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exhaustion, wear and tear, and obsolescence are to be allowed in
respect of any property shall be the adjusted basis provided in
section 1011". As pertinent here, section 1011(a) defines the
term "adjusted basis" as the basis determined under section 1012,
adjusted as provided under section 1016, and section 1012 pro-
vides that the basis of property is its cost. Section 1016(a)(2)
provides in pertinent part that adjustments in respect of prop-
erty shall be made, inter alia, to the extent of the amount of
depreciation deductions allowed for that property. Section
1015(a) provides in pertinent part that if “property was acquired
by gift after December 31, 1920, the basis shall be the same as
it would be in the hands of the donor”.
Assuming arguendo (1) that SDC transferred the computer
simulator to TGC by gift, (2) that any such gift is treated as a
gift to petitioners for purposes of determining petitioners’
entitlement for the taxable years at issue to depreciation
deductions with respect to that simulator, and (3) that petition-
ers’ basis in the computer simulator under section 1015(a) is
SDC’s cost of, and thus its basis in, that simulator, we must
determine SDC’s cost of that simulator.
Petitioners contend that SDC’s cost of the computer simula-
tor is the amount that SDC paid to TGC pursuant to the 1992
contract (i.e., $1,049,117). On the record before us, we reject
that contention. SDC paid $1,049,117 to TGC pursuant to the 1992
contract for all of the work that TGC performed under that
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