Opinion
Docket No. 6200-73.
1976-03-23
LAWRENCE OCRANT AND NANCY H. OCRANT, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Barry J. Goldstein, for the petitioners. John D. Moats, for the respondent.
Held: Depreciation deductions to be claimed for a short taxable year may be computed pursuant to the ‘averaging convention’ authorized by sec. 1.167(a)-10(b), Income Tax Regs., at one-half the rate applicable for the short taxable year. The depreciation deduction is not intended to reflect the decline in the fair market value of an asset, but to enable its owner to charge its cost off over its useful life.
Held, an investment credit could not be claimed with respect to certain assets where petitioners failed to prove that the assets were not used by the same parties before and after they were purchased. Sec. 1.48-3(a)(2)(i), Income Tax Regs. Barry J. Goldstein, for the petitioners. John D. Moats, for the respondent.
FAY, Judge:
Respondent determined the following deficiencies in the Federal income tax of petitioners:
+---------------+ ¦1965¦$341.36 ¦ +----+----------¦ ¦1966¦553.67 ¦ +----+----------¦ ¦1968¦14,167.77 ¦ +---------------+
We are to decide if a joint venture of which Lawrence Ocrant was a member claimed excessive deductions for depreciation on the U.S. partnership return of income which it filed for 1968, and if in respect of that same year an investment credit was claimed on property used by the same parties both before and after it was purchased by the venture.
FINDINGS OF FACT
Certain of the facts pertaining to this case have been stipulated and they are found accordingly.
Petitioners, husband and wife, filed joint Federal income tax returns for the years in issue at the Southwest Service Center, Austin, Tex. They were residents of Denver, Colo., when they filed their petition with this Court.
Petitioner Lawrence Ocrant (Ocrant) owned a 20-percent interest in a joint venture; King, Seipman & Ocrant (venture). The venture was organized on December 1, 1968, to acquire and lease oil field completion equipment.
On the day it was organized the venture purchased used oil field completion equipment for $2,587,119.02 from seven limited partnerships, six of which were managed by their general partner, Imperial American Resource Fund, Inc. (Imperial), and one of which was managed by its general partner, Royal Resources Exploration, Inc. (Royal). This equipment had been purchased by the limited partnerships throughout the calendar year 1968 and upon purchase had been placed into service. The limited partnerships sold the equipment to the venture at cost when it was organized, and immediately leased the equipment back from the venture. The limited partnerships claimed no depreciation deductions in respect of this equipment for the period in which they owned it.
When the venture was organized on December 1, 1968, it entered into an agreement with Regency Income Corp. (Regency), under the terms of which Regency became manager of the venture and was authorized to purchase oil field completion equipment on the venture's behalf. On December 1, 1968, Regency concluded agreements with Imperial and Royal under which they became its agents for the purchase of such equipment. Pursuant to these agreements, new equipment was purchased for the venture for $398,997.65 during December 1968, and used equipment was purchased for it for $30,362.95 during that same month. The equipment purchased pursuant to the agency agreements was leased to the limited partnerships.
On the U.S. partnership income tax return of income filed by the venture for 1968, 6 months' depreciation computed under the 200-percent declining balance method December 1968, and 6 months' depreciation computed under the 150-percent declining balance method was claimed with respect to the used equipment acquired by the venture during that same month.
An investment credit, furthermore, was claimed with respect to the equipment acquired pursuant to the agency agreements concluded with Imperial and Royal.
OPINION
The venture was organized on December 1, 1968, and began to acquire oil field completion equipment, most of which was already in use when the venture acquired it. On the U.S. partnership return of income which it filed for 1968, the venture claimed a full 6 months of depreciation on the equipment which it acquired during that year. Petitioners contend that the venture was authorized to do so under the ‘averaging convention.’ Respondent contends that the venture was entitled to claim no more than 1 month's depreciation on that equipment. In our opinion petitioners' contention is based on a misapprehension of how the ‘averaging convention’ is to be applied.
As the venture sought to apply it in this instance, the ‘averaging convention’ authorizes that depreciation deductions claimed for a given year with respect to assets acquired during that year be computed ‘at one-half the rates applied for the full year.’ Scoville Manufacturing Co., 25 B.T.A. 265, 276 (1932).
Petitioners contend that during the calendar year 1968 the venture acquired assets for which it sought to claim depreciation deductions computed in accordance with the ‘averaging convention’; and that under the ‘averaging convention’ the deductions were properly computed at one-half the rate appropriate to that calendar year.
