                       T.C. Memo. 1997-530



                     UNITED STATES TAX COURT



ELI T. SLEIMAN, JR. AND JANIE L. SLEIMAN, ET AL,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 12663-95, 12664-95,    Filed November 24, 1997.
                 12665-95.


     Robert S. Bernstein and Scott D. Richburg, for petitioners.

     Robert W. Dillard and Stephen R. Takeuchi, for respondent.




     1
          Cases of the following petitioners are consolidated
herewith for purposes of trial, briefing, and opinion: Peter D.
Sleiman and Carolina T. Sleiman, docket No. 12664-95; and Anthony
T. Sleiman and Bonnie C. Sleiman, docket No. 12665-95.
                                   - 2 -



                         MEMORANDUM OPINION


     DINAN, Special Trial Judge:       These consolidated cases were

heard pursuant to the provisions of section 7443A(b)(3) and Rules

180, 181, and 182.2

     Respondent determined deficiencies in petitioners' Federal

income taxes and accuracy-related penalties pursuant to section

6662(a) as follows:

Eli T. Sleiman, Jr. and Janie L. Sleiman, docket No. 12663-95

                                               Penalty
     Year             Deficiency             Sec. 6662(a)

     1992               $3,544                  $709

Peter D. Sleiman and Carolina T. Sleiman, docket No. 12664-95

                                               Penalty
     Year             Deficiency             Sec. 6662(a)

     1991               $3,332                  $666
     1992                4,286                   857

Anthony T. Sleiman and Bonnie C. Sleiman, docket No. 12665-95

                                               Penalty
     Year             Deficiency             Sec. 6662(a)

     1991               $2,049                  $410
     1992                4,174                   835

     After concessions by the parties, the issues remaining for

decision are:   (1) Whether petitioners Eli T. Sleiman and Peter

     2
          Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -

D. Sleiman are entitled to increase their respective stock bases

in their wholly owned S corporations, Real Estate Equities, Inc.

(REE) and Triple Net Equities, Inc. (TNE), by the principal

amounts of bank loans to REE and TNE which they personally

guaranteed; (2) whether respondent properly reallocated Miramar

Equities, Inc.'s (ME's) bases in its land and depreciable real

property; (3) the proper amortization period for a loan

commitment fee and attorney's fees incurred by ME during 1992 in

connection with obtaining a loan; (4) whether REE and ME are

entitled to deductions pursuant to section 164(a) for taxes

incurred in connection with recording mortgages in the State of

Florida; and (5) whether REE and TNE are required to report

tenant improvements as rental income.

     Some of the facts have been stipulated and are so found.

The stipulations of fact and attached exhibits are incorporated

herein by this reference.   Petitioners resided in Jacksonville,

Florida, on the date their respective petitions were filed.

     Petitioners Eli T. Sleiman (Eli), Peter D. Sleiman (Peter),

and Anthony T. Sleiman (Anthony) are brothers.   All three

participated with a fourth brother, Joseph E. Sleiman, who is not

a party to these cases, in various real estate development

projects in northern Florida.

     The brothers ordinarily divided up the different aspects of

their real estate development activities among themselves.    Eli

is a licensed contractor who oversees the construction
                               - 4 -

activities.   Peter is an attorney admitted to practice in the

State of Florida.   He handles all of the real estate development

paperwork, including the negotiations of financing and leasing

arrangements.   Anthony is responsible for locating desirable

property sites.   Respondent's adjustments that remain in issue

relate to three real estate development projects that Eli, Peter,

and Anthony operated through three corporations, REE, TNE, and

ME, each of which had elected to be treated as an S corporation

under section 1362(a).

REE

      During 1991 and 1992, Eli was the sole shareholder of REE,

which was incorporated on August 21, 1991, in the State of

Florida.   REE was organized to purchase and develop property and

to lease it to Blockbuster Video, Inc. (Blockbuster), which had

entered into a lease agreement with Eli, dated July 30, 1991.

Eli later assigned the lease to REE.3

      On October 23, 1991, REE purchased property located at 910

Dunn Avenue (the Dunn property) in Jacksonville, Florida.    The

Dunn property was formerly the site of a gasoline station and

required substantial environmental remediation due to land

contamination problems.

      3
          In their reply brief, petitioners object to
respondent's proposed finding of this fact on the ground that
respondent failed to prove that Eli assigned the lease to REE.
Petitioners, however, did not submit any evidence that supports
their objection. After reviewing the record, the Court is not
persuaded that such an assignment did not in fact occur.
                                 - 5 -

     REE financed its purchase of the Dunn property and its

construction of the building thereon with a 1-year construction

loan from SouthTrust Bank of Alabama, N.A. (SouthTrust Bank) in

the amount of $450,000.    The mortgage note required REE to make

monthly payments of interest, but not principal, computed at a

rate of 3\4 percent above SouthTrust Bank's "base rate".      The

principal balance was due and payable on October 23, 1992.      REE's

closing costs of the mortgage note included a loan commitment fee

in the amount of $4,500.

