Noyce v. Commissioner

HALPERN, J., concurring: While I concur in the result reached by the majority, I am unable to join in the reasoning with respect to the depreciation deduction claimed by petitioner. I believe that the majority’s narrow focus on the ratio of business use to total use is premised upon an over-simplified conception of depreciation. Although the majority’s analysis seems to reach the appropriate result in this case, I fear it may lead to inappropriate results in the future.

Depreciation is defined for Federal income tax purposes as the decline in value of property caused by exhaustion, wear and tear, and obsolescence. See sec. 167(a). Such factors effect a decline in the value of property in two ways: (1) By use, and (2) with the passage of time. The former (use depreciation) is evident in the simple observation that certain assets tend to wear out more, and decline in value faster, when put to use. 1 The latter (nonuse depreciation) is evident in the fact that certain assets decline somewhat in value even when wholly unused. 2 Many assets decline in value due to both use depreciation and nonuse depreciation. 3

In this case, we are required to determine whether and to what extent petitioner is entitled to a depreciation deduction. Thus, we must distinguish between that portion of the year’s depreciation (both use depreciation and nonuse depreciation) for which a deduction is allowable (allowable depreciation), and that portion of the year’s depreciation for which a deduction is not allowable (nonallowable depreciation). 4 The majority, however, apportions the year’s depreciation as if use depreciation were the only component to apportion. They disregard the nonuse component.

In many cases, where allowable use depreciation mirrors allowable nonuse depreciation, the majority’s neglect will be benign, and the majority’s analysis will produce the right result. However, the percentage of use depreciation that is allowable may differ from the percentage of nonuse depreciation that is allowable. Consider a wealthy collector of airplanes, whose sole purpose in purchasing such airplanes is to impress his friends with his wealth and extravagance. As a wholly incidental matter, however, and hoping to achieve a tax deduction, wealthy collector flies each airplane once a year on a business trip. Wealthy collector never flies any of the planes for personal use. Under the majority’s analysis, wealthy collector is entitled to 100 percent of the potential depreciation deductions. Clearly, however, such result would be absurd. The problem is that wealthy collector purchased and continues to maintain the planes solely for personal reasons, and thereby incurs the nonuse component of depreciation solely for personal purposes. Thus, any depreciation deduction allowed for the nonuse component of depreciation would result in an undeserved tax windfall for wealthy collector. While that, admittedly, is an extreme case, the lack of symmetry (between allowable and nonallowable use depreciation on the one hand and allowable and nonallowable nonuse depreciation on the other) may be present in other cases as well, even if to a lesser extent. At the time a depreciable asset is placed in service, the percentage of allowable nonuse depreciation for that year can be determined, independent of whatever actual business or personal use of that asset thereafter occurs. 5 Thus an examination of taxpayer’s motivation for purchasing an asset is required, in order to determine how much of the inevitable nonuse depreciation is incurred for a business purpose and is, therefore, allowable as a deduction. 6 As a separate matter, it is still necessary to determine the ratio of business (or profit-related) use to other (personal) uses of the asset, in order determine the use depreciation component of allowable depreciation.

I recognize the potential difficulty of bifurcating the depreciation analysis in the manner suggested. Presupposed by that scheme is some means of determining how much of an asset’s potentially allowable depreciation ought to be attributed to use depreciation and how much to nonuse depreciation. Yet that task hardly seems insurmountable. 7 In any event, we ought to take the proper theoretical approach in addressing the problem. If concessions must be made to the practical difficulties of employing that approach, such concessions can be made at a later time as circumstances dictate.

In the case at hand, the majority opinion sheds little light on the question of why petitioner purchased the plane. Unenthusiastically, I conclude that petitioner in this case probably incurred use depreciation and nonuse depreciation in the same proportion. Thus, I would in this case reach the same result as the majority, since the distinction between use depreciation and nonuse depreciation does not come into play. I cannot join in the majority opinion, however, because, their rationale would not take such distinction into account, even in an appropriate case.

Another potential allocation that the majority has declined to address is that between the portion of the asset used for business and the portion used for personal gratification. See International Artists, Ltd. v. Commissioner, 55 T.C. 94 (1970) (depreciation deduction allowed to the extent premises were used for business purposes and disallowed to the extent used for personal purposes). If, for example, petitioner had bought a 747 with a jacuzzi and game room, instead of an apparently unremarkable six-seater, it might well be that — even if the plane had been flown only on business flights — a substantial portion of the depreciation would be attributable to personal use. If such were the case, the cost above that reasonably required for business purposes would have been incurred solely for personal reasons and, hence, would not give rise to a depreciable basis for property used in a trade or business. Compare sec. 167(a) with sec. 262.

