Simon v. C.I.R.

• Decision Date: 13 October 1995
• Docket Number: D,No. 1708,1708
• Citation: 68 F.3d 41
• Parties: -6911, 64 USLW 2269, 95-2 USTC P 50,552 Richard L. SIMON and Fiona Simon, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. ocket 94-4237.
• Court: U.S. Court of Appeals — Second Circuit

Page 41

68 F.3d 41

76 A.F.T.R.2d 95-6911, 64 USLW 2269,

95-2 USTC P 50,552

Richard L. SIMON and Fiona Simon, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 1708, Docket 94-4237.

United States Court of Appeals Second Circuit.

Argued June 13, 1995.

Decided Oct. 13, 1995.

Edward T. Perelmuter, Washington, DC (Loretta C. Argrett, Assistant Attorney General, Gary R. Allen, Richard Farber, Tax Division, Department of Justice, Washington, DC, of counsel), for Respondent-Appellant.

Marvin E. Frankel, New York City (Steven C. Todrys, Eugenia Yudanin, Arthur Pelikow, Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, New York City, of counsel), for Petitioners-Appellees.

Before: OAKES, WINTER and MAHONEY, Circuit Judges.

WINTER, Circuit Judge:

This appeal from the Tax Court raises the question whether professional musicians may take a depreciation deduction for wear and tear on antique violin bows under the Accelerated Cost Recovery System ("ACRS") of the Economic Recovery Tax Act of 1981 ("ERTA"), Pub.L. No. 97-34, 95 Stat. 172, although the taxpayers cannot demonstrate that the bows have a "determinable useful life."

The parties agree that under the pre-ERTA Internal Revenue Code of 1954 and the Treasury Department regulations interpreting that Code, the bows would be considered depreciable property only if the taxpayers could demonstrate a determinable useful life. The issue here is to what extent, if any, the ACRS modified the determinable useful life requirement.

BACKGROUND

The facts are essentially undisputed. Richard and Fiona Simon are highly skilled professional violinists. Richard Simon began to play and study the violin at the age of 7. He received a bachelor of music degree from the Manhattan School of Music in 1956 and subsequently pursued his master's degree in music at the Manhattan School of Music and Columbia University. In 1965, Mr. Simon joined the New York Philharmonic Orchestra ("Philharmonic") as a member of its first violin section. Since then, he has also been a soloist, chamber music player, and teacher. Mr. Simon was a full-time performer with the Philharmonic throughout the relevant tax year.

Fiona Simon has played and studied the violin since the age of 4. She studied at the Purcell School in London from 1963 to 1971 and at the Guildhall School of Music from 1971 to 1973. Ms. Simon joined the first violin section of the Philharmonic in 1985. She, too, has been a soloist, chamber music player, teacher, and free-lance performer. Ms. Simon was a full-time performer with the Philharmonic throughout the pertinent tax year.

The business property at issue consists of two violin bows ("the Tourte bows") made in the nineteenth century by Francois Tourte, a bowmaker renowned for technical improvements The Simons use the Tourte bows regularly in their trade. In 1989, the tax year in question, the Simons performed in four concerts per week as well as numerous rehearsals with the Philharmonic. Id. at 249, 1994 WL 450480. Their use of the Tourte bows during the tax year at issue subjected the bows to substantial wear and tear. Id. at 252, 1994 WL 450480. Believing that they were entitled to depreciate the bows under the ACRS, the Simons claimed depreciation deductions for the two bows on their 1989 Form 1040 in the amount of $6,300 and $4,515. The parties stipulated that these amounts represent the appropriate ACRS deductions if deductions are allowable.

                in bow design.  These bows were purchased by the Simons in 1985 and were in a largely unused condition at the time.  The Tax Court found that "[o]ld violins played with old bows produce exceptional sounds that are superior to sounds produced by newer violins played with newer bows."  Simon v. Commissioner, 103 T.C. 247, 250, 1994 WL 450480 (1994).  The Tax Court also found that violin bows suffer wear and tear when used regularly by performing musicians.  With use, a violin bow will eventually become "played out," producing an inferior sound.  Id. at 252, 253, 1994 WL 450480.   However, a "played out" Tourte bow retains value as a collector's item notwithstanding its diminished utility.  The Simons' Tourte bows, for example, were appraised in 1990 at $45,000 and $35,000, even though they had physically deteriorated since their purchase by the Simons in 1985 for $30,000 and $21,500, respectively
                

The Tax Court agreed with the Simons and allowed the depreciation deductions. The Commissioner brought the present appeal. ¹

DISCUSSION

This appeal turns on the interpretation of the ACRS provisions of I.R.C. Sec. 168, ² which provide a depreciation deduction for "recovery property" placed into service after 1980. Recovery property is defined by that section as "tangible property of a character subject to the allowance for depreciation" when "used in a trade or business, or ... held for the production of income." I.R.C. Sec. 168(c)(1). The record establishes that the Simons' Tourte bows were tangible property placed in service after 1980 and used in the taxpayers' trade or business. The Commissioner contends, however, that the bows are not "property of a character subject to the allowance for depreciation."

