Decision
The Tax Court determined that the Simons' deduction for the depreciated value of the violins was proper for the 1989 tax year under § 168 of the Tax Code.
The majority of the court agreed that the deduction should be allowed, pointing out that "taxpayers have long been allowed asset depreciation deductions in order to allow them to allocate their expense of using an income-producing asset to the periods that are benefited by that asset". This is so that depreciation taken in a given year represents that year’s reduction of the asset through use.
Prior to the passage of the Economic Recovery Tax Act of 1981 (ERTA), the depreciation of personal property was solely determined by § 167 of the Internal Revenue Code of 1954. Calculating depreciation under this part of the code required the taxpayer to determine the “useful life” of property which was difficult and often led to disagreements. After ERTA, Congress simplified the process by reducing the number of years over which a taxpayer could depreciate property to four periods (3, 5, 10, and 15 years) and basing the depreciation on these statutory year periods rather than useful life.
Under § 168(a), a taxpayer may deduct depreciations of "recovery property" which is property that is (1) tangible, (2) placed in service after 1980, (3) of a character subject to the allowance for depreciation, and (4) used in the trade or business, or held for the production of income. The court defined subsection (3) to mean that the "property must suffer exhaustion, wear and tear, or obsolescence in order to be depreciated". Because of the frequent wear and tear of the bows, the court found that the bows fit in the parameters of depreciable personal property under § 168.
Even though the fair market value of bows increased, the court stated that for it to look into determining whether an asset has a "separate, non business" value for depreciation purposes would be contrary to Congress’s intent to simplify this concept.
Read more about this topic: Simon V Commissioner
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