Is Office Artwork Depreciable Property?

By Anthony S. Bakale, CPA, M. Tax., Cohen & Co. Ltd., Cleveland

Editor: Anthony S. Bakale, CPA, M. Tax.



Many professional offices contain decorations (artwork, knickknacks, sculptures, memorabilia, etc.). Whether that office belongs to a Fortune 500 company, a professional services firm, or a family-owned business, some decorations are usually around to make customers feel comfortable and to give the business an air of success. Or they could be there just because the decorator said they were necessary. Whatever the reason, tax practitioners’ clients may ask whether the décor’s cost is depreciable for tax purposes. The tax practitioner likely will answer, “It depends.”

Say a client recently remodeled its offices and, in the process, purchased new furniture, carpeting, telecommunications equipment, and artwork. In a detailed review of the asset listing and supporting documents, the tax practitioner finds that the client spent a significant sum on the artwork. The invoices reveal that some items were purchased at local galleries, others directly from freelance artists, and others from furniture and office supply stores. The prices range from a couple hundred to several thousand dollars. Further inquiries to the client reveal that regardless of the items’ cost, they all are treated pretty much the same. None are protected from breakage, damage, or day-to-day wear and tear.

Whether the items are depreciable depends on the client’s answers to further questions. It may depend on whether the decorations are considered “valuable and treasured” art pieces or just plain tangible property used in the trade or business, subject to exhaustion, wear and tear, or obsolescence. The distinction, however, may be subjective and uncertain, with little helpful guidance.

In 1968 the IRS issued Rev. Rul. 68-232, in which it held that:

[A] valuable and treasured art piece does not have a determinable useful life. While the actual physical condition of the property may influence the value placed on the object, it will not ordinarily limit or determine the useful life. Accordingly, depreciation of works of art generally is not allowable. [Emphases added.]


This ruling has become the standard for whether office decorations, including artwork, are depreciable; however, the IRS has since then been fairly silent on depreciation of office decorations or artwork displayed in an office. The revenue ruling lacks guidance on what constitutes a valuable and treasured work of art.

Therefore, until the IRS publishes a bright-line test or safe harbor, whether artwork and other office decorations are depreciable is often in the eye of the beholder.

Analysis of Applicable Law and Arguments

In 1968, when the IRS issued Rev. Rul. 68-232, depreciation of tangible personal property was determined under Sec. 167. Under the general regulations for this section (Regs. Sec. 1.167(a)-1, last amended in 1972 (T.D. 7203)), to claim depreciation for property used in a trade or business, the taxpayer is required to establish the property’s cost basis, useful life, and salvage value. Based on the law in 1968, the IRS’s position with respect to valued and treasured artwork made perfect sense. It would be difficult to establish a useful life for valued and treasured pieces of art that were already hundreds of years old. But more important, since valued and treasured artwork would be expected to appreciate in value, its projected salvage value would most likely exceed its cost, thus leaving zero as the depreciable cost. Depreciable cost was a sum of the taxpayer’s basis (or original cost) less the estimated salvage value.

However, the depreciation rules have undergone two significant amendments since 1968. The first occurred as part of the Economic Recovery Tax Act (ERTA) of 1981, P.L. 97-34 (see ERTA Sections 201 and 203). For most tangible personal property, these sections replaced the depreciation determined under Sec. 167 with the accelerated cost recovery system (ACRS) as provided in new Sec. 168.

Sec. 167(a) allows as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, or obsolescence of property used in a trade or business. Sec. 167(b) provides, “For determination of depreciation deduction in [the] case of property to which section 168 applies, see section 168.” Sec. 168 applies to tangible property placed in service after 1980 that qualifies for the depreciation deduction under Sec. 167(a) (i.e., is subject to exhaustion, wear and tear, or obsolescence and is used in a trade or business). When the ACRS became law as part of ERTA, the Senate Finance Committee report explaining the provision stated:

The committee bill replaces the present system of depreciation with the Accelerated Cost Recovery System (ACRS). ACRS permits recovery of capital costs for most tangible depreciable property using accelerated methods of cost recovery over predetermined recovery periods generally unrelated to, but shorter than, present law useful lives. [S. Rep’t No. 144, 97th Cong., 1st Sess. 48 (1981)]