     REE and SouthTrust Bank also executed a construction loan

agreement on October 23, 1991, which provided for the loan

proceeds to be advanced in two installments.    Under the

agreement, the first installment was to be advanced for the

purchase of the Dunn property, and the second installment was to

be advanced upon the completion of the improvements.

     REE's mortgage note was secured under a mortgage and

security agreement by the Dunn property and its improvements and

REE's interest in the Blockbuster lease.    Hollis Wilson Crenshaw,

Inc., an independent appraiser, submitted an appraisal to

SouthTrust Bank that valued the Dunn property with the

Blockbuster lease at $870,000.    The mortgage and security

agreement also provided that REE was ultimately responsible for

the costs of any remedial action required to correct

environmental problems.    Although he was not a direct borrower,

Eli personally guaranteed the mortgage note.
                               - 6 -

      On December 4, 1992, REE received a commitment from

SouthTrust Bank for permanent financing of the Dunn property.      On

December 21, 1992, REE and SouthTrust Bank executed a renewal

mortgage note that provided for REE to make monthly interest and

principal payments through the maturity date of October 23, 2002,

with interest computed at a rate of 8.02 percent for the first 5

years and thereafter adjusted in accordance with the average

yield of the 5-year Treasury note.     The renewal mortgage note was

made effective as of October 23, 1992.    REE's closing costs of

the renewal mortgage note included a loan commitment fee in the

amount of $2,250.

      The parties also executed a mortgage modification agreement

on December 21, 1992, which reflected REE's release from the

original mortgage note by its execution of the renewal mortgage

note.   Eli also consented to have his personal guaranty extended

to cover the renewal mortgage note.

      REE made all of the payments on its construction loan and

its permanent loan from SouthTrust Bank.    Eli was not called upon

to pay any amount on his personal guaranties during 1991 and

1992.

TNE

      During 1991 and 1992, Peter was the sole shareholder of TNE,

which was incorporated on August 5, 1991, in the State of

Florida.   Like REE, TNE was organized to purchase and develop

property and lease it to Blockbuster, which had entered into a
                                - 7 -

lease agreement with Peter and his wife, Carol T. Sleiman, dated

March 25, 1991.    Peter and Carol Sleiman later assigned the

Blockbuster lease to TNE.

     On September 4, 1991, TNE purchased property located on

Roosevelt Boulevard (the Roosevelt property) in Jacksonville,

Florida, as the site for the Blockbuster store.    Like REE's Dunn

property, a gasoline station had been operated on the site in

prior years.    As early as 1987, the State of Florida determined

that the Roosevelt property had been contaminated by the gasoline

station and thereafter designated the property as eligible to

participate in its Early Detection Incentive (EDI) environmental

cleanup program.    The EDI program subsidized eligible property

owners to either clean up contaminated property with government

resources or to reimburse owners who paid for the clean up costs

themselves.    Under the EDI program, the Roosevelt property's

prior owners had the gasoline tanks, distribution lines, and a

large amount of contaminated soil removed from the site.    TNE

acquired the right to further participate in the EDI program when

it purchased the property.

     TNE financed the purchase of the Roosevelt property and its

construction of the building thereon with loans from Peter's

related business entities.    Although Peter could not recall at

trial where the funds came from, TNE's records show that it

received loans during 1991 from Duval Royal Investment, Inc. and

Brothers Five of Jacksonville, Ltd.
                                 - 8 -

     In order to pay off its debt to its related entities, TNE

obtained a loan from SouthTrust Bank in the amount of $450,000 on

October 2, 1992.   TNE's promissory note was secured under a

mortgage and security agreement by the Roosevelt property and its

improvements, TNE's interest in the Blockbuster lease, and TNE's

right to participate in Florida's EDI program.    Although he was

not a direct borrower, Peter personally guaranteed the loan.

     TNE made all of the payments on its October 2, 1992,

SouthTrust Bank loan.   Peter was not called upon to pay any

amount with respect to his personal guarantee during 1992.

ME

     During 1991 and 1992, Anthony was the sole shareholder of

ME, which was incorporated on September 6, 1991, in the State of

Florida.   ME was organized to purchase, renovate, and lease the

Miramar shopping center in Jacksonville, Florida.

     ME purchased the Miramar shopping center from Country, Inc.,

on July 15, 1992, for $745,000.    In the purchase and sale

agreement, the parties allocated $60,000 of the purchase price to

land and $685,000 to buildings.

