help upgrade the nation’s industrial base, stimulate 

productivity and innovation throughout the economy, lower 

personal tax burdens and restrain the growth of the Federal 

Government.” Id. Congress felt that prior law and rules 

governing depreciation deductions need to be replaced “because 

they did not provide the investment stimulus that was felt to be 

essential for economic expansion.” Id. at 1449. Further, 

Congress believed that the true value of the depreciation 

deduction had declined over the years because of high inflation 

rates. Id. As a result, Congress believed that a “substantial 

restructuring” of the depreciation rules would stimulate capital 

formation, increase productivity and improve the country’s 

competitiveness in international trade. Id. Congress also felt 

that the prior rules concerning the determination of a useful 

life were “too complex”, “inherently uncertain” and engendered 

“unproductive disagreements between taxpayers and the Internal 

Revenue Service.” Id. To remedy the situation, Congress 

decided 

that a new capital cost recovery system 

should be structured which de-emphasizes the 

concept of useful life, minimizes the number 

of elections and exceptions and is easier to 

comply with and to administer. 

Id. 
9 

 Accordingly, Congress adopted the Accelerated Cost Recovery 

System (“ACRS”) in ERTA. The entire cost or other basis of 

eligible property is recovered under ACRS, eliminating the 

salvage value limitation of prior depreciation law. GENERAL 

EXPLANATION OF THE ECONOMIC RECOVERY TAX ACT OF 1981 at 1450. ACRS was 

codified in I.R.C. § 168, which provided, in relevant part, as 

follows: 

§ 168. Accelerated cost recovery system 

(a) Allowance of Deduction. -- There shall be 

allowed as a deduction for any taxable year 

the amount determined under this section with 

respect to recovery property. 

(b) Amount of Deduction. -- 

(1) In general.-- Except as otherwise 

provided in this section, the amount of the 

deduction allowable by subsection (a) for any 

taxable year shall be the aggregate amount 

determined by applying to the unadjusted 

basis of recovery property the applicable 

percentage determined in accordance with the 

following table: 

 ********************************* 

(c) Recovery Property. -- For purposes of 

this title -- 

(1) Recovery Property Defined. -- Except as 

provided in subsection (e), the term 

"recovery property" means tangible property 

of a character subject to the allowance for 

depreciation -- 

(A) used in a trade or business, or 

(B) held for the production of income. 

26 U.S.C. § 168. ACRS is mandatory and applied to “recovery 

property” placed in service after 1980 and before 1987.3

 

3In the Tax Reform Act of 1986, P. L. 99-514, § 201, Congress 

made substantial changes to I.R.C. § 168. In particular, 
10 

 Section 168(c)(2) grouped recovery property into five 

assigned categories: 3-year property, 5-year property, 10-year 

property, 15-year real property and 15-year public utility 

property. Three year property was defined as § 1245 property4

with a class life of 4 years or less. Five year property is all 

§ 1245 property with a class life of more than 4 years. Ten year 

property is primarily certain public utility property, railroad 

tank cars, coal-utilization property and certain real property 

described in I.R.C. § 1250(c). Other long-lived public utility 

property is in the 15-year class. 26 U.S.C. § 168(a)(2)(A), (B) 

and (C). Basically, 3-year property includes certain short-lived 

assets such as automobiles and light-duty trucks, and 5-year 

property included all other tangible personal property that was 

not 3-year property. Most eligible personal property was in the 

5-year class. 

 The Commissioner argues that ERTA § 168 did not eliminate 

the pre-ERTA § 167 requirement that tangible personalty used in a 

trade or business must also have a determinable useful life in 

order to qualify for the ACRS deduction. She argues that the 

phrase “of a character subject to the allowance for depreciation" 

demonstrates that the pre-ERTA § 167 requirement for a 

determinable useful life is the threshold criterion for claiming 

the § 168 ACRS deduction. 

 

Congress deleted the “recovery property” concept from the 

statute. 

4§ 1245 property is, inter alia, any personal property which is 

or has been property of a character subject to allowance for 

depreciation provided in § 167. 26 U.S.C. § 1245(3). 
11 

 Much of the difficulty inherent in this case arises from two 

related problems. First, Congress left § 167 unmodified when it 

added § 168; second, § 168 contains no standards for determining 

when property is "of a character subject to the allowance for 

depreciation." In the absence of any express standards, logic 

and common sense would dictate that the phrase must have a 

reference point to some other section of the Internal Revenue 

Code. Section 167(a) would appear to be that section. As stated 

above, that section provides that "[t]here shall be allowed as a 

depreciation deduction a reasonable allowance for the exhaustion, 

wear and tear. . . of property used in a trade or business. . . 

." The Commissioner assumes that all of the depreciation 

regulations promulgated under § 167 must, of necessity, be 

imported into § 168. That importation would include the 

necessity that a taxpayer demonstrate that the asset have a 

demonstrable useful life, and (the argument continues) satisfy 

the phrase "tangible property of a character subject to the 

allowance for depreciation" in § 168. 

 However, we do not believe that Congress intended the 

wholesale importation of § 167 rules and regulations into § 168. 

Such an interpretation would negate one of the major reasons for 

enacting the Accelerated Cost Recovery System. Rather, we 

believe that the phrase "of a character subject to the allowance 

for depreciation" refers only to that portion of § 167(a) which 

allows a depreciation deduction for assets which are subject to 

exhaustion and wear and tear. Clearly, property that is not 

subject to such exhaustion does not depreciate. Thus, we hold 

that “property of a character subject to the allowance for 
12 

depreciation” refers to property that is subject to exhaustion, 

wear and tear, and obsolescence. However, it does not follow that 

Congress intended to make the ACRS deduction subject to the § 167 

useful life rules, and thereby breathe continued life into a 

regulatory scheme that was bewildering, and fraught with 

problems, and required "substantial restructuring." 

