Fieland v. Comm'r of Internal Revenue
| Decision Date | 30 January 1980 |
| Docket Number | Docket No. 2001-75. |
| Citation | 73 T.C. 743 |
| Parties | LOUIS C. FIELAND and RUTH F. FIELAND, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held, component depreciation not available in the circumstances of this case in respect of existing improvements to used real property acquired for a lump sum. Such improvements to the building made by the taxpayer's predecessor must be depreciated by the taxpayer-purchaser together with the building itself over the remaining useful life of the building. Held, further, allocations of taxpayer's purchase price between land and building made in the deficiency notice sustained. Held, further, useful life of building determined. Held, further, so-called premium or excess rent paid by lessee over the initial term of the lease to reimburse the original lessor for cost of improvements could not be separately amortized by the taxpayer-purchaser of the property over the initial term of the lease. Midler Court Realty, Inc. v. Commissioner, 61 T.C. 590 (1974), affd. 521 F.2d 767 (1975), followed. Held, further, such excess rent not excludable from gross income. Held, further, documentary support for a claimed interest deduction presented for the first time after the trial will not be considered. Louis C. Fieland, pro se.
Jani Maurer and Larry Kars, for the respondent.
The Commissioner determined deficiencies in income tax against petitioners for the years 1969-71, as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦ ¦ ¦
+------+-------------¦
¦1969 ¦$37,546.60 ¦
+------+-------------¦
¦1970 ¦37,260.93 ¦
+------+-------------¦
¦1971 ¦37,290.70 ¦
+--------------------+
The principal issue relates to the amount of depreciation allowable in respect of a building owned by Mr. Fieland.
Some of the facts have been stipulated, and, as stipulated, are incorporated herein by reference.
Petitioners, husband and wife, filed joint returns for the years in issue. The husband, Mr. Fieland, will sometimes hereinafter be referred to as petitioner. At the time the petition was filed in this case, he resided in Florida; his wife resided in New York.
As more fully hereinafter set forth, petitioner in December 1968 purchased certain property (the property) in Nassau County, N.Y., consisting of a building of some 50,000 square feet and underlying land of approximately 4.75 acres, zoned for light industrial use. The property is on the west side of Route 107, Broadway-Hicksville Road, a major north-south artery. Opposite the property on Route 107 is a large area known as the Grumman Aerospace Complex, which contains the corporate headquarters of Grumman Aerospace Corp. (Grumman), an airport, and various buildings used by Grumman1 in its business as a producer of military aircraft and related systems, military and commercial seacraft, and spacecraft. Also, in the immediate vicinity of the property are a number of commercial and light industrial facilities. The surrounding community is primarily residential. The property is about 31;2 miles from the center of Hicksville.
The building on the property is constructed of masonry and steel, and was erected between 1951 and 1953. It contains approximately 50,000 square feet. Prior to 1967, the property was owned and occupied by the Corydon M. Johnson Co., a publisher of technical manuals for Grumman and other concerns. Grumman also leased space in the building in the early sixties for use by its purchasing department. In 1966, Country Capital Corp. (Country Capital), a federally licensed small business investment company, acquired complete ownership of the property in foreclosure proceedings. Petitioner acted as trial counsel for Country Capital in those proceedings.
At the time of foreclosure, the building was a one-story factory and warehouse with a two-story section at the front of the building. Approximately 30,000 square feet of the building was an unfinished factory and warehouse area with concrete floors, exposed block walls, unfinished ceilings, suspended space heaters, and exposed fluorescent lighting. Another approximately 10,000 square feet had been used as office space and had tiled floors, but there were still exposed block walls, unfinished ceilings, suspended space heaters, and exposed fluorescent lighting. The remaining area of approximately 10,000 square feet was office space with tiled floors, finished walls, finished ceilings, and recessed lighting, and was located in the building's two-story section. The building had plumbing facilities to accommodate approximately 165 employees. The parking area adjacent to the building met the then-minimum building code requirements, with space available for approximately 110 cars.
On October 19, 1967, Country Capital leased the property to Grumman for 6 years, but, pursuant to paragraph 54 of the lease, the 6-year term was stated to commence 10 days after the completion of 15 “items” which were to be performed by the lessor as specified in paragraph 53. Rent was stated to be $125,000 per year, and the lessee agreed to pay all real estate taxes as additional rent. At its insistence, Grumman was given an option not only to renew the lease for a term of an additional 5 years at an annual rental of $72,500, but to purchase the property for $750,000 during the fifth and sixth years of the term of the lease.2 Grumman leased the premises in order to provide office space for engineers working on the lunar module (LEM) used in the Apollo Space Program.
