Taking a deduction for an asset used in a trade or business is normally not a problem for most businesses. However, in cases where the asset employed is a valuable antique musical instrument, the IRS has sought to disallow such deductions. Major areas of controversy include 1) the useful lives of such assets and 2) the fact that antique instruments often increase in value, rather than decrease in value. In Simon v. Commissioner (103 TC No. 285) and Liddle v. Commissioner (103 TC No. 247), the Tax Court addressed these issues and others in determining whether to allow depreciation deductions for antique musical instruments used by professional musicians.
A requirement complicating the calculation of depreciation deductions prior to ERTA, (the Economic Recovery Tax Act of 1981), later simplified by Congress, was that the taxpayer determine the useful life of assets employed in a trade or business. Allowances for depreciation deductions were granted under IRC section 167. IRC section 167(a) provides that "There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear, and tear (including a reasonable allowance for obsolescence) of property used in the trade or business, or of property held for the production of income." The regulations developed under this section provided that such property could only be depreciated if the taxpayer could establish the property's useful life. In determining this useful life, the taxpayer was required to consider the "wear and tear and decay or decline from natural causes" that were known to affect the asset [Regs. section 1.167(a)-1(b)].
Revenue Ruling 8-232 (1968-1 C.B. 79) states that a valuable and treasured art piece does not have a determinable useful life. The ruling also distinguishes between the condition of the artwork and its life. While the actual physical condition of the artwork may influence the market value placed on it, its condition will not ordinarily limit or determine the artifact s useful life. Accordingly, works of art may not be depreciated. While a precise definition of "works of art" does not exist in the code, such assets usually fall into a category of assets that have no determinable useful life and do not predictably decline in value.
Both Simon and Liddle were similar in that the petitioners were professional musicians who had purchased antique musical instruments (Simon: two 19th century violin bows; Liddle: a late 17th century bass viol) and used them to play in symphony orchestras. Both used their instruments regularly for rehearsals and performances. The violin bows had been purchased in 1985 for more than $50,000 and insured in 1994 for $75,000. The viol had been purchased for $28,000 in 1984 and appraised at $65,000 in 1991.
The taxpayers argued that because the bows were used in their businesses, were necessary to their businesses, and had suffered wear and tear due to that use, depreciation deductions were appropriate. An expert witness testified that the bows had, indeed, suffered irreversible wear and tear.
The IRS provided two primary arguments that the taxpayers were not entitled to depreciation deductions: 1) The bows had indeterminate useful lives because they were treasured works of art for which it is impossible to determine useful lives. Their status as works of art was conditioned on their age (in excess of 100 years) and their appreciated value. 2) Referring to Revenue Ruling 68-232 (supra), the IRS maintained that the controlling issue which precluded taking a depreciation deduction was the inability of the taxpayers to assign reasonable useful lives to the instruments. The fact that the bows had existed for more than 100 years was evidence of their indeterminate lives making it impossible for the taxpayers to determine the remaining useful life of the instruments.
The court held for the taxpayers, ruling that neither the age nor the market values of the instruments were controlling. …