Court Opinion

ID: 4480120
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:04.111625+00
Date Added: 2024-06-11T14:53:01.801558
License: Public Domain

Fay, J., concurring: Although quite frankly I find some of the language in the majority opinion regarding the matter of redetermination of estimated useful life inconsistent with the principles set forth in Macabe Co., 42 T.C. 1105 (1964), I, nevertheless, believe that the result reached by the Court in the instant case is correct. I concur with the majority view that there is no rule of law under which depreciation claimed in the year of sale is disallowed because the sales price of depreciable assets exceeds the taxpayer’s adjusted basis therein as of the beginning of the year. I also believe that respondent can disallow a depreciation deduction in the year of sale, where, as happened here, the sale occurs barely 1 year after the assets were acquired and respondent regards the sale as evidence that the taxpayer intended to hold the assets for merely the period he actually did hold them, in this case 1 year. Where the respondent does this the burden of proof is on the taxpayer to show (1) that at the time he acquired the asset he intended to hold it for the period estimated by him, (2) that the other estimates in the depreciation equation adopted by him were accurate, and (3) that appreciation in market value caused the amount received upon the sale of the asset to exceed his estimate of salvage value. The findings of fact in the instant case indicate that petitioner introduced no shred of evidence that it intended to hold the assets in question longer than 1 year, that its estimates of salvage value were correct, or that the gain realized resulted from market appreciation rather than from the use of inaccurate estimates in its own depreciation schedules or the schedules of its transferor. (Some of the assets sold were acquired in a nontaxable transaction and had carryover bases.) Only gains due to market appreciation (and not artificial or pseudo gains due to excessive depreciation) are taxable under section 1231. In United States v. Ludey, 274 U.S. 295 (1927), the Supreme Court, in the following analogy, enunciated what I believe remains to be the basic principle of depreciation accounting: The theory underlying this allowance for depreciation is that by using up the * * * [asset], a gradual sale is made of it. The depreciation charged is the measure of the cost of the * * * [asset] which has been sold [p. 301]. If petitioner were allowed the full measure of depreciation claimed by it, under the circumstances of this case, it would have recovered tax free through the depreciation provisions proportionately more of its cost or investment in the assets than it is entitled to recover. This case, in my view, does not involve the question of whether respondent, when an unanticipated sale occurs, is permitted under the depreciation provisions to abandon the taxpayer’s estimate of useful life and to substitute in lieu thereof the actual period the asset was held. In short, I believe that the facts of this case are more analogous to Massey Motors v. United States, 364 U.S. 92 (1960), and Hertz Corp. v. United States, 364 U.S. 122 (1960) (where the taxpayers knew at the time they acquired the assets that they would sp.11 them prior to the expiration of the estimates of useful life used in their depreciation schedules), rather than to Macabe Co., supra; Fribourg Navigation Co. v. Commissioner, 335 F. 2d 15 (C.A. 2,1964), affirming a Memorandum Opinion of this Court; and Cohn v. United States, 259 F. 2d 371 (C.A. 6, 1958). As to whether respondent is permitted under the depreciation provisions to equate t'he term “useful life” with the period the asset was actually held, I believe that the Supreme Court in Massey Motors v. United States, supra, lias indicated that lie may not so do. That Court, after emphasizing that prediction or estimation is the very essence of depreciation accounting, concluded that— Congress intended that the taxpayer should, under the allowance for depreciation, recover only the cost of the asset less the estimated salvage, resale or second-hand value. This requires that the useful life of the asset be related to the period for which it may reasonably be expected to be employed in the taxpayer’s business. Likewise salvage value must include estimated resale or secondhand value. * * * [Emphasis supplied. 364 U.S. at 107.) See also Macabe Co., supra at 1116. Useful life is necessarily an estimate which may not be equated with the actual holding period of an asset. Fisher and Forrester, JJ., agree with this concurring opinion.