DocketNumber： Docket No. 6578-77
Citation Numbers： 1980 U.S. Tax Ct. LEXIS 106, 74 T.C. 662
Judges： Goffe
Filed Date： 7/9/1980
Status： Precedential
Modified Date： 1/13/2023
*106
As the first step in the development of a luxury residential community, X built a golf course and country club. The golf course and country club were to serve as a marketing tool for adjacent residential properties. To solve real estate title problems and to insulate X and its operations from the membership of the country club, X formed Y as a wholly owned subsidiary and transferred the assets of the golf course and country club to Y. Some assets were transferred outright, but some were transferred subject to a retained estate for 40 years in X. The estate for years was retained so that X could operate the golf course and country club until the residential properties were sold.
X claimed a depreciation deduction due to the amortization of the estate for 40 years, which deduction was disallowed by respondent.
*662 The Commissioner determined a deficiency in the Federal income tax of petitioners for the taxable year ended July 31, 1973, in the amount of $ 107,460.76. Due to concessions, one issue remains to be decided: whether an estate for 40 years retained by petitioner Lomas Santa Fe, Inc., is an interest *663 subject to an allowance for depreciation under
FINDINGS OF FACT
Some of the facts have been stipulated. *108 The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Lomas Santa Fe, Inc. (hereinafter Lomas), and its two subsidiary corporations, Lomas Santa Fe Country Club and Norco Landscape & Maintenance Co., filed their consolidated Federal income *109 tax return for the taxable year ended July 31, 1973, with the Office of the Internal Revenue Service, Fresno, Calif.2 Petitioners, all of which are California corporations, had their principal offices in Solana Beach, Calif., when their petition was filed in this proceeding.
At all times relevant to this proceeding, Theodore E. Gildred (hereinafter Gildred) owned all of the outstanding capital stock of Lomas, was the chairman of the board of directors of Lomas, 3 and was the president of Lomas. Thomas E. Kern (hereinafter Kern) was at all times relevant to this proceeding a member of the board of directors of Lomas and was a vice president of Lomas.
*110 In 1964, Lomas began to formulate a plan for the development of a high quality residential community. The community, which was to be called Lomas Santa Fe, was to be developed on acreage which had been purchased in 1959 from the Rancho Santa Fe Irrigation District. The plan included a neighborhood shopping center, residential units (single-family homes, condominiums, and apartments), and a championship golf course and country club. The development of the golf course and country club was contemplated for two major reasons: first, to enhance the value of the residential properties; and second, to ease the density restrictions imposed by the Rancho Santa Fe Irrigation District.
Gildred had considerable experience as a developer and, based *664 upon that experience, he believed that houses which bordered a golf course would be in greater demand and would fetch higher prices than those which did not. Lomas intended that the golf course would be the hub of the residential community of Lomas Santa Fe. It was contemplated that the golf course would attract the higher income residential market and would greatly enhance the value of the lots which would be sold for residential use. *111 The golf course was needed as an amenity to attract potential purchasers of residential properties because Lomas Santa Fe was some distance from the city of San Diego. In addition to the obvious recreational aspects of the golf course, its cart paths would enable residents of Lomas Santa Fe to travel from their homes to the shopping center via electric cart or similar vehicle.
The Rancho Santa Fe Irrigation District imposed strict density limits upon developments within that district. 4 The acreage held by Lomas was within that district, and it accordingly was subject to deed restrictions upon the density of residential development thereon. In 1967, a master plan for the development of Lomas Santa Fe was submitted to the San Diego County Board of Supervisors and to the Rancho Santa Fe Irrigation District, both of which had control over the development of the acreage on which Lomas Santa Fe was to be built. In approving the master plan, the San Diego County Board of Supervisors and the Rancho Santa Fe Irrigation District imposed the condition that an open-space easement on the acreage used for the golf course be dedicated in perpetuity to the county of San Diego. 5 Such an *112 easement was granted, and the master plan was approved. Because of the dedication of acreage for the golf course to open-space use, the Rancho Santa Fe Irrigation District raised the density limits for the remaining acreage, permitting roughly the same number of dwellings to be built on the remaining land as would have been constructed on the total acreage.
