                  T.C. Summary Opinion 2011-132



                      UNITED STATES TAX COURT



             ROBERT L. WILLSON, SR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11164-04S.               Filed November 23, 2011.



     Robert L. Willson, Sr., pro se.

     Jessica R. Nolen, for respondent.




     HOLMES, Judge:   Robert Willson opened a bar in 1986, and it

gave him nothing but trouble.    He’s seen lawsuits, endless

repairs, and even a catastrophic fire.    One might say the City of

Des Moines did him a favor when it finally condemned the land in

2000 to expand its airport--right around the time Willson began

serving a federal prison term.    But the Commissioner wouldn’t let

things be and says that the condemnation triggered a large
                               - 2 -

capital gain that Willson didn’t correctly report.1   This meant

the bar would give him one more headache--because, though Willson

represented himself at trial, the facts as he described them

would be worthy of an advanced exam problem in tax accounting.

                            Background

     Willson never planned to own a bar.   He would much rather

have kept fixing cars at the repair shop he’d owned since at

least the early 1980s--but that work became impossible after a

burglar shot him in the arm.   Looking for a new career, he used

his savings to lease, and then buy, land next to the Des Moines

International Airport.   On the land there were already some

buildings.   The largest was an inverted L-shaped structure called

Fast Jacks (referred to as a “rock” bar because it featured

“rock-and-roll” music and dancing).    Nestled inside the “L” was a

beer garden, and to the north--abutting the highway--a smaller

building that had been used as a house and then a pizza kitchen.

Willson reopened the place in 1986 and renamed it City Limits.

He bought out his landlord and became owner on July 1, 1986.

     Willson soon learned that the bar’s limited parking forced

clients to park on the street, and pass around a small pond.



     1
       The case was tried under Internal Revenue Code section
7463. (All section citations are to the Code as in effect for
2000 unless otherwise noted, and all Rule references are to the
Tax Court Rules of Practice and Procedure.) Because Willson
chose small-case status, this decision is not reviewable by any
other court, and this opinion should not be cited as precedent.
                                - 3 -

Because departing patrons weren’t the best swimmers or

jaywalkers, Willson decided he’d better do something about it.

     The first thing he did was fill the pond with dirt and

rocks.    Then he graded the land, expanded parking, and spent

$3,000 to put in parking-lot lights.    He also spent $10,000 to

put in a new sewer system.    By 1987 he had two gravel parking

lots which had cost him a total of $10,000, and a paved one on

which he spent $19,000.    He remodeled the bar’s interior for

$25,000 and built a large shed for $15,000.    Business took off,

and Willson decided to rent his bar out so that someone else

could operate it for awhile.

     All was well for a time, but then his tenants stopped paying

rent.    Willson went over to see what was wrong.   More than he

imagined--a series of unfortunate events had culminated in the

collapse of the roof.    He again fixed the place up and

unsuccessfully tried to sell it.    There were no takers, and

Willson moved on to his backup plan.    He finished building an

outdoor concert stage that his lessees had started (they laid the

concrete) and added another stage in the beer garden.      He even

paid $10,000 to put large windows in a wall so that patrons could

see indoor performances from outside.

     With these new stages, the bar became a local mecca for a

type of “rock and roll” called “glam metal.”    While the Court

took no expert testimony on the nature of such groups, it did
                                - 4 -

allow into the record Willson’s own explanation of this genre of

musical entertainment.   We also took judicial notice that “hair

bands” had lost much of their popularity with the coming of

something called “grunge rock” (another type of “rock and roll”

music) in the early nineties.   This was important to Willson’s

business because “hair bands,” with such unlikely names as Head

East, Great White, and Saturn Cats could still draw large crowds

to a bar on the outskirts of Des Moines but had become affordable

providers of live entertainment.   Willson even invited one of

these “hair bands” to be a sort of artist-in-residence.

     One night in 1994, a few band members did something to a

smoke machine that sparked an enormous fire.   This fire engulfed

everything except the parking lots, the shed, and the property’s

original house.2   It also forced Willson to make a choice--sell

to the City as part of its airport expansion, or rebuild.

Willson was unable to sell, so he had to rebuild.   He rented out

the old house to a tenant who installed minor improvements (e.g.,

poles) and opened an establishment felicitously--and

paronomastically--called the “Landing Strip,” in which young lady

ecdysiasts engaged in the deciduous calisthenics of perhaps

unwitting First Amendment expression.   See City of Erie v. Pap’s

A.M., 529 U.S. 277, 289 (2000); Evans v. Commissioner, T.C. Memo.



