Income Tax-Deductions-Lessor’s Amortization of the Amount by which the Purchase Price of Improved Realty Exceeds the Appraised Value of Land-Bender v.United States

Taxpayer, upon being informed that his tenant would not renew his lease unless he could be assured of additional parking facilities, purchased three lots adjacent to the leasehold and immediately demolished the houses thereon in order to provide the necessary space. Since the owners of these residential properties knew of taxpayer’s special need, taxpayer was forced to pay substantially more than the total appraised value of the land. In computing his income tax, taxpayer sought to amortize over the life of the lease the cost of razing the buildings and the amount of the purchase price in excess of the appraised value of the land as expenditures incident to securing a lease. The Commissioner of Internal Revenue, disallowing this amortization deduction, contended that since taxpayer bought the improved realty with the intention of razing the buildings, the entire purchase price as well as the cost of demolition should be allocated to the land which is a nondepreciable asset. In a suit for refund of taxes, the federal district court reversed the Commissioner’s determination and allowed the deduction. The court held that when improved realty is purchased to secure a lease renewal, the amount by which the purchase price exceeds the appraised fair market value of the land alone may be amortized by the lessor over the period of the leasehold as a capital expenditure incurred for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income. This is true even though the taxpayer intended at the time of the purchase to demolish the buildings on the land.