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Richard L. Simon and Fiona Simon v. Commissioner of Internal Revenue

Court of Appeals for the Second Circuit
1995 U.S. App. LEXIS 28823, 68 F.3d 41, 76 A.F.T.R.2d (RIA) 6911 (1995)
ELI5:

Rule of Law:

Under the Accelerated Cost Recovery System (ACRS) established by the Economic Recovery Tax Act of 1981, tangible personal property used in a trade or business is depreciable if it is subject to exhaustion, wear and tear, or obsolescence. The property does not need to have a 'determinable useful life' as was required under pre-ERTA law.


Facts:

  • Richard and Fiona Simon are professional violinists with the New York Philharmonic Orchestra.
  • In 1985, the Simons purchased two 19th-century violin bows made by renowned bowmaker Francois Tourte for $30,000 and $21,500, respectively.
  • The bows were in a largely unused condition at the time of purchase.
  • The Simons use the Tourte bows regularly and extensively in their profession, subjecting them to substantial physical wear and tear.
  • With use, the bows' utility for producing exceptional sound diminishes, eventually becoming 'played out' for professional performance.
  • Despite the physical deterioration from use, the bows retain or increase their monetary value as collectors' items; by 1990, they were appraised at $45,000 and $35,000.

Procedural Posture:

  • Richard and Fiona Simon claimed ACRS depreciation deductions for two violin bows on their 1989 federal income tax return.
  • The Commissioner of Internal Revenue disallowed the deductions.
  • The Simons filed a petition in the United States Tax Court to challenge the Commissioner's determination.
  • The Tax Court, in a reviewed decision, held for the Simons, ruling that the bows were depreciable recovery property.
  • The Commissioner (appellant) appealed the Tax Court's decision to the United States Court of Appeals for the Second Circuit, where the Simons are the appellees.

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Issue:

Does the Accelerated Cost Recovery System (ACRS) permit a depreciation deduction for tangible business property that is subject to exhaustion and wear and tear, even if the property does not have a determinable useful life and is expected to appreciate in value?


Opinions:

Majority - Winter, Circuit Judge

Yes. The Accelerated Cost Recovery System (ACRS) permits a depreciation deduction for tangible business property subject to wear and tear, even without a determinable useful life. The court reasoned that the Economic Recovery Tax Act of 1981 (ERTA) fundamentally changed the depreciation scheme with the dual purposes of stimulating economic growth and simplifying complex tax rules. By creating predetermined recovery periods, ACRS deliberately 'de-emphasized' the concept of useful life, which was central to the old system of matching an asset's cost to the income it produced. Re-imposing a 'determinable useful life' requirement would contradict Congress's explicit intent to eliminate the unproductive disagreements between taxpayers and the IRS that this concept frequently caused. Therefore, under ACRS, the phrase 'property of a character subject to the allowance for depreciation' only requires that the property be subject to exhaustion, wear and tear, or obsolescence in its business use.


Dissenting - Oakes, Senior Circuit Judge

No. The ACRS does not permit a depreciation deduction for property that does not have a determinable useful life. The dissent argued that Congress never intended to abandon the foundational principle of depreciation: that an asset must have a reasonably estimable useful life. The statutory text defining 'recovery property' as 'property of a character subject to the allowance for depreciation' incorporates the historical requirements of I.R.C. § 167, including the useful life requirement. The majority's interpretation renders this statutory phrase superfluous, as virtually all tangible property used in a business is subject to some wear and tear. Legislative history, including a key conference report, explicitly states that assets without a determinable useful life are not depreciable.



Analysis:

This decision clarifies that the ACRS, applicable to property placed in service between 1981 and 1986, represented a significant policy shift from accurate accounting to economic stimulus. By eliminating the 'determinable useful life' and 'salvage value' requirements, the court allowed for the depreciation of assets, like valuable antiques used in a business, that appreciate in market value but still physically deteriorate. The case serves as a key example of statutory interpretation where legislative intent to simplify a complex regime and stimulate the economy was held to override long-standing regulatory requirements. While its direct application is limited to the ACRS era, the reasoning influences debates on the purpose of tax deductions and the interpretation of sweeping legislative reforms.

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