Potts, Davis & Company v. Commissioner of Internal Revenue

431 F.2d 1222, 26 A.F.T.R.2d (RIA) 5568, 1970 U.S. App. LEXIS 7173

• Court: Court of Appeals for the Ninth Circuit
• Decided: September 29, 1970
• Docket: 24026_1
• Status: Published

Opinions

EUGENE A. WRIGHT, Circuit Judge:

The Commissioner of Internal Revenue asserted a deficiency in the income tax of Potts, Davis & Co. (Potts-Davis) in the amount of $3,176.09 resulting from disallowance of depreciation of insurance files claimed during the preceding three fiscal years. The Tax Court (Fay, J.) held that Potts-Davis in the proceeding before it had failed to prove that these files had a determinable useful life and was therefore not entitled to the claimed deductions. We Affirm.

The essential facts as stipulated by the parties and found by the Tax Court are not in dispute. Potts-Davis is an Oregon corporation engaged in the business of selling varied types of insurance. In 1961, Potts-Davis purchased all of the stock of another, related insurance agency (Grabenhorst-Potts). Graben-horst-Potts was then liquidated and Potts-Davis received all of its assets in a dissolution pursuant to § 334(b) (2) of the Internal Revenue Code of 1954.

Among the assets of Grabenhorst-Potts acquired by Potts-Davis were the files in question. They consisted of 936 active insurance files, each relating to a client. The Tax Court found that they included much information necessary for client service, including:

(a) correspondence with insurers and insureds;

(b) claims adjustments;

(c) property appraisals for fire insurance ratings;

(d) premium audits;

(e) premium financing records; and

(f) Rating Bureau information.

In addition, the Tax Court specifically found that “[t]he files had no value strictly as a list of customers.”

Potts-Davis assigned a total value of $23,400 to the files based upon their estimate that $25 was the approximate cost of reproducing each. Having arrived at a value for them, Potts-Davis concluded that the files had a useful life of six years and accordingly claimed % of the total value ($3,900) as a depreciation deduction pursuant to § 167 of the Internal Revenue Code of 1954.

There is no dispute that this “property” was used by Potts-Davis in its trade or business as required by § 167(a) nor is there any controversy as to the method of depreciation used. In assessing the deficiency, the Commissioner took the two-fold position that (a) the files were not depreciable property within the meaning of § 167 and (b) that if they were depreciable property, they had no determinable useful life upon which to predicate depreciation.

The Tax Court specifically declined to rule as to whether this property was or was not depreciable. Rather, it grounded its decision in favor of the Commissioner on the sole ground that Potts-Davis had not proved that the files have a determinable useful life.

The deduction sought here by Potts-Davis is not obtained as a matter of absolute right, but rather is available as a matter of Congressional grace.¹ In order to avail himself of such a deduction, the taxpayer has the burden of showing that the claimed deductions fall within the statutory provisions which allow for them.² This burden on the taxpayer is accompanied by the presumption that the determinations of the Commissioner are correct.³

This court has, however, consistently held that the presumption of correctness disappears upon introduction of appropriate evidence by the taxpayer, provided that the evidence thus introduced is sufficient to support a contrary finding.⁴ Drawing on these principles, it is apparent that the central controversy here is whether the evidence introduced in the Tax Court by Potts-Davis was sufficient to support a finding contrary to that made by the Commissioner in his initial determination of the deficiency.

Potts-Davis relies heavily upon the fact that the only evidence in the record as to the useful life of the files was testimony on its behalf. It consisted of the testimony of one of its major stockholders, Mr. Davis, and the testimony of another insurance agent, Mr. Denton. Potts-Davis relies heavily on the fact that there were no witnesses or testimony offered by the Commissioner to support his position that the files had no determinable useful life.

We do not believe that the Commissioner is required to come forward with witnesses or testimony in support of his determinations. The Tax Court is not, of course, free to ignore the uncontroverted testimony of the taxpayer ⁵ but we do not believe that the Commissioner is required to rebut such testimony by his own witnesses. This is particularly true where, as here, the proposition of the Commissioner in assessing the deficiency is a negative one, i. e., that these files had no determinable useful life.⁶

While we are in full agreement with those decisions which have ruled that the Tax Court need not necessarily accept the uncontroverted testimony of the taxpayer,⁷ we have nonetheless examined the testimony in the record insofar as it relates to the question before us, i. e., the determinable useful life, if any, of the files.

In short, we find that Mr. Davis’ testimony⁸ is almost wholly conclusory and offers little in the way of reasons to support the taxpayer’s own determination that the files had a useful life of six years. We find no testimony which offers any meaningful explanation of precisely why the files became “obsolete” and why they did so in the six-year period claimed by Potts-Davis.

At oral argument, counsel for Potts-Davis offered several explanations as to why this period was chosen but these reasons are not to be found in the record and could not therefore, have been considered by the Tax Court. We cannot go beyond the record before the court below in deciding this appeal.⁹

We appreciate the difficulty facing the taxpayer who must assign some realistic, meaningful evaluation to the life of an asset for which the depreciation deduction is sought. Viewed however from a lenient standard of proof, we do not think that the testimony of Mr. Davis was sufficient to warrant a contrary finding by the Tax Court. Indeed, Mr. Davis’ inability to furnish any cogent reasons for his conclusion that these files became obsolete in six years tends to substantiate the Commissioner’s position that the files, in fact, had no determinable useful life.