     ME financed the purchase of the Miramar shopping center and

the renovations to be made thereon with a 1-year construction

loan from SouthTrust Bank in the amount of $1,500,000.    The

promissory note required ME to make monthly payments of interest,

but not principal, computed at a rate of 3\4 percent above

SouthTrust Bank's "base rate".    The principal balance was to be
                               - 9 -

due and payable on June 30, 1993.   ME's closing costs of the

promissory note included a loan commitment fee in the amount of

$15,000.

     With respect to the construction loan, ME and SouthTrust

Bank executed an agreement, dated July 15, 1992, which provided

that the loan proceeds would be advanced in two installments.

Under the agreement, the first installment was to be advanced for

the acquisition of the shopping center and the second installment

was to be advanced upon the completion of the improvements and

the subsequent delivery of tenant leases that showed a minimum

rental income flow.

     ME's promissory note was secured under a mortgage and

security agreement by the shopping center and ME's interest in

the shopping center leases.   Anthony personally guaranteed the

promissory note.

     On June 3, 1993, ME received a commitment from SouthTrust

Bank for permanent financing for the Miramar shopping center

project.   On July 20, 1993, ME and SouthTrust Bank executed a

renewal promissory note that provided for ME to make monthly

principal and interest payments through the maturity date of

July, 20, 2003, with interest computed at a rate of 7.53 percent

for the first 5 years and thereafter adjusted in accordance with

the average yield on the 5-year Treasury note.   The renewal

promissory note also required ME to pay a prepayment premium for

the amounts of any prepayments in the first 3 years of the
                              - 10 -

permanent loan's term.   ME's closing costs of the renewal

promissory note included a loan commitment fee in the amount of

$5,000.

     The parties modified and extended the original mortgage and

security agreement to have it serve as security for the renewal

promissory note.   Anthony's personal guaranty was also extended

to cover the renewal promissory note.

Stock Basis

     The first issue for decision is whether Eli and Peter are

entitled to increase their respective bases in the stock of REE

and TNE by the principal amounts of the loans from SouthTrust

Bank to REE and TNE which they personally guaranteed.

     Respondent determined in the statutory notices of deficiency

that Peter's and Eli's distributions from TNE and REE exceeded

their adjusted bases in the stock of TNE and REE and that they

are required to recognize capital gain on the amounts of those

excesses.4

     Respondent's determinations in the statutory notices of

deficiency are presumed to be correct, and petitioners bear the


     4
          As a result of the stipulations of the parties, the
amounts of the distributions received by Peter and Eli during
1992 are greater than the amounts determined by respondent. The
stipulations provide that Eli received distributions from REE in
the amount of $55,400 and Peter received distributions from TNE
in the amount of $119,397.42 during 1992. As stated above, we
incorporate such stipulations into our findings of fact and
herein instruct the parties to use such greater amounts of the
distributions in their Rule 155 computations.
                               - 11 -

burden of proving otherwise.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

       Section 1368(b)(2) provides that if the amount of a

distribution of property made by an S corporation to a

shareholder exceeds the adjusted basis of the shareholder's stock

in the S corporation, such excess is treated as gain from the

sale or exchange of property in the taxable year of the

distribution.    The amount of the gain, if any, that Peter and Eli

are required to recognize because of the distributions they

received during 1992, therefore, depends on their adjusted bases

in the stock of TNE and REE at the end of 1992.

       Petitioners contend that respondent erred by not allowing

Eli and Peter to increase their adjusted bases in their stock in

REE and TNE by the $450,000 loans from SouthTrust Bank to REE and

TNE.    They argue that, in substance, the loan transactions

constitute loans to Eli and Peter followed by capital

contributions by them of the proceeds to REE and TNE.

       Respondent argues that petitioners are bound by the form of

their transactions.    Respondent further argues that if the Court

does consider petitioners' substance over form argument, the

transactions do not constitute capital contributions because Eli

and Peter did not make an economic outlay in connection with

their guarantees.

       Section 1012 provides that the basis of property is the cost

of the property.    A shareholder's basis in his shares of
                              - 12 -

corporate stock is equal to the amount paid for the stock.

Estate of Leavitt v. Commissioner, 90 T.C. 206, 212 (1988), affd.

875 F.2d 420 (4th Cir. 1989); Uri v. Commissioner, T.C. Memo.

1989-58, affd. 949 F.2d 371 (10th Cir. 1991); sec. 1.1012-1(a),

Income Tax Regs.

     Section 1016(a)(1) generally provides that the basis of

property shall be adjusted for items properly chargeable to a

capital account.   A shareholder's basis in the shares of stock of

a corporation is increased by any additional contributions to the

capital of the corporation made after the acquisition of the

shares.   Sec. 1.118-1, Income Tax Regs.5   The resolution of this

issue depends on whether Eli's and Peter's personal guaranties

may be treated as capital contributions which increase their

adjusted bases in their shares of stock in REE and TNE.

