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The Supreme Court affirmed the holding of the Court of
Appeals for the Second Circuit; i.e., that the taxpayer was
entitled to an allocation of the acquisition cost between the
building and land and entitled to depreciate the basis over the
remaining useful life of the building.18 The Supreme Court noted
that, as lessee of the land, the taxpayer’s “ownership” or use of
its building was subject to significant control by the lessor and
to conditions of the lease. For example, the taxpayer’s right to
use its building was burdened by the payment of rent and the
obligation to relinquish use of the building and/or to demolish
the building at the end of the lease term. This point suggests
that in purchasing the land, the taxpayer may, to some extent,
have been perfecting unfettered ownership in the building.
In addition, the Supreme Court pointed out that the
Millinery Ctr. Bldg. Corp. v. Commissioner, supra, taxpayer did
not prove that its rental payments were excessive for what it was
leasing, and, therefore, the Supreme Court left for another day
the question of the deductibility of payments for relief from the
terms of a lease. In deciding that the approach of the Court of
18 The allocation permitted was between a depreciable
(building) and a nondepreciable (land) portion of the merged
interest. The Government did not seek Supreme Court review of
the depreciation allowance of that portion of the acquisition
cost that exceeded the value of the building’s remaining economic
life. No portion was permitted to be deducted as current
business expense attributable to the effective cancellation of
the land lease.
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