Opinion ID: 782365
Heading Depth: 1
Heading Rank: 3

Heading: Appeal: Depreciation

Text: 7 The IRS contends that Cardinal cannot claim a depreciation deduction for the cost of 168 tons of tin initially installed in the tin bath because the tin is not subject to exhaustion or wear and tear within the meaning of 26 U.S.C. § 167(a) and therefore does not constitute property for which a depreciation deduction may be taken. See 26 U.S.C. § 168 (providing applicable depreciation method for depreciation deduction authorized by § 167). The IRS argues that because the tin is consumed during the manufacturing process, its cost may be deducted instead under 26 U.S.C. § 162, as an expense of operation. 8 Section 167(a) of the Internal Revenue Code authorizes a depreciation deduction of a reasonable allowance for the exhaustion, wear and tear ... of property used in the trade or business.... 26 U.S.C. § 167(a); Treas. Reg. § 1.167(a)-2. Unlike § 162, which provides a deduction for expenses that are ordinary and necessary and are paid or incurred during the taxable year in carrying on any trade or business, the depreciation deduction authorized by § 167 encompasses only capital expenditures or assets, which are amortized and depreciated over time. INDOPCO, Inc. v. Comm'r, 503 U.S. 79, 83-84, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992). 9 [I]f a taxpayer can prove with reasonable accuracy that an asset used in the trade or business or held for the production of income has a value that wastes over an ascertainable period of time, that asset is depreciable under § 167.... Whether or not ... a tangible asset, is depreciable for Federal income tax purposes depends upon the determination that the asset is actually exhausting, and that such exhaustion is susceptible of measurement. 10 Newark Morning Ledger Co. v. United States, 507 U.S. 546, 566, 113 S.Ct. 1670, 123 L.Ed.2d 288 (1993) (citing Rev. Rul. 68-483, 1968-2 Cum.Bull.91-92). Cardinal, therefore, must show only that the tin was subject to exhaustion and wear and tear. Liddle v. Comm'r, 65 F.3d 329, 335 (3d Cir.1995); Simon v. Comm'r, 68 F.3d 41, 46 (2d Cir.1995) (holding that, for the purposes of § 168, `property subject to the allowance for depreciation' means property that is subject to exhaustion, wear and tear, or obsolescence). As the district court noted, the burden of demonstrating that an asset is depreciable is undemanding: even imperceptible physical changes in or impact[s] upon the particular item of property during its usage [are] sufficient to qualify the property in question as depreciable. O'Shaughnessy v. Comm'r, 2001 WL 1640129, 2001 U.S. Dist. LEXIS 22738 at  15 (D.Minn.2001) (citing, generally, Simon, 68 F.3d 41; Liddle, 65 F.3d 329); see also INDOPCO, 503 U.S. at 84, 112 S.Ct. 1039 (stating a presumption in favor of capitalization: The notion that deductions are exceptions to the norm of capitalization finds support in various aspects of the Code.). 11 As indicated above, Cardinal initially installed 168 tons of tin in the tin bath in 1992. The quality and quantity of tin installed in the bath were diminished during the manufacturing process by evaporation and other chemical reactions, specifically the formation of tin oxide and tin sulfide. Accordingly, Cardinal added tin to the bath to maintain the volume required to keep the float glass manufacturing system functioning — approximately sixty-two tons during its first seven years of operation. The tin installed initially in the bath declined in volume and purity as a result of its use in the glass manufacturing process, undergoing exhaustion, wear and tear within the meaning of § 167. Because the tin as installed initially qualified as depreciable capital property, and because the property was placed in service after December 31, 1986, Cardinal appropriately depreciated the tin by claiming a MACRS deduction under § 168: property of a character subject to the allowance for depreciation under § 167. 26 U.S.C. § 168(c)(1); Kurzet v. Comm'r, 222 F.3d 830, 843 (10th Cir.2000) (citing Hosp. Corp. of Am. v. Comm'r, 109 T.C. 21, 42, 1997 WL 412127 (1997)).