     Ordinarily, taxpayers are bound by the form of the

transaction they have chosen and may not in hindsight recast the

transaction to obtain tax advantages.   Don E. Williams Co. v.

Commissioner, 429 U.S. 569, 579-580 (1977); Commissioner v.

National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 148-149

(1974).

     After reviewing the loan documents submitted into evidence

in these cases, and having considered the testimony of Peter


     5
          This rule applies in addition to the basis adjustments
specific to S corporation shareholders. Sec. 1.1367-1(a)(2),
Income Tax Regs.; see secs. 1016(a)(17), 1367(a).
                               - 13 -

Sleiman and SouthTrust Bank's officers, we find that the

substance of each loan is consistent with its form.    First, as

discussed infra, the loans from SouthTrust Bank to REE and TNE do

not lack economic substance.   Second, REE and TNE did not treat

the loan proceeds as contributions to capital by Peter and Eli on

their own books and records.   Rather, they recorded the loans

from SouthTrust Bank as liabilities owed by REE and TNE to

SouthTrust Bank.

     Petitioners argue that SouthTrust Bank in substance relied

primarily on Eli's and Peter's personal guaranties as security

for the loans rather than the assets listed in the mortgage and

security agreements.   We reject petitioners' attempts to

disregard the value of the properties owned by REE and TNE and

used as collateral for their loans.     In addition to the value of

the land and improvements, the Blockbuster leases provide ample

cash-flow to service the loans.   Contrary to petitioners'

contentions, we find that SouthTrust Bank took into account the

risks associated with the contamination of the land supporting

the loan by conditioning its loan commitments on its review of

environmental audits of the land.   SouthTrust Bank also minimized

its economic exposure to future environmental problems in the

mortgage and security agreements.   We find that petitioners have

failed to prove that the loans to REE and TNE lack economic

substance.
                              - 14 -

     Petitioners contend that this case is controlled by Selfe v.

United States, 778 F.2d 769 (11th Cir. 1985).    In Selfe, the

United States Court of Appeals for the Eleventh Circuit indicated

that the shareholder's guaranty of an S corporation loan could

increase the shareholder's basis even though the shareholder had

not satisfied any of the obligation.    Id. at 774.   The court

remanded the case to the District Court for it to decide whether

the taxpayer's guaranty amounted to either an equity investment

in or a shareholder loan to the corporation.     Id. at 775.   It

instructed the District Court to determine whether the loan in

question was in substance a loan to the shareholder rather than

to the corporation.    Id.

     Petitioners' reliance on Selfe is misplaced.     In Selfe, the

taxpayer started a business and obtained a loan which was secured

by her own property.   The taxpayer later incorporated the

business under subchapter S and converted the loan into a

corporate obligation, which she guaranteed and which continued to

be secured by her own property.    Id. at 770.   The instant cases

are distinguishable on their facts from Selfe because SouthTrust

Bank made the original loans to REE and TNE, not to Eli and

Peter, and the collateral for the loans are REE's and TNE's

assets, not Eli's and Peter's.    See Wise v. Commissioner, T.C.

Memo. 1997-135 (also appealable to the Eleventh Circuit).

     Moreover, it is well established that a shareholder cannot

increase his or her basis in an S corporation's stock absent an
                               - 15 -

economic outlay by the shareholder.     Reser v. Commissioner, 112

F.3d 1258, 1264 (5th Cir. 1997), affg. on this issue T.C. Memo.

1995-572; Goatcher v. United States, 944 F.2d 747, 751 (10th Cir.

1991); Harris v. United States, 902 F.2d 439, 445 (5th Cir.

1990); Estate of Leavitt v. Commissioner, 875 F.2d at 422; Selfe

v. Commissioner, supra at 772.

     We find that Eli's and Peter's wholly unperformed guaranties

in these cases do not meet the requirement that a shareholder

make an economic outlay in order to increase his basis in his

stock.   As explained above, these guaranties were not tantamount

to equity investments nor to shareholder loans to the

corporations.   Thus, it is only the actual payment by the

guarantor of the guarantied obligation that constitutes an

economic outlay, not the guaranty itself.     Estate of Leavitt v.

Commissioner, 875 F.2d at 422-423; Underwood v. Commissioner, 63

T.C. 468, 476 (1975), affd. 535 F.2d 309, 312 (5th Cir. 1976);

Perry v. Commissioner, 47 T.C. 159, 163-164 (1966), affd. 392

F.2d 458 (8th Cir. 1968).   In these cases, Eli and Peter did not

pay any of the loans that they guaranteed and therefore did not

increase their capital investments in REE and TNE.    Accordingly,

we hold that Eli and Peter may not increase their respective

bases in REE and TNE by the principal amounts of the South Bank

Trust loans.    Respondent's determinations are sustained on this

issue.

