[*] Professor of Law, University of Colorado School of Law; of counsel, Ireland, Stapleton, Pryor & Pascoe, P.C., Denver, Colorado. A.B., 1958, University of Michigan; J.D. with distinction, 1961, University of Michigan. I would like to thank members of the faculty of the University of Seattle School of Law, members of the faculty at the University of Buffalo School of Law, and members of the Erie County Bar Association for their many helpful suggestions made during and following colloquia at which I presented earlier versions of this Article. Thanks are also due to Juliann Dyson and Kyle Boschen for their invaluable research assistance. Return to text.

[1] See I.R.C. § 197; H.R. CONF. REP. NO. 213, 103d Cong., 1st Sess. 672-73 (1993), reprinted in 1993 U.S.C.C.A.N. 1088, 1361-62. All citations to sections of the Internal Revenue Code in this Article are to the Internal Revenue Code of 1986, as amended before June 1996. Return to text.

[2] See infra notes 20-33 and accompanying text. Return to text.

[3] See I.R.C. §§ 197(e)(2), (f)(3). Return to text.

[4] See id. § 197(e)(5)(A). Return to text.

[5] The effect of these provisions is explained in the Conference Committee Report in the following manner:

[N]o good will, going concern value or other Section 197 intangible is to arise in connection with the acquisition of . . . real property. . . . Instead, the entire cost of acquiring such real property is to be included in the basis of the real property and is to be recovered under the principles of present law applicable to such property.
H.R. CONF. REP. NO. 213, supra note 1, at 688, reprinted in 1993 U.S.C.C.A.N. at 1377. Return to text.

[6] See I.R.C. § 167(c)(2). Return to text.

[7] Id. § 167(c)(2). Return to text.

[8] H.R. CONF. REP. NO. 213, supra note 1, at 681-82, reprinted in 1993 U.S.C.C.A.N. at 1370-71. Return to text.

[9] A ground lessor is the owner and lessor of unimproved real property. Return to text.

[10] For example, the ground lessor's residuary interest, if any, in improvements constructed by the lessee. Return to text.

[11] This is because the only other asset that the ground lessor "owns," in an income tax sense, is the land. Return to text.

[12] See I.R.C. §§ 167(c)(2), 197(e)(5), 197(f)(8). Return to text.

[13] See id. § 167(a). Return to text.

[14] In simple terms, for the purposes of this Article, the value of the land as an unencumbered fee is determined by ascertaining the rental that the land would produce free from the ground lease and the improvements made by the lessee under the ground lease and capitalizing that income with a multiplier that reflects the return expected for similar real estate. Return to text.

[15] See, e.g., Moore v. Commissioner, 15 T.C. 906 (1950), rev'd, 207 F.2d 265 (9th Cir. 1953), cert. denied, 347 U.S. 942 (1954), on remand, 14 T.C.M. (CCH) 869 (1955); W. Reed Quilliam, Jr., Depreciation of Property Acquired Subject to a Lease: Premium Lease Rentals as a Wasting Asset, 4 VAL. U. L. REV. 261, 272 (1970); Raymond Rubin, Depreciation of Property Purchased Subject to a Lease, 65 HARV. L. REV. 1134, 1135 (1952); Note, World Publishing Co. v. Commissioner, 76 HARV. L. REV. 1303 (1963) [hereinafter Harvard Note]; Jules R. Willen, Note, Depreciation of Tenant-Erected Building by Purchaser of Fee, 23 MD. L. REV. 353, 357 (1963) [hereinafter Maryland Note]; Note, Purchaser's Depreciation Rights in Property Subject to a Lease, 82 MICH. L. REV. 572, 573, 588-89 (1983) [hereinafter Michigan Note]; Note, Depreciation Disallowed on Inherited Leased Property, 3 UTAH L. REV. 130, 131-32 (1952) [hereinafter Utah Note]; Irwin W. Feldman, Note, Taxation_Depreciation of Tenant Erected Improvements by Purchaser-Lessor, 1963 WIS. L. REV. 484, 485, 489, 491 (1963) [hereinafter Wisconsin Note]. Return to text.

