ABC Rentals of San Antonio, Inc. - Page 8

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               On their income tax returns ending in 1987 and 1988, the               
          Entities continued to depreciate all rental units placed in                 
          service during prior tax years, using the accelerated cost                  
          recovery system (ACRS).  The recovery period used by the Entities           
          to calculate the depreciation under ACRS was 5 years.                       
               For Federal income tax purposes, the Entities calculated               
          depreciation on their rental units placed in service for tax                
          years ending after 1986 using the income forecast method.6  On              
          rental units initially acquired by an Entity through purchase               
          from third parties and rented for the first time and for rental             
          units rented by an entity on a subsequent rental contract, each             
          year's depreciation deduction was equal to the cost of the rental           
          units multiplied by a fraction.  The numerator of the fraction              
          was the current year's income from that rental unit.  The                   
          denominator of the fraction was 300 percent of the rental unit's            
          initial cost, which was the amount of total gross rental that               
          would be received if the initial rental contract on such rental             
          went to term.                                                               
               Guaranteed attached Statement 2 to its tax return for the              
          taxable year ending December 31, 1987.  The only information                
          Statement 2 provided was that the type of property being                    
          depreciated was "RENTAL UNITS".  The statement did not say that             
          Guaranteed made an election of the income forecast method or of             

               6Under the income forecast method used by the Entities, a              
          rental unit's depreciation deduction was based on the rent                  
          received on that rental unit.  Consequently, a depreciation                 
          deduction was not taken on a rental unit during any month in                
          which it did not earn rental income.                                        

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Last modified: May 25, 2011