T .C. Su m m ary Op i n io n2 01 7 -3 1

UNITED STATES TAX COURT

SHARON M . NIELSEN AND STEVE L. NIELSEN, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 0 0 50 -1 5 S. Fi l edM ay 8 , 2 0 1 7
.

Sh aro n M . Ni el s en an dSt ev e L. Ni el s en , p ro s e. M arkA. Nel so n , fo r res po n d en t
.

SUM M ARY OPINION CARLUZZO, Sp eci al Tri al J u d g e: Th i s cas e was h eardp urs u an t t o th e p ro v is i o n s o f s ect i o n 7 4 6 3 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
. 1 Pu rs u an t t o s ect i o n7 4 6 3(b ), th e d eci si on t o b e en t eredi s n o t

1 Un l es s o th erwi s e i nd i cat ed , s ect io nreferen ces are t o t h e In t ern al Rev en u e (co n ti n u ed ...)- 2
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rev i ewab l e b y

an y o ther co u rt , an d t h i s o p i n i o ns h al l n o tb e t reat ed as p reced en t fo r an y o th er cas e. In a n o t ice o f d efi ci en cy d at edM ay 1 4, 2 0 15 (n o ti ce), res p o n d en t d et erm i n eda $ 5 ,2 9 7 d efi ci en cy i np et i ti o n ers ’ 2 01 2 Fed eral i n co m e t ax . Th e i s su e fo r d eci s i o n i s wh et h er p et i t i on ers are en t i tl edt o a d ep reci at io nd edu ct i o n i nan
am ou n tg reat er th an res p o n d en tal l o wed
. Back gro u n d So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Atth e t i m e t h e p et i t i o n was fi l ed , p et i t i o ners res i d ed i n Cal ifo rn i a. Pet i t i o ners o wn eds ev eral ren t al real es t at e p ro p ert i es (ren t al p ro pert i es ) i n 2 0 1 2 i n Wh i t t i er, Cal i fo rn i a: 7 7 5 6/ 7 7 5 8 / 7 7 6 0 Newl i nAv e. (7 75 6 Newl i n p ro p erty ); 1 3 4 5 1 A: F Cam il l a St . (Cam i l l a p ro p erty ); an d6 5 2 2 -6 5 2 4 Newl i nAv e. (6 5 2 2 Newl i n p ro p erty ). M r. Ni el s en p u rch as edthe 7 7 5 6 Newl i np ro pert y fo r $ 3 60 ,0 0 0 i n2 0 0 3 . At th e t i m e t h ere were t h ree b ui ld i n g s erect edo ni t . In2 0 1 2 th e Lo s An g el es Co u n ty Offi ce o f t h e As ses s o r as s es s edth e 7 7 5 6 Newl i np ro p ert y ata v al ue o f $ 4 2 5 ,3 2 4 , o f wh ich am ou n t$ 18 9 ,0 3 2 was at tri b ut ab l e t o i m p ro v em en t s an d$ 2 3 6 ,2 9 2 was

1 (...co n t in u ed ) Co d e o f 1 9 8 6 , as am en d edan di neffect fo r t h e y ear i n i s s ue. Ru l e referen ces are t o the Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 3
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at tri b u t ab l e t o l an d . Si m

p l e m ath em at i cs s h o ws th atacco rd i n g t o th e t ax
as s es s o r’ s o ffi ce, th e v al u e o f t h e i m p ro vem en t s co n s t i tu t ed 4 4 .4 % o f t h e t o t al
v al u e o f t h e p ro p ert y . Pet i t i o ners p u rch as edth e Cam i l l a p ro pert y fo r $ 7 5 0 , 0 0 0 i n2 0 03 . Atth e t i m e t h ere were fo u r b u i l di ng s erect edo n i t
. In2 0 0 3 Hawt ho rn e Sav i n g s (Hawt ho rn e) p erfo rm eda p ro fes s i o n al ap p rai s al o f t h e Cam i l l a p ro p ert y an d d et erm i n eda v al u e o f $ 75 0 ,0 0 0 , at tri b u t i n g $ 2 5 5 ,4 8 6 t o i m p ro v em en t s an dth e b al an ce t o l an d . In2 0 12 th e Lo s An g el es Co u n ty Offi ce o f t h e As s es s or as s es s ed th e Cam i l l a p ro p ert y ata v al u e o f $ 7 9 5 ,0 00 , o f wh i ch am ou n t$ 3 0 5,8 0 0 was at tri b u t ab l e t o i m

