DocketNumber: Docket No. 14462-79
Citation Numbers: 80 T.C. 538, 1983 U.S. Tax Ct. LEXIS 103, 80 T.C. No. 26
Judges: Sterrett,Cohen,Tannenwald,Featherston,Irwin,Wilbur,Chabot,Nims,Hamblen
Filed Date: 3/21/1983
Status: Precedential
Modified Date: 10/19/2024
*103
In April of 1976, petitioner acquired a leasehold interest in a parcel of undeveloped land. The lease, which ran for 52 1/2 years at the time of acquisition, required petitioner to construct and operate an office building on the leased premises. During 1976, petitioner made rental payments pursuant to the lease. Construction of the building was completed in September of 1977.
*538 OPINION
By statutory notice dated July 6, 1979, respondent determined a deficiency of $ 8,379 in petitioners' Federal income tax for their 1976 taxable year. After concessions, the sole issue for decision is whether certain lease payments made by petitioners in 1976 are deductible under
The facts have been fully stipulated pursuant to
Petitioners Herschel H. Hoopengarner and his wife, Roberta S. Hoopengarner, resided in San Clemente, Calif., at the time of filing the petition herein. They timely filed their 1976 joint Federal income tax return with the Internal Revenue Service Center, Fresno, Calif. Roberta Hoopengarner is a party to this proceeding solely by reason of having filed a joint return with Herschel H. Hoopengarner (hereinafter petitioner).
During the year in issue, petitioner was employed by Penn Mutual Life Insurance Co. In April of 1976, he acquired by *539 assignment a leasehold interest in a parcel of undeveloped land in Irvine, Calif., from Troy Associates, Ltd., for $ 67,500. No part of this payment was deducted on petitioner's 1976 return. The lease originally was entered into by the Irvine Co., as lessor, and Troy Associates, Ltd., as lessee, for a period of 55 years, commencing November 1, 1973. Thus, petitioner's term was for approximately 52 1/2 years.
Under the terms of the lease, rent for the entire year was due in advance on November 1 of each year. On April 27, 1976, petitioner paid $ 9,270.56 into an escrow account for the rent attributable to the period*107 from October 15, 1975, to October 31, 1976. Of this amount, $ 4,524.03 was attributable to the period from April 27, 1976, to October 31, 1976. On December 1, 1976, petitioner paid $ 8,974.10 to the Irvine Co. to cover the rental period from November 1, 1976, to October 31, 1977. The foregoing payments were ordinary and necessary expenses.
The lease provided that the lessee was to construct and operate an office building on the leased premises, both of which would ultimately revert to the lessor. Construction of the building began in February of 1977 and was completed by September of 1977. Petitioner, as lessor of the office building, entered into a lease agreement in December 1976 with his employer Penn Mutual Life Insurance Co. However, Penn Mutual did not move into the building until November of 1977. Petitioner received no rent in 1976. Another tenant, Red Jacket, took possession in September of 1977.
On a schedule entitled "Rental and Royalty Income" attached to his 1976 return, petitioner claimed a deduction from gross income for rental payments made to Irvine Co. in the amount of $ 10,767. *108 that the lease payments were "pre-opening expenses."
Petitioner contends that the lease payments made by him are deductible under
*540 While we have already found as a fact that the rental payments were ordinary and necessary, we cannot find as a fact, in the circumstances here present, that the petitioner made those payments "for the purposes of the trade or business" as required by
Section 212(2) allows a deduction all ordinary and necessary expenses paid or incurred for the management, conservation, or maintenance of property held for the production of income. Again, we note our finding that the rental payments were ordinary and necessary. Thus, the question remains whether such payments were incurred for the management, conservation, *541 or maintenance of property held for the production of income.
The property that was held in this case was not the land or the building, it was the leasehold interest, upon which annual payments were due. *111 of legal logic is necessary for us to conclude that the lease was purchased and subsequently held for the production of income.
During 1976, petitioner received no income from his leasehold acquisition. However, this does not preclude deductibility.
We are conscious that there is a requirement under section 212 that the taxpayer have a proprietary or possessory interest in the income-producing property. See
*118 A relatively minor detail remains to be resolved. Petitioner deducted rental payments of $ 10,767 on his 1976 return. Of the $ 9,270.56 paid by petitioner on April 27, 1976, and fully deducted on his return, the accrued rent attributable to the period prior to the time that petitioner acquired the leasehold is not deductible as current rent but rather constitutes part of the lease acquisition cost. Petitioner appears to have conceded as much.
