dissenting: I must, to some extent, agree and disagree with both the majority’s view and Chief Judge Hamblen’s minority view. Both views are thoughtful, but each approach unnecessarily results in taxpayers’ being entitled to all or none of the depreciation claimed. Both positions fail to consider that the bows may have two separate attributes — recoverable or depreciable and intrinsic attributes. If both are considered, the results that the majority and minority views advocate could, to some extent, be achieved. As I see this issue, under either section 167, permitting “a reasonable allowance for the exhaustion, wear and tear”, or section 168, permitting depreciation for specific categories of “recovery property”, a taxpayer should not be entitled to a depreciation deduction for intrinsic value, which is generally not subject to wear and tear and/or makes the life of the object indeterminable. The facts reveal, and neither viewpoint denies, that the bows are being subjected to wear and tear due to their use by professional musicians. It is also factually indisputable that, in spite of their use, the bows continue to increase in value from the original purchase price because of their unique qualities. The crucial point, which has not been addressed, concerns the effect of the wear and tear upon the intrinsic value inherent in the asset.
The majority reaches the conclusion that each entire bow constitutes recovery property as defined in section 168(c)(1). Majority op. pp. 269-260. I agree that the bows are tangible property placed in service after 1980, and that the bows were used in petitioners’ trade or business. I do not agree, however, that petitioners have shown that all of the property is of a character subject to the allowance for depreciation. Admittedly, some portion of the bows is subject to wear and tear, but not the intrinsic value that may exist even if the bows can no longer be used as bows. The burden is on petitioners to show which portion of the bows is subject to wear and tear and, therefore, recovery property.
There are numerous situations in the tax law where property is composed of both depreciable and nondepreciable portions. One example of this concept may be found in situations where a business is purchased and some portion of the purchase price may be attributable to goodwill — the nondepreciable intrinsic value of a business. Ithaca Indus., Inc. v. Commissioner, 97 T.C. 253 (1991), affd. 17 F.3d 384 (4th Cir. 1994). More specifically, our Court has considered the intrinsic value in works of art and musical instruments and not permitted depreciation attributable to that aspect. Browning v. Commissioner, T.C. Memo. 1988 — 293, affd. 890 F.2d 1084 (9th Cir. 1989); Clinger v. Commissioner, T.C. Memo. 1990-459. On several occasions we have delineated the existence of depreciable business use and nondepreciable personal use in the same property. See, e.g., International Artists, Ltd. v. Commissioner, 55 T.C. 94 (1970); Gudmundsson v. Commissioner, T.C. Memo. 1978-299. Finally, and by way of analogy, bifurcation of property into depreciable and nondepreciable portions is entrenched in the tax treatment of improvements to realty, which may be depreciable even though the land upon which they rest is not subject to depreciation.
To better illustrate the concept of intrinsic value, let us assume that Elvis Presley had purchased a guitar for $1,000. Due to his fame, however, the value of the guitar immediately increases to $11,000. If Elvis Presley had used the guitar in his business, he would have been entitled to depreciate the $1,000 amount, either over its useful life or in accordance with its section 168 class life, as may have been appropriate. If, however, another musician purchases Elvis’ guitar for $11,000, the portion of the guitar which would be subject to wear and tear or be recovery property would be about $1,000, more or less, depending upon how much Elvis had used it and/or the cost of a similar quality guitar at the time of purchase. The fact that it had been Elvis’ guitar will sustain a premium value which is attributable to the guitar’s intrinsic collector’s value. Even if Elvis’ guitar became unusable for commercial purposes, collectors would be willing to pay for the intrinsic value because it had belonged to Elvis. Usually, that value increases with time due to increased uniqueness attributable to scarcity or increased popularity. That intrinsic value could be affected by wear and tear, but the wear and tear will not necessarily eliminate the intrinsic value. Accordingly, under section 167 the remaining intrinsic value would be the equivalent of “salvage value”. Because section 168 does not consider salvage value, the intrinsic value should not be considered recovery property.
These same principles apply to the bows under consideration. Some portion of the value and purchase price is attributable to the collector’s value and is not recovery property within the meaning of section 168.1 Although Congress, by enacting section 168, intended to simplify the classification of depreciable property and permit shorter periods of writeoff, there was no intent to permit the writeoff of the portion of property attributable to the intrinsic collector’s value of unique property. The burden rests with taxpayers to show that portion of the property which is depreciable or recovery property and which portion is intrinsic or investment. Petitioners in this case have not shown the cost portion or value of the bows which is subject to wear and tear and, accordingly, must fail here. Admittedly, it would be unfair to hold that petitioners did not have some depreciation attributable to their use of the bows. It would be equally unfair (to other taxpayers) to permit petitioners to write off the intrinsic value which is unaffected by wear and tear or use.
The majority’s holding permits the opportunity for substantial unintended abuse. Taxpayers will be able to depreciate items with current business utility and intrinsic collector’s value and, after 3 or 5 years, have the tax benefit of the entire cost, at a time when the value of the item has not decreased or may have increased. The process may be duplicated over and over, providing substantial writeoffs with the cost borne by the public fisc. Ultimately, the taxpayer accumulates numerous of these collector’s items which are passed on to future generations because of their intrinsic collector’s value, which is likely to have substantially appreciated.
For the reasons expressed, I respectfully dissent.
Taxpayers may be able to show that their use of an asset with both recovery property and intrinsic attributes would render the entire cost, including some or all of the intrinsic portion, valueless. Petitioners, however, have not shown that to be the case here.