Moores v. Commissioner
| Decision Date | 31 January 1995 |
| Docket Number | Docket No. 25181-92. |
| Citation | 69 T.C.M. 1797 |
| Parties | Jack M. Moores and Joan G. Moores v. Commissioner. |
| Court | U.S. Tax Court |
A. Craig Fleishman and James P. Gregory, 7887 E. Belleview, Englewood, Colo., for the petitioners. Virginia L. Hamilton, for the respondent.
Respondent determined deficiencies in petitioners' Federal income tax for the years and in the amounts as follows:
Year Deficiency
1986 .............................. $ 22,700
1987 .............................. 109,852
1988 .............................. 79,817
1989 .............................. 31,355
The sole issue for decision is whether petitioners may separately depreciate (or amortize) the so-called premium value of a lease encumbering an office building that petitioner Jack M. Moores purchased in 1986.
Unless otherwise indicated, section references are to the Internal Revenue Code as in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
The facts in this case were fully stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioners resided in Lakewood, Colorado, at the time they filed their petition for redetermination.
On September 1, 1986, petitioner Jack M. Moores entered into a contract to purchase the Energy I Building, an office building located in Casper, Wyoming. The Energy I Building, constructed in 1975 of precast concrete, is a two-story structure containing a total of 66,625 square feet, with 52,237 square feet of leasable space. The property includes parking spaces and two garage structures.
As of September 1, 1986, the Energy I Building was encumbered by a lease. Specifically, by lease agreement dated May 1, 1979, Gulf Oil Company (Gulf) contracted to lease the Energy I Building for a term of 5 years for a rent of $394,392 per year. On July 1, 1983, Gulf executed a lease extension agreement extending the lease for an additional 5 years (through April 30, 1989) for a rent of $647,216.43 per year. As of September 1, 1986, the rent that Gulf was obligated to pay under the lease extension agreement exceeded market rental rates, resulting in a so-called lease premium value.
The terms by which petitioner Jack M. Moores acquired the Energy I Building are memorialized in a document entitled "REAL PROPERTY PURCHASE AGREEMENT" (the purchase agreement) which states in pertinent part:
NOW, THEREFORE, in consideration of the mutual undertakings of the parties hereto, it is hereby agreed as follows:
1. Purchase and Sale. Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the Land, together with all right, title and interest of Seller in and to all improvements, structures, supplies and fixtures located upon the Land, all right, title and interest of Seller in and to the personal property located upon or about the Land and used in the operation of said office building, all right, title and interest of Seller in and to the name "Energy I Building", and, to the extent assignable, all right, title and interest of Seller in and to all leases, contract rights, agreements, tenant lists, advertising material and telephone exchange numbers (hereinafter, collectively, the "Property"), all upon the terms, covenants and conditions hereinafter set forth.
2. Purchase Price. The purchase price for the Property shall be the sum of $2,210,644.
In addition to the purchase agreement, the transfer of the Energy I Building is evidenced by a special warranty deed, a bill of sale and assignment, and an assignment of parking lease.
The various documents memorializing the transfer of the property do not purport to allocate the purchase price among the building, land, personal property, or the Gulf lease. However, the parties now agree that the $2,210,644 purchase price is allocable in part to land and personal property in the amounts of $175,000 and $103,564, respectively.
As a result of his purchase of the Energy I Building, petitioner Jack M. Moores acquired the seller's entire interest in the Gulf lease. As of September 1, 1986, there were 32 months remaining under the 1983 Gulf lease extension agreement. The useful life of the Energy I Building substantially exceeded the remaining term of the lease under the lease extension agreement.
In computing their Federal income taxes for the years in issue, petitioners allocated $932,715 of the total purchase price for the Energy I Building to the building itself and began reporting depreciation deductions computed under the straight line method over 19 years. At the same time, petitioners allocated $1,000,000 of the total purchase price for the Energy I Building to the premium value of the lease. Viewing the premium value of the lease as a separate, depreciable asset, petitioners reported amortization deductions over the 32-month rental period remaining under the Gulf lease extension agreement. Specifically, petitioners reported amortization deductions in the amounts of $125,000, $375,000, $375,000, and $125,000, on their Federal income tax returns for the taxable years 1986, 1987, 1988, and 1989, respectively.
