Richard L. Simon and Fiona Simon v. Commissioner of Internal Revenue
103 T.C. 247; 1994 U.S. Tax Ct. LEXIS 60; 103 T.C. No. 15 (1994)
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Rule of Law:
Tangible personal property used in a trade or business that suffers actual wear and tear is eligible for depreciation deductions under the Accelerated Cost Recovery System (ACRS), regardless of whether the property has a determinable useful life or appreciates in market value over time.
Facts:
- Richard Simon and Fiona Simon were full-time professional violinists with the New York Philharmonic Orchestra.
- In 1985, the Simons purchased two 19th-century violin bows made by renowned maker François Tourte for a combined price of $51,500.
- The Simons acquired the bows for their superior tonal quality and used them regularly and actively in their profession.
- Prior to their purchase by the Simons, the bows had been preserved in pristine condition in collections and were relatively unused.
- The Simons' professional use subjected the bows to substantial physical wear and tear, causing the wood to erode.
- The bows were made of Pernambuco wood, which has become very scarce, contributing to their value.
- Despite the physical deterioration from use, the bows' appraised value increased significantly, with a combined insured value of $80,000 by 1990.
Procedural Posture:
- Richard and Fiona Simon filed their 1989 joint federal income tax return, claiming depreciation deductions for two violin bows.
- The Commissioner of Internal Revenue disallowed the deductions and, on December 11, 1991, issued a notice of deficiency to the Simons for $21,198 in tax and a $4,240 penalty.
- The Simons petitioned the U.S. Tax Court, a court of first instance, for a redetermination of the deficiency.
- The parties filed a stipulation of settled issues, resolving all matters except for the eligibility of the violin bows for depreciation deductions.
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Issue:
Are antique violin bows, which are subject to physical wear and tear from professional use but are also appreciating in value as collectibles, eligible for depreciation deductions under the Accelerated Cost Recovery System (ACRS)?
Opinions:
Majority - Laro, J.
Yes. The violin bows are eligible for depreciation deductions. Under the Accelerated Cost Recovery System (ACRS), tangible property is depreciable if it is subject to exhaustion, wear and tear, or obsolescence and is used in a trade or business. The bows, although valuable antiques, are subject to substantial physical wear and tear from the Simons' active and regular use in their profession. Congress enacted ACRS to simplify depreciation and eliminate disputes over an asset's 'useful life' and salvage value. The fact that the bows have appreciated in market value is irrelevant to their eligibility for depreciation, as tax law separates the concept of physical depreciation from market value fluctuations.
Concurring - Ruwe, J.
Yes. ACRS was a significant step toward tax simplification, which eliminated the difficult requirements of proving an asset's useful life and salvage value. The dissent's approach would resurrect these complex, pre-ACRS requirements, defeating the purpose of the new law. While the result may seem imperfect because an appreciating asset is being written off, that is the price of the tax simplification Congress intended with section 168.
Concurring - Beghe, J.
Yes. The author concurs in the result for reasons stated in a separate opinion in the companion case, Liddle v. Commissioner.
Dissenting - Hamblen, C.J.
No. The bows are not eligible for depreciation deductions. Property is depreciable only if it has a determinable useful life and declines in value predictably. The ACRS system did not eliminate this fundamental requirement. These bows are treasured works of art with an indeterminable useful life and have appreciated, not declined, in value. Allowing depreciation here creates a tax shelter for musicians, is contrary to legal precedent like Browning v. Commissioner, and ignores legislative history indicating that assets without a determinable useful life are not depreciable.
Dissenting - Gerber, J.
No. The entire cost of the bows is not eligible for depreciation, but a portion might be. The bows have a dual nature: a depreciable component as a tool subject to wear and tear, and a non-depreciable component related to their intrinsic collector's value. The depreciation deduction should be limited only to the portion of the bows' cost attributable to their use as a tool, not the portion attributable to their appreciating intrinsic value as collectibles. The petitioners failed to make this allocation, so they should not be entitled to any deduction.
Dissenting - Halpern, J.
No. The bows are not eligible for depreciation deductions. To be depreciable under ACRS, an asset must have a determinable useful life, which the bows lack. Furthermore, the allocation approach suggested by Judge Gerber is improper. We do not generally allow the owner of an asset, like land, to fragment its various utilities to depreciate some but not others. The bows should be treated as a single, non-depreciable asset because their overall useful life as a collectible is indeterminable.
Analysis:
This decision solidifies the principle that under ACRS, the primary test for depreciability is whether a tangible asset used in business is subject to physical wear and tear, not its economic appreciation or determinable useful life. It decouples the tax concept of depreciation from the economic reality of an asset's market value, simplifying the deduction for taxpayers. This ruling significantly impacts those who use antique or high-value collectible items as tools of their trade, such as musicians or artists, by affirming their ability to recover the cost of these assets despite their potential for appreciation.
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