12 The IRS contends that the district court's holding that molten tin may be depreciated directly contradicts revenue ruling 75-491, upon which the IRS's arguments in opposition to the depreciation deduction primarily are based. Revenue ruling 75-491 advised that the initial installation of tin used in the float process manufacture of flat glass is not depreciable property qualifying as `section 38 property' for investment credit purposes. Rev. Rul. 75-491, 1975-2 C.B. 19. The IRS asserts that because the ruling reasonably interprets 26 U.S.C. §§ 162 and 167 and the regulations promulgated to implement those sections with respect to the issue of molten tin, the ruling should be accorded deference under United States v. Mead Corp., 533 U.S. 218, 222, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). 13 The Supreme Court held in Mead that although a tariff classification ruling by the United States Customs Service ... has no claim to judicial deference under Chevron [U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984)], there being no indication that Congress intended such a ruling to carry the force of law[,].... under Skidmore v. Swift & Co., 323 U.S. 134, 65 S.Ct. 161, 89 L.Ed. 124 (1944), the ruling is eligible to claim respect according to its persuasiveness. Mead, 533 U.S. at 221, 121 S.Ct. 2164. The IRS reads Mead as instructing that revenue rulings are due deference commensurate with the degree of the agency's care, its consistency, formality, and relative expertness.... Mead, 533 U.S. at 228, 121 S.Ct. 2164. 14 The Supreme Court has refrained from deciding whether revenue rulings are entitled to deference. In United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220, 121 S.Ct. 1433, 149 L.Ed.2d 401 (2001), the Court stated, We need not decide whether the Revenue Rulings themselves are entitled to deference. In this case, [which addresses the year to which back-pay awards should be attributed for tax purposes,] the Rulings simply reflect the agency's longstanding interpretation of its own regulations. Because that interpretation is reasonable, it attracts substantial judicial deference. 532 U.S. at 220, 121 S.Ct. 1433 (citing Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512, 114 S.Ct. 2381, 129 L.Ed.2d 405 (1994)). 15 The Court accorded deference to the IRS's revenue rulings in Cleveland Indians largely because the rulings reflected the agency's steady interpretation of its own 61-year-old regulation implementing a 62-year-old statute. `Treasury regulations and interpretations long continued without substantial change, applying to unamended or substantially reenacted statutes, are deemed to have received congressional approval and have the effect of law.' Id. (quoting Cottage Sav. Ass'n. v. Comm'r, 499 U.S. 554, 561, 111 S.Ct. 1503, 113 L.Ed.2d 589 (1991) (citation omitted)). Revenue ruling 75-491, at issue here, does not reflect a similarly longstanding or consistent interpretation of an unamended or substantially reenacted statute. As the district court explained, the revenue ruling, which analyzed whether molten tin qualified as depreciable property, predates the `substantial restructuring' of the depreciation rules effected by the adoption of the Accelerated Cost Recovery System (ACRS) (1981) and the Modified Accelerated Cost Recovery System (MACRS) (1986). See Liddle, 65 F.3d at 332-33, n. 3 ([Under ACRS,] the entire cost or other basis of eligible property is recovered[,] eliminating the salvage value limitation of prior depreciation law.) (quoting General Explanation of the Economic Recovery Tax Act of 1981 at 1450); see also Kurzet, 222 F.3d at 842-43. 16 The statutory framework on which the agency's analysis in revenue ruling 75-491 was based has changed significantly. Additionally, revenue ruling 75-491, unlike that at issue in Cleveland Indians, until now has not been tested in the courts or otherwise reconsidered by the IRS. See Cleveland Indians, 532 U.S. at 220, 121 S.Ct. 1433; see also Davis v. United States, 495 U.S. 472, 482-84, 110 S.Ct. 2014, 109 L.Ed.2d 457 (1990) (giving weight to the IRS's interpretation of for the use of where it had been in long use as was confirmed by several revenue rulings and judicial decisions). Accordingly, we conclude that the district court did not err in declining to treat revenue ruling 75-491 as controlling or persuasive authority. See Keller v. Comm'r, 725 F.2d 1173, 1182 (8th Cir.1984) ([W]hile they are entitled to some evidentiary weight, the Commissioner's private letter rulings and Revenue Rulings are not controlling authority and do not persuade this court in the present case.) (citation omitted); Oetting v. United States, 712 F.2d 358, 362 (8th Cir.1983); see also True Oil Co. v. Comm'r, 170 F.3d 1294, 1304 (10th Cir.1999). 17