558
Opinion of the Court
§ 1016. This is so because the depreciation deduction allowable for the building (if the building is used to produce income) must, upon the sale or exchange of the property, be subtracted from the taxpayer's basis in the building whether the deduction was taken or not; but there is no subtraction from the land's basis since no such deduction is allowable for the land. See, e. g., Treas. Reg. § 1.167(a)-5 (requiring an apportionment of basis when a taxpayer has acquired "a combination of depreciable and nondepreciable property for a lump sum, as for example, buildings and land").
Although the Code and regulations allow some flexibility within such major categories of tax treatment,9 the boundaries between the major categories are almost completely impassable. When a taxpayer is dealing with associated items falling into two different major categories, he cannot, as a general matter, choose to treat those items as a single property falling into one category or the other; a taxpayer may not, for example, decide to treat some or all of his apartment building as more land. Nor may a taxpayer choose to add "improvement" costs to the basis of whichever item he pleases: some costs, say of a new roof, must be treated as adding to the value of the depreciable building (or as separate depreciable assets), whereas other costs, like that of grading a building site, must be treated as additions to the value of the nondepreciable land. See, e. g., Rev. Rul. 74- 265, 1974-1 Cum. Bull. 56 (distinguishing between depreciable and nondepreciable improvements to land).
Depletion and depreciation are two of these major categories of tax treatment. As this Court said almost a half-9 For example, a taxpayer may set up a depreciation account for a new furnace separate from that of the account of the building in which it is installed; he may also, under some circumstances, set up a "composite" account which combines the cost of the building with the cost of "improvements," such as the furnace. See generally Treas. Reg. § 1.167(a)-7 (describing "group," "classified," "composite," and component accounts for depreciable property).
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