     2
       Willson was using the old house as temporary housing for
some of the bands.
                                - 5 -

2010-62.    He also used $169,000 of his $200,000 insurance

proceeds to rebuild the bar.3

     Des Moines began moving to condemn the bar and the land

sometime in 1999.    Willson closed the bar doors by May 5, when he

transferred the property to his lawyer for safekeeping until the

matter with the City was resolved.      His criminal troubles--

something to do with money and drugs and possibly the bar--were

reaching the point where Willson was about to begin serving a

federal prison term, and he authorized his lawyer to act for him

in dealing with the City while he was imprisoned.

     The City did finally condemn the property--perhaps to the

relief of Willson’s neighbors--by January 25, 2000.      (The date is

a bit fuzzy, because witnesses’ memories had become hazy; but the

local property records show the City of Des Moines owned the

property by that date.)    The City placed the condemnation award

in a trust account, and the trust made a distribution--most of

which satisfied outstanding loans tied to the property.

     Despite his legal problems, however, Willson did manage to

file his 2000 tax return.    The Commissioner determined that he

had underreported his income.    Willson timely filed a petition to

contest the Commissioner’s determination, but trial was postponed

for several years while he served out his sentence.     After his

release, Willson moved back to Iowa (where he resided when he


     3
         He spent $144,000 on materials and $25,000 on labor.
                                - 6 -

filed his petition), and we tried the case in Des Moines.    The

one remaining issue is Willson’s adjusted basis in the property

at the time of the condemnation.4

                             Discussion

     We begin by stressing that Willson chose “S case” status.

Rule 174(b) allows a taxpayer like Willson to introduce evidence

in an S case that would otherwise not be admissible, and it lets

us conduct the trial as informally as possible (consistent with

orderly procedure) and to admit any evidence we decide has

“probative value”--a fancy way of saying any evidence that helps

or hurts Willson’s case.    This looser rule is important here,

because Willson presented his case quite credibly through his own

testimony and that of others who worked at the bar or lived

nearby during its heyday.    Despite the raffish pasts of Willson

and some of his witnesses, we found their testimony on his

investment in the bar entirely credible.

     Willson did his best to explain in as plain a way as

possible the history of the property and what he spent on it.      We

will try to return the favor by minimizing taxspeak.    Explaining

our decision, however, does require some tax vocabulary:    Someone



     4
       Willson also claimed more real-estate taxes on his return
than allowed in the notice of deficiency. The Commissioner
conceded an additional $22,519 in taxes before trial, which left
$10,291 in dispute. Because Willson provided no evidence at
trial of any taxes paid beyond the $22,519, we sustain the
Commissioner on this issue. See Rule 142(a)(1).
                                - 7 -

who sells property is taxed on the gain, not the sale price.

This gain basically depends on two other numbers:    the amount the

seller receives and what is called “adjusted basis.”    Sec.

1001(a).    Both these numbers can be complicated to figure out.

The amount the seller receives is not just how much cash he

pockets.    It also includes, for example, money that goes to pay

off other debts tied to the property.    Sec. 1.1001-2(a), Income

Tax Regs.    The Commissioner stated in his pretrial memorandum

that the amount that Willson received in this sense (called the

“amount realized”) is $203,427.    Willson doesn’t dispute this.5

     That leaves us with the “adjusted basis.”    To figure out

Willson’s gain, we have to subtract the adjusted basis from the

amount realized.    Basis is pretty much what a property owner paid

for the property plus what he later spent to improve it.      Secs.

1011, 1012, 1016.    A taxpayer can’t generally deduct these

payments right away because they provide a benefit that lasts

longer than just one taxable year.6

     But before calculating the capital gain the basis must be

adjusted under section 1016.    And depreciation is one of those

adjustments we need to figure out in this case.    See sec.

1016(a)(2).    Most property doesn’t just fall apart one day, it



     5
       In his pretrial memorandum and at trial the Commissioner
referred to this as Willson’s “economic benefit.”
     6
       For example, when Willson built a shed on his property, he
didn’t plan to rebuild it every year.
                               - 8 -

suffers wear and tear over time.      That’s why the Code allows a

taxpayer yearly deductions for depreciation over the estimated

useful life or recovery period of the property used in a trade or

business.7   See secs. 167 and 168.    Once property is no longer

used in a trade or business, a taxpayer can’t take depreciation

deductions even if he still owns it.      See sec. 167(a)(1).

