Michael A. McGrath and Frances Y. McGrath - Page 12




                                       - 12 -                                         
          this tax return to treat any property they placed in service in             
          1996 as section 179 property.                                               
          _____________________________________                                       
               No more than $18,739 of petitioner’s capital expenditures              
          for the Improvements constitutes a substitute for rent.                     
                                       OPINION                                        
                       I.  Deducting the Cost of Improvements                         
               Petitioners contend that, under section 162(a)(3), they may            
          deduct the cost of the Improvements because they (1) were                   
          required to pay for and make the Improvements, and (2) did not              
          acquire either title to, or an equity interest in, the                      
          Improvements.  Petitioners’ contention closely tracks the                   
          statutory language.  Petitioners’ contention also appears to be             
          based on assumed economic realities; i.e., that the Improvements            
          that the lessee was required to make would increase the Store               
          Space’s value, that this expected value increase implicitly                 
          reduced the amount of the rent obligations, and that, to the                
          extent of the reduction, the cost of the Improvements is                    
          deductible rent expense under section 162(a)(3).  Respondent                
          contends that petitioners must capitalize and depreciate the cost           
          of the Improvements because they are nondeductible capital                  
          expenditures under section 263.  We agree with respondent’s                 
          conclusion and much of respondent’s analysis.                               








Page:  Previous  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  Next

Last modified: May 25, 2011