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 sale.
    • 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 qualified.
      • 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.
  • The Appellate Court affirmed.