Fairfield Plaza, Inc. v. Commissioner - 39 T.C. 706 (1963)

Rule:

Section 1.61-6, Income Tax Regs., provides that "When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts." Such "equitable" apportionment demands that relative values be reflected. Accordingly, if one parcel is of greater value than another, apportionment solely on the basis of square footage appears inappropriate.

Facts:

Petitioner taxpayer, Fairfield Plaza, Inc., purchased a piece of land. Petitioner divided the property into two tracts and made certain improvements on the land. Petitioner sold both of the tracts of land in different years and allocated his basis between the two tracts based upon square footage. Petitioner also allocated certain amounts that had been placed into escrow between the two tracts. The amounts in escrow were for improvements to the tract that was sold last. Respondent Internal Revenue Service (IRS) determined that deficiencies existed in petitioner’s federal income taxes. Petitioner challenged the respondent’s determination claiming that the IRS erroneously determined the proper allocation of his basis between the two tracts of land and that respondent erroneously allocated the amounts that were placed in escrow for improvements between the two tracts of land. The court affirmed respondent’s determination that the allocations were improper.

Issue:

Was respondent’s determination that the allocations were improper, correct?

Answer:

Yes.

Conclusion:

The court affirmed respondent’s determination that the allocations were improper. The court found that the allocation of basis was not proper within the meaning of Treas. Reg. § 1.61-6. The court reasoned that the relative values of the two tracts were different. The tract that was sold last was of a greater value. Finally, the court found that the taxpayer was not entitled to allocate the amounts placed into escrow between the two tracts of land. The court reasoned that the amounts in question were used for improvements to the tract that was sold last.