Court Opinion

ID: 9488615
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:50:22.191467+00
Date Added: 2024-06-11T17:52:59.394030
License: Public Domain

OAKES, Senior Circuit Judge,
dissenting:
I cannot believe that Congress, in changing the depreciation deduction from the Asset Depreciation Range System (“ADRS”) for recovery of assets placed in service after December 31, 1980, to the Accelerated Cost Recovery System (“ACRS”) whereby the cost of an asset is recovered over a predetermined period shorter than the useful life of the asset or the period the asset is used to produce income, intended to abandon the concept underlying depreciation, namely, that to permit the deduction the property must have a useful life capable of being estimated. See Harrah’s Club v. U.S., 661 F.2d 203, 207 (Ct. of Cl.1981). I find no indication in either the changes of statutory language or the well-documented legislative history that Congress intended such a radical change as the majority of this panel, the Tax Court majority, and the Third Circuit in Liddle v. C.I.R., 65 F.3d 329 (3d Cir.1995), have held it did. Indeed, it seems to me that the statutory language and the legislative history — consistent with the dual congressional purpose of simplification and stimulating economic growth by permitting accelerated depreciation periods — retained the fundamental principle that, in order to depreciate, the asset involved must have a determinable useful life.
First, with respect to the statutory language, the question before us is whether antique violin bows constitute depreciable “recovery property” under section 168(c)(1) of the Internal Revenue Code effective during 1989, the year in issue. I.R.C. § 168(c)(1) defined “recovery property” by saying:
except as provided in subsection (e) the term “recovery property” means tangible property of a character subject to the allowance for depreciation — (A) used in a trade or business, or (B) held for the production of income.
Id. (emphasis added). Moreover, section 168(c)(2) assigned “recovery property” into four classes or tiers, and defined “recovery property” (other than real property) as “section 1245 property.” Section 1245(a)(3) defined “section 1245 property” as “any property which is or has been property of a character subject to the allowance for depreciation provided in section 167....” How section 168(c)(2), section 1245(a)(3), and section 167 could all be read out of the statute as they have been by the majority of this panel, the Tax Court majority, and the Third Circuit, seems to me incomprehensible. Needless to say, the cases are legion that under section 167, taxpayers must establish that the property being depreciated has a determinable useful life. See Browning v. C.I.R., 890 F.2d 1084, 1086-87 (9th Cir.1989) (disallowing depreciation deductions for antique violins); Associated Obstetricians and Gynecologists, P.C. v. C.I.R., 762 F.2d 38, 39-40 (6th Cir.*481985) (disallowing depreciation deductions for art works on medical office walls); and Hawkins v. C.I.R., 713 F.2d 347, 353-54 (8th Cir.1983) (disallowing investment tax credit for law office art works). See generally Jacob Mertens, Jr., Mertens Law of Federal Income Taxation § 23 A.01 (Clark Board-man Callaghan ed. 1995) (1942).
Under the majority’s interpretation, however, the only criterion necessary to obtain a deduction under section 168(c) is that the property be subject to wear and tear. Thus, a car buff in the trade or business of buying, collecting, and selling antique automobiles, who drives his autos to auto shows may obtain a depreciation deduction, or the law office that buys fine Sheraton or Chippendale desks or chairs for office use can take a deduction, though in each case the auto or furniture is actually appreciating in value and has no determinable useful life.
As for legislative history, the majority candidly admits that House Conference Report 97-215, which states that “assets that do not decline in value on a predictable basis or that do not have a determinable useful life, such as land, goodwill, and stock, are not deprecia-ble,” “means what it says,” see Maj.Op. at 46 (citing H.R.Conf.Rep. No. 215 at 206, U.S.C.C.A.N.1981, p. 296). The majority then adds that the Report “gives us slight pause.”1
The majority of this court joins the Tax Court majority and the Third Circuit in holding that section 168(c)(1) applies to all tangible property that is subject to “wear and tear.” I agree with the Commissioner that such an interpretation renders meaningless the phrase in section 168(c)(1) “of a character subject to the allowance for depreciation,” since all tangible property used in a trade of business is necessarily subject to wear and tear. See Commissioner’s Rep.Br. at 3-4 (citing to U.S. v. Nordic Village, Inc., 503 U.S. 30, 35, 112 S.Ct. 1011, 1015, 117 L.Ed.2d 181 (1992) (“a statute must, if possible, be construed in such fashion that every word has some operative effect”)). This point is confirmed by the General Explanation of the Economic Recovery Tax Act of 1981 which states that section 168 “does not change the determination under prior law as to whether property is depreciable or non-depreciable.” Staff of Joint Comm, on Taxation, 97th Cong., 1st Sess. 77 (Comm.Print 1981).
Nor can reliance be placed, as it is by the majority, upon the fact that section 168(f)(9) changed prior law by removing “salvage value” from the depreciation calculus. The fact that Congress eliminated salvage value while simultaneously defining the term “recovery property” as “tangible property of a character subject to the allowance for depreciation,” cannot support the conclusion that section 168 eliminated the threshold requirement that taxpayers establish a determinable useful life for their property. Had Congress intended otherwise, the statute simply would have defined “recovery property” as “tangible property used in a trade or business” rather than as “tangible property of a character subject to the allowance for depreciation,” and not specified that the recovery property be “section 1245 property,” which, as stated, refers us back to section 167.
Since, concededly, taxpayers Richard and Fiona Simon have not established that the bows in question have determinable useful *49lives, the bows do not qualify for the depreciation deduction. It is a long way from the dual purpose of section 168 (to shorten the depreciation periods for property that would have been depreciable under section 167 in order to stimulate investment and to simplify the complex series of rules and regulations pertaining to useful lives by substituting a four-tier system of three-year, five-year, ten-year, and fifteen-year property), to abandonment of the underlying concept of deprecia-ble property altogether. In my view, the decision of the Tax Court should be reversed and accordingly I hereby dissent.

. The majority, after first calling it the House Conference Report, then goes on to call it "the House Report.” The majority then opposes "the House Report,” which is a misnomer, to the Senate Report which the majority says “repudiates the scheme of complex depreciation rules, including 'current regulations.’ ” See Maj.Op. at 46 (citing S.Rep. No. 144 at 47). In fact, what the majority calls the House Report is the Joint Explanatory Statement of the Committee of Conference, and is "an explanation of the effect of the action agreed upon by the managers [on the part of the House and Senate at conference] and recommended in the accompanying report.” See H.R.Conf.Rep. No. 215 at 195, reprinted in 1981 U.S.C.C.A.N. 285. The Conference Committee report surely "trumps” the Senate Report if the Senate Report did indeed "repudiate[] the scheme of complex depreciation rules, including 'current regulations.' "
But my reading of the Senate Report is that it did not repudiate "current regulations” in the sense that the majority opinion would have us believe. The Senate Report only mentions "[c]urrent regulations" in a reference to the congressional purpose of simplification, which reads "Current regulations provide numerous elections and exceptions which taxpayers — especially, small businesses — find difficult to master and expensive to apply." S.Rep. No. 144 at 47, U.S.C.C.A.N.1981, p. 152. All that the Senate committee believed was that a "new capital cost recovery system should be structured which de-emphasizes the concept of useful life, minimizes the number of elections and exceptions, and so is easier to comply with and to administer.” Id. De-emphasis, I submit, is quite different from destruction.