Reineman v. United States
Decision Date | 06 April 1962 |
Docket Number | No. 13460.,13460. |
Citation | 301 F.2d 267 |
Parties | Howard M. REINEMAN and Helen Reineman, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. |
Court | U.S. Court of Appeals — Seventh Circuit |
Louis F. Oberdorfer, Asst. Atty. Gen., Charles T. Duncan, Atty., Tax Div., Dept. of Justice, Washington, D. C., James P. O'Brien, U. S. Atty., Chicago, Ill., Lee A. Jackson, Joseph Kovner, Attys., Dept. of Justice, Washington, D. C., for appellant.
Eugene T. Devitt, Gerard R. Scheib, Scheib & Maher, Allan J. Newman, Chicago, Ill., for appellees.
Before HASTINGS, Chief Judge, and DUFFY and SWYGERT, Circuit Judges.
This is an appeal by the Government from a judgment in the amount of $76,052.60 with interest, entered in favor of plaintiffs1 (taxpayers) in a suit for refund of overpayment of personal federal income tax for the year 1954.
The case was tried to the court without the intervention of a jury. The district court sustained taxpayers' claim that the entire cost of six thoroughbred brood mares over age ten purchased by taxpayers in November and December, 1954 for $102,608 was deductible in full in the year of purchase, as depreciation "of property used in the trade or business."2
The district court also sustained taxpayers' claim that the deficiency assessment which gave rise to the overpayment should be set aside because the Commissioner made a second inspection of taxpayers' books of account for the year 1954 without giving taxpayers prior written notice as required by Section 7605 (b), Internal Revenue Code of 1954.3
Brood mare sales are held each year in October, November and December. The breeding season runs from February 15 to June 15, and the gestation period for a foal is 340 days. The custom in the thoroughbred industry, recognized by the Government, is that all thoroughbreds have a birth date of January 1. One year is added to the age of each thoroughbred brood mare on January 1 of each year without regard to the month of birth.
Taxpayers started in the business of raising thoroughbred horses in 1942 with a small stable of race horses. Their operations grew until in 1948 they were in the business of breeding race horses on a large scale.
In 1954, taxpayers owned approximately one hundred brood mares, ranging in age from two to twenty years. In 1954, they purchased ten additional brood mares, ranging in age from six to twenty years. Seven of these brood mares were over age ten at the time of purchase.4 They were placed in the herd with the other one hundred brood mares owned by taxpayers. During the years 1949 to 1953 inclusive, taxpayers had purchased twenty brood mares over age ten for a total cost of $150,416.67.
With respect to taxpayers' adoption of a ten year useful life for all horses in their stable, the district court found that:
* * *"
A ten year useful life was adopted for all horses regardless of productivity or of age at the time of acquisition. The six brood mares in question were over age ten when purchased in 1954 and taxpayers, applying a ten year useful life, deducted the entire cost on their 1954 income tax return. This followed a practice consistently used by taxpayers since 1942 and never before challenged by the Internal Revenue Service.
This deduction was disallowed by the Commissioner on the ground that the six mares in question had a probable useful life of sixteen to seventeen years, and further that since the mares were purchased in November and December, 1954, only two-twelfths or one-twelfth of the annual amount was deductible in that year.
We are faced with two issues in this appeal. The first relates to whether the entire cost of the six brood mares in question was properly deducted as depreciation in the year of purchase (1954) by taxpayers. The amount of depreciation allowable is not in dispute. It is agreed that taxpayers may deduct the full purchase price of the mares. It is merely a question of timing — when may the cost be properly claimed?
The second issue relates to the correctness of the finding and holding of the district court that the deficiency assessment must be set aside because the Commissioner made a second inspection of taxpayers' 1954 books of account without notifying taxpayers in writing as required by Section 7605(b), supra.
Since our resolution of the second issue is dispositive of this appeal, we first give it consideration. On this question, the district court entered the following findings of fact:
Agent Rogers did not testify at the trial. The Government took his discovery deposition and introduced it at the trial. The burden of Rogers' testimony in his deposition is that, although he reopened the year 1954, he made no examination of taxpayers' books and records. He stated in effect that he got the information and data necessary to prepare his computation of allowable depreciation expenses for the year 1954 "from the taxpayer's accountant's work papers, for the year 1955 and subsequent years." These were made available to him by the accountant. The work papers were not produced at the trial.
The computation by Agent Rogers is shown as Plaintiff's Exhibit 2 and reads:
PLAINTIFF'S EXHIBIT 2 (U. S. Treasury Department — Internal Revenue Service) (COMPUTATION OF ALLOWABLE DEPRECIATION EXPENSE) Form 1914 Apr. 1954 Exhibit A Howard M. & Helen S. Reineman 1954 * Kind of property (If buildings, state type of construction. Exclude land and other non-depreciable property) Life Remaining Depreciation Cost Or Estimated Allowed Or Other Basis Used In From Depreciation Kind of Date Cost or Allowable In To Be Accumulating Beginning Allowable Property (Age) Acquired Other Basis Prior Years Recovered Depreciation Of Year This Year ------------------------------------------------------------------------------------------------------------------------------ Bibijon (13) 11-1-54 5,000.00 — 0 — 5,000.00 17 Yrs. 4 Yrs. (2/12) 208.33 Monsoon (13) 12-2-54 44,100.00 — 0 — 44,100.00 17 4 (1/12) 918.75 Linaria (11) 12-8-54 30,870.00 — 0 — 30,870.00 16 5 (1/12) 514.50 Maintenon (13) 12-8-54 12,936.00 — 0 — 12,936.00 17 4 (1/12) 269.50 Market Basket (12) 12-9-54 5,292.00 — 0 — 5,292.00 16 4 (1/12) 110.25 Tilly's Last (11) 12-9-54 4,410.00 — 0 — 4,410.00 16 5 (1/12) 73.50 Totals 102,608.00 102,608.00 2,094.83 Total...
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