The golf course and country club, being a central and *665 dominant feature of Lomas Santa Fe, was to be used as an essential marketing tool and sales vehicle in the offer of residential properties. Lomas did not intend to keep the golf course and country club indefinitely, but rather, intended to dispose of it when its*113 usefulness as a marketing tool expired.
The idea of including a golf course as an integral part of a development community was not novel, but residential development usually preceded the development of the golf course. As a result, the promises of the developer were the most tangible assurance that home buyers would receive concerning the completion of their development community. In contrast, Lomas undertook the development of the golf course in 1967 as the first step in its project to develop Lomas Santa Fe. Gildred was convinced that his marketing approach would produce results superior to those attainable with only the promise of a golf course.
Lomas Santa Fe Country Club (hereinafter Country Club) was organized on November 14, 1968. Country Club was formed to serve as a vehicle for the refinement of title to the residential properties and to ensure that membership in the country club would not constitute an equity interest in Lomas.
On February 11, 1969, Country Club issued 72,869 shares of its capital stock to Lomas in exchange for certain property as described below. The 72,869 shares so exchanged were all of the issued and outstanding shares of stock in Country Club. *114 Lomas was the sole shareholder of Country Club until July 26, 1973, when 21 percent of such shares were sold by Lomas to Gildred. At all times relevant to this proceeding, Lomas controlled the board of directors of Country Club.
On December 2, 1968, at a meeting of the board of directors of Lomas, several resolutions were adopted concerning a sale of the golf course facilities which Lomas had already developed and which Lomas still owned. The resolutions were as follows:
Resolved that the officers of [Lomas] are hereby authorized and instructed to offer for sale, and to sell, to Lomas Santa Fe Country Club, in return for shares of capital stock in Lomas Santa Fe Country Club, as of a date certain for evaluation purposes, all of the real property set aside, planned and developed as a Country Club, subject thereto to an estate for 40 years in the property generally known as, and containing thereon, the golf professional shop, the existing clubhouse, the area for the contemplated future clubhouse, and the golf course proper.
Resolved Further that in order to insure the control of [Lomas] for future *666 development of real property in the vicinity of the property on which the *115 golf course is located that there will be specifically excluded from the conveyance to Lomas Santa Fe Country Club, the tenth fairway and the areas known as the east and west parkways, but the use of such tenth fairway shall be granted pursuant to a separate agreement between [Lomas] and Lomas Santa Fe Country Club, or an easement thereon.
Resolved Further that [Lomas] will maintain and operate the golf course, bar, dining and related facilities pursuant to its reserved estate for years, and that this corporation will repair, maintain and make improvements upon the golf course, bar, dining and related facilities in consideration for 75% of the membership dues charged by Lomas Santa Fe Country Club for the use of all facilities located upon the subject property.
Resolved Further that Lomas Santa Fe Country Club would have administrative control over all of the operations and facilities upon the subject real property hereinabove referred to.
By letter dated December 3, 1968, and pursuant to the foregoing resolutions, Lomas submitted its offer to Country Club. Lomas offered to transfer property valued by Lomas at $ 728,680.89 and cash of $ 9.11 in exchange for 72,869 shares of capital*116 stock in Country Club at the par value of $ 10 per share. In addition to a technical description of the property transferred, Lomas explained and expanded upon its offer in the letter as follows:
You will note that the real property over which the tenth fairway of the golf course is located and those areas known commonly as the east and west parkways are specifically excluded from our proposal. Should you accept the offer herein contained, we will by separate agreement or easement, insure that the operation, repair, maintenance and improvement of the golf course is not hindered by the exclusion of the tenth fairway, said exclusion being so that Lomas Santa Fe, Inc. may have a full supervision over the development of the lands adjacent to said tenth fairway.