Most of the rental payment made on December 1, 1976, was attributable to the 1977 taxable year. Petitioner has correctly argued that such payment is fully deductible in 1976 under
Respondent *119 contends that petitioner's deduction is limited by the amount set out in his pleadings, $ 10,767. However, we find that the issue of the deductibility of payments attributable to 1977 was tried by the consent of the parties, and therefore the pleadings need not be amended to reflect this fact.
To reflect the foregoing,
*545 Cohen,
There is no doubt that the taxpayer, here, intended to engage in the trade or business of operating an office building, and that he was utilizing the land subject to the ground lease for the purpose of constructing such a building. Indeed, most of his brief is devoted to the argument that he was engaged in that trade or business during the taxable year. He argues, *120 and I agree, that operation of a single piece of rental real property may constitute a trade or business.
Under similar circumstances, this Court has held that a taxpayer cannot avoid the pre-opening expense rules by claiming a deduction under section 212. For example, in
Petitioners argue on brief that, if the expenses are not deductible under
Further the RV campground was not rental property until January 1974. While the property was apparently leased to the family corporation in 1973, rents were not charged during that year. Petitioners clearly had two separate activities occurring on the same piece of property. One part was the farm rental business and the second was the development of an RV park. The expenses here in issue, according to petitioner-husband's testimony and the evidence presented, clearly were connected with the development of the RV park.
Accordingly, the expenses*122 by petitioners are capital expenditures and thus not deductible. Respondent's determination as to this issue is sustained.
Similarly, in
Nor does the record contain sufficient evidence that the mobile homes were being held for the production of income, independently of the claimed trade or business in respect of camping and recreational facilities, so as to sustain a deduction under section 212. Indeed, if anything, the evidence points in the opposite direction, namely, that the mobile homes were intended to be an integral part of the aforesaid claimed trade or business or for the personal use of the [taxpayer's] sons. * * *
See also
The expenses, here, were obviously not intended to be personal, but the lease was an integral part of the rental trade or business contemplated by the taxpayer at the time the expenses*123 were incurred. I submit that this case is indistinguishable from
The question narrows to whether petitioner held the leased property during the years involved for the production of income. The Tax Court decided that he had failed to so show and this holding has substantial support in the record. It is true that Sec. 9 of the lease sets out that it was understood that *547 one of petitioner's purposes in obtaining it was to establish and maintain a pleasure resort thereon, but the court considered this feature in connection with petitioner's testimony * * * and concluded that the expenditures were a part of a plan to acquire the * * * [property of the lessor corporation]. * * *
The taxpayer in the
Section 212 is not a catchall for deduction of all nonpersonal expenses. Section 212 is coextensive in most respects with
"except for the requirement of being incurred in connection with a trade or business," * * * a deduction under section 212 "is subject * * * to all the restrictions and limitations that apply in the case of the deduction under * * *
There is a basic distinction between allowing deductions for expenses in connection with taxable income or income-producing property in which one already has an existing interest or right, on the one hand, and expenses incurred in an attempt to obtain income by the creation or acquisition of some new interest, on the other hand.
*548
Petitioner's announced intention, ultimately carried into effect in this case, was to acquire an interest in an office building constructed on leased land and to operate the office building as a business. He was
The majority here seems to believe that ground rents are somehow unique, inasmuch as they are recurring and are designated as rentals incurred for particular time periods. It is inaccurate and not conclusive of the issue to say that "the rent paid during 1976 did not produce any equity that survived a year beyond the time that the payment was made." Payments on a lease are payments for acquisition of an "estate-for-years" in the land. See C. Moynihan, Introduction to the Law of Real Property 64 (1962). Each payment is necessary to the acquisition of the whole interest. Long-term ground leases are in many localities*127 the only means of acquiring land. In California, where this property was located, 55 years, the original term of the subject lease, is the maximum legal term of a lease of property held by, or under management and control of, a municipal body.
We have rejected the contention that items that cannot be expected to provide benefits beyond the taxable year are not subject to the pre-opening expense rules, which require capitalization of rents, *130 salaries, *549 necessary" expenses clearly deductible on a current basis once the business has commenced.
There can be little question that other construction-related expense items, such as tools, materials, and wages paid construction workers, are to be treated as part of the cost of acquisition of a capital asset. The taxpayer does not dispute this. Of course, reasonable wages paid in the carrying on of a trade or business qualify as a deduction from gross income.
