Depreciation of office furniture and fixtures - recoverable over five years?
The Treasury has set forth the class lives for various assets in a long line of revenue procedures, most recently Rev. Proc. 87-56. Of particular interest to many taxpayers are asset classes dealing with office furniture and fixtures: Asset Class 00.11, Office Furniture, Fixtures, and Equipment, which includes furniture and fixtures that are not a structural component of a building (such as desks, files, safes and communications equipment (other than communications equipment included in other classes)), and Asset Class 57.0 Distributive Trades and Services, which includes assets used in wholesale and retail trade, and personal and professional services. Proper classification among the various asset classes is important in determining the appropriate recovery period for a particular asset. This can be seen, for example, in the difference between Asset Class 00.11, which has a class life of 10 years (and therefore a seven-year recovery period) and Asset Class 57.0, which has a class life of nine years and a five-year recovery period).
Proper asset classification has become more of an issue as of late, as evidenced by the number of cases addressing this matter - e.g., Walgreen Co. & Subsidiaries, 68 F3d 1006 (7th Cir. 1995) rev'g and rem'g 103 TC 582 (1994); JFM, Inc. & Subsidiaries, TC Memo 1994-239; and ABC Rentals of San Antonio, Inc., TC Memo 1994-601, appeals docketed, 10th Cir., 5/16/95. The issue was addressed most recently in Norwest Corporation and Subsidiaries, TC Memo 1995-390, in which the taxpayer argued that office furniture and fixtures placed in service between 1987 and 1989 were properly classified under Asset Class 57.0 rather than Asset Class 00.11, since the assets were used in a distributive trade or service.
The Tax Court held that the furniture and fixtures (other than furniture and fixtures unique to the taxpayer's banking and financial services business) fell under Asset Class 00.11 and, therefore, had a recovery period of seven years. According to the court, Rev. Proc. 87-56 divided assets into two broad categories: (1) asset guideline classes 00.11-00.4, consisting of specific depreciable assets (such as furniture and fixtures) used in all business activities, and (2) asset guideline classes 01.1-80.0, consisting of depreciable assets used in specific activities. Under the courts analysis, if an asset could qualify under either of the two broad categories, it was required to be included solely in the first.
While the court indicated that it "examined the background of class 57.0 in Walgreen Co....[and] JFM, Inc...," there was no analysis of these cases or their application to the issue before the court. In fact, had the court analyzed these cases within the context of the issue before it, it would have determined that the cases required the taxpayers classification of furniture and fixtures as Class 57.0 assets.
In its prior decision in Walgreen Co., the court held that the subject real property was not properly classified within an industry class (i.e.,Asset Class 57.0), because a statutory provision specifically provided that real property could not be included in any of the industry classes unless it was explicitly included. Since Asset Class 57.0 did not specifically include Sec. 1250 property, such property could not be included in the asset class. There are no such specific statutory exclusions with respect to office furniture and fixtures.
The Walgreen Co. case is also helpful because it clearly indicated that "assets used in the provision of professional services such as those offered by doctors, dentists, lawyers, [and] accountants..." were included in Asset Class 57.0 Including lawyers and accountants in Asset Class 57.0 is very telling, because none of the assets used in their businesses are unique to their professions. If the court's determination in Norwest is correct, i.e., that only assets "unique" to distributive trades or services can be classified as Class 57.0 assets, it is unclear how the courts decision affects professionals such as lawyers and accountants. Does the Norwest opinion suggest that, contrary to the description of the asset class, professionals do not have any assets that can be classified under Asset Class 57.0? And if this is the case, why are accountants and lawyers specifically referenced in connection with Asset Class 57.0?
Even more significantly, the JFM, Inc. court concluded, when faced with an asset that could be classified under either Asset Class 00.3 or Asset Class 57.0, that "[i]t is clear that classes 57.0 and 57.1 were intended to cover all possible types of real or personal property...whereas 00.3 is a catchall for otherwise unclassifiable improvements to realty." (Emphasis added.) The court determined that, although the assets could, have been included in Asset Class 00.3 (like office furniture and fixtures could be classified as Class 00.11 assets), the assets were properly included in Asset Class 57.0. because all property used in that trade or business was covered under Asset Class 57.0.
While the Norwest court concluded that the industry in which a particular asset is used does not affect its life, the JFM, Inc. court held otherwise. The JFM, Inc. decision was based, at least in part, on the Conference Report to the Tax Reform Act of 1986, which contained the following guidance in connection with the formulation of asset guidelines:
Any class life prescribed under the Secretary's authority must reflect the anticipated useful life, and the anticipated decline in value over time, of an asset to the industry or other group. Useful life means the economic life span of property over all users combined and not, as under prior law, the typical period over which a taxpayer holds the property. (Emphasis added.)
The Norwest decision is also inconsistent with Rev. Rul. 95-52, which held that "consumer durable property" subject to rent-to-own contracts was included in Asset Class 57.0 of Rev. Proc. 87-56 and treated as five-year property. The term "consumer durable property" is defined in Rev. Proc. 95-38 to include furniture. Such furniture is "generally used in the home" (emphasis added) and, therefore , includes furniture used in a home office. Since Rev. Rul. 95-52 does not require that furniture be used in the home to be considered "consumer durable property", furniture leased to a business under a rent-to-own contract would also be included in Asset Class 57.0. Since Rev. Proc. 87-56 does not discriminate between classes of property based on whether property is owned or leased, it follows that furniture used in any distributive trade or business is properly characterized as a Class 57.0 asset.
Consequently, the Norwest court appears to have reversed established case law and administrative law and disregarded congressional intent in holding that the general category (i.e., Asset Class 00.11) overrides the specific category (i.e., Asset Class 57.0), and that all assets are treated the same, regardless of the industry in which they are used.