The committee further stated in its report, “The entire cost or other basis of eligible property is recovered under the new system, eliminating the salvage value limitation under present law.” It is clear from these statements that Congress intended to do away with the prior system of depreciation based on useful lives and salvage value as provided under Regs. Sec. 1.167(a)-1 and Sec. 167, prior to amendments by ERTA. The Senate Finance Committee report further states, “Eligible property includes depreciable property other than (1) property the taxpayer properly elects to amortize . . . and (2) most property the taxpayer properly elects to depreciate under a method not expressed in terms of years.” Eligible property was further limited to tangible property.

The second significant amendment occurred in 1986 as part of the Tax Reform Act (TRA) of 1986, P.L. 99-514 (see TRA Section 201). Congress amended Sec. 168 to establish the modified accelerated cost recovery system (MACRS), which is the depreciation system that applies today. These amendments to Sec. 168 did not change the premise that an asset’s useful life is no longer the basis for determining the amount of depreciation (established by the addition of Sec. 168 under ERTA) for which a taxpayer may claim depreciation with respect to an asset. The TRA’s amendments to Sec. 168 included a new seven-year recovery period for assets with class lives of 10–15 years and any assets that do not have class lives. Although the committee reports do not specifically state the reason for including assets without class lives in the seven-year recovery period, it appears that Congress was aware that the IRS had not assigned class lives to all tangible property that could be depreciated under Sec. 168.

Therefore, it would appear that a taxpayer no longer has to establish a class life for property to depreciate it under MACRS. The taxpayer needs to establish four things with respect to the property: (1) It must be eligible property, meaning it must be tangible property not subject to amortization or for which an election was made to depreciate under a method not based on a term of years; (2) the property must have been placed in service after 1986 (1980 for ACRS); (3) it must be subject to exhaustion, wear and tear, or obsolescence; and (4) it must be used in a trade or business.

There should not be much debate whether artwork used as decoration in a taxpayer’s offices meets criteria 1, 2, and 4. Artwork is obviously tangible property (and it can be assumed that an alternative method of depreciation would not be elected, as it would be hard to justify). The second requirement, when the artwork was placed in service, is a factual matter. The fourth requirement of being used in a trade or business may be subject to IRS challenge, but if the artwork is displayed at the taxpayer’s business in areas frequented by customers, employees, suppliers, etc., one can assume it should meet this criterion. The Tax Court has looked at this phrase, “used in a trade or business.” In Alamo Broadcasting Co., 15 T.C. 534 (1950), the Tax Court held that “used in a trade or business” meant “devoted to the trade or business.” Therefore, artwork that is maintained solely at the taxpayer’s office should be considered used in a trade or business.

That leaves only the third criterion of whether the artwork is subject to exhaustion, wear and tear, or obsolescence. Since this is an “or” test, if any one of the three conditions exists, the taxpayer meets the third criterion. It is most likely that artwork will not be exhausted, which implies that the property is used up or consumed in the ordinary course of its function. Also, since beauty is in the eye of the beholder, it may be difficult to argue that artwork becomes obsolete. (Although, with respect to pieces that are “trendy,” this may in fact be the case.) So, the taxpayer will need to prove that the artwork is subject to wear and tear.

Again the Code and regulations are not much help because neither sets forth a standard of what constitutes wear and tear. For example, does it have to be significant? Does it have to occur over a short period? Does it at some point have to render the object inoperable? At this point, such standards do not exist, so it appears that merely establishing the fact that wear and tear occurs should be sufficient. One may argue that because artwork only hangs on a wall or sits on a floor or shelf as a display, it is not subject to wear and tear. However, the curator of any museum would say that all artwork, no matter how extensively preserved or protected, deteriorates (is subject to wear and tear) over time.

In a recent article in The Guardian, Stephen Deuchar, director of the United Kingdom’s Art Fund and former director of Tate Britain, said there is no way to halt the effects of time on artwork, rather, conservators can only slow down inevitable decay (Thorpe, “Tate Director Sir Nicholas Serota Urges Art Galleries to Turn Down the Heating,” The Guardian (Nov. 12, 2011)). Therefore, with a little expert testimony, the taxpayer should be able to establish that in the conditions in which artwork is displayed—an open office without the atmospheric controls of a fine museum—the artwork is subject to significant wear and tear.

