## Facts

- A lessor owned downtown Omaha land subject to a 50-year lease beginning July 1, 1928, with specified annual rentals.
- The lease required the lessee to promptly construct a multi-story building costing at least $250,000; the lessee built the required building.
- On January 4, 1950, World Publishing Co. purchased the lessor’s entire interest in the property “subject to” the existing lease for $700,000 as an investment.
- The parties stipulated that, as of January 1950, the building’s remaining useful life was no longer than the lease’s unexpired term.
- For tax years 1952–1954, the taxpayer claimed annual “Depreciation and Amortization” deductions by allocating $300,000 of the purchase price to the building and amortizing that amount over the remaining lease term.
- The Commissioner disallowed the deductions, asserting the taxpayer acquired only nondepreciable land and no depreciable interest in the tenant-erected building.

## Issues

1. Whether a purchaser of the lessor’s interest in leased land acquires a depreciable interest in a tenant-erected building that will revert at lease end when the building’s remaining useful life does not exceed the remaining lease term.
2. Whether, and on what basis, the purchaser may allocate part of the purchase price to that wasting interest and recover it through depreciation or amortization over the lease’s unexpired term.

## Decision

- The Eighth Circuit reversed the Tax Court and held the taxpayer acquired a depreciable interest in the tenant-erected building.
- The court concluded the taxpayer purchased more than land: it also acquired a reversionary and related interest in the building, which was wasting over a finite period.
- Because the building’s remaining useful life was not greater than the unexpired lease term, the portion of the purchase price attributable to the building was recoverable over that term.
- The court rejected the view that the lessor’s interest in the building was not “held for the production of income,” finding the building and lease terms central to the investment’s income-producing character.
- The court accepted the taxpayer’s $300,000 allocation to the building for purposes of the appeal and approved amortization over the remaining lease term.
- The case was remanded with directions to allow the claimed deductions.

## Legal Principles

- Depreciation (or amortization) permits recovery of the taxpayer’s cost or basis in income-producing property subject to exhaustion, wear and tear, or obsolescence.
- A purchaser of a fee interest subject to a long-term lease may acquire a depreciable, wasting interest in a tenant-erected building when economic reality shows part of the purchase price was paid for that finite-lived interest.
- When the building’s remaining useful life is no longer than the unexpired lease term, the allocable portion of the purchase price may be recovered over that remaining term.
- The availability of depreciation turns on the taxpayer’s cost in an income-producing, wasting interest, not solely on who holds present legal title to the physical structure.
- Purchase-price allocation to the wasting building interest is permitted when supported by the record and not effectively rebutted.

## Conclusion

The court held that an arm’s-length purchaser of a lessor’s interest in land subject to a lease requiring a tenant-built building may depreciate (or amortize) the portion of the purchase price properly allocable to the reversionary, finite-lived building interest when the building’s remaining useful life does not exceed the lease’s remaining term.


World Publ’g Co. v. Comm’r, 299 F.2d 614 (8th Cir. 1962)