World Publishing Co. v. Commissioner

On June 29, 1928, George Warren Smith, Inc. (Smith), the owner of two lots, leased the lots to Farnam Realty Corporation (Farnam) for a term of 50 years. Annual rentals averaged $28,500 but varied for specific decades. The lease required Farnam to immediately construct a multistory building on the property for no less than $250,000. Farnam complied. On January 4, 1950, World Publishing Co. (the taxpayer) (plaintiff) purchased Smith’s entire interest in the property, including the lease, as an investment for $700,000, subject to the lease to Farnam. The taxpayer asserted a $10,547.92 deduction for depreciation and amortization. The taxpayer determined this amount by spreading $300,000, the part of the purchase price the taxpayer and a qualified appraiser claimed was allocable to the building, over the remaining years of the outstanding lease. The commissioner of Internal Revenue (the commissioner) (defendant) disallowed the deduction. To support his argument, the commissioner cited various cases involving inheritance or devises in which the taxpayer came into ownership of tenant-improved property subject to an outstanding lease. The commissioner argued, and the United States Tax Court agreed, that the taxpayer did not acquire a depreciable interest in property, because land was acquired, not a wasting asset. The tax court further determined that (1) the taxpayer did not show it held any interest in the building for the production of income, (2) the taxpayer acquired the same interest as Smith, and (3) Smith had no depreciable interest in the building. The taxpayer appealed.