Court Opinion

ID: 8597865
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:05:18.5298+00
Date Added: 2024-06-11T16:55:02.769715
License: Public Domain

KASHIWA, Judge,
dissenting:
I dissent.
There is no dispute here whether these assets, railroad gradings and tunnel bores, will physicially wear out. It is agreed they will not. It is equally clear that despite their physical durability, these assets will someday be retired by plaintiff from service. Although Code § 167 is usually *128associated with annual allowances for the physical wasting of an asset, the statute by its express terms extends to annual allowances for anticipated obsolescence. According to Treas. Reg. §1.167(a)-9, obsolescence may occur for a variety of reasons:
* * * Obsolescence is attributable to many causes, including technological improvements and reasonably foreseeable economic, changes. Among these causes are normal progress of the arts and sciences, supersession or inadequacy brought about by developments in the industry, products, methods, markets, sources of supply, and other like changes, and legislative or regulatory action.
Anticipation of obsolescence, of course, is required before the asset’s useful life to the business can be estimated. But an estimate is just that and need only be reasonable: mathematical certainty is not and has never been required when deriving useful life. See Treas. Reg. § 1.167(a)-l(b); Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 654-655 (1931); United States v. Ludey, 274 U.S. 295, 302 (1927). See also Massey Motors, Inc. v. United States, 364 U.S. 92, 105 (1960). Long ago, the Treasury implicitly recognized the uncertainties of anticipating obsolescence when Bulletin F approximated round-numbered useful lives for certain extremely durable assets, such as dams, tunnels, grading, and roads. See Bulletin F (revised January 1942) 58, 59, 61, 66, 67, reprinted in [1981] Index CCH Stand. Fed. Tax Rep. ¶¶ 310 etseq.
The majority discusses in great length how this taxpayer’s industrial depreciation experts derived the useful lives of its railroad gradings and tunnel bores. I perceive no need to repeat that discussion. It suffices to say the methodology consists of three steps: (1) the depiction of available retirement experience on partial or "stub survivor” curves; (2) the approximation of a useful life for the entire asset class based on a comparison of the stub curves and the 18 standard full-length survivor curves developed in industrial studies at Iowa State College (now Iowa State University); and (3) the evaluation and concomitant refinement of that approximate useful life in light of present conditions and anticipated developments within the industry. This meth*129odology has been employed for almost 50 years in financial and regulatory accounting and has been endorsed (as the majority concedes) by several recent court decisions for purposes of the federal income tax. I find none of defendant’s arguments against the application of the methodology to these facts persuasive.
For example, defendant argues that the Iowa standard curves can be used only if the data on actual retirements clearly demonstrate retirements will increase as the asset class ages. That argument is inherently flawed and the majority apparently agrees with me that the argument should be ignored. Plaintiffs experts on industrial depreciation included the civil engineer who developed the Iowa curves after extensive study. His testimony (and that of plaintiffs other depreciation expert) is clear that because the retirement rate for any industrial property will eventually increase, the Iowa curves are applicable to all industrial property. Defendant offered no contrary expert testimony on this point. Moreover, nothing within common sense dictates that the increasing retirement rate will be equally apparent at all times while the assets are in use. Industrial retirement experience simply does not always fall into neat arithmetic progressions. To hold plaintiff to such a standard ignores reality.
It is critical to point out that the Iowa curves were the result of specific studies, done over a period of years, to approximate the useful lives for particularly long-lived assets. These studies catalogued retirements, including those attributable solely to obsolescence, of the assets within 176 broad classifications. The 18 Iowa standard full-léngth curves were derived from the full-length curves of the 176 asset classes when it was found those 176 curves fell into 18 discrete patterns.
Recognizing the value of the empirical studies from which the Iowa standard curves are derived, and further recognizing that only a reasonable estimate of useful life need be made under Treas. Reg. § 1.167(a)-l(b), supra, this court has previously endorsed the methodology the present taxpayer employs. In Pennsylvania Power & Light Co. v. United States, 188 Ct. Cl. 76, 411 F. 2d 1300 (1969), and Virginia Electric and Power Co. v. United States, 188 Ct. Cl. *130120, 411 F. 2d 1314 (1969), the taxpayers sought an allowance under Code § 167 for the anticipated obsolescence of real property easements and certain related costs. In those cases, as in the present one, recovery was premised on useful lives derived by John J. Reilly, a long-recognized expert on industrial depreciation, through the Iowa curves. There, as here, Mr. Reilly testified in exhaustive detail as to how his projections were obtained. In allowing the Pennsylvania Power and Virginia Electric plaintiffs recovery, we plainly embraced the methodology and I dissent because the majority fails to apply that methodology today.
The majority argues against the application of the Iowa curve methodology for two basic reasons. One is concern that the Iowa methodology, either in general or as applied here, is not statistically precise. But the Code requires not precision but rather reasonableness for an obsolescence allowance to be proper under section 167. Given the broad band of empirical experience underlying the Iowa curves, as well as the curves’ widespread acceptance for other accounting purposes, I have little trouble concluding that useful life projections based on the Iowa curves satisfy the reasonableness requirement of Code § 167.
The majority’s second reason for not accepting the useful lives projected from the Iowa curves is that the asset groups which underlie the particular Iowa curves plaintiffs experts selected consist of boxcars and submarine cables, rather than other railroad gradings and tunnel bores. But that argument surely proves too much,- for just as there are no assets underlying the Iowa curves precisely identical with railroad gradings and tunnel bores, neither were there assets within the Iowa study that had even a slight resemblance to the easements present in Pennsylvania Power, supra, and Virginia Electric, supra. Yet this court had little problem in those cases accepting useful lives derived from the Iowa curves. Moreover, by requiring that physically similar property underlie the particular Iowa curve that is selected, the majority disregards the very nature of the Iowa studies. The premise underlying the Iowa curves is that the retirement experience of all industrial properties, regardless of physical characteristics, will conform to one of the 18 standard curves. It follows *131from this premise that only the available retirement experience, i.e., the stub survivor curve, and not physical characteristics need be compared to project useful life. A taxpayer has always been free, notwithstanding the Iowa curves, to project useful life from that of physically similar property. Like property, however, cannot always be found and it is where no similar property exists that the alternate methodology of the Iowa curves was uniquely significant.
The tax practitioner is, I think, left after today’s majority opinion with two options when projecting the useful life of an extremely durable asset. One option is to rely on those Iowa curves which contain at least in part the retirement experience of physically similar assets. For railroad gradings and tunnel bores, I imagine the likely candidates will be the Iowa curves reflecting the retirements of stone culverts or of various paving types. Those assets, like railroad gradings and tunnel bores, are particularly long lived and are inseparable physically from the realty they improve. This taxpayer might well have prevailed had those Iowa curves been selected.
A more likely option for the practitioner is to ignore the Iowa curves as a method of projection. If one must compare the retirement experience of like properties and anticipate technological developments whether the Iowa curves are used or not, the standard curves become at best a subtle refinement of, and merely cumulative to, an expert’s judgment. Such refinements are often lost, in this court as elsewhere, to the pragmatics of cost-conscious litigation. Given the widespread acceptance of the Iowa curves for financial and regulatory accounting, and further given the previous acceptance of the curves for tax accounting, I can only view that result as unfortunate. To repeat, I dissent.