Allocation of Basis
                              - 16 -

     The second issue for decision is whether respondent properly

reallocated ME's bases in its land and depreciable real property.

     On its 1992 return, ME claimed a basis in land in the amount

of $60,000, and a basis in nonresidential real property in the

amount of $945,286.23.6   Respondent disallowed ME's claimed bases

and determined that $377,735 is properly allocated to land.    As a

result of the reallocation, respondent disallowed $11,615 of ME's

claimed depreciation deduction.

     In their post-trial briefs, the parties address only the

proper allocation of the purchase price of the Miramar shopping

center that was listed in the purchase and sale agreement.

Respondent maintains that $377,735 of the $745,000 purchase price

is properly allocated to land.    Petitioners maintain that only

$60,000 of the purchase price is properly allocated to land.

     When a combination of depreciable and nondepreciable

property is purchased for a lump sum, the lump sum must be

apportioned between the two types of property to determine their

respective costs.   In making this allocation, section 1.167(a)-5,

Income Tax Regs., provides:



     6
          Apart from the purchase agreement, there is no evidence
in the record as to what portion of the claimed basis in
nonresidential real property was claimed as ME's purchase price
for the shopping center's existing buildings as distinct from its
capital expenditures incurred during 1992 for renovations. Based
on the amounts listed in the purchase agreement, we find that
$685,000 of the claimed basis was claimed as purchase price and
the remainder was claimed as capital expenditures.
                              - 17 -

          In the case of the acquisition on or after March
     1, 1913, of a combination of depreciable and
     nondepreciable property for a lump sum, as for example,
     buildings and land, the basis for depreciation cannot
     exceed an amount which bears the same proportion to the
     lump sum as the value of the depreciable property at
     the time of acquisition bears to the value of the
     entire property at that time. * * *

     Thus, the relevant inquiry is the respective fair market

values of the depreciable and nondepreciable property at the time

of acquisition.   Weis v. Commissioner, 94 T.C. 473, 482-483

(1990); Randolph Building Corp. v. Commissioner, 67 T.C. 804, 807

(1977).   Petitioners bear the burden of proving that respondent's

allocation is incorrect.   Rule 142(a); see Elliott v.

Commissioner, 40 T.C. 304, 313 (1963).

     Petitioners rely on the allocation agreed to by ME and

Country, Inc., the seller of the shopping center.   They argue

that the allocation in the purchase and sale agreement is

determinative of the property's fair market value at the time of

acquisition because the transaction was conducted at arm's

length.   Respondent cites the value of the land as estimated in

an independent appraisal report and as determined by the Duval

County property tax appraiser's office in arguing that ME's

allocation is improper.

     Petitioners have introduced no evidence, other than the

purchase and sale agreement, that supports the allocation claimed

on ME's return.   In contrast, two separate appraisals, discussed

infra, convince us that the value of the land constitutes a
                              - 18 -

greater percentage of the value of the entire property than the

percentage allocated in the agreement.    We find that respondent

correctly determined that the amount reported by ME as its basis

in land on its 1992 Federal income tax return is incorrect.     We

must therefore decide whether petitioners have proved that

respondent's reallocation is erroneous.

     Hollis Wilson Crenshaw, Inc. prepared an appraisal of ME's

shopping center proposal for SouthTrust Bank.    It estimated the

value of the entire property at $2,800,000, and the value of the

land at $575,000.   The estimates, however, include the value of:

(1) An office building (the Parrish building) on another plot of

land located adjacent to the shopping center; and (2) proposed

renovations to the existing buildings.    Therefore, the appraisal

does not reflect the fair market value of the shopping center's

land and buildings at the time of acquisition.

     Likewise, the parties' stipulation that the Duval County

appraiser's office appraised the value of the land at $529,688 as

of January 25, 1993, is not determinative.   An estimated value of

the land absent an estimated value of the buildings thereon does

not allow us to make a conclusive apportionment of the shopping

center's purchase price under section 1.167-5(a), Income Tax

Regs.

     In addition, ME's records show an entry on December 31,

1992, in the amount of $77,054 for land improvements, which

amount is not reflected on its return.    Petitioners have also not
                               - 19 -

established whether the Parrish building was purchased during

1992 and, if so, for how much.   They have failed to address

whether or not these amounts should be taken into account in

apportioning the value of the shopping center between land and

depreciable property.

