- 15 -
construct at his own cost a building on the property, the
lessee, not the lessor, is entitled to a deduction for the
depreciation of the building. See Reisinger v.
Commissioner, 144 F.2d 475 (C.A. 2, 1944), affirming a
Memorandum Opinion of this Court; Friend v. Commissioner,
119 F.2d 969 (C.A. 7, 1941), affirming a Memorandum Opinion
of this Court; Commissioner v. Pearson, 188 F.2d 72 (C.A. 5,
1951), reversing and remanding on other grounds 13 T.C. 851;
First Nat. Bank of Kansas City v. Nee, 190 F.2d 61 (C.A. 8,
1951); Goelet v. United States, 266 F.2d 881 (C.A. 2, 1959);
Schubert v. Commissioner, 286 F.2d 573 (C.A. 4, 1961),
affirming 33 T.C. 1048.
The lessee, who is obligated to make improvements to
the realty, is entitled to recover his capital outlay by
deductions for depreciation. His right to the deductions is
not altered by the fact that, under doctrines of local law,
legal title to the improvements may reside in the lessor.
In such situations it is the lessee, not the lessor, who
suffers the economic loss as the property deteriorates, and
who is entitled to the statutory allowance. Helvering v.
Lazarus & Co., 308 U.S. 252 (1939); First Nat. Bank of
Kansas City v. Nee, supra. The party claiming depreciation
must have some investment in the wasting asset. Detroit
Edison Co. v. Commissioner, 319 U.S. 98 (1943).
To the same effect, see sec. 1.162-11(b), Income Tax Regs.11
11
Sec. 1.162-11. Rentals.--
* * * * * * *
(b) Improvements by lessee on lessor’s property.--(1)
The cost to a lessee of erecting buildings or making
permanent improvements on property of which he is the lessee
is a capital investment, and is not deductible as a business
expense. * * * [Emphasis added.]
The balance of this provision has been superseded by the
enactment of sec. 168, in particular, sec. 168(i)(8)(A).
However, the statutory language does not affect the continued
validity of that part of the regulation set forth in this note.
For an example of this continued validity, see Nelson v.
Commissioner, T.C. Memo. 2000-212.
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