- 8 -
on a preponderance of the evidence. See Arevalo v. Commissioner,
124 T.C. at 250-251.
II. Depreciation Deduction
Section 167(a) allows as a depreciation deduction a
reasonable allowance for the “exhaustion, wear and tear” of
property (1) used in a trade or business or (2) held for the
production of income.
Depreciation deductions are based on investment in and
actual ownership of property rather than on 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 transfer of formal legal title does not
shift the incidence of taxation attributable to ownership of
property where the transferor continues to retain significant
control over the property transferred. Arevalo v. Commissioner,
469 F.3d at 439; Crooks v. Commissioner, 453 F.3d at 656; 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”, the transfer of formal legal
title is disregarded when determining ownership of an asset for
purposes of depreciation. See Arevalo v. Commissioner, 469 F.3d
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