You will note that pursuant to the descriptions in the Exhibits attached hereto that the parking lot, tennis court and swimming pool would be granted to Lomas Santa Fe Country Club outright.
Please note that the golf course proper, (subject to the exclusions and either agreement or easement described above), as well as the golf professional shop, the present club house and the parcel of real property upon which it is contemplated*117 that the future club house will be constructed have been reserved by this corporation for a period of forty years.
This corporation would, subject to any future agreements or conveyances, which would act to modify the plan set forth herein, operate the golf course, bar, dining and related facilities during the period of its reserved estate for years, specifically excluding the parking, tennis, swimming and administrative facilities and responsibilities. In light of the enormous costs involved in the operation, repair, maintenance and improvement of a golf course facility, we *667 would require that 75% of the proposed membership dues be collected for our account for that purpose.
It would be further understood and agreed by this corporation that your corporation would operate the parking, tennis and swimming facilities and would have administrative control over the entire operations of all the facilities.
It is contemplated that this corporation would construct at its own cost further improvements and facilities upon the subject real property and would be willing, upon completion of same, to negotiate a value thereon by mutual agreement for which we would accept payment therefor*118 in cash or shares of stock in your corporation.
The assets which Lomas offered to transfer outright to Country Club and the value of those assets were as follows:
| Asset | Value |
| Acreage (7 acres at $ 8,000/acre) | $ 56,000.00 |
| Skyline Drive widening | 35,123.99 |
| Sewer | 35,835.73 |
| Tunnel | 37,808.03 |
| Tennis court | 36,837.13 |
| Playground equipment | 718.75 |
| Nursery fence | 775.85 |
| Cash | 9.11 |
| Total | 203,108.59 |
The assets in which Lomas reserved an estate for 40 years, their useful lives, and their value were as follows:
| Asset | Useful Life | Value |
| Acreage (60 acres at $ 8,000/acre) | Unlimited | $ 480,000.00 |
| Acreage (61.1 acres at $ 8,000/acre) | Unlimited | 492,800.00 |
| Acreage (1.4 acres at $ 8,000/acre) | Unlimited | 11,200.00 |
| Main clubhouse | 40 years | 45,148.20 |
| Golf-ball building | 40 years | 696.57 |
| Pool clubhouse | 40 years | 39,488.19 |
| Golf course | Unlimited | 737,692.07 |
| Sprinkler | 15 years | 152,000.00 |
| Pumphouse | 40 years | 11,811.52 |
| Maintenance | 40 years | 40,708.35 |
| Snack bar | Not shown | 69,368.24 |
| Total | 2,080,913.14 |
The value of the estate for 40 years in those assets was computed by multiplying the value of the assets by a factor of 0.7474275, and the value of the remainder conveyed to Country*119 Club was *668 computed by multiplying the value of the assets by a factor of 0.2525725. 6 Thus, the value of the estate for 40 years in the foregoing assets was $ 1,555,331.73, and the value of the remainder was $ 525,581.41. The value of the assets offered to be transferred outright ($ 203,108.59) and the value of the remainder interest ($ 525,581.41) combine for a total offer of $ 728,690 worth of assets.
On December 17, 1968, at a special meeting of the board of directors of Country Club, the three directors of Country Club, Gildred, Kern, and Kent Staab, unanimously resolved that the offer of Lomas be accepted. 7 In accordance with the agreement between Lomas and Country Club, two corporation grant deeds were prepared. Two deeds dated February 11, 1969, were recorded in the Office of the Recorder of San Diego County on December 3, 1971. One deed grants Country Club the property which was not subject to restriction, and*120 the other deed grants Country Club a remainder interest in the property which was subject to an estate for 40 years.
The cost of the golf course and its landscaping in which Lomas retained an estate for 40 years was $ 1,151,244. 8 Lomas had a basis in those assets equal to their cost. Petitioners computed the basis that Lomas had in its estate for 40 years in the land and landscaping of the golf course by applying a factor of 0.7474275 to the basis that Lomas had in those assets. 9 Thus, petitioners determined that Lomas had a basis of $ 855,086 in its estate for 40 years in those assets.
