Michael A. McGrath and Frances Y. McGrath - Page 1

                                 T.C. Memo. 2002-231                                  

                               UNITED STATES TAX COURT                                

              MICHAEL A. MCGRATH AND FRANCES Y. MCGRATH, Petitioners v.               
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 126-99.              Filed September 18, 2002.              

                    In 1995, Ps leased (as lessee) retail space in a                  
               shopping center to operate a bakery.  When Ps entered into             
               the lease, the leased space was nothing more than a dirt               
               floor enclosed by temporary walls; the leased space was not            
               serviced by any utilities.  The lease obligated Ps to make             
               substantial permanent improvements to the leased space at              
               their own expense.  Other than trade fixtures, the permanent           
               improvements Ps made to the leased space became the property           
               of the lessor upon installation.                                       
                    Ps did not make a sec. 179, I.R.C. 1986, election on              
               their timely filed tax return for either 1995 or 1996.  Ps             
               did not file a timely amended tax return for either 1995 or            
                    1.  Held: Ps’ expenditures for the permanent                      
               improvements they made to the leased space constitute                  
               capital expenditures that are not currently deductible.                
               Sec. 263, I.R.C. 1986.  Ps’ cost recovery for the years in             

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