by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Here are a few "tax tidbits," so we can stay aware the force that really controls our lives:
FEDERAL INCOME TAX; DEDUCTIONS; DEPRECIATION; LEASES; PREMIUM VALUE: Where a taxpayer purchases a fee simple interest in a building that is encumbered by an existing lease agreement under which the tenant is paying rent in excess of the market rental rates, resulting in a "lease premium value", the taxpayer is not permitted to treat the lease premium as an intangible asset subject to an amortization expense deduction separate from the depreciation allowance available for the building. Moores v. Commissioner, T.C. Memo. 1995-52. "There is no basis in law or fact for treating the premium value of the lease in question as an asset separate and distinct from the fee simple interest in the property...the value of the lease... is reflected in the value of the property that it encumbers." It makes no difference that ownership of the property was transferred to the taxpayer by a special warranty deed while ownership of the leasehold interest was "transferred" by a "Bill of Sale and Assignment".
FEDERAL INCOME TAX; DEDUCTIONS; PASSIVE ACTIVITY LOSSES; RENTAL REAL ESTATE: The I.R.S. has proposed regulations which provide, among other things, "that a rental real estate activity of a qualifying taxpayer will remain passive for a taxable year unless the taxpayer materially participates in the activity" and "the election to treat all interests in real estate as a single activity is binding for the taxable year in which it is made and for all future years in which the taxpayer is a qualifying taxpayer unless there is a material change in the taxpayer's facts and circumstances and the election is revoked." Proposed Regulations ¶49,561.
FEDERAL INCOME TAX; INCOME; REAL ESTATE SALES IN ORDINARY COURSE OF BUSINESS: Where a taxpayer purchases a tract of land, intending to develop the entire tract, and over a twenty year period develops portions of the tract and eventually sells off the remaining undeveloped portions of the tract and retires, sale proceeds of the undeveloped lots is treated as ordinary income, and not capital gains. Tollis v. Commissioner, 95-1 USTC ¶50,076 (unpublished). The taxpayer was unable to carry his burden of proving that he sufficiently separated the undeveloped parcels from the developed parcels. Accordingly, the sale of the undeveloped parcels was treated as a sale to customers in the ordinary course of the taxpayer's business.
Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260.
Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.