*121 The creation of Country Club solved practical problems of real estate law. Attorneys for Lomas wanted to settle all potential boundary and easement problems prior to the sale of any residential lots. By creating a separate entity to hold the golf course and country club, boundaries between that transferred property and the retained residential property were set accurately. Because the residential property and golf course property were held by different entities, easements for playing rights, *669 cart paths, and open slopes were negotiated easily and placed on the residential lots with certainty.
The creation of Country Club helped Lomas retain control over its development of Lomas Santa Fe. The opinion of the California Supreme Court in
By the time of trial, Lomas had received three offers for the*122 purchase of the golf course and country club. One offer, made in 1974, was an unsolicited offer from a California corporation owned by some of the club members. Another offer, made in 1977, was a solicited offer from a California corporation owned by some of the club members. The third offer was outstanding at the date of trial and was made by a foreign corporation not linked to club members.
In 1973, during a financial audit of petitioners, a certified public accountant noticed that petitioners had not been amortizing the estate for years which was held by Lomas. The assets that are subject to the estate for years fit into two categories: (1) Those which are depreciable assets having a useful life equal to or less than 40 years; and (2) those which have no determinable useful life and are not depreciable assets. Lomas had been claiming depreciation deductions for the assets in the first category because their useful lives would expire prior to or at the same time as the termination of the estate for 40 years. Lomas had not been claiming depreciation deductions for the assets that fit into the second category (land and landscaping) or for the estate for 40 years in those assets.
*123 On their consolidated Federal income tax return for the taxable year ended July 31, 1973, petitioners claimed their usual depreciation deductions in respect of the assets which were depreciable assets having a useful life equal to or less than 40 years, and they also claimed, for the first time, a depreciation deduction due to the amortization of the portion of the estate for *670 years which represented an interest in the land and landscaping of the golf course. The amount of the latter was $ 21,377.16. 10 In addition, petitioners modified the computation of their net operating loss carryover to the taxable year ended July 31, 1973, by including an "amortization correction" in the amount of $ 21,377.16 for the taxable year ended July 31, 1972.
In determining a deficiency in Federal income tax for the taxable year ended July 31, 1973, the Commissioner disallowed the depreciation deduction taken*124 in respect of the estate for years, and he recomputed petitioners' net operating loss carry-over, eliminating the "amortization correction" from petitioners' computation. Those two adjustments were made "for the reasons that your investment in the Lomas Santa Fe Country Club does not represent an amortizable or depreciable asset."
ULTIMATE FINDING OF FACT
The creation of Country Club by Lomas and the retention by Lomas of an estate for 40 years in certain assets transferred to Country Club were motivated by business purposes and must not be disregarded for tax purposes.
OPINION
As the first step in the development of a luxury community to be known as Lomas Santa Fe, Lomas created a golf course and country club on part of the land that Lomas had designated for development. The golf course and country club were made part of the community for two reasons: first, to enhance the value of the residential properties being developed; and second, to ease the density restrictions imposed by the local irrigation district.
A fully operational golf course and country club having been created, Lomas decided to form a wholly owned subsidiary, Country Club, to hold the golf course and country club*125 property while Lomas developed the residential community. Lomas formed Country Club to separate the golf course and country club from its other assets. Specifically, Country Club was to serve as a vehicle for the refinement of title to the residential *671 properties and to ensure that membership in the country club would not constitute an equity interest in Lomas.
Under the facts of
In 1973, during a financial audit of petitioners, a certified public accountant noticed that petitioners had not been amortizing the estate for years which was held by Lomas. The assets that are subject to the estate for years fit into*127 two categories: (1) Those which are depreciable assets having a useful life equal to or less than 40 years; and (2) those which have no determinable useful life and are not depreciable assets. Lomas had been claiming depreciation deductions for the assets in the first category because their useful lives would expire prior to or at the same time as the termination of the estate for 40 years. Lomas had not been claiming depreciation deductions for the *672 two assets that fit into the second category (the land and the landscaping for the golf course), because those two assets have no determinable useful lives and thus are not depreciable assets.
