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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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