[16] See, e.g., Quilliam, supra note 15, at 266; Note, Lessee-Erected Improvements Securing Long-Term Leases: An Overlooked Depreciation Deduction for the Landlord, 63 YALE L.J. 872, 875 (1954) [hereinafter Yale Note]. Return to text.

[17] See, e.g., Alvin D. Lurie, Depreciating Structures Bought Under Long Leases: An Adventure in Blunderland, 18 N.Y.U. INST. FED. TAX'N 43, 56 (1960); Quilliam, supra note 15, at 264; Mikel M. Rollyson, Long Waiting Line at Geneva Drive-In, 4 J. REAL EST. TAX'N 364, 368 (1977); Michigan Note, supra note 15, at 586. Return to text.

[18] See, e.g., Lurie, supra note 17, at 48; Quilliam, supra note 15, at 264, 266; Rollyson, supra note 17, at 368; Rubin, supra note 15, at 1144, 1147; Wisconsin Note, supra note 15, at 487; Yale Note, supra note 16, at 874-75, 877. Return to text.

[19] As used in this Article, the "security value" of lessee-constructed improvements is the value the ground lessor derives from the improvements' (1) acting as security for the performance of the lessee's obligations under the ground lease; (2) making the real estate more leasable on termination of the existing lease; and (3) being available to serve as security for a loan to the ground lessor. Return to text.

[20] See, e.g., Midler Court Realty, Inc. v. Commissioner, 61 T.C. 590 (1974), aff'd, 521 F.2d 767 (3d Cir. 1975); Schubert v. Commissioner, 33 T.C. 1048 (1960), aff'd, 286 F.2d 573 (4th Cir. 1961), cert. denied, 366 U.S. 960 (1961); Peters v. Commissioner, 4 T.C. 1236 (1945); Friend v. Commissioner, 40 B.T.A. 768 (1939), aff'd, 119 F.2d 959 (7th Cir. 1941), cert. denied, 314 U.S. 673 (1941); Lurie, supra note 17, at 52-53; Quilliam, supra note 15, at 266; Maryland Note, supra note 15, at 354, 357; Wisconsin Note, supra note 15, at 492; Yale Note, supra note 16, at 877. Return to text.

[21] See, e.g., Moore v. Commissioner, 207 F.2d 265 (9th Cir. 1953), rev'g 15 T.C. 906 (1950), cert. denied, 347 U.S. 942 (1954); Friend, 40 B.T.A. at 771; Quilliam, supra note 15, at 272, 275; Wisconsin Note, supra note 15, at 492. Return to text.

[22] See, e.g., Fieland v. Commissioner, 73 T.C. 743 (1980); Midler Court Realty, 61 T.C. at 596. Return to text.

[23] See I.R.C. §§ 167(c)(2), 197(e)(5). Return to text.

[24] See, e.g., M. DeMatteo Constr. Co. v. United States, 310 F. Supp. 1313 (D. Mass. 1970), aff'd, 433 F.2d 1263 (1st Cir. 1970); Barnes v. United States, 222 F. Supp. 960 (D. Mass. 1963), aff'd sub nom. Buzzell v. United States, 326 F.2d 825 (1st Cir. 1964); Goelet v. United States, 161 F. Supp. 305 (S.D.N.Y. 1958), aff'd, 266 F.2d 881 (2d Cir. 1959); Schubert, 33 T.C. at 1054; Rollyson, supra note 17, at 366; James V. Heffernan, Note, Depreciation Allowable on Lessee-Constructed Property Subject to Long-Term Lease, 37 CORNELL L.Q. 323, 326 (1952) [hereinafter Cornell Note]; Maryland Note, supra note 15, at 356; Wisconsin Note, supra note 15, at 487. Return to text.

[25] See, e.g., Moore, 207 F.2d at 272; Lurie, supra note 17, at 57; Rollyson, supra note 17, at 366; Rubin, supra note 15, at 1147; Cornell Note, supra note 24, at 325; Maryland Note, supra note 15, at 356; Yale Note, supra note 16, at 878. Return to text.