In determining a deficiency in tax for the taxable year ended July 31, 1973, the Commissioner disallowed the depreciation deduction taken in respect of the estate for years, and he recomputed petitioners' net operating loss carryover, eliminating the "amortization correction" from petitioners' computation. Those two adjustments were made "for the reasons that your investment in the Lomas Santa Fe Country Club does not represent an amortizable*129 or depreciable asset."
In this proceeding, respondent's chief argument is that the transfer of assets by Lomas to Country Club and the retention by Lomas of an estate for 40 years in some of those assets should both be disregarded for tax purposes. Therefore, respondent reasons that for tax purposes, Lomas still owns the transferred assets and holds a direct, nondepreciable fee interest in the land and landscaping of the golf course. Petitioners argue that Country Club was created to fulfill a valid business purpose, that all transactions between Lomas and Country Club fulfilled valid business purposes, that Lomas and Country Club are separate *673 entities, and that the form of the initial transaction between Lomas and Country Club accurately reflected its substance. Therefore, petitioners reason that the transfer of assets by Lomas to Country Club and the retention by Lomas of an estate for 40 years in some of those assets should not be disregarded for tax purposes. Petitioners then conclude that they properly claimed a depreciation deduction due to the amortization of the estate for years which is held by Lomas.
The crux of respondent's argument is that the manner in which*130 petitioners structured the transfer of assets and retention of an estate for years does not reflect the substance of the transaction. Respondent contends that petitioners are attempting to do indirectly what they cannot do directly, i.e., they are attempting to depreciate land and landscaping, which do not have limited useful lives. Respondent characterizes Country Club as "little more than a shell" and describes the transaction between Lomas and Country Club as a "device." The 100-percent ownership of Country Club by Lomas initially, and by Lomas and Gildred eventually, in conjunction with the 100-percent ownership of Lomas by Gildred, are seen by respondent as evidencing sufficient domination and control by Gildred to consider the two corporations as one and the economic interests of Gildred and the two corporations as inseparable. Respondent argues by way of analogy to the doctrine of merger, contending that when viewed as a whole, Lomas and Country Club were in the same economic position after the transaction as before, and Lomas could, through its control of Country Club, at any time, convey a fee interest in the property subject to the estate for years. Respondent also points*131 out that Country Club had little or no value to potential buyers without the assets in which Lomas held an estate for years. Further, respondent contends that a fatal flaw in petitioners' position is the admitted intention of Lomas to dispose of the golf course and country club after the residential development of Lomas Santa Fe had been completed. As further evidence of the identity of Lomas and Country Club, respondent points out that the agreement which granted Lomas a percentage of membership dues and fees was later altered to give Lomas a greater share of those dues and fees. Finally, respondent argues that the relationship between Lomas and Country Club regarding the maintenance and operation of the golf course and country club is vague and ill-defined.
*674 At the outset of our discussion of this issue, it seems appropriate to note that this is not an attempt by the Commissioner to "distribute, apportion, or allocate gross income, deductions, credits, or allowances" as he is empowered to do under section 482. Instead, the Commissioner has chosen to ignore the corporate entity of Country Club for purposes of taxation and to disregard entirely the initial transaction*132 between Lomas and Country Club.
The test that we must use for deciding whether or not Lomas and Country Club are separate entities for tax purposes was enunciated by the Supreme Court in
The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. * * *
* * * In general, in matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal. In such situations the form is a bald and mischievous fiction. [
The United States Court of Appeals for the Ninth Circuit, the forum to which this case would be taken on appeal, has adopted the foregoing test for use when deciding whether or not*133 a corporation should be treated as a separate entity. In
As a general rule, a corporation is to be treated as an entity separate from the individuals who own it.
On the other hand, where the corporation is created for a business activity or the creation is followed by business activity the corporation must be recognized as a separate entity.
