Opinion ID: 1992669
Heading Depth: 2
Heading Rank: 2

Heading: Inclusion of Disallowed Depreciation Expense in Computing Prior Owner's Depreciation

Text: Appellants next contend that the DPW improperly considered the amount of depreciation offset by the gain on sale in computing the prior owner's depreciation. The DPW offset the seller's allowable depreciation by the amount of gain seller realized from the sale of the facilities, which Appellants concede is proper under Manual section IV.D.9.e, which provides: Gains and losses realized from the disposal of depreciable assets, not to exceed 10% of the total allowable depreciation for the year, are an allowable cost. However, Appellants challenge the DPW's determination of their depreciable basis in the properties, which did not give Appellants the benefit of an increased cost basis that would result from the disallowance of the seller's depreciation in its final year of ownership. The DPW correctly maintains that a buyer's cost basis under section IV.D.9.f is the purchase price less any straight line depreciation by the prior owner without regard to any reduction imposed by DPW under Manual section IV.D.9.e. Such an interpretation of section IV.D.9.f is proper since the section makes no reference to possible adjustment to the straight line depreciation under the preceding subsection (section IV.D.9.e). Moreover, any other interpretation would result in a windfall increased cost basis (albeit a relatively small one) to the buyer.