[26] See, e.g., First National Bank of Kansas City v. Nee, 85 F. Supp. 840, 842-43 (W.D. Mo. 1949), motion for new trial overruled 92 F. Supp. 328 (W.D. Mo. 1950), aff'd, 190 F.2d 61 (8th Cir. 1951); Lurie, supra note 17, at 46; Rollyson, supra note 17, at 366; Cornell Note, supra note 24, at 327; Maryland Note, supra note 15, at 354. Return to text.

[27] See, e.g., Schubert v. Commissioner, 33 T.C. 1048 (1960), aff'd, 286 F.2d 573 (4th Cir. 1961), cert. denied, 366 U.S. 960 (1961); Goelet, 161 F. Supp. at 310-11; First National Bank of Kansas City, 85 F. Supp. at 842-43; Geneva Drive-In Theatre, Inc. v. Commissioner, 67 T.C. 764, 772 (1977), aff'd, 622 F.2d 995 (9th Cir. 1980); Quilliam, supra note 15, at 263, 279; Rollyson, supra note 17, at 365-66, 368-69; Cornell Note, supra note 24, at 330; Maryland Note, supra note 15, at 354; Michigan Note, supra note 15, at 582, 584; Utah Note, supra note 15, at 131; Wisconsin Note, supra note 15, at 486, 489. Return to text.

[28] See supra note 27. Return to text.

[29] See, e.g., World Publishing Co. v. Commissioner, 299 F.2d 614 (8th Cir. 1962), rev'g 35 T.C. 7 (1960); Cleveland Allerton Hotel, Inc. v. Commissioner, 166 F.2d 805 (6th Cir. 1948), rev'g 6 T.C.M. (CCH) 498 (1947); First National Bank of Kansas City, 85 F. Supp. at 840; Geneva Drive-In Theatre, 67 T.C. at 764; Millinery Ctr. Bldg. Corp. v. Commissioner, 21 T.C. 817 (1954), aff'd in part, rev'd in part, 221 F.2d 322 (2d Cir. 1955), cert. granted, 350 U.S. 820 (1955), aff'd, 350 U.S. 456 (1956). Return to text.

[30] See, e.g., Moore v. Commissioner, 207 F.2d 265 (9th Cir. 1953), rev'g 15 T.C. 906 (1950), cert. denied, 347 U.S. 942 (1954), on remand, 14 T.C.M. 869 (1955); Commissioner v. Pearson, 188 F.2d 72 (5th Cir. 1951), rev'g 13 T.C. 851 (1949), cert. denied, 342 U.S. 861 (1951); M. DeMatteo Constr. Co. v. United States, 310 F. Supp. 1313 (D. Mass. 1970), aff'd, 433 F.2d 1263 (1st Cir. 1970); Rowan v. Commissioner, 22 T.C. 865 (1954); Quilliam, supra note 15, at 263, 276; Rollyson, supra note 17, at 366; Rubin, supra note 15, at 1147; Cornell Note, supra note 24, at 325; Maryland Note, supra note 15, at 354, 356; Utah Note, supra note 15, at 130-31; Wisconsin Note, supra note 15, at 487. Return to text.

[31] See, e.g., Geneva Drive-In Theatre, 67 T.C. at 764; Schubert, 33 T.C. at 1048; Quilliam, supra note 15, at 284; Rollyson, supra note 17, at 365; Maryland Note, supra note 15, at 357; Michigan Note, supra note 15, at 586; Utah Note, supra note 15, at 131; Wisconsin Note, supra note 15, at 486-87. Return to text.

[32] See, e.g., Midler Court Realty, Inc. v. Commissioner, 61 T.C. 590 (1974), aff'd, 521 F.2d 767 (3d Cir. 1975); Bernstein v. Commissioner, 22 T.C. 1146 (1954), aff'd, 230 F.2d 603 (2nd Cir. 1956); Peters v. Commissioner, 4 T.C. 1236 (1945); May v. Commissioner, 3 T.C.M. (CCH) 733 (1944); Annex Corp. v. Commissioner, 2 T.C.M. (CCH) 167 (1943); Wisconsin Note, supra note 15, at 493. Return to text.

[33] See, e.g., Moore, 207 F.2d at 265; Wisconsin Note, supra note 15, at 489, 491. Return to text.

[34] See infra notes 36-42 and accompanying text. Return to text.

[35] See infra notes 43-48 and accompanying text. Return to text.