Both the Supreme Court and the United States Court of Appeals for the Ninth Circuit incorporated alternative tests in *675 the language of their opinions. The question whether there existed a valid business purpose for the creation of a corporation and the question whether that corporation engaged in business activity after its creation are questions of fact which must be answered in light of all of the facts and circumstances of that case.
Country Club was formed for two reasons: first, to serve as a vehicle for the *135 refinement of title to the residential properties; and second, to ensure that membership in the country club that Lomas had developed would not constitute an equity interest in Lomas. Both are business purposes. Respondent has not questioned the existence of those motives or their reasonableness, and we find that Lomas acted prudently and in its best economic interests.
Country Club was created to solve practical problems of real estate law. Attorneys for Lomas wanted to settle all potential boundary and easement problems prior to the sale of any residential lots. By creating a separate entity to hold the golf course and country club, boundaries between the transferred property and the retained residential property would necessarily be set with accuracy. Because the residential property and golf course property were held by different entities, easements for playing rights, cart paths, and open slopes could be negotiated easily and placed on the residential lots with certainty.
Country Club was created to help Lomas retain control over the development of Lomas Santa Fe. Based upon the opinion of the California Supreme Court in
We also note that Country Club is not a mere shell; it actively engaged in business activity after its creation even though Lomas operated a portion of the facilities at the golf course and country club. Moreover, no motive or plan of tax avoidance is apparent in this instance. The formation of Country Club resulted from purely business considerations, and it engaged in business activity after its formation. Both of the alternative tests that were spelled out in
Not only are we convinced that there was a business purpose for the creation of Country Club, but also we find that there was a business purpose for the retention by Lomas of an estate for years in certain assets which were transferred to Country Club in exchange for stock. In essence, Lomas created the golf course and country club to serve as a "loss leader" which would attract home buyers. By its very nature as a "loss leader," it was more important that the golf course and country club enhance the value of residential properties than operate at a profit. As long as Lomas could operate the golf course and country club, that policy could be carried out. If, however, the membership of the country club obtained control over the operation of the golf course and country club, 11 the membership certainly might not be disposed toward operation at a loss, the quality of the golf course and country club could decline, and its value to Lomas as a marketing tool could evaporate. Therefore, to protect the value of the golf course and country club as a marketing tool, it was necessary for Lomas to retain a modicum of operational control over those facilities. Although*138 other methods were considered, retention of an estate for years was chosen as the vehicle by which that objective would be attained. Thus, the transfer of assets by Lomas to Country Club and the retention *677 by Lomas of an estate for years was motivated by a business purpose, and respondent's characterization of the transaction as a "device" is wholly inappropriate. Therefore, the transaction must not be disregarded. Cf.
*139 We adhere to the foregoing result despite respondent's arguments that Gildred, Lomas, and Country Club must be viewed as one for purposes of this case. Respondent contends that Lomas and Country Club were both under the domination and control of Gildred and, therefore, the transfer of assets by Lomas to Country Club must be disregarded. To support that contention, respondent cites
If * * * the Gregory case is viewed as a precedent for the disregard of a transfer of assets without a
We acknowledge and embrace the legal principle espoused in
Respondent has also cited
Respondent argues further that a fatal flaw in petitioners' position is evidenced by the intention of Lomas to dispose of the golf course and country club after its utility as a marketing tool had ceased. We disagree and view that intent as supportive of petitioners' position. First, the intent to sell confirms our holding that Country Club was created for a business purpose because the prospect of sale is consistent with an intent to settle potential title problems. Second, the intent to sell confirms our holding that the golf course and country club were marketing*143 tools, and our consequent holding that Lomas had a legitimate interest in the quality of those marketing tools and a business purpose in retaining its estate for 40 years. Although respondent argues otherwise, we see no relevance in the fact that a purchaser of the golf course and country club would have to purchase both the estate for years and either the assets of Country Club or Country Club stock in order to obtain a fee interest. That fact only illustrates the effectiveness of the mechanism chosen by Lomas to limit the potential interest of country club members.