The parties agree that Section 168's phrase "of a character subject to depreciation" must be interpreted in light of the I.R.C. Sec. 167(a) ³ allowances for "exhaustion, wear and tear, and ... obsolescence." The Simons and the Tax Court maintain that, when read in conjunction with the plain language of Section 167, Section 168 requires only that the Tourte bows suffer wear and tear in the Simons' trade to qualify as "recovery property." See 103 T.C. at 260, 1994 WL 450480. The Commissioner, on the other hand, argues that because all property used in a trade or business is necessarily subject to wear and tear, the Simons' construction of Section 168 would effectively render Section 168's phrase "of a character subject to the allowance for depreciation" superfluous, a result that Congress presumably could not have intended. See United States v. Nordic Village, Inc., 503 U.S. 30, 35, 112 S.Ct. 1011, 1015, 117 L.Ed.2d 181 (1992) (It is a "settled rule that a statute must, if possible, be construed in such a fashion that every word has some operative effect."). Therefore, Section 168's requirement that the property be "of a character subject to the allowance for depreciation" must include an element beyond wear and tear, namely the "determinable useful life" requirement embodied in 26 C.F.R. Sec. 1.167(a)-1, a Treasury regulation of pre-ERTA vintage.

We do not agree with the Commissioner's premise because some tangible assets used in business are not exhausted, do not suffer wear and tear, or become obsolete. For example, paintings that hang on the wall of a law firm merely to be looked at--to please connoisseur clients or to give the appearance of dignity to combative professionals--do not generally suffer wear or tear. More to the point, the Simons' Tourte bows were playable for a time precisely because they had been kept in a private collection and were relatively unused since their manufacture. Indeed, it appears that one had never been played at all. Had that collection been displayed at a for-profit museum, the museum could not have depreciated the bows under ERTA because, although the bows were being used in a trade or business, they were not subject to wear and tear. The Tourte bows are not unlike numerous kinds of museum pieces or collectors' items. The Commissioner's textual argument thus fails because there are tangible items not subject to wear and tear.

The Commissioner next argues that Congressional intent and the notion of depreciation itself require that Section 168's statutory language be supplemented by reading into the word "character" a requirement that tangible property have a demonstrable useful life. To address that issue, we must briefly examine the history of the depreciation allowance.

The tax laws have long permitted deductions for depreciation on certain income-producing assets used in a trade or business. See, e.g., Act of Oct. 3, 1913, 38 Stat. 167; Revenue Act of 1918, 40 Stat. 1067; I.R.C. Sec. 23(1) (1939); I.R.C. Sec. 167(a) (1954). The original rationale for the depreciation deduction was to allow taxpayers to match accurately, for tax accounting purposes, the cost of an asset to the income stream that the asset produced. See Massey Motors, Inc. v. United States, 364 U.S. 92, 104, 80 S.Ct. 1411, 1418, 4 L.Ed.2d 1592 (1960) ("it is the primary purpose of depreciation accounting to further the integrity of periodic income statements by making a meaningful allocation of the cost entailed in the use ... of the asset to the periods to which it contributes"). In its traditional incarnation, therefore, the pace of depreciation deductions was determined by the period of time that the asset would produce income in the taxpayer's business. As the Supreme Court noted in Massey, "Congress intended by the depreciation allowance not to make taxpayers a profit thereby, but merely to protect them from a loss.... Accuracy in accounting requires that correct tabulations, not artificial ones, be used." Id. at 101, 80 S.Ct. at 1416.

To implement this accurate tax accounting, the concept of a determinable useful life was necessary because, without such a determination, one could not calculate the proper annual allowance--"the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost." United States v. Ludey, 274 U.S. 295, 300-01, 47 S.Ct. 608, 610, 71 L.Ed. 1054 (1927). The regulation that the Commissioner now relies upon was promulgated under the 1954 Internal Revenue Code and reflects the rationale underlying the accounting scheme in effect just prior to ERTA. See Treas.Reg. Sec. 1.167(a)-1 (1972);...