Still, the IRS has not withdrawn Rev. Rul. 68-232 and has not amended the regulations under Sec. 167 to remove the useful-life standard. Although the committee reports to ERTA directly address salvage value, they are vague on whether the useful-life standard has been legislated into oblivion.

A Tax Court case often cited by revenue agents when this issue comes up on exam is Associated Obstetricians and Gynecologists P.C., T.C. Memo. 1983-380. In this case the taxpayer, a doctors’ office, displayed various pieces of art in its offices. For the years at issue, the taxpayer claimed depreciation with respect to the artwork, which the IRS disallowed. At trial the IRS argued that the works of art did not have a useful life, based on Rev. Rul. 68-232. The court held in favor of the IRS, but noted that Rev. Rul. 68-232 was not applicable because the paintings in question “were more wall decorations than works of art.” (Note that the cost of the objects ranged in price from $40 to $7,000, and the years at issue were 1976 and 1977.) The court also stated, “[T]he paintings could be depreciated if [the] petitioner established their economic useful life and salvage value.” As noted, the tax years at issue were prior to the amendment of the depreciation rules by ERTA and the TRA.

In Simon, 103 T.C. 247 (1994), the IRS argued that violin bows used by the taxpayers in their trade or business of being orchestra musicians could be depreciated only if the taxpayers could establish a useful life for the property. The IRS argued that the bows were treasured works of art that appreciated in value and for which it was impossible to determine useful lives. In its opinion, the Tax Court looked at congressional intent for the passage of Sec. 168:

In enacting ERTA, the Congress found that the pre-ERTA rules for determining depreciation allowances were unnecessarily complicated and did not generate the investment incentive that was critical for economic expansion. The Congress believed that the high inflation rates prevailing at that time undervalued the true worth of depreciation deductions and, hence, discouraged investment and economic competition. The Congress also believed that the determination of useful lives was “complex” and “inherently uncertain,” and “frequently [resulted] in unproductive disagreements between taxpayers and the Internal Revenue Service.” [Simon, 103 T.C. at 255, quoting S. Rep’t No. 144, 97th Cong., 1st Sess. 47 (1981)]

Accordingly, Congress decided that a new capital cost recovery system would have to, among other things, lessen the importance of the concept of useful life for depreciation purposes. Under ERTA, useful life remained a part of the depreciation system inasmuch as it established the recovery period in which an asset would be placed. Assets were assigned a recovery period based on their asset depreciation range (ADR) class life under pre-ERTA law, which was generally based on an asset’s useful life. Simon involved tax year 1989, but the items in question were placed in service during tax year 1985, so in this case the court was required to apply pre-1986 rules. The amendments made by the TRA to Sec. 168 did not enter the court’s analysis. However, with the amendment of Sec. 168 by the TRA, it would seem that the useful-life concept has become even less significant, since items without a class life (established based on “useful life”) are automatically placed in the seven-year category.

The Tax Court further stated in the Simon case:

This minimization of the useful life concept through a deemed useful life was in spirit with the two main issues that ERTA was designed to address, namely:
(1) Alleviating the income tax problems that resulted mainly from the complex depreciation computations and useful life litigation, and
(2) to economic policy concerns that the pre-ERTA depreciation systems spread the depreciation deductions over such a long period of time that investment in income-producing assets was discouraged through the income tax system. [Simon, 103 T.C. at 257]

The Tax Court skirted Rev. Rul. 68-232 by finding that the bows were not works of art, but assets used actively, regularly, and routinely to produce income in the taxpayers’ business. The court instead focused on the continuing significance of useful life post-ERTA in determining whether an asset is depreciable. Specifically, it stated that “ERTA was enacted partially to address and eliminate the issue that we are faced with today, namely, a disagreement between taxpayers and the Commissioner over the useful life of assets that were used in taxpayers’ trades or businesses” (Simon, 103 T.C. at 258–259). With this “elimination of disagreements” purpose in mind, Congress defined five broad classes of “recovery property” and provided the periods of years over which taxpayers could recover its cost.

