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Depreciation deductions are based on an investment in and
actual ownership of property rather than the possession of bare
legal title. See Arevalo v. Commissioner, 124 T.C. at 251; Grant
Creek Water Works, Ltd. v. Commissioner, 91 T.C. 322, 326 (1988);
Narver v. Commissioner, 75 T.C. 53, 98 (1980), affd. 670 F.2d 855
(9th Cir. 1982). “The Supreme Court has repeatedly stressed
that, in examining transactions for the purpose of determining
their tax consequences, substance governs over form.” Arevalo v.
Commissioner, 469 F.3d at 439; see also Frank Lyon Co. v. United
States, 435 U.S. 561, 572-573 (1978); Grodt & McKay Realty, Inc.
v. Commissioner, 77 T.C. 1221, 1236 (1981).
If the benefits and burdens reflecting ownership have not
passed from “seller” to “purchaser”, we disregard the transfer of
formal legal title when determining ownership of an asset for tax
purposes. See Arevalo v. Commissioner, 469 F.3d at 439. In
other words, when a taxpayer never actually owns the property in
question, the taxpayer is not allowed to claim a deduction for
depreciation. See Arevalo v. Commissioner, 124 T.C. at 251;
Grodt & McKay Realty, Inc. v. Commissioner, supra at 1236-1238;
see also Schwartz v. Commissioner, T.C. Memo. 1994-320, affd.
without published opinion 80 F.3d 558 (D.C. Cir. 1996). Whether
the benefits and burdens of ownership with respect to property
have passed to the taxpayer is a question of fact that must be
ascertained from the intention of the parties as established by
the written agreements read in light of the attending facts and
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Last modified: November 10, 2007