[36] See infra notes 37-38 and accompanying text. Return to text.

[37] See, e.g., Buzzell v. Commissioner, 326 F.2d 825 (1st Cir 1964); Barnes v. United States, 222 F. Supp. 960 (D. Mass. 1963), aff'd sub nom. Buzzell v. Commissioner, 326 F.2d 825 (1st Cir. 9164); Goelet v. United States, 161 F. Supp. 305 (S.D.N.Y. 1958), aff'd, 266 F.2d 881 (2d Cir. 1959); Bueltermann v. United States, 61 F. Supp. 451 (E.D. Mo. 1945), rev'd, 155 F.2d 597 (8th Cir. 1946); Currier v. Commissioner, 51 T.C. 488 (1968); Rowan, 22 T.C. at 865; Pearson v. Commissioner, 13 T.C. 851 (1949), rev'd, 188 F.2d 72 (5th Cir. 1951), cert. denied, 342 U.S. 861 (1951); Currier v. Commissioner, 7 T.C. 980 (1946). Return to text.

[38] See, e.g., Buzzell, 326 F.2d at 825; Goelet, 161 F. Supp. at 305; Pearson, 13 T.C. at 851. Return to text.

[39] See, e.g., M. DeMatteo Constr. Co. v. United States, 310 F. Supp. 1313 (D. Mass. 1970), aff'd, 433 F.2d 1263 (1st Cir. 1970); Fieland v. Commissioner, 73 T.C. 743 (1980). Return to text.

[40] See, e.g., M. DeMatteo Constr., 310 F. Supp. at 1313; World Publishing Co. v. Commissioner, 35 T.C. 7 (1960), rev'd, 299 F.2d 614 (8th Cir. 1962). The Eighth Circuit Court of Appeals reversed the Tax Court in World Publishing Co. v. Commissioner and, apparently, permitted the purchaser to depreciate the improvement. While depreciating the improvement was the wrong answer, the right answer might have allowed the purchaser to depreciate or amortize the amount that had been allocated to the improvement partly as the cost of the "security value" of the improvement and partly as a payment for premium rentals. Return to text.

[41] 35 T.C. 7 (1960), rev'd, 299 F.2d 614 (8th Cir. 1962). Return to text.

[42] See, e.g., Buzzell v. Commissioner, 326 F.2d 825 (1st Cir. 1964); M. DeMatteo Constr., 310 F. Supp. at 1313; Barnes v. United States, 222 F. Supp. 960 (Mass. 1963), aff'd sub nom. Buzzell v. Commissioner, 326 F.2d 825 (1st Cir. 1964); Fieland, 73 T.C. at 743; Currier v. Commissioner, 51 T.C. 488 (1968); Rowan v. Commissioner, 22 T.C. 865 (1954); Pearson v. Commissioner, 13 T.C. 851 (1949), rev'd, 188 F.2d 72 (5th Cir. 1951), cert. denied, 342 U.S. 861 (1951); Currier v. Commissioner, 7 T.C. 980 (1946). Return to text.

[43] See infra notes 47-48 and accompanying text. Return to text.

[44] See infra notes 47-48 and accompanying text. Return to text.

[45] 3 T.C.M. (CCH) 733 (1944). Return to text.

[47] See, e.g., Midler Court Realty, In See, e.g., Midler Court Realty, Inc. v. Commissioner, 61 T.C. 590 (1974), aff'd, 521 F.2d 767 (3d Cir. 1975); Bernstein v. Commissioner, 22 T.C. 1146 (1954), aff'd, 230 F.2d 603 (2nd Cir. 1956); Cleveland Allerton Hotel, Inc. v. Commissioner, 6 T.C.M. (CCH) 498 (1947), rev'd, 166 F.2d 805 (6th Cir. 1948); Peters v. Commissioner, 4 T.C. 1236 (1945); Annex Corp. v. Commissioner, 2 T.C.M. (CCH) 167 (1943). Return to text.

[48] See, e.g., Fieland v. Commissioner, 73 T.C. 743 (1980); Midler Court Realty, 61 T.C. at 590. Return to text.

[49] 6 T.C.M. (CCH) 498 (1947), rev'd, 166 F.2d 805 (6th Cir. 1948). Return to text.