Construction-related depreciation is not unlike expenditures for wages for construction workers. The significant fact is that the exhaustion of construction equipment does not represent the final disposition of the taxpayer's investment in that equipment; rather, the investment in the*129 equipment is assimilated into the cost of the capital asset constructed. Construction-related depreciation on the equipment is not an expense to the taxpayer of its day-to-day business. It is, however, appropriately recognized as a part of the taxpayer's cost or investment in the capital asset. * * * By the same token, this capitalization prevents the distortion of income that would otherwise occur if depreciation properly allocable to asset acquisition were deducted from gross income currently realized. [
The Court went on to discuss "an additional pertinent factor," i.e., that of maintaining tax parity between taxpayers. If the taxpayer, here, had acquired the land on the basis of purchase, incurring interest and principal payments during the period of construction, he would be required to capitalize the greater portion of such payments. *550 this taxpayer should be treated more favorably than such purchaser.
The majority found that petitioner qualified for a deduction under section 212 "by virtue of his ownership of the lease." But I do not see how this contractual interest is property superior to the contractual interests held by the taxpayers in the pre-opening expense cases (e.g., 1. This amount apparently represents the rent attributable to the period Oct. 15, 1975, to Dec. 31, 1976.↩ 2. Petitioner makes fleeting reference to other alleged rental properties as a predicate for arguing that he was already in the rental trade or business when he acquired the lease for the Irvine property. No evidence of his activities with respect to those other properties appears, however, other than in his 1976 return wherein he attempted to deduct under 3. See, e.g., 4. The question of whether property is held for the production of current or future income, when it is not producing current income, is one of intent. See 5. See, in this connection, the analysis in 6. This conclusion does not run afoul of 7. It is not enough to say that sec. 212 is coextensive in most respects with 8. If it were applicable, then the doctrine conceivably could be used to disallow any sec. 212(2) deductions on the ground that the level of the taxpayer's activities with respect to the property being held might someday elevate him to trade or business status. Under the test for determining whether a taxpayer is in a trade or business announced by this Court in 9. Compare, for example, 1. The claimed loss consisted of the following items: 2. E.g., 3. E.g., 4. See 5. 6. The Senate Finance Committee stated, as its reason for the enactment of section 195, that: "The committee believes that the provision for the amortization of business startup and investigatory expenses will encourage formation of new businesses and decrease controversy and litigation arising under present law with respect to the proper income tax classification of startup expenditures [S. Rept. 96-1036, at 11 (1980).]"↩Footnotes
Depreciation $ 618.00 Repairs 74.61 Salaries and wages 48.00 Insurance 282.00 Interest on business debt 2,016.67 Other (telephone, etc.) 2,453.83 5,493.11 Other labor 495.34 Total loss 5,988.45
379 Madison Avenue v. Commissioner of Internal Revenue , 60 F.2d 68 ( 1932 )
Eugene H. Walet, Jr. And Celia R. Walet v. Commissioner of ... , 272 F.2d 694 ( 1959 )
Marion A. Burt Beck v. Commissioner of Internal Revenue , 194 F.2d 537 ( 1952 )
Martin J. And Margaret M. Zaninovich and Vincent M. And ... , 616 F.2d 429 ( 1980 )
Adolph Coors Company v. Commissioner of Internal Revenue , 519 F.2d 1280 ( 1975 )
Fred W. Woodward and Elsie M. Woodward, F. R. Woodward and ... , 410 F.2d 313 ( 1969 )
Jack E. Golsen and Sylvia H. Golsen v. Commissioner of ... , 445 F.2d 985 ( 1971 )
Bennett Paper Corporation and Subsidiaries v. Commissioner ... , 699 F.2d 450 ( 1983 )
United States v. Manor Care, Inc. , 490 F. Supp. 355 ( 1980 )
Richmond Television Corporation v. United States , 345 F.2d 901 ( 1965 )
Richmond Television Corp. v. United States , 86 S. Ct. 233 ( 1965 )
Woodward v. Commissioner , 90 S. Ct. 1302 ( 1970 )
United States v. Gilmore , 83 S. Ct. 623 ( 1963 )
Madison Gas and Electric Company v. Commissioner of ... , 633 F.2d 512 ( 1980 )
Doran S. Weinstein and Jean S. Weinstein v. The United ... , 420 F.2d 700 ( 1970 )
The Colorado Springs National Bank, a National Banking ... , 505 F.2d 1185 ( 1974 )
Trust Under the Will of Bingham v. Commissioner , 65 S. Ct. 1232 ( 1945 )