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Commerce City required that certain improvements be made to
the Eudora property in order to obtain the rezoning Goshorn
needed to conduct its business. During 1987, Goshorn made
improvements to lot 3 necessary to comply with Commerce City's
industrial zoning requirements and to meet Goshorn's business
needs. The required improvements, costing $134,752.52, consisted
of a paved parking lot and improvements to convert the pre-
existing building on lot 3 into office space. Goshorn occupied
and used the premises from the time the improvements were made
until it ceased doing business in 1992.
During 1985, petitioner, in consultation with Lloyd Sweet,
Jr., petitioner's certified public accountant, and with the real
estate agent involved in the purchase of the Eudora property,
determined that the fair market rental value of the Eudora
property and surrounding rental properties was $1,000 per acre
per month. Lot 3, which was the portion Goshorn leased, con-
sisted of 5 acres. Thus, a rent of $5,000 per month was charged.
The leasehold improvements were reported on Form 4562, Deprecia-
tion and Amortization, as 5-year property on Goshorn's Federal
tax returns.
In 1992, Goshorn stopped renting lot 3 from petitioner.
Subsequently, lot 3 was leased to a third party for $4,500 per
month.
Respondent determined that the leasehold improvements made
to the Eudora property by Goshorn during 1987 constituted a tax-
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