[50] 21 T.C. 817 (1954), aff'd in part, rev'd in part, 221 F.2d 322 (2d Cir. 1955), cert. denied, 350 U.S. 820 (1955), aff'd, 350 U.S. 456 (1956). Return to text.

[51] 6 T.C.M. (CCH) at 498. Return to text.

[52] Cleveland Allerton Hotel, Inc. v. Commissioner, 166 F.2d 806, 806 (6th Cir. 1948). Return to text.

[53] 350 U.S. 456, 461 (1956). Return to text.

[54] Id. at 495-96. Return to text.

[55] See, e.g., Fieland v. Commissioner, 73 T.C. 743 (1980); Peters v. Commissioner, 4 T.C. 1236 (1945); May v. Commissioner, 3 T.C.M. (CCH) 733 (1944). Return to text.

[56] 350 U.S. 456, 461 (1956). Return to text.

[57] 166 F.2d 805, 807 (6th Cir. 1948). Return to text.

[58] See Rev. Rul. 60-180, 1960-1 C.B. 114; Millinery Ctr. Bldg. Corp. v. Commissioner, 221 F.2d 322 (2d Cir. 1955), aff'd, 350 U.S. 456 (1956). Return to text.

[59] See Williams v. Commissioner, 37 T.C. 1099 (1962); Schubert v. Commissioner, 33 T.C. 1048 (1960), aff'd, 286 F.2d 573 (4th Cir. 1961). Return to text.

[60] See infra notes 61-64 and accompanying text. Return to text.

[61] See Goelet v. United States, 161 F. Supp. 305 (S.D.N.Y. 1958), aff'd, 266 F.2d 881 (2nd Cir. 1959). Return to text.

[62] See Williams, 37 T.C. at 1099; Schubert, 33 T.C. at 1048. Return to text.

[63] See Goelet, 161 F. Supp. at 305; Williams, 37 T.C. at 1099; Schubert, 33 T.C. at 1048. Return to text.

[64] See Geneva Drive-In Theatre, Inc. v. Commissioner, 67 T.C. 764, 770 (1977), aff'd, 622 F.2d 995 (9th Cir. 1980); Williams, 37 T.C. at 1099; Schubert, 33 T.C. at 1048. Return to text.

[65] See, e.g., Geneva Drive-In Theatre, 67 T.C. at 764; Williams, 37 T.C. at 1099; Schubert, 33 T.C. at 1048. Return to text.

[66] 67 T.C. at 764. Return to text.

[67] Id. at 770. Return to text.

[68] Geneva Drive-In Theatre, Inc. v. Commissioner, 622 F.2d 995, 996 (9th Cir. 1980). Return to text.

[69] 67 T.C. at 771-72. Return to text.

[70] See supra note 18 and accompanying text; infra notes 109-19 and accompanying text. Return to text.

[71] Another possible item of value to the ground lessor, and one that a purchaser or heir might acquire, is the value associated with a desirable and creditworthy tenant. This item standing alone, however, should not have a great impact on the purchase price or estate tax value. Therefore, this value is primarily helpful in demonstrating that premium rentals, or an interest in a lessee-constructed improvement having security value, have been acquired. Return to text.

[72] See Moore v. Commissioner, 15 T.C. 906 (1950), rev'd, 207 F.2d 265 (9th Cir. 1953), reh'g granted, 14 T.C.M. (CCH) 869 (1955); Pearson v. Commissioner, 13 T.C. 851 (1949), rev'd, 188 F.2d 72 (5th Cir. 1951); Currier v. Commissioner, 7 T.C. 980 (1946). Return to text.

[73] See supra note 72. Return to text.

[74] See supra note 72. Return to text.

[75] 188 F.2d 72 (5th Cir. 1951). Return to text.

[76] 207 F.2d 265 (9th Cir. 1953). Return to text.

[77] 22 T.C. 865 (1954). Return to text.

[78] See infra text accompanying notes 80-88. Return to text.

[79] 299 F.2d 614 (8th Cir. 1962). Return to text.