     The trial showed that Willson and the Commissioner disagree

about how much Willson spent on the property over the years, and

how much the allowable depreciation reduced that amount.

I.   Amount Spent

     In the notice of deficiency, the Commissioner said Willson

spent $170,000 for the property--$160,000 for the real estate and

$10,000 for a liquor-distribution system that the previous owner

had installed.   Willson doesn’t dispute that he paid $10,000 for

equipment, but he remembers paying more for the real estate.        We

don’t find his testimony credible on this particular point--the

property assessments for later years led us to conclude that his

estimate is a bit high.

     The Commissioner, however, doesn’t divide the $160,000 cost

of the real estate between the land and the buildings.      This is a



     7
       Let’s say it costs a taxpayer $10,000 to construct a
building that will last ten years. He can’t deduct $10,000 from
his taxes when he builds it. Nor does he have to wait ten years
to take the deduction. Instead, he might get to deduct $1,000
from his taxes in each of the ten years that he’s using the
building. (Actual depreciation is much more complex than in this
example.)
                                - 9 -

critical mistake.   Because land is not subject to the same wear

and tear as buildings, depreciation isn’t allowed for the land.

Willson did give us the 1994 real-estate assessment, and based on

its land-to-buildings ratio, we find that $29,000 is allocable to

the land (the nondepreciable asset) and $131,000 is allocable to

the buildings.

     Willson also gets basis for any improvements he made to the

property after he bought it.   Willson filled in the pond, graded

the land, and put in parking lots with lights for $37,000.8    He

added a sewer system for $10,000 and a big shed for $15,000.    He

also spent $25,000 in modifications to the interior of the rock

bar and $10,000 to replace a wall with windows.   These expenses

are depreciable.    Once we add them to his original cost, Willson

had the following basis in the property before taking into

account any depreciation:




     8
       We find that the cost of filling in the pond and grading
the land was directly related to, and a necessary part of, the
parking lots’ construction, and not inextricably associated with
the land itself. Because we find that the parking lots were
depreciable property necessary to the operation of Willson’s
business, we add the cost of filling in the pond and grading the
land to the parking lots’ bases. See, e.g., Trailmont Park, Inc.
v. Commissioner, T.C. Memo. 1971-212.
                                - 10 -

                 Item                             Basis
Land                                 $29,000
Shed                                     15,000
Equipment (liquor distribution)          10,000
Parking lots                             37,000
Sewer system                             10,000
Buildings                            166,000
  Total                              267,000

II.     Depreciation

       Section 167 gives us the general rules governing

depreciation deductions.     In 1981 Congress added section 168,

entitled “Accelerated Cost Recovery System” (ACRS), which

simplified the rules and allowed taxpayers to take greater

depreciation deductions over fewer years.         Economic Recovery Tax

Act of 1981 (ERTA), Pub. L. 97-34, secs. 201(a), 209(a), 95 Stat.

203, 226.     ACRS was then replaced by the modified accelerated

cost recovery system (MACRS) in 1986.       See Tax Reform Act of 1986

(TRA 86), Pub. L. 99-514, secs. 201, 203, 100 Stat. 2122, 2143.

We still, however, apply ACRS to depreciable property like

Willson’s property that was placed in service from 1981 through

1986.     This is because MACRS applies only to property placed in

service after 1986.     Id. sec. 203(a), 100 Stat. 2143.
                                - 11 -

     A.      Shed

         Willson built a large storage shed in 1987 that was

unaffected by the 1994 fire.     Because he couldn’t remember the

month in which it was built, we depreciate his shed from January

15, 1987,9 to May 15, 1999.10   We also find MACRS applies because

the shed was built after 1986.

