## Facts

- James Bailey bought a residential building in an urban renewal area of Pittsburgh, Pennsylvania, for $1,320 in 1978 from the Urban Redevelopment Authority of Pittsburgh (URA).
- The property was in historic districts and subject to an urban renewal plan that included historic-façade rehabilitation.
- Bailey agreed that the URA would restore the building’s exterior façade while he would rehabilitate the interior and maintain the façade.
- The URA, not Bailey, selected the contractor, negotiated the contract, and paid the contractor directly for the façade work.
- Bailey could not alter the façade without the URA’s written approval.
- Bailey granted the URA an easement allowing entry to repair the façade at Bailey’s expense if he failed to maintain it under the agreement.
- The Commissioner determined income tax deficiencies for 1977–1981, asserting that the URA’s façade expenditures were includable in Bailey’s gross income, with related disputes over basis, depreciation, and investment tax credit.

## Issues

1. Whether the URA’s payments to rehabilitate the property’s historic façade were includable in Bailey’s gross income under I.R.C. § 61.
2. If not includable in income, whether the URA-funded façade expenditures could be included in Bailey’s basis in the building.
3. Whether Bailey could claim depreciation deductions attributable to the façade improvement.
4. Whether Bailey could claim an investment tax credit attributable to the façade improvement.

## Decision

- The URA-funded façade rehabilitation was not includable in Bailey’s gross income because he lacked “complete dominion” over the improvement.
- Bailey could not include the amount of the façade grant in the building’s basis.
- Bailey could not claim depreciation deductions attributable to the URA-funded façade work.
- Bailey was not entitled to an investment tax credit for the URA-funded improvements.

## Legal Principles

- Gross income under I.R.C. § 61 requires an accession to wealth that is clearly realized and over which the taxpayer has complete dominion.
- A government-funded improvement to a taxpayer’s property may be excluded from income when the taxpayer neither receives nor controls the funds and the improvement remains subject to substantial third-party controls and enforceable rights (e.g., alteration restrictions and easements).
- Exclusion of third-party-funded improvements from gross income generally prevents the taxpayer from treating those expenditures as cost basis, and therefore prevents depreciation or credits tied to taxpayer cost.

## Conclusion

The Tax Court held that a redevelopment authority’s direct payment for and continuing control over a historic-façade rehabilitation prevented the improvement from being gross income to the property owner, but the owner correspondingly could not increase basis or claim depreciation or investment tax credits for the authority-funded work.


Bailey v. Commissioner, 88 T.C. 1293 (1987)