James M. and Ruth J. Riley - Page 13

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          B.   Depreciation                                                           
               On Schedules F, petitioners claimed depreciation deductions            
          for the truck, the farm buildings on the DeMoore, Sioux Valley,             
          and Ross farms, and the installed tile on the Ross farm using the           
          straight-line method for the years at issue.  Respondent                    
          disallowed $19,500 of the $21,500 depreciation claimed for 2001,            
          $35,667 of the $37,000 claimed for 2002, and all of the $8,000              
          claimed for 2003.  Respondent allowed all of the $2,000                     
          depreciation of the tile installed on the Ross farm deducted for            
          2001 and $1,333 of the $2,000 deducted for 2002.  Respondent                
          disallowed all depreciation claimed for the farm buildings                  
          because petitioners had not established their bases in the                  
          property or shown that the assets met the requirements of section           
          167.  Respondent also disallowed depreciation and expensed                  
          deductions petitioners claimed for the truck.                               
               1.   Depreciation of Farm Buildings and Tile                           
               Section 167(a) allows as a depreciation deduction a                    
          reasonable allowance for the exhaustion, wear, and tear of                  
          property used in a trade or business.  The purpose of the                   
          deduction for depreciation is to allow the taxpayer to recover              
          over the useful life of the property its cost or other basis.               
          United States v. Ludey, 274 U.S. 295, 300-301 (1927).                       
               Pursuant to section 168(a), the depreciation deduction for             
          any tangible property generally is to be determined by using the            

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