Collins Music Co., Inc. v. U.S., 93-1441

• Decision Date: 15 April 1994
• Docket Number: No. 93-1441,93-1441
• Citation: 21 F.3d 1330
• Parties: -1754, 94-1 USTC P 50,179 COLLINS MUSIC COMPANY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1330

21 F.3d 1330

73 A.F.T.R.2d 94-1754, 94-1 USTC P 50,179

COLLINS MUSIC COMPANY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 93-1441.

United States Court of Appeals Fourth Circuit.

Argued Oct. 28, 1993.

Decided April 15, 1994.

ARGUED: Curtis W. Stodghill, Dobson, Jones & Layman, P.A., Greenville, SC, for appellant. Frank Phillip Cihlar, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellee. ON BRIEF: William H. Thomas, III, Dobson, Jones & Layman, P.A., Greenville, SC; David H. Wilkins, Cecil H. Nelson, Wilkins & Nelson, Greenville, SC, for appellant. Michael L. Paup, Acting Assistant Attorney General, Gary R. Allen, Richard Farber, J. Preston Strom, Jr., U.S. Atty., Tax Div., U.S. Dept. of Justice, Washington, DC, for appellee.

Before RUSSELL and HALL, Circuit Judges, and CLARKE, Senior United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge DONALD RUSSELL wrote the opinion, in which Judge K.K. HALL and Senior Judge CLARKE joined.

OPINION

DONALD RUSSELL, Circuit Judge:

Collins Music Company, Inc. ("Collins") appeals a decision of the United States District Court for the District of South Carolina, holding that, under the Internal Revenue Code of 1954, as amended by the Economic Recovery Tax Act of 1981 ("ERTA"), Pub.L. No. 97-34, 95 Stat. 172, costs expended to purchase coin-operated video games were recoverable over a five-year period, and not over a three-year period as Collins had contended. We affirm.

I.

The relevant facts are not in dispute. Collins is a South Carolina corporation in the business of providing coin-operated amusement games, including video games, to the public. Collins enters into agreements with business establishments to locate equipment at the establishments and to service the equipment. Revenue from the equipment is divided between Collins and the owners of the establishments.

Prior to the enactment of ERTA, during the tax years 1979 through 1981, Collins recovered the funds it expended to purchase video games using a three-year cost recovery period. On audit, the Internal Revenue Service ("IRS") accepted the use of a three-year recovery period.

In tax returns filed for the tax years 1982 through 1986, following the passage of ERTA, Collins continued its practice of calculating video game cost recovery based upon a recovery period of three years. The IRS disallowed portions of these deductions for the years 1982 and 1983, ¹ asserting that the games should be depreciated using a 5-year cost recovery period. In 1987, Collins timely filed amended tax returns for the years 1982 and 1983 and paid the amounts claimed due by the IRS. Collins accepted the IRS's determination and treated its video games as 5-year property in amended tax returns filed for the years 1984 through 1986. Based on cost recovery conducted over a 5-year period, Collins claimed tax refunds for the years 1985 and 1986. The IRS, however, refused to pay Collins any refund for these years, disallowing the claimed deductions. Subsequently, Collins filed amended tax returns for the years 1982 to 1986, based on its original position that it could recover the costs expended in purchasing its video games over a 3-year period. When the IRS refused to refund the money Collins now claimed was due it, Collins filed suit against the Government in the United States District Court for the District of South Carolina.

At a bench trial, the Government maintained that Collins's video games were 5-year property and not 3-year property. The district court found that the Government's position was correct. ² Collins appeals from this determination.

II.

Under I.R.C. Sec. 167, Congress has authorized taxpayers to take depreciation deductions as a means of recovering costs used to purchase certain property used in a trade or business, or held for the production of income. Prior to the enactment of ERTA, taxpayers could elect to take depreciation deductions as determined under the Class Life Asset Depreciation Range ("CLADR") system. Under CLADR, section 167(m)(1) of the Internal Revenue Code allowed for depreciation deductions "based on the class life prescribed by the Secretary [of the Treasury] which reasonably reflects the anticipated useful life of that class of property to the industry or other group." I.R.C. Sec. 167(m)(1) (1976). Asset guideline periods for many classes of assets had been promulgated by the IRS ³ under CLADR and were collected in IRS revenue procedures. See, e.g., Rev.Proc. 77-10, 1977-1 C.B. 548.

