Current Developments in Depreciation
BY RUDOLPH J. ENGLERT Partner, Cincinnati Office
Presented before Columbus Chapter of The Ohio Society of Certified Public Accountants and before the University
of Dayton Tax Institute, Dayton — December 1960
RECENT COURT DECISIONS
Shortly after the enactment of the 1954 Code, considerable publicity
was given in tax publications, newspapers, and elsewhere to an alleged loophole in the then new depreciation allowances. An example was given of a man earning $100,000 a year who pays $4,600 for a car for use in his business. It was then demonstrated that after using this car for a year and selling it for $1,200 less than he paid for it, the man made a net-after-tax cash profit of $525. Using the double-declining balance method of depreciation he takes a deduction of $2,300 (based on a four-year useful life). This reduced his taxes $2,000 since he was in the 87% bracket. He paid $275 capital gains tax on the sale of the car (25% of $1,100). Thus, the net reduction in his tax was $1,725. After subtracting the $1,200 cash loss on the sale of the car he had $575 more cash in his pocket than he had before he bought the car.
This idea was quite appealing to the many taxpayers who owned property subject to depreciation allowances, particularly those who usually sold their property before it reached the end of its physical life. There were others, however, who didn't appreciate this state of affairs. I assume they were the people who didn't use their automobiles in their work. In any event, one congressman was so distressed about the situation that he wrote to the Treasury Department. Mr. Laurens Williams, Assistant to the Secretary of the Treasury, replied to the congressman and the congressman placed the reply in the Congressional
Record of June 16, 1955.
This recitation of an incident occurring in 1955 undoubtedly seems out of place in a 1960 discussion of current developments. However, Mr. Williams' letter contained the first official statements by the Treasury Department as to the meaning it would attribute to the concepts
of "salvage value" and "useful life." His letter represents the commencement of a controversy which lasted five years and just terminated in June 1960.