Upon examination of petitioners' tax returns, respondent disallowed the amortization deductions described above. The deficiency notice issued to petitioners states in pertinent part:
Amortization expense deductions * * * are not allowable because it has not been established that any portion of the 1986 building acquisition costs were paid for (or allocable to) an amortizable or depreciable asset other than the building itself.
In conjunction with the disallowance of the amortization deductions reported by petitioners, respondent allowed petitioners increased depreciation deductions attributable to the building in the amounts of $14,990 for 1986, and $52,966 for each of the years 1987, 1988, and 1989. These latter adjustments were made to account for respondent's reallocation of adjusted basis from the lease premium to the building.1
There is no dispute that the rent provided under the Gulf lease extension agreement exceeded market rental rates on September 1, 1986. Further, the parties now agree (contrary to petitioners' original reporting position) that the premium value of the Gulf lease was $765,000 on September 1, 1986.
Section 167(a) provides the general rule that a deduction for depreciation is permitted to account for the exhaustion, wear and tear, and obsolescence of property that is either used in the taxpayer's trade or business or held for the production of income. Sec. 1.167(a)(1), Income Tax Regs. See Massey Motors, Inc. v. United States [60-2 USTC ¶ 9554], 364 U.S. 92, 93 (1960); Colorado Natl. Bankshares, Inc. v. Commissioner [Dec. 46,875(M)], T.C. Memo. 1990-495, affd. [93-1 USTC ¶ 50,077] 984 F.2d 383 (10th Cir. 1993). A deduction for depreciation is generally available for both tangible and intangible property. In this regard, section 1.167(a)-(3), Income Tax Regs., provides that:
If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. * * *
Deductions are a matter of legislative grace, and petitioners bear the burden of proving their entitlement to any deduction claimed on their Federal income tax returns. New Colonial Ice Co. v. Helvering [4 USTC ¶ 1292], 292 U.S. 435, 440 (1934); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933); see Rule 142(a).
Petitioners contend, contrary to respondent's determination, that the premium value of the Gulf lease is an intangible asset that is subject to an amortization expense deduction separate from the depreciation allowance available with respect to the Energy I Building. Petitioners assert that they need only show that the premium value of the lease has an ascertainable value and a limited useful life. We disagree.
The issue raised 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 (3d Cir. 1975); Schubert v. Commissioner [Dec. 24,094], 33 T.C. 1048 (1960), affd. [61-1 USTC ¶ 9217] 286 F.2d 573 (4th Cir. 1961); Moore v. Commissioner [Dec. 17,998], 15 T.C. 906 (1950), revd. and remanded [53-2 USTC ¶ 9563] 207 F.2d 265 (9th Cir. 1953), on remand [Dec. 21,172(M)] T.C. Memo. 1955-219; Friend v. Commissioner [Dec. 10,844], 40 B.T.A. 768 (1939), affd. [41-1 USTC ¶ 9271] 119 F.2d 959 (7th Cir. 1941). As explained in more detail below, this Court has uniformly held that an amortization deduction is not allowed under the circumstances presented.
We begin our review with Moore v. Commissioner, supra, a case involving a taxpayer who inherited a one-half interest in a building encumbered by a favorable lease. The matter came before this Court for consideration of two issues: (1) Whether the taxpayer was entitled to a depreciation deduction with respect to her inherited one-half interest in the building; and (2) whether the taxpayer was entitled to an amortization deduction with respect to the premium value of the lease.
Although we held that the taxpayer was entitled to a depreciation deduction with respect to the building, Moore v. Commissioner, supra at 910-911, we nevertheless rejected the taxpayer's argument that she should be allowed an amortization deduction with respect to the premium value of the lease. As the following excerpt reveals, we concluded that it would be inappropriate to treat the lease as a separate, depreciable asset.
In the case of Milton H. Friend [Dec....
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