ERTA, enacted on August 13, 1981, substantially amended the Internal Revenue Code. In particular, ERTA eliminated the CLADR system and replaced it with the Accelerated Cost Recovery System ("ACRS"), applicable to property placed in service after December 31, 1980, see ERTA, tit. II, Sec. 209(a), 95 Stat. at 226. Congress's purpose in creating ACRS was twofold, as evidenced by two excerpts from a Senate Finance Committee report. First, the report states: "The changes [in the depreciation system] made by the bill will encourage investment, which will improve productivity, and will simplify the tax law and tax administration." S.Rep. No. 144, 97th Cong., 1st Sess. 6 (1981), reprinted in 1981 U.S.C.C.A.N. 105, 112. The report goes on to state:

The committee believes that present rules for determining depreciation allowances ... need to be replaced because they do not provide the investment stimulus that is essential for economic expansion. The committee also believes that present rules are unnecessarily complicated.

Id. at 47, reprinted in 1981 U.S.C.C.A.N. at 152. Thus, in creating ACRS, Congress intended both to induce investment and thereby to stimulate the economy, and to facilitate IRS administration of, and taxpayer compliance with, the tax laws. Clinger v. Commissioner, 1990 T.C.M. (P-H) p 90,459, at 2195, 1990 WL 124522 (Aug. 27, 1990).

The structure of ACRS, as originally enacted, is found in I.R.C. Sec. 168 (Supp. V 1981). As opposed to CLADR, into which taxpayers had to elect, depreciation deductions must be calculated under ACRS, id. Sec. 167(a), unless a taxpayer opts out pursuant to section 168(e)(2). Collins does not claim to have elected to take depreciation deductions other than under the ACRS system.

ACRS, as originally structured under ERTA, divided depreciable property into five groups: 3-year property, 5-year property, 10-year property, 15-year real property and 15-year public utility property. With the exception, not relevant here, of 15-year real property, section 168(b)(1) provided cost recovery schedules for the different classes of property.

I.R.C. Sec. 168(c) (Supp. V 1981) divided property into the aforementioned classes according to the property's "present class life." "Present class life" is defined in section 168(g)(2) as "the class life (if any) which would be applicable with respect to any property as of January 1, 1981, under subsection (m) of section 167 (determined without regard to paragraph (4) thereof and as if the taxpayer had made an election under such subsection)." I.R.C. Sec. 168(g)(2) (Supp. V 1981). Section 167(m)(1), the text of which is quoted above, remained unchanged by ERTA.

III.

The sole issue in this case is whether Collins was justified in classifying its video games as 3-year property, as opposed to 5-year property. ⁴ Following ERTA's restructuring, the Internal Revenue Code defines "[t]he term '3-year property' [as] section 1245 class property--(i) with a present class life of 4 years or less; or (ii) used in connection with research and experimentation." I.R.C. Sec. 168(c)(2)(A) (Supp. V 1981). "The term '5-year property' means recovery property which is section 1245 class property and which is not 3-year property, 10-year property, or 15-year public utility property." ⁵ Id. Sec. 168(c)(2)(B). Section 1245 class property with no assigned class life is, therefore, 5-year property.

It is clear that, under the plain meaning of the statute, Collins's coin-operated video games were properly characterized as five-year property. Before the district court, both sides agreed that, prior to 1981, the IRS had not assigned a class life to coin-operated video games. ⁶ On appeal, the Government argues that video games had an assigned class life: they fall within asset guideline class 79.0, encaptioned "Recreation", which "[i]ncludes assets used in the provision of entertainment services on payment of a fee or admission charge, as in the operation of bowling alleys, billiard and pool establishments, theaters, concert halls, and miniature golf courses." Rev.Proc. 83-35, Sec. 3, 1983-1 C.B. 745, 762. The present class life of "Recreation" property is 10 years. Id.

If Collins's coin-operated video games properly fell within the ambit of "Recreation" properties, a contention with which we are not entirely comfortable, ⁷ then, under ERTA, because Collins's games' present class life exceeded four years, the games were classified as five-year property. Alternatively, if no present class life applied to Collins's games, then, under the explicit language of section 168(c)(2)(B), Collins's games again were properly classified as five-year property. Thus, Collins's video games were properly characterized as 5-year property. Accord C & M Amusements, Inc. v. Commissioner, 1993 T.C.M. (RIA) p 93,527, at 2828-29, 1993 WL 471040 (Nov. 16, 1993).

IV.

Collins concedes that, under the applicable statute and revenue rulings, its property was properly classified as 5-year property. Its only argument is that the IRS had an obligation to issue a ruling that promulgated a class life for video games that would have allowed it to classify its video games as 3-year property. In response, the Government first asserts that the IRS had no authority to take such action, and, second, that even if it did, its inaction is not subject to judicial review.

As noted above,...