In this case, it has not been suggested that the airplane purchased by petitioner was any larger or more luxurious than reasonably necessary, and the majority opinion would seem to suggest that such is not the case. 8 I would therefore conclude that such allocation is here unnecessary, but ought to be considered in an appropriate case.

Before closing, I would venture a brief comment on the dissents of Judges Jacobs and Parr. Judge Jacobs concludes that the costs in question must be personal to the petitioner because Intel did not expect or require him to incur them and, consequently, they were voluntary. Although Judge Jacobs may be right in his conclusion that the costs constitute a nondeductible personal expenditure of petitioner’s, he must first consider whether the costs were incurred in petitioner’s trade or business of being an employee apart from Intel’s expectations or requirements. That incurring the costs was not expected or required by Intel may be indicative of whether such costs were incurred in petitioner’s trade or business, but it is not determinative. See Heineman v. Commissioner, 82 T.C. 538 (1984). Clearly, an employee may voluntarily incur deductible costs in attending a convention or meeting, so long as she is benefiting or advancing the interests or her trade or business by such attendance. Sec. 1.162-2(d), Income Tax Regs. That same point is pertinent to Judge Parr’s additional reasons for dissenting.

For the foregoing reasons, I concur in the result reached by the majority.

For example, a 1982 automobile with 300,000 miles will generally be in worse condition and sell for far less than a 1982 automobile (same model) with only 30,000 miles.

Computers, for example, decline rapidly in value, even when unused, due to obsolescence. Nonuse depreciation, however, is not due exclusively to obsolescence. Thus, even automobiles, which are not generally thought of in the short run as becoming obsolete, suffer some nonuse depreciation. Thus, a 1982 automobile with 30,000 miles will be in worse condition and sell for less than a 1987 automobile (same model) with the same mileage.

For example, an automobile wears out, somewhat, merely with the passage of time, but wears out faster when put to use.

A depreciation deduction is only allowable for trade or business property or property held for the production of income. Sec. 167(a). Moreover, entitlement to a depreciation deduction is always predicated on a profit motive. Sec. 183(a).

When an asset is placed in service, the owner ordinarily is aware that such asset will decline in value as time passes, even if not used. Thus, the decision to incur nonuse depreciation is made at the outset, independent of whatever use of the asset is later made. Thus, if an asset is placed in service with the intent of using it solely for business, the nonuse depreciation is incurred wholly for a business purpose, and ought to be deductible in its entirety, even if for some reason that asset never actually is used for a business purpose (such as fire fighting equipment if no fire occurs).

Of course, the nonuse depreciation is only inevitable if the taxpayer continues to hold the asset; if the asset is sold, taxpayer, obviously, would not incur any further depreciation. Thus, it would be more accurate, particularly in years subsequent to placing the asset in service, to consider why the asset is kept and maintained by the taxpayer, since it is that motivation that would explain why any subsequent nonuse depreciation is incurred. For simplicity’s sake, we operate here under the assumption that the motive for placing the asset in service and the motive for maintaining the asset are the same.

Expert testimony or other evidence might be obtained, demonstrating how much more an asset might sell for if it had been unused for a particular period of time, as opposed to if it had not only been unused during that period of time but had been manufactured immediately thereafter, thereby being undiminished neither by use nor the passage of time. Consider, for example, an automobile made in year 0 and driven for 30,000 miles in that year, which sells for $10,000 on the first day of year one. If it were shown that such automobile would then sell for $12,000 if it had not been driven at all, and that such automobile would sell for $15,000 if it had been made in year 1 instead of year 0 (in addition to not having been driven), then the ratio of use depreciation to nonuse depreciation would be 2 to 3: 60 percent of the total depreciation would be attributable to nonuse.

Although the allocation in International Artists, Ltd. v. Commissioner, 55 T.C. 94 (1970), was made on the basis of space, the controlling concept is broader: no expense beyond that reasonably necessary for a business purpose may be deducted. Sec. 262. Thus, if taxpayer in this case had purchased, for example, a “gold-plated” six-seater, a large portion of that expense, including depreciation, would be unrelated to any business purpose and, consequently, would not be deductible.