Useful life? What useful life?
The taxpayer in a recent Tax Court case, Grinalds, TC Memo 1993-66, constructed specialized improvements for a tenant and attempted to recover the cost of these improvements over the term of the lease. He argued that, because the improvements would be worthless after the lease term, he should be allowed to use the five-year lease term rather than the 31 1/2 years provided by the modified accelerated cost recovery system (MACRS) as the applicable period to recover his costs.
The IRS held, and the Tax Court agreed, that the changes in the law in 1981, which provided for calculating depreciation based on statutory percentages rather than useful lives, precluded the taxpayer from using the improvements' actual useful life.
Observation: The Service issued general information in fall 1992 suggesting that the taxpayer in this case might be required to continue to depreciate the improvements over 31 1/2 years even if they were demolished to allow for new improvements for a new tenant.
Observation: The position that demolishing a structural component of a building, for example, a roof, will not entitle the taxpayer to an abandonment loss was first articulated in the proposed regulations under the accelerated cost recovery system. Those regulations have not been finalized, nor have proposed regulations been issued under MARCS. One can at least hope that the position on abandonment losses will be softened or eliminated.
Recommendation: If Grinalds had given an amount of money equal to the cost of the specialized leasehold improvements to the tenant, requiring that the tenant construct his own improvements, Grinalds should possibly have amortized the cost as a leasehold cost over the lease's five-year term.
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|Publication:||The Tax Adviser|
|Article Type:||Brief Article|
|Date:||Feb 1, 1994|
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