ABC Rentals of San Antonio, Inc. - Page 10

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               ABC did not attach a separate statement to its return for              
          its taxable year ending May 31, 1987.  ABC did not include the              
          year the rental property was placed in service, nor did it                  
          include the unadjusted basis of the rental property.                        
               The Form 4562 filed with ABC's tax return for the year                 
          ending May 31, 1987, contains the heading on line 7 "Property               
          subject to section 168(e)(2) election."8  The 1986 instructions             
          for this form provide that line 7 should be used to report                  
          property that the taxpayer elects, under section 168(e)(2), to              
          depreciate by any method not based on a term of years.                      
          Furthermore, the instructions provide that the depreciation                 
          deduction for the property should be entered in column (f) of               
          line 7.9  However, ABC left column (f) of line 7 blank.  Rather,            
          it appears the depreciation deduction for the rental property has           
          been included in column (f) of line 8--"Other depreciation" where           
          a $119,195 deduction is claimed.  ABC failed to indicate on its             
          Form 4562 or anywhere else on its return that it was using the              
          income forecast method of depreciation.  The only methods of                
          depreciation indicated on its return are "ACRS" and "DDB".                  

               8Sec. 168(e)(2) is the predecessor to sec. 168(f)(1) and               
          applies to property placed in service prior to Jan. 1, 1987.                
          ABC's tax return for the year ended May 31, 1987, contains                  
          depreciation deductions for property placed in service from June            
          1 through Dec. 31, 1986, which would be governed by the former              
          sec. 168(e)(2) as well as property placed in service from Jan. 1            
          through May 31, 1987, which would be governed by sec. 168(f)(1).            
               9See infra pp. 21-22.                                                  




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