The year with respect to which computations are made under the ‘averaging convention’ is not, however, the calendar year, but the taxable year, in which the assets are acquired. Cf. Hillyer, Deutsch, Edwards, Inc., 21 B.T.A. 452, 460 (1930); sec. 1.167(a)-10(b), Income Tax Regs.; and in this instance the taxable year in which the assets were acquired as of only 1 month's duration.
If a taxpayer is in existence for only a part of what would otherwise be his taxable year, then his taxable year is the short period during which he is in existence and for which he filed a return. Sec. 443(a)(2);
cf. Estate of Theodore Roodner, 64 T.C. 680, 682 (1975). In this instance the venture was not in existence during the entire calendar year 1968, but only during the final month of that year; and it was during that month that the assets to be depreciated were acquired by the venture. Were the depreciation deductions claimed with respect to those assets to be computed in accordance with the ‘averaging convention,‘ one-half the rate appropriate to that month, not to the entire calendar year 1968, would be applied. Petitioners' reliance on the ‘averaging convention’ to justify a claim of 6 months' depreciation on the assets acquired by the venture during December 1968 is therefore wholly misplaced.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.SEC. 443. RETURNS FOR A PERIOD OF LESS THAN 12 MONTHS.(a) RETURNS FOR SHORT PERIOD.— A return for a period of less than 12 months (referred to in this section as ‘short period’) shall be made under any of the following circumstances:(2) TAXPAYER NOT IN EXISTENCE FOR ENTIRE TAXABLE YEAR.— When the taxpayer is in existence during only part of what would otherwise be his taxable year.
Petitioners next contend that by the close of 1968 the fair market value of the equipment had fallen substantially below the amount which the venture had paid for it. Petitioners especially note in this connection that much of the equipment purchased by the venture had been purchased and used by the limited partnerships during the first 11 months of 1968 and then sold to the venture at cost. It is petitioners' position that by the close of 1968 the excess of the equipment's cost to the venture over its fair market value was greater than the depreciation deductions claimed by the venture for 1968; and that for this reason the deductions were reasonable within the meaning of section 167.
Sec. 167(a), I.R.C. 1954, provides:(a) GENERAL RULE.— There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—(1) of property used in the trade or business, or(2) of property held for the production of income.
We dismiss this contention out of hand; for the depreciation deduction is not intended to reflect the decline in the fair market value of an asset, but rather to enable the owner to charge off the cost of the asset over its useful life. Cf. Coca-Cola Bottling Co. of Baltimore v. United States, 487 F.2d 528 (Ct. Cl. 1973).
Having considered petitioners' contentions we hold that the venture was not entitled to claim 6 months' depreciation on the equipment it acquired during December 1968. Rather respondent was fully justified in allowing the venture no more than 1 month's depreciation on the equipment.
Pursuant to the agency agreements with Imperial and Royal, equipment was purchased for $429,360.60 during December 1968, in order that the venture might lease it to the limited partnerships. The venture claims that under section 38
it is entitled to an investment credit for all of this equipment.
SEC. 38. INVESTMENT IN CERTAIN DEPRECIABLE PROPERTY.(a) GENERAL RULE.— There shall be allowed, as a credit against the tax imposed by this chapter, the amount determined under subpart B of this part.(b) REGULATIONS.— The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section and subpart B.
Certain of this equipment, however, purchased for $30,362.95, was previously in use. Petitioners contend that the used equipment was obtained from independent suppliers. Respondent contends that this equipment was used by the limited partnerships prior to its being acquired by the venture, and used by those same partnerships thereafter; and that therefore the venture is not entitled to an investment credit for that equipment. Sec. 1.48-3(a)(2)(i), Income Tax Regs.
Sec. 1.48-3(a)(2)(i), Income Tax Regs.: Property shall not qualify as used section 38 property if, after its acquisition by the taxpayer, it is used by (a) a person who used such property before such acquisition, * * *
In support of their contention petitioners introduced into the record the testimony of Stanley B. Hallman who supervised the preparation of the 1968 tax return of King, Seipman & Ocrant. From his testimony we have learned that the only records that might have indicated from what parties the used equipment was obtained, had not been made available to us. This being the case, we must sustain respondent's determination on this issue; for petitioners have the burden of proving that determination erroneous. Welch v. Helvering, 290 U.S. 111 (1933).
Decision will be entered for the respondent.