     After reviewing the record, we find that petitioners have

failed to meet their burden of proving that respondent's

reallocation of ME's basis in land and depreciable real property

is erroneous.   Rule 142(a).   The evidence does not show that the

proportionate value of the shopping center's land acquired by ME

during 1992 is accurately reflected in the purchase and sale

agreement.   Due to their failure to produce probative evidence

concerning the value of the property at the time of acquisition,

petitioners have not carried their burden of showing error in

respondent's allocation.   Among other things, petitioners have

failed to establish whether ME's postacquisition improvements or

its costs of acquiring the Parrish building should be taken into

account.   We hold that respondent must be sustained on this

issue.
                                - 20 -



Amortization Period

     The third issue for decision is the proper amortization

period for loan commitment fees and attorney's fees incurred by

ME during 1992 to obtain a construction loan.

     As part of the closing costs of its $1,500,000 construction

loan from SouthTrust Bank, ME was required to pay a loan

commitment fee in the amount of $15,000.    ME also incurred

attorney's fees in the amount $6,450 to obtain the construction

loan.

     On its 1992 return, ME claimed the fees as prepaid mortgage

expenses and amortized them over a 1-year period,7 which resulted

in a claimed amortization deduction in the amount of $10,475.     In

the statutory notice of deficiency, respondent determined that

the fees were properly amortized over an 11-year period, which

includes the 1-year period of the construction loan and the 10-

year period of the permanent loan, and disallowed $9,500 of the

claimed amortization deduction.

     Amounts paid for services rendered in connection with a loan

constitute capital expenditures which must be amortized over the

term of the loan.     Lay v. Commissioner, 69 T.C. 421, 437-440


     7
          The difference, in the amount of $500, between the
amortizable amount of fees stipulated to by the parties, $21,450,
and the amortizable amount claimed on ME's return, $20,950, is
apparently attributable to an increase in the amount of allowable
attorney's fees.
                               - 21 -

(1977); Enoch v. Commissioner, 57 T.C. 781, 794-795 (1972);

Lovejoy v. Commissioner, 18 B.T.A. 1179 (1930).

       Respondent's position is that ME is required to amortize the

fees over an 11-year period because that is the definite period

of the loan.    Respondent argues that we should view the

construction loan and the permanent loan from SouthTrust Bank as

a single loan.    Petitioners counter that the two loans were

properly treated as separate loans for purposes of amortizing the

fees because the loans were bargained for separately and contain

different material terms.

       We agree with petitioners on this issue.   The instant case

is distinguishable on its facts from the cases cited by

respondent.    See Wilkerson v. Commissioner, 70 T.C. 240 (1978),

revd. on another issue 655 F.2d 980 (9th Cir. 1981); Lay v.

Commissioner, supra; Williams v. Commissioner, T.C. Memo. 1981-

643.    Unlike those cases, ME's original loan documents do not

refer to the permanent loan or otherwise indicate that it had

bargained for permanent financing at the time it obligated itself

under the construction loan.    Rather, it separately negotiated

and obtained a commitment for permanent financing from SouthTrust

Bank less than a month before the due date of the construction

loan.    ME was also required to pay an additional commitment fee

in the amount of $5,000 for its permanent loan.

       Respondent points out that the permanent loan documents

include words such as "renewal", "extension", "modification", and
                                 - 22 -

"reaffirmation", and that both loans were obtained from the same

lender.   However, the material terms of the two loans, such as

the interest rates, prepayment premiums, and repayment periods

are significantly different.     The requirement of an additional

commitment fee further convinces us that the permanent loan

constituted a separate obligation on behalf of ME.     Moreover, the

fact that SouthTrust Bank was the lender of each loan is not

determinative of our decision.     See Buddy Schoellkopf Prods.,

Inc. v. Commissioner, 65 T.C. 640, 648-650 (1975).

     After examining the material terms contained in the loan

documents, in lieu of relying merely on their labels, we find

that the construction loan and the permanent loan are separate

loans.    We therefore hold that ME properly amortized its loan

commitment fee and attorney's fees over the 1-year period of its

construction loan.

Taxes

     The fourth issue for decision is whether REE and ME are

entitled to deductions pursuant to section 164(a) for certain

taxes incurred in connection with recording mortgages in the

State of Florida.

     REE and ME incurred the following amounts of intangible

personal property taxes and documentary stamp taxes during 1992:

                      Intangible Personal       Documentary
     S Corporation        Property Tax           Stamp Tax

            REE              $   900              $1,440
            ME                 3,000               4,800
                                - 23 -

     The intangible personal property tax is levied against

notes, bonds, and other obligations for the payment of money

which are secured by a mortgage, deed of trust, or other lien

upon real property situated in the State of Florida.     Fla. Stat.

ch. 199.133(1) (1989).    The documentary stamp tax is levied on

mortgages, trust deeds, or other evidences of indebtedness filed

or recorded in the State of Florida.     Fla. Stat. ch. 201.08(1)

(1989).

     In the statutory notices of deficiency, respondent

disallowed REE's and ME's claimed deductions for taxes on the

ground that the taxes constituted capital expenditures.