[80] See, e.g., Goelet v. United States, 161 F. Supp. 305 (S.D.N.Y. 1958), aff'd, 266 F.2d 881 (2nd Cir. 1959); First National Bank of Kansas City v. Nee, 85 F. Supp. 840 (W.D. Mo. 1949), motion for new trial, 92 F. Supp. 328 (W.D.Mo. 1950), aff'd, 190 F.2d 61 (8th Cir. 1951); Bueltermann v. United States, 61 F. Supp. 451 (E.D. Mo. 1945), rev'd, 155 F.2d 597 (8th Cir. 1946); Friend v. Commissioner, 40 B.T.A. 768 (1939), aff'd, 119 F.2d 959 (7th Cir. 1941). Return to text.

[81] Moore v. Commissioner, 207 F.2d 265, 274-75 (9th Cir. 1953). Return to text.

[82] See, e.g., M. DeMatteo Constr. Co. v. United States, 310 F. Supp. 1313 (D. Mass. 1970), aff'd, 433 F.2d 1263 (1st Cir. 1970); Currier v. Commissioner, 51 T.C. 488 (1968); Schubert v. Commissioner, 33 T.C. 1048 (1960), aff'd, 286 F.2d 573 (4th Cir. 1961). Return to text.

[83] 188 F.2d 72, 74 (5th Cir. 1951), rev'g 13 T.C. 851 (1949). Return to text.

[84] Moore, 207 F.2d at 272. Return to text.

[85] See, e.g., Rev. Rul. 55-89, 1955-1 C.B. 284; First National Bank of Kansas City v. Nee, 190 F.2d 61 (8th Cir. 1951); Goelet v. United States, 161 F. Supp. 305 (S.D.N.Y. 1958), aff'd, 266 F.2d 881 (2d Cir. 1959); Geneva Drive-In Theatre, Inc. v. Commissioner, 67 T.C. 764 (1977), aff'd, 622 F.2d 995 (9th Cir. 1980). Return to text.

[86] See supra notes 18-19 and accompanying text; infra notes 109-12 and accompanying text. Return to text.

[87] See, e.g., Moore v. Commissioner, 207 F.2d 265, 265 (9th Cir. 1953), reh'g granted, 14 T.C.M. (CCH) 869 (1955); Commissioner v. Pearson, 188 F.2d 72 (5th Cir. 1951); Rowan v. Commissioner, 22 T.C. 865 (1954). Return to text.

[88] 22 T.C. at 873. Return to text.

[89] 299 F.2d 614, 623 (8th Cir. 1962), rev'g 35 T.C. 7 (1960). Return to text.

[90] See, e.g., M. DeMatteo Constr. Co. v. United States, 433 F.2d 1263 (1st Cir. 1970). Return to text.

[91] See, e.g., Geneva Drive-In Theatre, Inc. v. Commissioner, 67 T.C. 764 (1977), aff'd, 622 F.2d 995 (9th Cir. 1980). Return to text.

[92] 299 F.2d at 621-22. Return to text.

[93] See supra note 18 and accompanying text; infra notes 95-108 and accompanying text. Return to text.

[94] See supra note 19 and accompanying text. Return to text.

[95] 299 F.2d at 622. Return to text.

[96] See supra note 92 and accompanying text. Return to text.

[97] 433 F.2d 1263, 1265 (1st Cir 1970). Return to text.

[98] Geneva Drive-In Theatre, 67 T.C. at 773. Return to text.

[99] 299 F.2d at 620. Return to text.

[100] Id. at 617. Return to text.

[101] See id. at 614. Return to text.

[102] 322 F.2d 495 (6th Cir. 1963). Return to text.

[103] Id. at 497. Return to text.

[104] 166 F.2d 805, 807 (6th Cir. 1948). Return to text.

[105] Id. at 806. Return to text.

[106] 190 F.2d 61 (8th Cir. 1951). Return to text.

[107] Id. at 71. Return to text.

[108] 67 T.C. 764, 772 (1977), aff'd, 622 F.2d 995 (9th Cir. 1980). Return to text.

[109] 622 F.2d at 996. Return to text.

[110] See, e.g., P. Dougherty Co. v. Commissioner, 159 F.2d 269 (4th Cir. 1946); Alamo Broadcasting Co., Inc. v. Commissioner, 15 T.C. 534 (1950). Return to text.