pro v em en t s an d$ 48 9 ,2 0 0 was at tri b u t ab l e t o l an d
. Acco rd i n g t o th e Hawt h o rn e ap p rai s al th e i m p ro v em en t s co n st i tu t ed 3 4% o f t h e t o tal v al u e o f th e p ro p ert y ; acco rd i ng t o th e t ax as s es s or’ s o ffi ce, t h e v al u e o f t h e i m pro v em en t s
co n st i tu t ed3 8 .4 % o f t he t o tal v al u e o f t h e p ro p erty . Pet i t i o ners p u rch as edth e 6 5 2 2 Newl in p ro p ert y fo r $ 5 2 0 ,0 00 i n 2 0 1 1 . At th e t i m e t h ere were t wo b u il d i n g s erect ed o n i t . In2 0 1 3 th e Lo s An g el es Co u n ty Offi ce o f t h e As ses s o r as s es s edth e 6 5 2 2 Newl i np ro p ert y ata v al ue o f $ 5 3 2 ,8 0 7 , o f wh ich am ou n t$ 16 3 ,9 4 0 was at tri b ut ab l e t o i m p ro v em en t s an d$ 3 6 8 ,8 6 7 was at tri b u t ab l e t o l an d . Acco rd i n g t o th e t ax as s es s o r’ s o ffi ce, t h e v al u e o f th e i m p ro v em en t s co ns t i tu t ed3 0 .7 % o f t h e t o t al v al u e o f t h e p ro p ert y .- 4
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OnOct o b er 4 , 2 0 12 , San t o s H. Krei m an n , ch i ef d ep u ty as s es s o r fo r t h e Lo s An g el es Co u n ty

Offi ce o f t he As s es s o r, s en ta l et t er t o W i l l i am T. Fu ji o k a, ch i ef
ex ecu t i v e o ffi cer o f t h e Co un ty o f Lo s An g el es , i d en t i fy i n g “ cri t i cal t as ks req u i ri n g i m

m ed i at e at t en t i o n ” (Oct o b er 4 , 2 0 1 2 , l et t er). In th e Oct o b er 4 , 2 0 1 2 , l et t er M r. Krei m an n d es cri b ed , am on g o th er t h i n gs , p l an s t o up g rad e t h e Lo s An g el es Co u n ty

Offi ce o f t he As s es s o r’ s i nfo rm at i o nt ech n o l o g y t o rep l ace

“ ex i s t i n g s y s t em s wh i ch n o l o n g er p ro v i d e th e req u i redfu n ct i o n al it y an d rel i ab i l i ty ” an di m

p ro v e acces s t o th e M u lt i pl e Li s ti ng Serv i ce t o i n creas e t h e
accu racyo f ap p rai sal s . Ona Sch edul e E, Sup p l em en t al In co m e an dLo s s , at t ach edt o p et i t i o n ers ’ t i m el y fi l ed2 0 1 2 Fed eral i n co m e t ax retu rn they cl ai m edd ep reci at i on d edu ct i o n s wi th res p ect t o th e ren tal p ro p ert i es u s i ng th e s trai g h t -l i n e m et h o do f d ep reci at io n wi th a reco v ery

p eri od o f 2 7
. 5 y ears . Pet i t i on ers i n cl u d edth e co s t o f t he l an dan d i m p ro v em en t s i n th ei r cal cu l at i o n s o f d ep reci ab l e b as i s fo r t he ren t al p ro p ert i es , res u l ti n g i n th e fo l l o w i n g d ep reci at i o n d edu ct i on s fo r t h e ren t al p ro p ert i es : Ren

t al Pro p ert y Am o u nt 7 7 5 6 Newl i n p ro p ert y $ 1 4 , 0 64 Cam

i l la p ro p ert y 3 2 ,3 1 2 6 5 2 2 Newl i n p ro p ert y 2 2 ,8 6 2- 5
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In th e n ot ice res p o n d en td i s al l o wed : (1 ) $ 7,4 0 6 o f t he $ 1 4 ,0 6 4 d ep reci at i o n d educt i o n cl ai m edwi th res p ectt o th e 7 7 56 Newl i np ro p ert y ; (2 ) $ 1 5 ,9 54 o f t h e $ 3 2 ,3 1 2 d ep reci at i o n d edu ct i o n cl ai m edwi th res p ectt o th e Cam il l a p ro p ert y ; an d (3 ) $ 1 5 ,1 0 5 o f t h e $ 2 2 ,8 6 2 d ep reci at i on d edu ct i o ncl ai m edwi th res p ectt o th e 6 5 2 2 Newl i n p ro p ert y . Acco rd i n g t o t he n o t i ce, res p o n d en t ’ s d i s al l o wan ce o f p o rt i on s o f t h e d ep reci at i o n d edu ct i o n s i s at tri b u t ab l e t o a red et erm i n at i o no f t h e d ep reci ab l e b as i s o f each ren t al p ro p ert y acco rd i n g t o an ap p o rt i o nm en to f v al u e b et ween i m

p ro v em en t s an dl an das fo l l o ws : Prop ert y Rat i o 7 7 56 Newl i n p ro p ert y 0 .4 4 4 Cami l la p ro p ert y 0 .3 8 6 5 22 Newl i n p ro p ert y 0 .3 1 Th e rat i o s u s edi n the n o t i ce are d eri v edfro m th e Lo s An gel es Co u nt y

