Fiddlers on the Tax: Depreciation of Antique Musical Instruments Invites Reexamination of Broader Tax Policy
Anthony P. Polito
Suffolk University Law School
American Journal of Tax Policy, Vol. 13, p. 87, 1996
The article places two recent Circuit Court decisions (Simon v. Commissioner, 68 F.3d 41 (2d Cir. 1995); and Liddle v. Commissioner, 65 F.3d 329 (3d Cir. 1995)) within the broader context of the role of depreciation allowances in the federal income tax. The depreciation allowance has always been something of anomaly within the income tax regime. United States cost recovery policy reveals an unresolved tension among alternative tax bases - economic income, realized income, or consumption. The United States income tax is based on the realization principle, but nevertheless allows current deductions for the physical deterioration of property. It does so, in principle, accurately to reflect income, but the allowances are accelerated relative to economic depreciation, drawing the taxation of businesses towards a consumption tax.
ACRS sought to simplify the depreciation regime and foster capital formation by severing the link between assets' recovery periods and their useful lives. It accelerated depreciation allowances to the point of converting the taxation of many businesses into something like a consumption tax. Nevertheless, it bows toward the principle of depreciation reflecting the affect of physical deterioration on economic income.
Faced with this unresolved tension, the Second and Third Circuits accomplished the best one should expect in cases that forced them to decide what property is depreciable, and thereby the role of depreciation in the income tax regime. Some commentators have objected to their decision to allow five-year cost recovery for antique musical instruments. Seen in the broader context of depreciation policy, however, the objection is to ACRS itself. As such, these cases invite reexamination of those tensions by asking whether the income tax should (1) abandon the realization principle for mark-to-market accounting or (2) abandon the attempt clearly to measure income and instead tax consumption.
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Date posted: March 7, 2007