Court Opinion

ID: 4481049
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:40.339314+00
Date Added: 2024-06-11T14:54:00.034752
License: Public Domain

Simpson, /., concurring: I agree with the majority in holding that the entire costs of the customer lists should not be charged off as an ordinary and necessary expense of the businesses in the year when the lists were purchased. I also agree that the customer lists purchased by the petitioners had declining values and that the petitioners should therefore be allowed to depreciate those lists over their useful lives. I disagree, however, with the majority’s method of determining that depreciation; I think the method proposed by the petitioners is more accurate. In my view, the applicable tests of whether an intangible asset is depreciable are contained in the respondent’s regulations, which provide: Sec. 1.167 (a)-3 Intangibles. If an intangible asset is known from experience or other factors to be of use in the business or in tbe production of income for only a limited period, tbe length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. * * * [Income Tax Regs.] Thus, the tests to be applied are whether the intangible asset has a limited life and whether that life can be estimated with reasonable accuracy. See Westinghouse Broadcasting Co., 36 T.C. 912 (1961), affd. 309 F. 2d 279 (C.A. 3, 1962), certiorari denied 372 U.S. 935 (1963); Thrifticheck Service Corporation, 33 T.C. 1038 (1960), affd. 287 F. 2d 1 (C.A. 2, 1961). In applying these tests, we must look carefully at what the petitioners acquired. In acquiring the name of a customer, they learned that such person used pickup-and-delivery laundry or drycleaning service and that such a person would be in need of a new supplier of such service. Since they were not permitted to use the name of Arcade, they could not trade on the goodwill that Arcade might have built up with the customer in either acquiring the business of the customer or in retaining it. Whether they retained the business of the customer would depend upon whether they provided satisfactory services, and whether the customer would refer any new customers to them would also depend upon the services which they furnished. The requirement of the regulations that an intangible asset must have a limited life to be depreciable is merely another way of providing that depreciation is allowable only for wasting assets. The value of the customer lists did decline over the years and will continue to do so. Some of the persons on the lists never did business with the petitioners, and others discontinued doing business with the petitioners from time to time. Though the decline in value was sporadic and not level, that fact does not deprive the petitioners of a right to an allowance for depreciation. As the customers were lost, the lists purchased from Arcade clearly lost value. It has been argued that a customer list, despite the departure of some customers, retains its value because of referrals or because some customers continue to use the services of the purchaser indefinitely. Although the petitioners may acquire new customers as a result of referrals by those persons on the customer lists acquired from Arcade, such new customers are acquired primarily because of the satisfactory services furnished by the petitioners, and it can hardly be said that they are acquired because of the lists. Some customers on the lists, such as a boarding school, may continue to do business with the petitioners indefinitely, but that fact should not obscure the fact that other customers on the Arcade lists are discontinuing to do business with the petitioners. The argument has also been made that the loss of customers on the lists is due to the dissatisfaction with the services of the petitioners, and not due to the natural exhaustion of the value of the lists. Although the number of customers who are lost would surely be affected by the services supplied by the petitioners, some customers would be lost 'because of their moving away from the community or because of their desire to have their laundry or drycleaning work handled in a different manner. Thus, some of the losses are due to forces similar to natural exhaustion. Moreover, when other customers discontinue using the petitioners’ services because of dissatisfaction with those services, the loss sustained by the petitioners is nonetheless real and substantial. Such a loss is somewhat within the control of the petitioners; however, the rate of exhaustion of business assets is often affected by the practices and procedures adopted by the user, and yet, that fact does not deprive the user of a right to an allowance for depreciation of the assets. In like manner, I think that the petitioners should not be denied a deduction for the loss in value of the lists merely because their business practices may affect the rate of that loss. The other test for the allowance of depreciation for an intangible asset is whether the life of the asset can be estimated with reasonable accuracy. The petitioners assigned an average cost to each customer on the lists and then deducted such cost whenever a customer was lost. I think this method of determining the depreciation in value of the lists is more accurate than the method adopted by the majority. To follow the regulations strictly and to allow depreciation in the traditional manner, the majority has determined that a portion of the customer lists is not depreciable at all and has attempted to estimate the useful life of the depreciable portion. These determinations are based on very scanty evidence. We know that some of the institutional customers are likely to remain with the petitioners indefinitely, but we have no evidence indicating whether they constitute 25 percent of the lists, 5 percent, or 50 percent. The only evidence that we have for estimating the useful life of the depreciable portion of the lists is the testimony of the president of the petitioners. He stated that they needed to obtain 20-percent new customers each year in order to “stand still” and that there was an annual turnover in customers of from 21 to 25 percent. Indeed, the petitioners have not claimed that they could estimate the useful lives of the customer lists, and such evidence was not offered for that purpose. Section 1.167(a)-3, Income Tax Regs., provides that “No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life.” In Grant T. Rudie, Jr., 49 T.C. 131 (1967), we approved and applied that provision of the regulations to deny a depreciation deduction to a taxpayer who presented far better evidence of useful life than we have in this case. Morover, the taxpayer in Commissioner v. Indiana Broadcasting Corporation, 350 F. 2d 580 (C.A. 7, 1965), reversing 41 T.C. 793 (1964), certiorari denied 382 U.S. 1027 (1966), also presented vastly superior evidence of useful life and was denied a depreciation deduction. Thus, it seems clear to me that to compute an estimated useful life on the basis of the evidence that we have in this case and to allow depreciation on such basis is clearly inconsistent with the respondent’s regulations and the prior decision of this Court. Furthermore, the adoption of such a practice will l’aise havoc with the administration of the depreciation provisions of the law. Although the regulations speak of estimating the useful life of an asset, I see that provision as merely the customary means for spreading the allowance for depreciation over the life of an asset. To apply such customary means in this case, it is necessary to make predictions based upon very little evidence. On the other hand, the petitioners have proposed a method which, rather than relying upon an estimate of useful life, measures more accurately the decline in the value of the lists. As in the case of cost depletion for mining, the petitioners’ method determines the decline in value for each year by charging off the cost of a customer when he is lost. The use of this method also eliminates the necessity of making the dubious allocation of a portion of the costs to those customers who may remain with the petitioners indefinitely. Thus, in this case, we have a choice between using the traditional method and relying upon dubious predictions or using a different method which more accurately measures the decline in value. Since the purpose for estimating useful life is to spread the depreciation allowance over the life of the asset, I would adopt the method proposed by the petitioners. FoeResteR and Dawson, //., agree with this concurring opinion.