     Our analysis doesn’t stop there.     We must determine what

kind of property the shed was.     This is because depreciation

under MACRS depends on how the Code and the IRS classify each

particular bit of property.     Based on the trial testimony, we

think that the shed was a large metal building like those found

on farms--it was big enough to store tractors and other heavy

equipment and even had windows.     Willson had also put down a



     9
       We weren’t able to determine precisely when Willson put
some of his property in service. After so many years, he
understandably could remember only the year and not the
particular day or month. When this happens, we make an
assumption in favor of the Commissioner (because Willson had the
burden of proof) and use the earliest possible date during the
year. See Langer v. Commissioner, T.C. Memo. 2008-255, affd. 378
Fed. Appx. 598 (8th Cir. 2010); Williams v. Commissioner, T.C.
Memo. 1987-308.
     10
       ACRS and MACRS tell us to apply the midmonth convention
to the nonresidential real property. See sec. 168(b)(2) (as in
effect before the Tax Reform Act of 1986 (TRA 86), Pub. L. 99-
514, 100 Stat. 2085); sec. 168(d)(2) (as in effect after TRA 86).
The midmonth convention treats “property placed in service during
any month (or disposed of during any month) as placed in service
(or disposed of) on the mid-point of such month.” Sec.
168(d)(4)(B). Although Willson closed the doors to the bar on
May 5, 1999, the midmonth convention says we don’t stop
depreciation until May 15, 1999.
                              - 12 -

concrete slab as a foundation.   We therefore find that the shed

is “nonresidential real estate,” see L & B Corp. v. Commissioner,

862 F.2d 667, 671-73 (8th Cir. 1988), revg. 88 T.C. 744 (1987),

and under MACRS is depreciable using a straight-line method over

31.5 years.11

     B.   Equipment

     The 1994 fire destroyed the liquor-distribution system.

Willson never replaced it, so section 1033 doesn’t apply.   This

means that, while Willson’s 1994 taxes may have been affected by

this property, see sec. 1.1033(a)-2(c)(2), Income Tax Regs., it

doesn’t affect our determination of Willson’s capital gain in

this case--we don’t add its cost to his basis, nor do we have to

calculate its depreciation.

     C.   Parking Lots and Sewage System

     We hold that the construction in 1987 of Willson’s parking

lots--including the filling of the pond, the grading, and the

installation of lights--and sewage system are “land

improvements.”   See Rev. Proc. 87-56, 1987-2 C.B. 674.   As such,

they are depreciable as 15-year MACRS property beginning July 1,




     11
       Under MACRS we apply a 31.5-year recovery period if the
nonresidential real property was placed in service before May 13,
1993, and a 39-year recovery period if placed in service after
May 12, 1993. See Omnibus Budget Reconciliation Act of 1993,
Pub. L. 103-66, sec. 13151, 107 Stat. 448.
                                 - 13 -

1987,12 using a 150-percent declining-balance method first, and

then a straight-line method in the first year it allows for a

greater depreciation deduction.      Sec. 168(b) (as in effect after

TRA 86).

     D.      Building

     That leaves us with the most complex asset to deal with--

the main building.      It is true that the right to deduct

depreciation doesn’t necessarily require property ownership; but

the Code requires the taxpayer to have made a capital investment

in the property he wants to depreciate.      See Gladding Dry Goods

Co. v. Commissioner, 2 B.T.A. 336, 338 (1925).      We find that

Willson’s capital investment was made on July 1, 1986, when he

bought the property.      Therefore we have to calculate the

depreciation from July 15, 1986, to May 15, 1999.13

     Because the building was placed in service in 1986, we start

with ACRS.    The building was nonresidential real estate, and ACRS

says to depreciate it over 19 years.      Sec. 168(c)(2)(D) (as in

effect before TRA 1986).      The 1994 fire, however, makes the

depreciation calculation more complicated because it destroyed

roughly two-thirds of the building.



     12
       We must apply a half-year convention. See sec. 168(d)(1)
(as in effect after TRA 86). This convention is a rule that
treats any property that a taxpayer begins or stops using in his
business during the year as having begun or stopped being used on
the midpoint of the year. See sec. 168(d)(4)(A).
     13
          Again we have to use a midmonth convention.
                               - 14 -

     Computing the depreciation for the one-third of the building

that was unscorched is easy.   We attribute $55,000 of the

building’s basis--about one-third of it--to this portion of the

property and find that it should be depreciated as 19-year ACRS

property from July 15, 1986, to May 15, 1999.14    Willson used

this part of the building for his business before, during, and

after the fire.   As for the remaining two-thirds, to which we

allocate $111,000 of the building’s basis, we find that it was

depreciable as 19-year ACRS property from July 15, 1986, until

July 15, 1994.

