Taxation – Federal Income Tax – Lessor’s Right to Depreciation Allowances Under Long Term-Lease

Plaintiff corporation leased its entire railroad property under a long-term lease subject to termination at the election of either party, or by breach of die lessee. The lessee agreed to preserve, replace, renew and maintain the property during the term and to return it upon termination “in at least as good condition as at the beginning of the term.” Plaintiff, on the other hand, agreed to reimburse the lessee for all additions and betterments to the property which passed to him upon termination. The government disallowed plaintiff’s claim for a tax refund based on its right to allow for depreciation, because plaintiff’s “property would be as valuable at the end of the term as it was at the beginning and, therefore, will not depreciate from the standpoint of its owner.” In a refund proceeding, held, plaintiff will suffer loss from obsolescence and depreciation regardless of lessee’s covenant.· The agreement to return in as good condition implies no more than to maintain in good condition, which does not mean restoring the value of the property at the end of the term. North Carolina Midland Railway Co. v. United States, (Ct. Cl. 1958) 163 F. Supp. 610.