*679 Respondent also faults the agreement between Lomas and Country Club, claiming that the relationship between those entities is vague and ill-defined and that subsequent alteration of the agreement evidences a lack of independence between the entities. Based upon the testimony and evidence in this case, we conclude that this complaint by respondent is without foundation. The terms of the agreement were set forth by Lomas in a letter to Country Club dated December 3, 1968, which is set forth in our findings of fact. The terms are straightforward, and alteration of the allocation of dues and fees is contemplated*144 by the portion of the agreement which acknowledges possible "future agreements or conveyances, which would act to modify the plan set forth herein."
Respondent's foregoing arguments were directed solely toward convincing this Court that we should disregard Country Club as an entity separate from Lomas and that we should ignore both the transfer of assets by Lomas to Country Club and the retention by Lomas of an estate for 40 years in certain of those assets. One by one, we have explained why those arguments are without merit. We, therefore, have found as facts that Country Club is an entity separate from Lomas and that neither the transfer of assets by Lomas to Country Club nor the retention by Lomas of an estate for 40 years in certain of those assets may be disregarded for tax purposes.
Thus, Lomas holds an estate for 40 years. Under California law, an estate for years is property. More specifically, an estate for years is a chattel real.
*146 Neither of the parties has cited any cases which would move our inquiry beyond the issues which are resolved above. Nevertheless, we are faced with the unsettling fact that Lomas apparently has converted a patently nondepreciable asset to one which is depreciable by simply relinquishing part of its interest in that property. After an exhaustive search of case law, we conclude that there are no cases directly on point. There is, however, one case which we find to be persuasive authority for disallowing petitioners' claimed deduction.
In
*681 Having thus split its property rights in the 19,180 shares of stock, the taxpayer allocated its basis in those shares between the retained lessor's interest and the transferred remainder interest. Using a useful life equal to the remaining lease term, a salvage value of zero, and the*148 applicable allocation of basis, the taxpayer calculated an allowance for depreciation, in respect of its retained lessor's interest in the 19,180 shares of stock, and claimed a depreciation deduction in that amount. The Commissioner disallowed the deduction and, pursuant to refund litigation, the question of deductibility was presented to the United States District Court for the Southern District of Georgia.
The facts in the instant case and those in the
Nevertheless, the facts in the instant case are distinguishable*149 from those present in the
The District Court held in favor of the taxpayer.
Rejecting the legal reasoning but not the findings of fact of the District Court, the United States Court of Appeals for the Fifth Circuit reversed the decision of the District Court.
By distributing the reversion in 1954, taxpayer did nothing more than split its bundle of property rights into two parts. We cannot see how this action on its part can result in a *151 depreciable asset where none previously existed, unless it made some additional investment. The rights which the taxpayer retained after the distribution are merely a fragment of the total bundle of nondepreciable property rights which the taxpayer had before the distribution. The taxpayer has obtained no asset which it did not have in 1913. While similar property might constitute a depreciable asset when acquired separately from the reversionary interest in the shares themselves and while a portion of the total tax basis of the shares can reasonably be allocated to the retained interest, the mere fact that a basis exists on the taxpayer's books and that the property is exhaustible does not alone confer depreciability. While there need not always be a
As we see it, the Court of Appeals has enunciated a logical and useful rule. It will be called into play only when a nondepreciable asset is divided into two parts, one of which is kept and one of which is given up. In that case, the retained interest will not be considered a depreciable asset even though the purchase of a *683 similar interest would result in its depreciability. The foregoing rule does not mean that the basis of the underlying property may not be allocated between the retained and transferred interests; the rule simply disallows the depreciation or amortization of that basis. We have followed this course in the past.
At the point where we digressed from the decision of the instant case to discuss the
Had Lomas purchased the estate for years from a third party rather than retained it as part of the creation of Country Club, its depreciability would be unquestioned. 13 See, e.g.,
*155 Instead, we will follow the approach of the United States Court of Appeals for the Fifth Circuit and examine the property *684 which was divided to create the retained estate for years. Cf.