 We previously noted that Congress believed that prior 

depreciation rules and regulations did not provide the investment 

stimulus necessary for economic expansion. Further, Congress 

believed that the actual value of the depreciation deduction 

declined over the years because of inflationary pressures. In 

addition, Congress felt that prior depreciation rules governing 

the determination of useful lives were much too complex and 

caused unproductive disagreements between taxpayers and the 

Commissioner. Thus, Congress passed a statute which "deemphasizes the concept of useful life." GENERAL EXPLANATION OF THE 

ECONOMIC RECOVERY TAX ACT OF 1981 at 1449. Accordingly, we decline 

the Commissioner's invitation to interpret § 168 in such a manner 

as to re-emphasize a concept which Congress has sought to "deemphasize." 

 The Commissioner argues that de-emphasis of useful life is 

not synonymous with abrogation of useful life. As a general 

statement, that is true. However, the position of the 

Commissioner, if accepted, would reintroduce unproductive 

disputes over useful life between taxpayers and the Internal 

Revenue Service. Indeed, such is the plight of Mr. Liddle. 

 Congress de-emphasized the § 167 useful life rules by 

creating four short periods of time over which taxpayers can 
13 

depreciate tangible personalty used in their trade or business. 

These statutory “recovery periods. . .are generally unrelated to, 

but shorter than, prior law useful lives.” GENERAL EXPLANATION OF THE 

ECONOMIC RECOVERY TAX ACT OF 1981 at 1450. The four recovery periods 

are, in effect, the statutorily mandated useful lives of tangible 

personalty used in a trade or business. 

 The recovery periods serve the primary purpose of ERTA. Once 

a taxpayer has recovered the cost of the tangible personalty used 

in a trade or business, i.e., once the taxpayer has written off 

the asset over the short recovery period, his or her basis in 

that asset will be zero and no further ACRS deduction will be 

allowed. To avail himself or herself of further ACRS deductions, 

the taxpayer will have to purchase a new asset. Thus, because 

the recovery period is generally shorter that the pre-ERTA useful 

live of the asset, the taxpayer’s purchase of the new asset will 

increase capital formation and new investment and, as a result, 

promote the Congressional objective for continued economic 

expansion. 

 Thus, in order for the Liddles to claim an ACRS deduction, 

they must show that the bass is recovery property as defined in 

I.R.C. § 168(c)(1). It is not disputed that it is tangible 

personalty which was placed in service after 1980 and that it was 

used in Brian Liddle’s trade or business. What is disputed is 

whether the bass is “property of a character subject to the 

allowance for depreciation.” We hold that that phrase means that 

the Liddles must only show that the bass was subject to 

exhaustion and wear and tear. The Tax Court found as a fact that 

the instrument suffered wear and tear during the year in which 
14 

the deduction was claimed. 103 T.C. 285, 294 (1994). That 

finding was not clearly erroneous. Accordingly, the Liddles are 

entitled to claim the ACRS deduction for the tax year in 

question. 

 Similarly, we are not persuaded by the Commissioner's "work 

of art" theory, although there are similarities between Mr. 

Liddle's valuable bass, and a work of art. The bass, is highly 

prized by collectors; and, ironically, it actually increases in 

value with age much like a rare painting. Cases that addressed 

the availability for depreciation deductions under § 167 clearly 

establish that works of art and/or collectibles were not 

depreciable because they lacked a determinable useful life. See, 

Associated Obstetricians and Gynecologists, P.C. v. Commissioner, 

762 F.2d 38 (6th Cir. 1985) (works of art displayed on wall in 

medical office not depreciable); Hawkins v. Commissioner, 713 

F.2d 347 (8th Cir.) (art displayed in law office not 

depreciable); Harrah's Club v. United States, 661 F.2d 203 (Ct. 

Cl. 1981) (antique automobiles in museum not depreciable). See

also, Rev. Rul. 68-232, 1968-1 C.B. 79 ("depreciation of works of 

art generally is not allowable" because '[a] valuable and 

treasured art piece does not have a determinable useful life.'"). 

 We also realize that, in a similar case, a musical 

instrument was held to not qualify for depreciation. See Browning 

v. Commissioner, 890 F.2d 1084 (9th Cir. 1989). However, 

Browning was decided on the basis of § 167(a) and depreciation 

law as it existed before the enactment of ERTA and §168, and it 

therefore provides little guidance to our inquiry. In addition, 

the taxpayer in Browning failed to meet his burden that the 
15 

Stradivarius violins in question had only a useful life of 12 

years under the ADR system then in effect. 890 F.2d at 1087. 

Moreover, it appears from the Tax Court opinion that the taxpayer 

may not have been using the instruments in his profession but 

rather was acquiring them as collectibles. 55 T.C.M.(CCH) 1232, 

1237 (1988)(“ [F]rom the record, we have no definite answer as to 

how often the three antique violins were used, if ever. . . . In 

fact, we suspect that petitioner was forming a collection of 

antique violins not only as musical tools of the trade but as 

antique collectibles.”) In Brian Liddle's professional hands, his 

bass viol was a tool of his trade, not a work of art. It was as 

valuable as the sound it could produce, and not for its looks. 

Normal wear and tear from Liddle's professional demands took a 

toll upon the instrument's tonal quality and he, therefore, had 

every right to avail himself of the depreciation provisions of 

the Internal Revenue Code as provided by Congress. 
16 

III.

 Accordingly, for the reasons set forth above, we will affirm 

the decision of the tax court.