The Tax Court essentially boiled down the issue of whether the taxpayers could depreciate the violin bows to one inquiry: Were the bows property of a character subject to exhaustion, wear and tear, or obsolescence? If they were, then the taxpayers could depreciate them. Therefore, if artwork or other office decorations are not “valuable and treasured” (as specified in Rev. Rul. 68-232), and the taxpayer can establish through expert testimony or otherwise that, as used by the taxpayer, the artwork or office decorations are subject to wear and tear, depreciation should be allowed on the assets. Simon was affirmed by the Second Circuit (68 F.3d 41 (2d Cir. 1995)).

In Liddle, 103 T.C. 285 (1994), the Tax Court came to a similar conclusion with respect to an antique bass viol. The IRS appealed to the Third Circuit, which upheld the Tax Court (65 F.3d 329 (3d Cir. 1995)).

In Selig, T.C. Memo. 1995-519, the Tax Court addressed whether the taxpayer could depreciate certain high-technology “exotic cars” the taxpayer had placed in service in its trade or business by exhibiting them to the public for an admission fee. The taxpayer maintained the cars were subject to obsolescence and therefore were depreciable. Again, the IRS sought to disallow the deduction on the basis that the taxpayer could not establish a useful life for the vehicles.

The Tax Court said the cars’ state-of-the-art character supported the taxpayer’s argument they were subject to obsolescence and stated, “[T]he fact that petitioners have failed to show the useful lives of the exotic automobiles is irrelevant.” The court cited Simon and Liddle as authority. This case is significant for holding that establishing a useful life was not a determining factor for claiming depreciation, and it dealt with tax years under current Sec. 168 (as amended by the TRA (MACRS)). The court stated that although Congress extensively revised and restated Sec. 168 under the TRA, “[t]here is no indication . . . that Congress intended to reimpose the requirement, eliminated by ERTA, that a taxpayer must show the useful life of property if the taxpayer is to determine the section 167 depreciation deduction under section 168.”

With respect to Simon and Liddle, the IRS issued AOD 1996-009 in which it indicated its nonacquiescence to those decisions. However, the IRS acknowledged that the Simon decision, based on the Tax Court’s holding in Selig, applies to post-1986 tax years. Subsequently, in 1999 the IRS issued Technical Advice Memorandum 199927001, in which it favorably cited the decisions in Simon and Liddle, which leads to the question of whether the IRS would continue to challenge the result in Simon.


It would appear that recent case law is favorable to the proposition that all artwork, “valued and treasured” or not, is subject to the allowance for depreciation under Sec. 168 if the taxpayer can meet that section’s four requirements described above. But the taxpayer most likely will continue to be in for a fight if the IRS examines its tax return. The taxpayer should be prepared to establish the business reasons for the acquisition of the artwork to meet the “used in a trade or business” standard. The taxpayer also should be prepared to establish that the items are subject to wear and tear or obsolescence in their use. Obviously, the more expensive the artwork, the more likely it is that an agent will disallow a claim of depreciation expense with respect to the item. Rightly or wrongly, field agents continue to adhere to Rev. Rul. 68-232.

At this point, it would be beneficial for the IRS to address this issue again in light of statutory changes and court decisions. At a minimum, the IRS should issue guidance establishing a bright-line test on what constitutes “valued and treasured” and what a taxpayer needs to do to establish wear and tear or obsolescence with respect to office art. The increased level of examination activity occurring over the past several years will undoubtedly create more litigation in this area, as agents are apt to pursue the low-hanging fruit. The disallowance of the depreciation deduction, coupled with an erroneous accounting method adjustment, can yield significant dollars. Add to that the potential tax adjustment—and related penalties and interest—and the dollars at stake for even modestly decorated offices can be a significant burden.

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Anthony Bakale is with Cohen & Co., Ltd., Baker Tilly International, Cleveland.

For additional information about these items, contact Mr. Bakale at 216-579-1040 or

Unless otherwise noted, contributors are members of or associated with Baker Tilly International.

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