[111] See, e.g., Commissioner v. Smith, 397 F.2d 804 (9th Cir. 1968). Return to text.

[112] See P. Dougherty Co., 159 F.2d at 269. If the ground lessor borrowed funds against the security of the lessee-constructed improvement and used those funds in the operation of the real estate, the use-in-trade-or-business test presumably would be met. Return to text.

[113] Another potentially advantageous and significant aspect of the ground lease involves the lessee. The desirability and creditworthiness of the lessee may represent a valuable interest of the ground lessor—an interest that can be purchased or inherited. Return to text.

[114] 521 F.2d 767 (3d Cir. 1975). Return to text.

[115] Id. at 769. Return to text.

[116] Id. at 769-70. Return to text.

[117] Id. at 770. Return to text.

[118] Id. The taxpayer failed to demonstrate that rent payments, which were higher than the rent that could be obtained for the land at the time of acquisition (1) were not made up for by lower rentals during the renewal terms of the lease; (2) were not consideration for the options to renew and to purchase; and (3) were not part of the purchase price if the lessee exercised the option to purchase. Id. The Tax Court, in Fieland, also used these considerations to hold that the purchaser had failed to demonstrate the presence of premium rentals. See also Turner Outdoor Advertising, Ltd. v. Commissioner, 69 T.C.M. (CCH) 2692 (1995). Return to text.

[119] 207 F.2d 265 (9th Cir. 1953), cert. denied, 347 U.S. 942 (1954). Return to text.

[120] Id. at 274-75. Return to text.

[121] Id. at 274. Return to text.

[122] Id. at 277. Return to text.

[123] Id. Return to text.

[124] Id. Return to text.

[125] 286 F.2d 573 (4th Cir. 1961), aff'g 33 T.C. 1048, cert. denied, 366 U.S. 960 (1961). Return to text.

[126] Id. at 580. Return to text.

[127] 40 B.T.A. 768 (1939), aff'd, 119 F.2d 959 (7th Cir. 1941), cert. denied, 314 U.S. 673 (1941). Return to text.

[128] Id. at 771-72. Return to text.

[129] 14 T.C.M. (CCH) 869, 872 (1955). Return to text.

[130] Id. Return to text.

[131] Id. at 873. Return to text.

[132] Id. Return to text.

[133] Id. Return to text.

[134] Id. (emphasis added). Return to text.

[135] Id.

136> 61 T.C. 590 (1974), aff'd, 521 F.2d 767 (3d Cir. 1975). Return to text.

[137] 73 T.C. 743 (1980). Return to text.

[138] Midler Court Realty, Inc. v. Commissioner, 521 F.2d 767, 769-70 (3d Cir. 1975); Fieland, 73 T.C. at 755-56. In addition, in Turner Outdoor Advertising, Ltd. v. Commissioner, 69 T.C.M. (CCH) 2692 (1995), the Commissioner conceded the validity of this concept. Return to text.

[139] 433 F.2d 1263, 1265 (1st Cir. 1970); Schubert v. Commissioner, 286 F.2d 573, 583 (4th Cir. 1961), aff'g 33 T.C. 1048, cert. denied, 366 U.S. 960 (1961). Return to text.

[140] See Geneva Drive-In Theatre, Inc. v. Commissioner, 67 T.C. 764, 773 (1977), aff'd, 622 F.2d 995 (9th Cir. 1980). Return to text.

[141] Id. (quoting 299 F.2d at 617). Return to text.

[142] See Midler Court Realty, Inc. v. Commissioner, 521 F.2d 767 (3d Cir. 1975); Fieland v. Commissioner, 73 T.C. 743 (1980). Return to text.

[143] See Schubert v. Commissioner, 286 F.2d 573, 583 (4th Cir. 1961), cert. denied, 366 U.S. 960 (1961); Moore v. Commissioner, 207 F.2d 265, 277-78 (9th Cir. 1953); Friend v. Commissioner, 40 B.T.A. 768 (1939), aff'd, 119 F.2d 959 (7th Cir. 1941). Return to text.

[144] 14 T.C.M. (CCH) 869, 873 (1955); see supra notes 11-27 and accompanying text. Return to text.