     Section 164(a) provides:

     SEC. 164.   TAXES.

          (a) General Rule.--Except as otherwise provided in
     this section, the following taxes shall be allowed as a
     deduction for the taxable year within which paid or accrued:

          (1)    State and local, and foreign, real property taxes.

          (2)    State and local personal property taxes.

          (3) State and local, and foreign, income, war profits,
     and excess profits taxes.

          (4)    The GST tax imposed on income distributions.

          (5)    The environmental tax imposed by section 59A.

     In addition, there shall be allowed as a deduction State and
     local, and foreign, taxes not described in the preceding
     sentence which are paid or accrued within the taxable year
     in carrying on a trade or business or an activity described
     in section 212 (relating to expenses for production of
     income). Notwithstanding the preceding sentence, any tax
     (not described in the first sentence of this subsection)
     which is paid or accrued by the taxpayer in connection with
                               - 24 -

     an acquisition or disposition of property shall be treated
     as part of the cost of the acquired property or, in the case
     of a disposition, as a reduction in the amount realized on
     the disposition.

     The parties agree that the intangible personal property

taxes and documentary stamp taxes incurred by REE and ME are

allowable as deductions within the purview of the second sentence

of section 164(a).    They disagree, however, as to whether the

last sentence of section 164(a) requires the amounts to be

capitalized.

     The last sentence of section 164(a) was added by the Tax

Reform Act of 1986, Pub. L. 99-514, sec. 134(a)(2), 100 Stat.

2085, 2116.    According to the conference report, there previously

was uncertainty as to whether certain taxes incurred in a trade

or business or an income-producing activity could be deducted

under section 164 or had to be capitalized under former section

189 or section 263.   The new provision was added to make it clear

that State, local, or foreign taxes (other than the taxes

enumerated in section 164(a)) that are incurred in a trade or

business or in an income-producing activity and that are

connected with the acquisition or disposition of property are to

be capitalized.   H. Conf. Rept. 99-841 (Vol. 2), at II-20 (1986),

1986-3 C.B. (Vol. 4) 20.

     Respondent's position is that the taxes incurred by REE and

ME must be capitalized as part of the cost of the acquired

properties because they were incurred in connection with the
                                - 25 -

acquisition of properties listed as collateral in the recorded

mortgages.   Petitioners' position is that the taxes in issue are

deductible under the second sentence of section 164(a).    They

argue that REE and ME are not required to capitalize the taxes in

issue because they were incurred in connection with the

acquisition of the construction loans and not the acquisition of

the properties.   For reasons outlined infra, we disagree with

both respondent's and petitioners' positions.

     The parties have not referred us to, and we have not

otherwise found, any cases or legislative history which directly

address the scope of the phrase "in connection with an

acquisition of property" as it is used in the third sentence of

section 164(a).   After careful consideration, we conclude that

the taxes in issue were more closely incurred in connection with

obtaining the construction loans than in acquiring the real

properties and may be amortized over the definite terms of the

construction loans.

     First, the Florida taxes in issue are levied upon the amount

borrowed by the taxpayer, not the value of the property which

secures the obligation.   Second, the amounts of the taxes in

issue were treated as closing costs of the construction loans by

REE, ME, and SouthTrust Bank.    The taxes reduced the principal

amounts of loan proceeds receivable by REE and ME; thus the taxes

constitute a cost of obtaining the loan proceeds.    Third, the

loan proceeds were only partly advanced for the purchase of the
                               - 26 -

real properties.   The remaining amounts were lent and borrowed

for construction and renovation activities.   Finally, our

interpretation of the third sentence of section 164(a) is

consistent with our holding with respect to ME's loan commitment

fee and attorney's fees, supra, in that costs incurred in

connection with obtaining a loan should be amortized over the

definite term of the loan in lieu of being currently deductible

or depreciable over the useful life of the property acquired with

the loan proceeds.    Cf. Anover Realty Corp. v. Commissioner, 33

T.C. 671, 674-675 (1960).

     We hold that REE and ME are required to amortize the taxes

in issue over the definite terms of their construction loans.8

Rental Income

     The fifth issue for decision is whether REE and TNE are

required to report tenant improvements as rental income.

     Under the lease agreements with Blockbuster, REE and TNE

were responsible for purchasing and installing Blockbuster's

standard carpeting.   Contrary to the lease agreements, however,

Blockbuster purchased and installed the carpeting at both the

Dunn and Roosevelt properties at costs of $11,020.43 and

$10,023.31, respectively.


