James M. and Ruth J. Riley - Page 14

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          applicable depreciation method, the applicable convention, and              
          the applicable recovery period.  The period for depreciation of             
          an asset begins when the asset is first placed into service.                
          Sec. 1.167(a)-10(b), Income Tax Regs.  Deductions for                       
          depreciation must be taken in the year in which depreciation                
          occurs and cannot be taken in subsequent years by reason of a               
          taxpayer’s failure to deduct the depreciation allowance in prior            
          years.  Sec. 1.167(a)-10(a), Income Tax Regs.                               
               Generally, depreciation is computed by using the cost of the           
          property as its basis.  Secs. 167(c), 1011, 1012; sec.                      
          1.167(g)-1, Income Tax Regs.  If depreciable property and                   
          nondepreciable property such as real property with improvements             
          are bought for a lump sum, the cost must be apportioned between             
          the land and the improvements.  United States v. Hill, 506 U.S.             
          546, 559 (1993); sec. 1.167(a)-5, Income Tax Regs.  In making               
          this allocation, section 1.167(a)-5, Income Tax Regs., provides:            
               In the case of the acquisition on or after March 1,                    
               1913, of a combination of depreciable and                              
               nondepreciable property for a lump sum, as for example,                
               buildings and land, the basis for depreciation cannot                  
               exceed an amount which bears the same proportion to the                
               lump sum as the value of the depreciable property at                   
               the time of acquisition bears to the value of the                      
               entire property at that time. * * *                                    
          Thus, the relevant inquiry is the respective fair market values             
          of the depreciable and nondepreciable property at the time of               
          acquisition.  Weis v. Commissioner, 94 T.C. 473, 482-483 (1990);            
          Randolph Bldg. Corp. v. Commissioner, 67 T.C. 804, 807 (1977).              

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