     We now must consider another section of the Code.    Section

1033 says that Willson doesn’t have to recognize gain on the

receipt of insurance proceeds when property is “involuntarily

converted” in whole or in part, by fire or flood or other acts of

God, when the amount realized is reinvested in suitable

replacement property.15   Sec. 1033(a)(2).   Without section 1033,

Willson’s receipt of the insurance proceeds in 1994 would have

been taxed as a partial sale of the destroyed portion of the



     14
       The depreciation for 19-year ACRS property is determined
using a 175-percent declining-balance method, and then a
straight-line method when it allows for a bigger deduction. Sec.
168(b)(2)(A)(ii) (as in effect before TRA 86).
     15
       Section 1.1033(a)-2(c)(2), Income Tax Regs., says that an
owner of property is deemed to have chosen section 1033’s
nonrecognition treatment if he fails to report the gain realized
on the involuntary conversion on his return for the first year in
which gain is realized. There’s no evidence suggesting Willson
reported any gain on his 1994 return.
                              - 15 -

building.   Section 1033, however, lets Willson delay paying tax

on the gain realized as long as he takes the money and reinvests

all of it in similar property within a couple of years.    This is

because the replacement property generally has the same basis as

the converted property, and the gain will eventually be

recognized when the replacement property is sold.

     But Willson’s receipt of “boot”--a bit of tax jargon that in

this case means the money the insurance company paid him but that

he didn’t reinvest in “eligible replacement property”--should

have caused him to pay taxes on some of the gain in 1994 (but no

greater than the amount of boot he received).   There is, however,

no evidence in the record showing that was what he did.    (There

is evidence that he gave the “boot” to the band that caused the

fire, out of sympathy for the uninsured loss of their equipment.)

     So how does all this affect our determination of Willson’s

adjusted basis?   Out of the $200,000 Willson received from the

insurance company, we find that $190,000 was to compensate for

the building damage and $10,000 was to replace some of his

personal property consumed by the fire.   Willson used $169,000 of

the insurance proceeds to rebuild his bar, which we find was

completed by January 15, 1995.   This means that Willson’s basis

in the reconstructed part of the building (as of January 15,

1995) was the same as his basis in the destroyed portion

immediately before the fire, minus $21,000 (the amount of the
                                   - 16 -

insurance proceeds given to repair his building that wasn’t

reinvested in the property and wasn’t recognized).16

     Now we need to figure out how to depreciate the remaining

two-thirds of the building from January 15, 1995, to May 15,

1999.        Should Willson have continued depreciating the

reconstructed portion of the building under ACRS or should he

have switched to MACRS?

     Taxpayers generally have to depreciate property that they

place in service after December 31, 1986, under MACRS.          But this

rule has its exceptions.        For example, Congress enacted

“antichurning” rules, which preclude the application of MACRS to

property placed in service after 1986 that was essentially owned

or used by the taxpayer before 1986--before MACRS applied.         See

sec. 168(f)(5) (as in effect after TRA 86).        One antichurning

rule says that section 1250 property acquired by the taxpayer

after December 31, 1986, does not qualify for MACRS if it was

acquired in an exchange described in section 1031, 1033, 1038, or

1039.        Section 168(f)(5)(B)(i), however, says that this rule

doesn’t apply to nonresidential real estate (e.g., Willson’s

building).        Therefore the Code suggests that we apply MACRS from

January 15, 1995, to May 15, 1999.




        16
        We can’t give him a higher basis under section
1033(b)(1)(B) for the gain he should have recognized in 1994, but
didn’t.
                               - 17 -

     We must account, however, for the eight years Willson’s

converted property was depreciable under ACRS in determining the

bulding’s remaining recovery period as of January 15, 1995.    We

therefore subtract 8 years from MACRS’s 39-year recovery period,

which leaves 31 years.17   This means that as of January 15, 1995,

the rebuilt portion of the building was depreciable over a 31-

year remaining recovery period, using a straight-line method.

     To summarize, the formula for figuring out Willson’s gain:

Amount realized                                    $203,427
Land                                                (29,000)
Shed                                                (15,000)
Parking lots                                        (37,000)
Buildings                                          (166,000)
Sewer system                                        (10,000)
+ MACRS depreciation of shed
+ MACRS depreciation of parking lots
+ MACRS depreciation of sewer system
+ ACRS & MACRS depreciation of main building
+ $21,000 of section 1033 unrecognized gain

     Since there are computations that still need to be made and

plugged into this formula,


                                         Decision will be entered

                                    under Rule 155.




     17
       See sec. 1.168(i)-6(c)(4)(i), Income Tax Regs. (effective
Feb. 26, 2007). Although this regulation doesn’t apply to this
case, we find it persuasive as to how to account for the prior
ACRS depreciation given the lack of guidance on the issue.