     8
           For reasons akin to our findings with respect to the
amortization period for ME's construction loan commitment fee and
related attorney's fees, we find that REE's construction and
permanent loans constitute separate loans for purposes of
amortization.
                               - 27 -

     In the case of the Dunn property, Blockbuster deducted

$11,020.43 from its rent due under the lease agreement.    REE

reported $628.43 of the $11,020.43 as rental income on its 1992

return.    In the statutory notice of deficiency, respondent

increased REE's rental income by $10,392, the amount incurred by

Blockbuster for carpeting costs that REE did not report as rental

income.

     In the case of the Roosevelt property, Blockbuster deducted

$10,023.31 from its rent due under the lease agreement.    TNE

reported such amount as rental income on its 1991 return.      TNE

also claimed a deduction in the amount of $10,023.31 as a repairs

expense.   Respondent disallowed the claimed deduction and

determined that the costs were capital expenditures that were

properly added to TNE's basis in the Roosevelt property.

     Section 61 defines gross income to mean all income from

whatever source derived, including rents.    Sec. 61(a)(5).    If a

lessee places improvements on real estate which constitute in

whole or part a substitute for rent, such improvements constitute

rental income to the lessor.    Sec. 1.61-8(c), Income Tax Regs.

Whether or not improvements made by a lessee result in rental

income to the lessor in a particular case depends upon the

intention of the parties, which may be indicated either by the

terms of the lease or by the surrounding circumstances.       Id.

     The statements accompanying the rent checks to REE and TNE

include credits for the amounts incurred by Blockbuster for the
                               - 28 -

carpeting.   The credits are described in the statements as

reimbursements for carpet costs.   In addition, Peter responded as

follows to his attorney's question at trial:

     Q   The scheduled rent -- monthly rent payments that

     were scheduled under the lease -- you reached an

     agreement with them that the scheduled rent payments

     would be reduced or eliminated until they recouped back

     the cost that they laid out for the carpet?

     A   That's -- in essence, that's correct.

     Notwithstanding the foregoing, petitioners argue that the

amounts incurred by Blockbuster provided no economic benefit to

REE and TNE and therefore do not constitute gross income to REE

and TNE because Blockbuster is the owner of the carpeting

pursuant to oral agreements.

     Peter's self-serving testimony on this matter was indefinite

and corroborated only by a letter, dated 2 years after the

carpeting was installed, from a Blockbuster representative who

stated that "to the best of [his] actual knowledge" that

Blockbuster owns the carpeting in its video stores.     The letter

does not refer to REE, TNE, or the oral agreements under which

petitioners argue that Blockbuster claims ownership of carpeting.

This letter has little, if any, probative value with respect to

REE's and TNE's cases.

     Under the circumstances of these cases, we find that the

carpeting constitutes improvements to the real properties owned
                              - 29 -

by REE and TNE, made in lieu of rent payments otherwise payable

under the lease agreements.   Petitioners have not explained why

REE and TNE would need to credit Blockbuster's rent with the

costs incurred for the carpeting if such costs were not incurred

as improvements to REE's and TNE's properties.    Petitioners'

scenario would result in a double benefit to Blockbuster for the

costs incurred; ownership of the carpeting plus reductions in

rent.

     We hold that REE and TNE must include in gross income the

costs of the carpeting incurred by Blockbuster and credited

against its rents payable to REE and TNE.

     With regard to REE's claimed deduction for the cost of the

carpeting as a repairs expense, section 263 provides that no

deduction shall be allowed for capital expenditures.     LaPoint v.

Commissioner, 94 T.C. 733, 735 (1990).    Capital expenditures

include amounts paid or incurred which add to the value or

substantially prolong the useful life of the property.    Sec.

1.263(a)-1(b), Income Tax Regs.    In contrast, amounts paid or

incurred for incidental repairs or maintenance are currently

deductible if they neither materially add to the value of the

property nor appreciably prolong the property's useful life.

Sec. 1.162-4, Income Tax Regs.    Since each case turns on its

special facts, the distinctions between current expenses and

capital expenditures are those of degree and not of kind.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 86 (1992).    The
                               - 30 -

burden of clearly showing the right to the claimed deduction is

on petitioners.   Id. at 84.

     This Court has repeatedly held that costs incurred for

carpeting generally constitute capital expenditures.      LaPoint v.

Commissioner, supra; Otis v. Commissioner, 73 T.C. 671, 674

(1980); Matlock v. Commissioner, T.C. Memo. 1992-324.

Petitioners appear to have abandoned the position claimed on

REE's return, since they did not address the deductibility of the

carpeting costs in their trial memorandum or their briefs.      We

find that they have failed to prove that REE is entitled to its

claimed repairs expense deduction.      We hold that REE must

capitalize the carpeting costs incurred by Blockbuster as part of

its basis in the Dunn property.   Likewise, we hold that TNE must

increase its basis in the Roosevelt property by the carpeting

costs incurred by Blockbuster on its behalf.

     To reflect the foregoing,

                                            Decisions will be entered

                                     under Rule 155.