Offi ce o f th e As s es s o r’ s as ses s m en tap po rt i o n i n g v al ue b et ween i m p ro v em en ts an dl an d
. Tak in g i nt o acco un t ad d it i o n al i n fo rm at i o n fro m th e Lo s An g el es Co u n ty Offi ce
o f t h e As s es s o r, res p o n den tn o wco n t en ds th atth e rat io s h ou l db e 0 .4 6 fo r th e Cam i l l a p ro p erty . Di s cu ss i o n As we h av e o b s erv edi n co u n tl es s o p i n i o n s, d edu ct i on s are a m at t er o f l eg i s lat i v e g race, an dthe t ax p ay er b ears th e b urd en o f p ro v i n g en t i t l em en tt o an y- 6
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cl ai m edd edu ct i on . 2 Ru l e 1 4 2 (a); INDOPCO, In c. v . Co m m i ss i o ner, 5 03 U.S. 7 9 , 8 4 (1 99 2 ); New Co l o n i al Ice Co . v . Hel v eri n g, 2 9 2 U.S. 4 3 5 , 4 40 (1 9 3 4 ). Sect io n 1 6 7 (a) al l o ws as a d ep reci at io nd edu ct i o n a reas o n ab le al l o wan ce fo r t h e ex h au s t i on , wear, an dt ear o f p ro pert y u s edi na t rad e o r b u s in es s . Th e p u rp os e o f t h e d edu ct i o n fo r d ep reci at io ni s t o al l o w th e t ax p ay er t o reco v er o v er th e u s efu l l i fe o f t h e p ro pert y i t s co s to r o th er b as is . Un i t edSt at es v . Lu d ey , 2 7 4 U.S. 2 9 5 , 3 0 0 -3 01 (1 9 2 7). Pu rs u an tt o s ect i o n1 6 8 (a), t he d ep reci at i o n d edu ct i o n fo r an y t an g i b l e p ro p ert y

g en eral l y i s t o b e d et erm i n edb y

u s in g t h e ap pl i cab l e d ep reci at i o n m et h o d, the ap p l i cab le co n v en t i o n , an dth e ap p l i cab l e reco v ery p eri o d
. Gen eral ly , d ep reci at i on i s co m p u t edb y u s in g th e co sto f t h e p ro p erty as i ts b as i s . Secs . 1 6 7 (c), 1 0 1 1 , 1 0 1 2 ; s ec. 1 .1 6 7 (g )-1 , In co m e Tax Reg s . If d ep reci ab l e p ro p erty an dn o n dep reci ab le p ro p ert y s u ch as real p ro p ert y

wi th i m p ro v em en t s are b o u g h tfo r a l u m

p s u m , th e co stm

us tb e ap p o rt io n edb et ween th e l an dan dth e i m p ro v em en t s . Un i t edSt at es v . Hi l l , 5 0 6 U.S. 5 4 6 , 5 5 9 (1 9 9 3 ); s ec. 1 .1 6 7 (a)-5 , In co m e Tax Reg s . Inm ak i n g th i s al l o cat i on , s ect i o n1 .1 6 7 (a)-5 , In co m e Tax Reg s., p ro v i des :

2 Pet i t i on ers d o n o t cl ai m

an dth e reco rdd o es n o t s ho w th at th e p ro v i s i o n s o f s ec. 7 4 91 (a) ap p l y

h ere, an dwe p ro ceed as th o u g h t h ey d o n o t
.- 7
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In th e cas e o f t h e acq u is i t i o no no r aft er M arch 1 , 1 9 1 3 , o f a co m b in at i o n o f d ep reci ab l e an dn o n d ep reci ab l e p ro p erty fo r a l u m p s u m , as fo r ex am

p l e, b ui l d i n g s an d l an d , th e b as i s fo r d ep reci at i o n can n o tex ceed an am o u n twh i ch b ears th e s am e p ro p o rt i o nt o th e l u m p s um as the v al u e o f t h e d ep reci ab l e p ro p erty atth e t i m e o f acq u i s it i o n b ears t o the v al u e o f t h e en t i re p ro p ert y atth at t i m e. * * * Th e rel ev an ti nqu i ry

i s the res p ect i v e fai r m ark etv al ues o f t h e d ep reci ab l e an d
n o n d ep reci ab l e p ro p erty

