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Accordingly, the cost of the Improvements, to the extent it
is not a rent substitute, is not deductible as “other payments”.
Petitioners’ cost recovery is by way of depreciation, as allowed
in the notice of deficiency.
In light of the foregoing, it is evident that petitioners
must capitalize the cost of the Improvements under section 263
and depreciate them in accordance with sections 167 and 168 even
though (1) the Lease required petitioners to make the
Improvements at their own expense, and (2) petitioners did not
hold title to, or otherwise acquire an equity interest therein.
Petitioners raise an additional contention to support their
claim that they may deduct the cost of the Improvements. On
opening brief, petitioners state, in pertinent part, as follows:
IRC � 110 (a) states: “Gross income of a lessee
does not include any amount received in cash (or
treated as a rent reduction) by a lessee from a lessor
- (1) under a short-term lease of retail space, and (2)
for the purpose of such lessee’s constructing or
improving qualified long-term real property for use in
such lessee’s trade or business at such retail space”.
Clearly, it is the intent of the IRC to not include as
14(...continued)
Expenditures, therefore, like those here involved, made [by
the lessee] for betterments and additions to leased
premises, cannot be deducted under the term “rentals”, in
the absence of circumstances fairly importing an exceptional
meaning; and these we do not find in respect of the statute
under review. Nor do such expenditures come within the
phrase “or other payments”, which was evidently meant to
bring in payments ejusdem generis with “rentals,” such as
taxes, insurance, interest on mortgages, and the like,
constituting liabilities of the lessor on account of the
leased premises which the lessee has covenanted to pay.
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