Opinion ID: 545550
Heading Depth: 2
Heading Rank: 2

Heading: Useful Life and Salvage Value Findings

Text: 16 Having found that the Tax Court did not err in rejecting Carland's depreciation method, we must now review the Tax Court's findings of actual useful lives and salvage values. 10 We review these findings under the clearly erroneous rule. Dinkins v. Commissioner, 378 F.2d 825, 828 (8th Cir.1967). The useful life of an asset for income tax purposes must be measured by its anticipated use in the taxpayer's business, not by the full abstract economic life of the asset in any business. Massey Motors Inc. v. United States, 364 U.S. 92, 97, 80 S.Ct. 1411, 1414-15, 4 L.Ed.2d 1592 (1960); Dinkins, 378 F.2d at 830. Likewise, the salvage value of an asset is not necessarily its scrap value; it is the amount that a taxpayer can reasonably expect to receive for the asset on resale at the end of its useful life. Massey Motors, 364 U.S. at 107, 80 S.Ct. at 1419. As we stated in Dinkins: 17 It is the taxpayer's own experience and operation that serves as the guideline for the Commissioner's depreciation equation. Only if the taxpayer's experience is inadequate may the general experience in the industry be used until such time as taxpayer's own experience forms an adequate basis for determination. 18 378 F.2d at 830. With these standards in mind, we now turn to the specific findings challenged by Carland. 19
20 Maintenance-of-way equipment includes large cranes (class 310), small cranes (class 320), ballast working machines (class 330), and a miscellany of other related equipment (class 340). The Tax Court found an average useful life of 10 years for all classes except for class 310 which it found had an average useful life of 15 years. Carland argues that these findings improperly disregard Carland's own experience, thereby violating Massey Motors and Dinkins. Carland contends that the record shows that Carland's maintenance-of-way equipment had a much shorter life, generally 3 to 5 years. 21 The record shows that the Tax Court findings were based on Carland's own detailed asset retirement data over a period from 1964 to 1984. Based on this data, the court found the useful life estimates made by one of Carland's witnesses unrealistic. Our review of Carland's retirement schedule reveals that of the thirteen class 310 units placed into service between 1964 and 1975 only seven were listed as being retired by 1984. 11 The average life of these seven units was approximately 12 years, with two having been held for over 16 years. The data on the other maintenance-of-way equipment shows service periods ranging from 1 to 18 years with an average of roughly 10 years. See Jt.App. at 988-90. In making its findings the Tax Court fully acknowledged that some of the retired equipment may not have been recorded. Based on this evidence we cannot say that the Tax Court was clearly erroneous in its findings regarding the useful life of maintenance-of-way equipment.
22 The Tax Court also relied heavily on Carland's own retirement data in determining the useful life of data processing equipment. The court considered testimony of one of Carland's witnesses who estimated the useful life of this equipment to be 5 years. However, the same witness indicated that some data processing equipment remained in service for as long as 15 years. Carland argues that the court's finding of 10 years was clearly erroneous. 23 Again, we find no error in the Tax Court's finding. Our review of Carland's retirement schedule reveals service periods for data processing equipment ranging from 3 to 15 years, with an average of around 8 years. Approximately one-half of the items listed were kept in service for 9 to 10 years. Significantly, over two-thirds of the class 400 units placed in service from 1964 to 1975 are not listed as having been retired by 1984. See Jt.App. at 990-91. Based on this we cannot say that the Tax Court was clearly erroneous in finding a useful life of 10 years for Carland's data processing equipment. 24
25 Carland's rolling stock is encompassed by classes 210 through 260. Class 210, which includes boxcars, flatcars, hopper cars, tank cars, gondolas, coaches, locomotives, and cabooses, is by far the largest of these classes, accounting for approximately 75 percent (in dollar terms) of the rolling stock acquired by Carland from 1964 through 1975. See 90 T.C. at 527. The remaining classes include traction motors, locomotive engines, alternators and generators, auto racks, and other miscellaneous equipment. The Tax Court combined these classes to determine an average salvage value and useful life for rolling stock as a whole. The court found an average salvage value of 15 percent (stated as a percentage of acquisition cost) and an average useful life of 20 years. 26 Carland first argues that the Tax Court's salvage value determination is based on improper hindsight which looks merely at the amounts Carland actually obtained on resale, and ignores inflationary price increases that occurred from 1964 through 1975. Carland attempts to justify its lower salvage value estimates using adjustments based on the Producer Price Index for those years. 27 We rejected a very similar argument in Dinkins. There, we found evidence of general price increases in new construction equipment containing technical improvements and betterments insufficient to prove the taxpayer's contention of a general price increase in older and in some respects obsolete construction equipment. 378 F.2d at 830-31. Although we think Carland's use of the Producer Price Index falters for the same reason, we need not rest on that ground alone. Certainly, a taxpayer estimating salvage values can expect some increase in general price levels over a period of 8 to 20 years. Although the Supreme Court in Fribourg Navigation Co. v. Commissioner, 383 U.S. 272, 86 S.Ct. 862, 15 L.Ed.2d 751 (1966), said that a depreciation deduction may not be denied solely because the asset is sold for a price above its adjusted basis, the Court did not hold, as Carland seems to argue, that salvage values must in all cases be estimated in real dollar terms. 