ON APPEAL FROM A DECISION OF THE UNITED STATES TAX COURT (No. 92-2126).
Before: Stapleton, McKEE, Circuit Judges, and Rosenn, Senior Circuit Judge.
In this appeal from a decision of the United States Tax Court we are asked to decide if a valuable bass violin can be depreciated under the Accelerated Cost Recovery System when used as a tool of trade by a professional musician even though the instrument actually increased in value while the musician owned it. We determine that, under the facts before us, the taxpayer properly depreciated the instrument and therefore affirm the decision of the Tax Court.
Brian Liddle, the taxpayer here, is a very accomplished professional musician. Since completing his studies in bass violin at the Curtis Institute of Music in 1978, he has performed with various professional music organizations, including the Philadelphia Orchestra, the Baltimore Symphony, the Pennsylvania ProMusica and the Performance Organization.
In 1984, after a season with the Philadelphia Orchestra, he purchased a 17th century bass violin made by Francesco Ruggeri (c. 1620-1695), a luthier who was active in Cremona, Italy. Ruggeri studied stringed instrument construction under Nicolo Amati, who also instructed Antonio Stradivari. Ruggeri's other contemporaries include the craftsmen Guadanini and Guarneri. These artisans were members of a group of instrument makers known as the Cremonese School.
Liddle paid $28,000 for the Ruggeri bass, almost as much as he earned in 1987 working for the Philadelphia Orchestra. The instrument was then in an excellent state of restoration and had no apparent cracks or other damage. Liddle insured the instrument for its then-appraised value of $38,000. This instrument was his principal instrument and he used it continuously to earn his living, practicing with it at home as much as seven and one-half hours every day, transporting it locally and out of town for rehearsals, performances and auditions. Liddle purchased the bass because he believed it would serve him throughout his professional career -- anticipated to be 30 to 40 years.
Despite the anticipated longevity of this instrument, the rigors of Liddle's profession soon took their toll upon the bass and it began reflecting the normal wear and tear of daily use, including nicks, cracks, and accumulations of resin. At one point, the neck of the instrument began to pull away from the body, cracking the wood such that it could not be played until it was repaired. Liddle had the instrument repaired by renown artisans. However, the repairs did not restore the instrument's "voice" to its previous quality. At trial, an expert testified for Liddle that every bass loses mass from use and from oxidation and ultimately loses its tone, and therefore its value as a performance instrument decreases. Moreover, as common sense would suggest, basses are more likely to become damaged when used as performance instruments than when displayed in a museum. Accordingly, professional musicians who use valuable instruments as their performance instruments are exposed to financial risks that do not threaten collectors who regard such instruments as works of art, and treat them accordingly.
There is a flourishing market among nonmusicians for Cremonese School instruments such as Mr. Liddle's bass. Many collectors seek primarily the "label", i.e., the maker's name on the instrument as verified by the certificate of authenticity. As nonplayers, they do not concern themselves with the physical condition of the instrument; they have their eye only on the market value of the instrument as a collectible. As the quantity of these instruments has declined through loss or destruction over the years, the value of the remaining instruments as collectibles has experienced a corresponding increase.
Eventually, Liddle felt the wear and tear had so deteriorated the tonal quality of his Ruggeri bass that he could no longer use it as a performance instrument. Rather than selling it, however, he traded it for a Domenico Busan 18th century bass in May of 1991. The Busan bass was appraised at $65,000 on the date of the exchange, but Liddle acquired it not for its superior value, but because of the greater tonal quality. Liddle and his wife filed a joint tax return for 1987, and claimed a depreciation deduction of $3,170 for the Ruggeri bass under the Accelerated Cost Recovery System ("ACRS"), I.R.C. § 168.*fn1 The Commissioner disallowed the deduction asserting that the "Ruggeri bass in fact will appreciate in value and not depreciate." Accordingly, the Commissioner assessed a deficiency of $602 for the tax year 1987. The Liddles then filed a petition with the Tax Court challenging the Commissioner's assertion of the deficiency. A closely divided court entered a decision in favor of the Liddles. 103 T.C. 285 (1994). This appeal followed.*fn2
The Commissioner originally argued that the ACRS deduction under § 168 is inappropriate here because the bass actually appreciated in value. However, the Commissioner has apparently abandoned that theory, presumably because an asset can appreciate in market value and still be subject to a depreciation deduction under tax law. Fribourg Navigation Co. v. Commissioner, 383 U.S. 272, 277 (1966) ("tax law has long recognized the accounting concept that depreciation is a process of estimated allocation which does not take account of fluctuations in valuation through market appreciation."); Noyce v. Commissioner, 97 T.C. 670 (1991) (taxpayer allowed to deduct depreciation under § 168 on an airplane that appreciated in economic value by 27 percent from the date of purchase to the time of trial).
Here, the Commissioner argues that the Liddles can claim the ACRS deduction only if they can establish that the bass has a determinable useful life. Since Mr. Liddle's bass is already over 300 years old, and still increasing in value, the Commissioner asserts that the Liddles can not establish a determinable useful life and therefore can not take a depreciation deduction. In addition, the Commissioner argues that ...