Opinion ID: 782365
Heading Depth: 2
Heading Rank: 1

Heading: Depreciability of Molten Tin

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)).