12 Indeed, in Fribourg the Court found it highly significant that the high resale profit had resulted from an unexpected and short-lived, but spectacular, change in the world market. Id. at 277, 86 S.Ct. at 865. Similar facts are not present here. The Tax Court therefore did not err in using Carland's actual sales profits over a 20-year period to help it determine a reasonable salvage value for rolling stock. 28 Carland next argues that even if the inflation issue is disregarded the Tax Court still erred in finding a 15 percent salvage value for rolling stock. Carland points out that although its data shows an average salvage of 15.37 percent for class 210 rolling stock, the salvage it obtained for equipment in classes 230 through 260 was lower, ranging from 4.6 percent to 10 percent. 29 Once again, we find no error. Carland appears to be asserting that the Tax Court should have made separate salvage value findings for each class of rolling stock. Yet Carland's own retirement schedule sets forth a group total encompassing all rolling stock classes. See Jt.App. at 988. Significantly, Carland's expert witness, Mr. Cournier, also considered all Carland's rolling stock as a group in his analysis of the useful life of that equipment for the court. 90 T.C. at 554. The Tax Court decided that aggregate treatment was imperative because of the paucity of historical data as to some type of freight cars   . 90 T.C. at 553. Moreover, Carland fails to explain how it was harmed to any significant extent by this averaging. As noted above, the vast majority of the rolling stock fell into class 210, which had an average salvage value of 15.37 percent. Adding the other classes with lower salvages brought the average down only to 14.7 percent. The Tax Court decided on a figure of 15 percent based on the entire record. 90 T.C. at 547. We cannot say that this finding was clearly erroneous. 30 We do find error in the Tax Court's finding of a 20-year useful life for Carland's rolling stock, however. In reaching this finding the Tax Court deviated sharply from its otherwise consistent reliance on Carland's own historical experience. Although the Court relied on Carland's historical data to determine the salvage value for rolling stock, the court rejected useful life estimates based on the same historical data on the apparent ground that the data was ambiguous and could not be relied upon as a valid indicator of useful lives. See 90 T.C. at 556-57. 13 The Tax Court arrived at the 20-year useful life figure by relying primarily on a 1981 depreciation study prepared by Kansas City Southern Railway and L & A Railway for the Interstate Commerce Commission (ICC). 14 This study analyzed the historical service lives of rolling stock actually owned by Kansas City Southern Railway and L & A Railway--not the rolling stock that was leased to these railroads by Carland. See Jt.App. at 2134, 2145. Nevertheless, the Tax Court found this study highly significant because a substantial portion of petitioner's rolling stock was in fact leased to the two railroads and presumably operated by them under conditions indistinguishable from their use of their own equipment. 90 T.C. at 555. 31 We think the Tax Court was too quick to reject Carland's own historical experience in determining a reasonable useful life for rolling stock. See Dinkins, 378 F.2d at 830. Carland is an equipment leasing company, not a railroad. Therefore, the equipment usage practices of Kansas City Southern Railway and L & A Railway, while perhaps relevant to the useful life determination, should not be systematically imputed to Carland. The importance of this point is highlighted by the fact that most of the rolling stock leased by Carland to Kansas City Southern and L & A Railway was used or remanufactured, see 90 T.C. at 523, whereas a large percentage of the freight cars upon which the ICC projections were based were purchased by the railroads when new, and thus had longer useful lives than Carland's rolling stock. Moreover, Charles Caroll, the Commissioner's primary witness, made no attempt to analyze Carland's historical data. Instead, his testimony merely discussed the useful lives of various rolling stock units owned by the two railroads. Repeating the Supreme Court's caution, it is the taxpayer's own practice that determines useful life, not the full abstract economic life of the asset in any business. Massey Motors, 364 U.S. at 97, 80 S.Ct. at 1414-15. 32 Our own analysis of Carland's historical data also supports a conclusion that the Tax Court erred in its determination of the useful life of Carland's rolling stock. Carland's retirement schedule fails to reveal a single instance in which a unit of rolling stock was kept in service for 20 years or longer. Rather, the schedule shows service periods for rolling stock ranging from 1 to 18 years, with an average of approximately 11 to 12 years. Jt.App. at 985-88. Many of the units kept in service for long periods produced little or no profit on resale. Therefore, the court's finding of a 20-year useful life seems inconsistent with a 15 percent salvage. We realize, of course, that many of the units placed into service by Carland before 1975 do not appear on the retirement schedule. Yet the Tax Court itself noted that the record indicated that some of these units had actually been retired. We are simply unable to find anything in the data to support the Tax Court's finding of a 20-year useful life for Carland's rolling stock. 33 Based on our review of the record, we conclude that the Tax Court erred in relying too heavily on the experience of Kansas City Southern Railway and L & A Railway to determine the useful life of Carland's rolling stock and that the finding of 20 years was clearly erroneous.