To reflect the foregoing and concessions by the parties,
1. All section references are to the Internal Revenue Code of 1954 as amended.↩
2. Norco is a party to these proceeding solely because it joined in the consolidated Federal income tax return for the taxable year ended July 31, 1973; none of the events involved in this proceeding relate to Norco or its activities.↩
3. The board of directors of Lomas was comprised of three persons.↩
4. Density, as the term is used in this case, means the number of residential properties permitted to be built on a given area of land such as an acre.↩
5. Specifically, the easement would cause the area set aside for the golf course to remain perpetually as open space to be used exclusively for golf course, park, and recreational purposes.↩
6. The factors came from Internal Revenue Publication No. 11 and are not disputed.↩
7. Kent Staab, at that time, was the manager of the country club as well as a vice president of Country Club.↩
8. Of the total amount, $ 413,552 was attributable to the cost of land and $ 737,692 to the cost of improvements.↩
9. This factor came from Internal Revenue Publication No. 11 and is not disputed.↩
10. (Basis - salvage value) / useful life = (855,086 - 0) / 40 = $ 21,377.15 (1-cent discrepancy with amount claimed).↩
11. In light of the opinion of the California Supreme Court in
12. See sec. 25.2512-5(c), (d), and (f) table II, Gift Tax Regs. The factors used by petitioners in this case were taken from an extension of table II which appears in Internal Revenue Publication No. 11. A similar extension of table II appears at par. 1209.50, [1977] Fed. Est. & Gift Tax Rept. (CCH). See and compare
13. Whether we characterize the creation of the estate for years as an exception or a reservation under California law, Lomas did not purchase the estate for years from Country Club within the meaning of the cited cases. Pursuant to the teaching of
Langdon L. Skarda, Carolyn A. Skarda, Lynell G. Skarda, ... , 250 F.2d 429 ( 1957 )
estate-of-moses-l-parshelsky-deceased-lawrence-a-baker-clarence-g , 303 F.2d 14 ( 1962 )
United States v. Georgia Railroad and Banking Company , 348 F.2d 278 ( 1965 )
Jesse Johnson and Virginia D. Johnson v. Commissioner of ... , 233 F.2d 752 ( 1956 )
National Lead Company v. Commissioner of Internal Revenue , 336 F.2d 134 ( 1964 )
Crown Cork International Corporation v. COMMISSIONER OF ... , 149 F.2d 968 ( 1945 )
Commissioner of Internal Revenue v. Moore. Moore v. ... , 207 F.2d 265 ( 1953 )
Shaw Construction Company v. Commissioner of Internal ... , 323 F.2d 316 ( 1963 )
Commissioner of Internal Revenue v. Marne S. Wilson, ... , 353 F.2d 184 ( 1965 )
Herald A. O'Neill and G. Evelyn O'neill, His Wife v. ... , 271 F.2d 44 ( 1959 )
The 1220 Realty Company v. Commissioner of Internal Revenue,... , 322 F.2d 495 ( 1963 )
Bell v. Harrison. Bell v. United States , 212 F.2d 253 ( 1954 )
Investers Diversified Services, Inc. v. Commissioner of ... , 325 F.2d 341 ( 1963 )
Bank of America National Trust & Savings Association v. ... , 193 F.2d 178 ( 1951 )
Dalton v. Bowers , 53 S. Ct. 205 ( 1932 )
Detroit Edison Co. v. Commissioner , 63 S. Ct. 902 ( 1943 )
Willard v. First Church of Christ, Scientist , 7 Cal. 3d 473 ( 1972 )
Higgins v. Smith , 60 S. Ct. 355 ( 1940 )
Silver Hills Country Club v. Sobieski , 55 Cal. 2d 811 ( 1961 )
Edinboro Company v. United States , 224 F. Supp. 301 ( 1963 )