Sharp v. United States
199 F.Supp. 743, aff'd 303 F.2d 783 (3d Cir. 1962)
Sharp and Sharp were business
partners who bought an airplane costing about $54k.
They used the plane 74% of
the time for personal use, and 26% of the time for business use.
For a few years, Sharp and
Sharp claimed a deduction on their taxes for depreciation of the airplane.
The total depreciation claimed was about $13.7k.
Finally, they sold the
airplane for $35.3k. When they filed their taxes, they claimed a loss on
the sale. The IRS disagreed and found that they had made a gain on the
Sharp and Sharp argued that
their adjusted basis in the plane
was $54k - $13.7k = $40.5k. Since they sold the airplane for only
$35.3k, they lost $5k.
The IRS had an alternate
method of calculating. They argued that depreciation is only allowed on business expenses, which
means that only the 26% of the airplane that was used for business
So, the business part of
the airplane was only worth 26% of the $54k, or about $14.2k. When you
subtract out the $13.7k of depreciation, the adjusted basis
of the business part of the airplane was only $500.
When they sold the
airplane, the business part was sold for $35k x 26% = $9300.
Therefore, there was a gain
of $9300 - $500 = $8800.
Since gains or losses on
the personal use part of the airplane are not deductible, the
partnership owes taxes on a gain or $8800.
The Trial Court found for the
IRS. Sharp and Sharp appealed.
The Trial Court found that
Sharp's logic would result in non-uniformity between taxes owed on
properties used exclusively for business, and those used for a
combination of business and personal uses.