                            T.C. Summary Opinion 2017-31



                            UNITED STATES TAX COURT



          SHARON M. NIELSEN AND STEVE L. NIELSEN, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20050-15S.                            Filed May 8, 2017.



      Sharon M. Nielsen and Steve L. Nielsen, pro se.

      Mark A. Nelson, for respondent.



                                 SUMMARY OPINION


      CARLUZZO, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
                                         -2-

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In a notice of deficiency dated May 14, 2015 (notice), respondent

determined a $5,297 deficiency in petitioners’ 2012 Federal income tax. The issue

for decision is whether petitioners are entitled to a depreciation deduction in an

amount greater than respondent allowed.

                                     Background

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

petition was filed, petitioners resided in California.

      Petitioners owned several rental real estate properties (rental properties) in

2012 in Whittier, California: 7756/7758/7760 Newlin Ave. (7756 Newlin

property); 13451 A:F Camilla St. (Camilla property); and 6522-6524 Newlin Ave.

(6522 Newlin property).

      Mr. Nielsen purchased the 7756 Newlin property for $360,000 in 2003. At

the time there were three buildings erected on it. In 2012 the Los Angeles County

Office of the Assessor assessed the 7756 Newlin property at a value of $425,324,

of which amount $189,032 was attributable to improvements and $236,292 was

      1
        (...continued)
Code of 1986, as amended and in effect for the year in issue. Rule references are
to the Tax Court Rules of Practice and Procedure.
                                        -3-

attributable to land. Simple mathematics shows that according to the tax

assessor’s office, the value of the improvements constituted 44.4% of the total

value of the property.

      Petitioners purchased the Camilla property for $750,000 in 2003. At the

time there were four buildings erected on it. In 2003 Hawthorne Savings

(Hawthorne) performed a professional appraisal of the Camilla property and

determined a value of $750,000, attributing $255,486 to improvements and the

balance to land. In 2012 the Los Angeles County Office of the Assessor assessed

the Camilla property at a value of $795,000, of which amount $305,800 was

attributable to improvements and $489,200 was attributable to land. According to

the Hawthorne appraisal the improvements constituted 34% of the total value of

the property; according to the tax assessor’s office, the value of the improvements

constituted 38.4% of the total value of the property.

      Petitioners purchased the 6522 Newlin property for $520,000 in 2011. At

the time there were two buildings erected on it. In 2013 the Los Angeles County

Office of the Assessor assessed the 6522 Newlin property at a value of $532,807,

of which amount $163,940 was attributable to improvements and $368,867 was

attributable to land. According to the tax assessor’s office, the value of the

improvements constituted 30.7% of the total value of the property.
                                        -4-

      On October 4, 2012, Santos H. Kreimann, chief deputy assessor for the Los

Angeles County Office of the Assessor, sent a letter to William T. Fujioka, chief

executive officer of the County of Los Angeles, identifying “critical tasks

requiring immediate attention” (October 4, 2012, letter). In the October 4, 2012,

letter Mr. Kreimann described, among other things, plans to upgrade the Los

Angeles County Office of the Assessor’s information technology to replace

“existing systems which no longer provide the required functionality and

reliability” and improve access to the Multiple Listing Service to increase the

accuracy of appraisals.

      On a Schedule E, Supplemental Income and Loss, attached to petitioners’

timely filed 2012 Federal income tax return they claimed depreciation deductions

with respect to the rental properties using the straight-line method of depreciation

with a recovery period of 27.5 years. Petitioners included the cost of the land and

improvements in their calculations of depreciable basis for the rental properties,

resulting in the following depreciation deductions for the rental properties:

                    Rental Property                    Amount

                7756 Newlin property                   $14,064
                Camilla property                        32,312
                6522 Newlin property                    22,862
                                        -5-

      In the notice respondent disallowed: (1) $7,406 of the $14,064 depreciation

deduction claimed with respect to the 7756 Newlin property; (2) $15,954 of the

$32,312 depreciation deduction claimed with respect to the Camilla property; and

(3) $15,105 of the $22,862 depreciation deduction claimed with respect to the

6522 Newlin property. According to the notice, respondent’s disallowance of

portions of the depreciation deductions is attributable to a redetermination of the

depreciable basis of each rental property according to an apportionment of value

between improvements and land as follows:

                    Property                           Ratio

           7756 Newlin property                        0.444
           Camilla property                             0.38
           6522 Newlin property                         0.31

The ratios used in the notice are derived from the Los Angeles County Office of

the Assessor’s assessment apportioning value between improvements and land.