Finally, Potts-Davis points out that the testimony of Mr. Davis was not, in fact, uncorroborated. The allegedly corroborative testimony is that of Mr. Den-ton, a partner in a life insurance agency in Salem which was a competitor of Potts-Davis. We have little doubt as to his expertise in view of his many years of experience in the insurance business in Oregon and elsewhere.

But the testimony of an expert witness is no better than the convincing nature of the reasons offered in support of his testimony.¹⁰ Mr. Den-ton’s testimony¹¹ as to the determinable useful life of these files completely lacks any reasons in support of Mr. Davis’ conclusions. Insofar as this question is concerned, Mr. Denton’s sole testimony was that he had “heard Mr. Davis’s testimony about the use of insurance records and files” and that he concurred “generally with the statement as Mr. Davis made it.”

We are unable to conclude that a general concurrence of this type is sufficient to constitute meaningful corroboration of the testimony of an interested party. This is particularly so in this controversy. Mr. Davis’ “testimony” occupies 42 pages of the record. Only one page deals with the question of the useful life of the files and how it was selected. Mr. Denton’s allegedly corroborative statement does not refer specifically to this or any other portion of Mr. Davis’ testimony. We conclude that Mr. Denton’s testimony added little, if anything, to the position of Potts-Davis before the Tax Court.

Potts-Davis recognizes the deficiency in Mr. Denton’s testimony. In their brief, they suggest that the lack of definitive testimony on the part of Mr. Den-ton resulted from “the tight docket of the court” and that Mr. Denton was not asked to testify at length “for the convenience of the court.” We cannot, of course, speculate as to what support Mr. Denton might have given had he been examined in detail on this point but rather are confined to the record made by Potts-Davis before the Tax Court. For whatever reasons, we are forced to conclude that Mr. Denton’s testimony fails to rise to the status of meaningful corroboration of the conclusory testimony of Mr. Davis on the point in question.

After a careful review of this record, we are unable to conclude that the Tax Court which heard the testimony and observed the demeanor of the witnesses was clearly erroneous in its determination that Potts-Davis had not carried its burden of proof in establishing its claimed right to the deduction.¹²

Affirmed.

1 . Deputy v. du Pont, 308 U.S. 488, 493, 60 S.Ct. 363, 84 L.Ed. 416 (1940).

2 . United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235-236, 75 S.Ct. 733, 99 L.Ed. 1024 (1955).

3 . Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1933).

4 . Niederkrome v. Commissioner of Internal Revenue, 266 F.2d 238, 241 (9th Cir. 1958), cert. denied 359 U.S. 945, 79 S.Ct. 725, 3 L.Ed.2d 678 (1959); Lawrence v. Commissioner of Internal Revenue. 143 F.2d 456 (9th Cir. 1944).

5 . See, e. g., Nicholas v. Davis, 204 F.2d 200 (10th Cir. 1953).

6 . Cf. Quock Ting v. United States, 140 U.S. 417, 11 S.Ct. 733. 35 L.Ed. 501 (1891); Birnbaum v. Commissioner of Internal Revenue, 117 F.2d 395 (7th Cir. 1941).

7 . Wood v. Commissioner of Internal Revenue, 338 F.2d 602 (9th Cir. 1964); Birnbaum v. Commissioner of Internal Revenue, 117 F.2d 395 (7th Cir. 1941); Hoefle v. Commissioner of Internal Revenue. 114 F.2d 713 (6th Cir. 1940).

8 . The bulk of Mr. Davis’ testimony dealt with the details of the transfer from Grabenhorst-Potts to Potts-Davis and the method by which the value of these files was arrived at. As to the question of useful life, Mr. Davis’ entire testimony follows:

Q. Mr. Davis, who selected the six-year life on the depreciation used in this case?

A. Well, we did in our office on the basis that normal policies are written for one, three or five years.

But there is hardly any policies written for five years, or there have hardly been any policies written for five years for many, many years. There were a few personal lines, fire policies, written like that.

Automobile policies have to be written for one year in the State of Oregon. All other policies are normally written for three years. They may have annual premium payments, but the policy is for a three-year term.

We used, basically the information in this file is fairly well used up by the end of that three years, when you make your audit, after you have made the audit at the end of three years, and so forth, but because you do occasionally go back to the preceding policy for information and material, jiartieu-larl.v in commercial and professional accounts. We used six years, and I don’t think there would be any of this material worth anything after six years. It would be obsolete and immaterial.

Q. In other words, the condition of the client changes sufficiently in six years to render it obsolete, is that correct?

A. Appraisals and cost of living that affect all this, very definitely. [R. 39 — 40].

9 . See. e. g.. Commissioner of Internal Revenue v. Belridge Oil Co., 267 F.2d 291 (9th Cir. 1959); Harbor Plywood Corp. v. Commissioner of Internal Revenue, 143 F.2d 780 (9th Cir. 1944).

10 . United States Pumice Supply Co. v. Commissioner of Internal Revenue. 308 F.2d 766, 769 (9th Cir. 1962).

11 . After having established his credentials and lack of interest in Potts-Davis, Mr. Denton testified as follows:

Q. You beard Mr. Davis’s testimony about the use of insurance records and files, did you not?

A. Yes, I did.

Q. Would you add or correct any of that testimony before adopting it as your own?

A. I concur generally with the statement as Mr. Davis has made it.

I might observe, if it is permitted, that the ordinary insurance business could be handled from an expiration record, but to do a professional insurance job, and service particularly commercial accounts, you must have all of these allied records, which are invaluable. [R. 61].

12 . Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960).