Prior to the completion of the work involved in the 15 items specified in paragraph 53 of the lease, Grumman, in February of 1968, requested that the building be modified to accommodate an increased personnel force of up to 750 people. Specifically, Grumman requested (i) that changes be made to the interior of the building so as to accommodate up to 750 people, and (ii) that additional parking space on the outside of the building be added to accommodate parking by the increased number of personnel. Accordingly, the lease was subsequently amended on March 18, 1968, by a rider,3 which modified a number of the provisions of the original lease.
Among other things, paragraph 53 was expanded by the rider to provide for extensive additional work. Items 1 through 15 of that paragraph remained unchanged, but new items 16 through 35 were added. Grumman took possession on April 21, 1968.4
Some of the items involved merely ordinary or deferred maintenance, such as cleaning up the premises, painting, repair of the parking area, repairs to roof, repairs to chain link fence and gate, etc. On the other hand, much of the work involved items that were capital in nature, such as the installation of a sprinkler system, battery operated exit lights, air conditioning facilities, expanded toilet and sewage removal facilities, new lighting fixtures, a 3,000-gallon fuel oil tank, metal office partitions, acoustical ceilings, roof exhaust fan, additional paved parking area, plaster-finished lobby wall, doors and frames, drinking fountains, and other items.
The rider also made some important changes in the financial arrangements between the parties. Thus, the annual rent during the initial 6-year term was increased to $163,500, but no change was made in the $72,500 rent payable during the 5-year renewal term. Further, paragraph 59 of the original lease, which established a schedule of payments required of the lessee in the event of the lessee's cancellation of the lease prior to termination of the 6-year term, was revised to include not only all rent to the end of the year within which notice of cancellation was given, but also additional payments as follows:
+----------------------------+
¦Within first year ¦$505,000¦
+-------------------+--------¦
¦Within second year ¦404,000 ¦
+-------------------+--------¦
¦Within third year ¦303,000 ¦
+-------------------+--------¦
¦Within fourth year ¦202,000 ¦
+-------------------+--------¦
¦Within fifth year ¦101,000 ¦
+-------------------+--------¦
¦Within sixth year ¦None ¦
+----------------------------+
Further, although the basic $750,000 price payable by the lessee upon exercising the option to purchase during the fifth and sixth years remained the same, there was an increase in the additions thereto referred to in note 2 supra.5
The amounts by which the rental during the 6-year term exceeded the rents provided in the renewal period, as well as the additional amounts required to be paid upon premature cancellation of the lease or the exercise of the option to purchase prior to the end of the 6-year period, were all directly related to the estimated expenditures by the lessor in carrying out the work called for by paragraph 53.
On December 20, 1968, petitioner purchased the property from Country Capital subject to the Grumman lease as amended by the rider. On the preceding day, December 19, 1968, apparently in anticipation of the sale to petitioner, Country Capital had mortgaged the property to a bank to secure an indebtedness of $750,000. Petitioner acquired the property subject to the first mortgage obligation. In addition, he paid $261,000 in cash and gave a purchase money note in the amount of $340,000. This original purchase price was thus $1,351,000. The December 20, 1968, purchase agreement gave petitioner an option to require Country Capital to repurchase the property between April 15, 1974, and May 15, 1974, inclusive, “at a consideration of $295,000.00 above the then existing balance of the first mortgage.” Such remaining balance at the termination of the 6-year lease period would be $506,792.
In connection with petitioner's purchase of the property, Country Capital represented that the lease and rider were in full force and effect, without defense or offset, that Grumman had accepted the premises, and that all rents were on a current basis. However, shortly after purchasing the...
To continue reading
Request your trial
-
MILBREW, INC. AND AMBER LABORATORIES v. Commissioner
...concedes that the component method is a permissible method of computing depreciation on used real property. See Fieland v. Commissioner Dec. 36,749, 73 T.C. 743, 752 (1980). Nevertheless, respondent contends that petitioners have failed to establish the depreciable cost bases and useful liv......
-
Moores v. Commissioner
...in this case is in no sense a novel one.2 The issue has been addressed by this Court in a number of cases including Fieland v. Commissioner [Dec. 36,749], 73 T.C. 743 (1980); Midler Court Realty, Inc. v. Commissioner [Dec. 32,445], 61 T.C. 590 (1974), affd. [75-2 USTC ¶ 9650] 521 F.2d 767 (......
-
Peterson v. Commissioner
...relative values, and the useful lives of the components were correctly determined at the time of acquisition. See Fieland v. Commissioner Dec. 36,749, 73 T.C. 743, 752 (1980), and cases cited therein. Petitioners failed to do this and the burden is on petitioners to sustain their claimed de......
-
CONTINENTAL GRAIN COMPANY v. Commissioner, Docket No. 34157-84
...While respondent's valuation in allocation of purchase price cases is afforded a presumption of correctness, Fieland v. Commissioner Dec. 36,749, 73 T.C. 743, 751 (1980), we find that the appraisals made by ASC and in Jones' report, both of which are on a going concern or value in use basis......