[145] See, e.g., Moore v. Commissioner, 69 T.C.M. (CCH) 1797 (1995); Schubert v. Commissioner, 33 T.C. 1048 (1960), aff'd, 286 F.2d 573 (4th Cir. 1961), cert. denied, 366 U.S. 960 (1961); Moore v. Commissioner, 15 T.C. 906 (1950), rev'd, 207 F.2d 265 (9th Cir. 1953), cert. denied, 347 U.S. 942 (1954); Peters v. Commissioner, 4 T.C. 1236 (1945); Friend, 40 B.T.A. at 770-72. Return to text.

[146] Cf. Michaelis v. Commissioner, 54 T.C. 1175 (1970). Return to text.

[147] 207 F.2d 265, 274 (9th Cir. 1953), cert. denied, 347 U.S. 942 (1954). Return to text.

[148] But see Schubert, 33 T.C. at 1053-54. In addition, section 167(c)(2) may present a problem in connection with the classification of the interest in the favorable aspects of the ground lease as section 1231 property. Since section 167(c)(2) prevents the amortization and depreciation of the interest in the ground lease, it would have to be classified as real property used in trade or business or held for profit in order to be treated as section 1231 property. See I.R.C § 1231(b). While a lessor's sale of the rent to become due pursuant to a ground lease almost certainly would be treated as an anticipatory assignment of income, a sale of all the lessor's rights and obligations under a ground lease, especially in conjunction with a sale of the fee simple, should be treated as a conveyance of real property used in trade or business or held for profit. Cf. Heim v. Fitzpatrick, 262 F.2d 887 (2d Cir. 1959). Return to text.

[149] See supra notes 65-68 and accompanying text. Return to text.

[150] See supra notes 60-68 and accompanying text. Return to text.

[151] In addition to being security for the lessee's performance of the ground lease, the lessee-constructed improvement will have value to the ground lessor if the improvement makes it easier to lease the premises should the lessee default and/or the ground lease terminate. Return to text.

[152] See supra notes 93-112 and accompanying text. Return to text.

[153] It may also aid in securing a new rental stream should the lessee breach the lease. Return to text.

[154] See I.R.C. § 167(c)(2). Return to text.

[155] The premium rentals, and possibly the creditworthiness and desirability of the lessee, add to the value of the ground lease. Return to text.

[156] See supra notes 113-22 and accompanying text. Return to text.

[157] See supra note 48 and accompanying text. Return to text.

[158] However, the Third Circuit in Midler questioned such an argument:

The existence of "premium" rentals . . . [as a result of skillful negotiation by the ground lessor] is inherently suspect in an arm's length transaction, especially in a transaction involving substantial rentals payable over a long period of time. In the absence of evidence to the contrary, we assume that . . . [a ground lessee] agreed to pay the . . . [ground lessor] the minimum rental for which it thought it could obtain the premises. Thus, any "premium" rent would have resulted from an error by . . . [the ground lessee] in judging the lowest obtainable rent or from some imperfection in the market. We are unwilling to burden the tax collection process with speculative inquiries into the relative fortunes of lessors and lessees at the bargaining table. We doubt that after-the-fact administrative and judicial proceedings will lead to a more precise determination of fair rental value than that upon which the parties to a lease agree in arm's length negotiations.
Midler Court Realty, Inc. v. Commissioner, 521 F.2d 767, 769 (3d Cir. 1975). Return to text.

[159] See supra notes 113-15 and accompanying text. Return to text.

[160] See Moore v. Commissioner, 14 T.C.M. (CCH) 869 (1955). Return to text.

[161] See, e.g., Schubert v. Commissioner, 286 F.2d 573 (4th Cir. 1961), cert. denied, 366 U.S. 960 (1961); Moore v. Commissioner, 207 F.2d 265 (9th Cir. 1953), cert. denied, 347 U.S. 942 (1954); Friend v. Commissioner, 40 B.T.A. 768 (1939), aff'd, 119 F.2d 959 (7th Cir. 1941), cert. denied, 314 U.S. 673 (1941). Return to text.

[162] See Moore, 14 T.C.M. (CCH) at 873. Return to text.