at th e t i m e o f acqu i s i t io n . W ei s v . Co m m i s s io n er, 9 4 T.C. 4 7 3 , 4 8 2 -4 83 (1 9 9 0); Ran d o l p h Bl dg . Co rp . v . Co m m i s s io n er, 6 7 T.C. 8 0 4 , 8 0 7 (1 97 7 ). Pet i t i o ners cl ai m ed d ep reci at i o nd educt i o n s wi th res p ect t o t h e ren t al p ro p ert i es as th o u g h t h e d ep reci ab l e b as i s o f each p ro p erty i n cl u d edb o th th e v al u e
o f t h e i m p ro v em en t s an d t h e l an d . Res p o n den td i s al l o wedp o rt i o n s o f t h e d ep reci at i o n d edu ct i o n s o n th e g ro u n d s t h atp et i t i o ners h adi n co rrect ly i n cl u d ed th e co s to f t h e n on d ep reci ab l e l an d i nth ei r cal cu l at i o n s o f d ep reci ab l e b as i s fo r th e ren t al p ro p ert i es . Pet i t i o n ers n o wag ree t h at th e v al u e o f t h e l an d s ho u ldn o t h av e b een i n cl u d ed i n th ei r cal cu l at i o n s o f t he d ep reci ab l e b as es o f t h e ren t al p ro p ert i es , h o wev er, t h ey co nt en dth atres po n den t’ s al l o cat i o n s t o l an d v al u es
were ex ces s i v e. Pet i t i o ners rai se v ari o u s ch al l en g es t o th e accu racyan dcred i b il i ty o f
res p o n d en t’ s rel i an ce o n t h e Lo s An g el es Co u n ty Offi ce o f t h e As s es s or’ s- 8
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as s es s m en t s an di ns t eadrel y o n two al tern at i ve m et h o ds o f v al u at i o n: (1 ) l an d
s al es m et h o dan d(2 ) i n s u ran ce m et h o d
. Pet i t i o ners as s ert , am o n g o th er t h i n g s , th atth e Lo s An g el es Co u n ty Offi ce
o f t h e As s es s o r’ s d at a “ i s ex trao rd in ari l y i n accu rat e” an di n t ern al l y i n co n s i s t en t
. W e h av e carefu ll y

rev i ewedth e reco rd , i n cl u d i ng th e Oct o b er 4 , 2 0 12 , l et t er an da d o cu m en tt i t l ed “ Parcel Det ai l --Lo s An g el es Co un ty As s es so r Po rt al ” o nwh i ch p et i t i o n ers rel y , an d d o n o ts h are t h ei r co n cern s wi th res p ectt o th e rel i ab i li ty o r
u n rel i ab i l i ty

o f t h e Lo s An gel es Co u n ty Offi ce o f t h e As ses s o r’ s as s es s m en t s . No r d o we g iv e m

u ch wei g h tt o th e aft er-t h e-fact al l o cat i o n s th atp et i t i o n ers ad v an ce i n th i s p ro ceed in g . Al th o u g h we ackn o wl ed g e th atth e o wn er o f p ro p ert y i s qu al i fi edb y

h i s o wn ers h i p al o n e t o t es t ify as t o i t s v al u e, s ee Deh m er Di s tri b u t o rs , In c., v . Tem p l e, 8 2 6 F.2 d1 4 6 3, 1 4 6 6 (5 th Ci r. 1 9 8 7 ); Un it ed St at es
v . Lau g h l i n , 8 04 F.2 d 1 3 36 , 1 3 4 0 (5 th Ci r. 1 98 6 ); Di et z v . Co n s o l id at edOi l & Gas , In c., 6 4 3 F.2 d1 08 8 , 1 0 9 4 (5 th Ci r. 1 9 8 1 ); Kes ten b au m v . Fal st aff Brewi n g Co rp ., 5 1 4 F.2 d6 90 , 6 9 8 (5 th Ci r. 1 9 7 5 ), m o d ifi edo n o th er g ro u n d s en b an c, 5 7 5 F.2 d5 6 4 (5 th Ci r. 1 9 7 8), we are aware o f n o au th o ri ty th ats u g g es t s th at th e qu al i fi cat i o n ex t en d s t o an al l o cat i o n o f t h e v al u e o f p ro p ert y b et ween l an dan d i m p ro v em en t s .- 9
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As b et w een p et i t i o n ers ’ al l o cat i o n s an dth e al l o cat i o n s b as edup o nth e Lo s An g el es Co u n ty

Offi ce o f t he As s es s o r’ s as s es s m en t s , we fi n d th e l at t er t o b e m o re rel i ab l e an dp ers u as i v e. W e n ot e t h atth e Hawt h o rn e ap prai s al an d al lo cat i o n s wi th res p ect t o th e Cam i l l a p ro p ert y s up p ort s o u r fi nd i n g i nth is reg ard
. Acco rd in g ly , p et i ti o n ers ’ al l owab l e d ep reci at i o n d edu ct i o n s are l i m i t edt o th e
am ou n t s n o w al l o wedb y res p o n d en t
. To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered
u n der Ru l e 1 5 5
.