Meyer v. United States

• Decision Date: 02 December 1965
• Docket Number: Civ. A. No. 65-321.
• Citation: 247 F. Supp. 939
• Parties: Albert C. MEYER and Eleanor M. Meyer v. The UNITED STATES of America.
• Court: U.S. District Court — District of Massachusetts

247 F. Supp. 939

Albert C. MEYER and Eleanor M. Meyer v. The UNITED STATES of America.

Civ. A. No. 65-321.

United States District Court D. Massachusetts.

December 2, 1965.

Lyman T. Burgess, Springfield, Mass., for plaintiff.

Steven Shapiro, Dept. of Justice, Washington, D. C., David A. Wilson, Jr., Dept. of Justice, Washington, D. C., W. Arthur Garrity, Jr., U. S. Atty., Boston, Mass., for defendant.

WYZANSKI, Chief Judge.

Plaintiffs, being husband and wife, bring this action for refund of federal income taxes paid by them on their joint returns for the three years 1959, 1960, and 1961. With respect to each year the same question is raised: whether the husband, as landlord, had a right to deduct from income received by him from each of several leases a sum representing amortization during the life of that lease of such part of the total price he paid for the parcel as is allocated to the building which stood there at the time of the purchase and which was subsequently demolished to meet the terms of the lease. At the time he made the purchase of each parcel the husband had negotiated with the prospective lessee a complete verbal understanding, including the proposed demolition, and thus the husband, conditional upon the execution of the lease, had at the time of purchase the conditional intention to demolish the building.

The Taxpayer's claim of a right to amortize the cost of the demolished building is denied by the Government on the ground that the whole purchase price must be allocated to the land, the purchaser-landlord-taxpayer having had at the time of the purchase a virtually absolute intention to demolish the building.

The applicable statutory provisions are set forth in §§ 165 and 167 of the Internal Revenue Code of 1954 (26 U.S.C. §§ 165 and 167):

SEC. 165. LOSSES.

(a) General Rule. — There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

(b) Amount of Deduction. — For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

(c) Limitation on Losses of Individuals. —In the case of an individual, the deduction under subsection (a) shall be limited to —

(1) losses incurred in a trade or business;

(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; * * *

* * * * * *

SEC. 167. DEPRECIATION.

(a) General Rule. — There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) —

(1) of property used in the trade or business, or

(2) of property held for the production of income.

The relevant Treasury regulation is set forth in § 1.165-3 (26 C.F.R. § 1.165-3):

SEC. 1.165-3. Demolition of buildings.

(a) Intent to demolish formed at time of purchase. (1) Except as provided in subparagraph (2) of this paragraph, the following rule shall apply when, in the course of a trade or business or in a transaction entered into for profit, real property is purchased with the intention of demolishing either immediately or subsequently the buildings situated thereon: No deduction shall be allowed under section 165(a) on account of the demolition of the old buildings even though any demolition originally planned is subsequently deferred or abandoned. The entire basis of the property so purchased shall, notwithstanding the provisions of Sec. 1.167(a)-5, be allocated to the land only. Such basis shall be increased by the net cost of demolition or decreased by the net proceeds from demolition.

(2) (i) if the property is purchased with the intention of demolishing the buildings and the buildings are used in a trade or business or held for the production of income before their demolition, a portion of the basis of the property may be allocated to such buildings and depreciated over the period during which they are so used or held. The fact that the taxpayer intends to demolish the buildings shall be taken into account in making the apportionment of basis between the land and buildings under Sec. 1.167(a)-5. In any event, the portion of the purchase price which may be allocated to the buildings shall not exceed the present value of the right to receive rentals from the buildings over the period of their intended use. The present value of such right shall be determined at the time that the buildings are first used in the trade or business or first held for the production of income. If the taxpayer does not rent the buildings, but uses them in his own trade or business or in the production of his income, the present value of such right shall be determined by reference to the rentals which could be realized during such period of intended use. The fact that the taxpayer intends to rent or use the buildings for a limited period before their demolition shall also be taken into account in computing the useful life in accordance with paragraph (b) of Sec. 1.167(a)-1.

(ii) Any portion of the purchase price which is allocated to the buildings in accordance with this subparagraph shall not be included in the basis of the land computed under subparagraph (1) of this paragraph, and any portion of the basis of the buildings which has not been recovered through depreciation or otherwise at the time of the demolition of the buildings is allowable as a deduction under section 165.

* * * * * *

(b) Intent to demolish formed subsequent to the time of acquisition. (1) Except as provided in subparagraph (2) of this paragraph, the loss incurred in a trade or business or in a transaction entered into for profit and arising from a demolition of old buildings shall be allowed as a deduction under section 165(a) if the demolition occurs as a result of a plan formed subsequent to the acquisition of the buildings demolished. The amount of the loss shall be the adjusted basis of the buildings demolished increased by the net cost of demolition or decreased by the net proceeds from demolition. See paragraph (c) of Sec. 1.165-1 relating to amount deductible under section 165. The basis of any building acquired in replacement of the old buildings shall not include any part of the basis of the property demolished.

(2) If a lessor or lessee of real property demolishes the buildings situated thereon pursuant to the requirements of a lease or the requirements of an agreement which resulted in a lease, no deduction shall be allowed to the lessor under section 165(a) on account of the demolition of the old buildings. However, the adjusted basis of the demolished buildings, increased by the net cost of demolition or decreased by the net proceeds from demolition, shall be considered as a part of the cost of the lease to be amortized over the term thereof.

The foregoing regulation is the lineal descendant of the following Treasury regulation, in effect in 1918 when it was known as Article 142 (see Treasury Regulations, 1919 edition, page 45.)

Art. 142. Voluntary removal of buildings.— * * *

When a taxpayer buys real estate upon which is located a building which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible loss by reason of the demolition of the old building, and no deductible expense on account of the cost

...