Taking into account additional information from the Los Angeles County Office

of the Assessor, respondent now contends that the ratio should be 0.46 for the

Camilla property.

                                     Discussion

      As we have observed in countless opinions, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proving entitlement to any
                                         -6-

claimed deduction.2 Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

      Section 167(a) allows as a depreciation deduction a reasonable allowance

for the exhaustion, wear, and tear of property used in a trade or business. The

purpose of the deduction for depreciation is to allow the taxpayer to recover over

the useful life of the property its cost or other basis. United States v. Ludey, 274

U.S. 295, 300-301 (1927). Pursuant to section 168(a), the depreciation deduction

for any tangible property generally is to be determined by using the applicable

depreciation method, the applicable convention, and the applicable recovery

period.

      Generally, depreciation is computed by using the cost of the property as its

basis. Secs. 167(c), 1011, 1012; sec. 1.167(g)-1, Income Tax Regs. If depreciable

property and nondepreciable property such as real property with improvements are

bought for a lump sum, the cost must be apportioned between the land and the

improvements. United States v. Hill, 506 U.S. 546, 559 (1993); sec. 1.167(a)-5,

Income Tax Regs. In making this allocation, section 1.167(a)-5, Income Tax

Regs., provides:


      2
       Petitioners do not claim and the record does not show that the provisions of
sec. 7491(a) apply here, and we proceed as though they do not.
                                        -7-

      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. * * *

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 Bldg. Corp. v. Commissioner, 67 T.C. 804,

807 (1977).

      Petitioners claimed depreciation deductions with respect to the rental

properties as though the depreciable basis of each property included both the value

of the improvements and the land. Respondent disallowed portions of the

depreciation deductions on the grounds that petitioners had incorrectly included

the cost of the nondepreciable land in their calculations of depreciable basis for

the rental properties. Petitioners now agree that the value of the land should not

have been included in their calculations of the depreciable bases of the rental

properties, however, they contend that respondent’s allocations to land values

were excessive.

      Petitioners raise various challenges to the accuracy and credibility of

respondent’s reliance on the Los Angeles County Office of the Assessor’s
                                         -8-

assessments and instead rely on two alternative methods of valuation: (1) land

sales method and (2) insurance method.

      Petitioners assert, among other things, that the Los Angeles County Office

of the Assessor’s data “is extraordinarily inaccurate” and internally inconsistent.

We have carefully reviewed the record, including the October 4, 2012, letter and a

document titled “Parcel Detail--Los Angeles County Assessor Portal” on which

petitioners rely, and do not share their concerns with respect to the reliability or

unreliability of the Los Angeles County Office of the Assessor’s assessments.

      Nor do we give much weight to the after-the-fact allocations that petitioners

advance in this proceeding. Although we acknowledge that the owner of property

is qualified by his ownership alone to testify as to its value, see Dehmer

Distributors, Inc., v. Temple, 826 F.2d 1463, 1466 (5th Cir. 1987); United States

v. Laughlin, 804 F.2d 1336, 1340 (5th Cir. 1986); Dietz v. Consolidated Oil &

Gas, Inc., 643 F.2d 1088, 1094 (5th Cir. 1981); Kestenbaum v. Falstaff Brewing

Corp., 514 F.2d 690, 698 (5th Cir. 1975), modified on other grounds en banc, 575

F.2d 564 (5th Cir. 1978), we are aware of no authority that suggests that the

qualification extends to an allocation of the value of property between land and

improvements.
                                        -9-

      As between petitioners’ allocations and the allocations based upon the Los

Angeles County Office of the Assessor’s assessments, we find the latter to be more

reliable and persuasive. We note that the Hawthorne appraisal and allocations

with respect to the Camilla property supports our finding in this regard.

Accordingly, petitioners’ allowable depreciation deductions are limited to the

amounts now allowed by respondent.

      To reflect the foregoing,


                                                    Decision will be entered

                                              under Rule 155.
