Here's a forwarded posting from the land use bar that might be of interest.
__________________________________________
Subj: Tax Note: When is a building "lost?"
Date: 4/28/98 9:38:29 AM EST
From: [log in to unmask] (Patrick A. Randolph, Jr.)
Reply-to: [log in to unmask]
The following posting is taken from the "Real Estate Tax Soup" List, a list
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Couple's Loss Occurred Before They Destroyed Building; Deduction Denied
A U.S. district court has held that a couple is not entitled to a
deduction for the loss of a building they demolished, finding that the loss
occurred before the building was destroyed when the couple discovered
asbestos and the building was vandalized.
Linden and Lois Gates purchased an old school building in 1984,
intending to renovate and lease the building. In 1988, the building was
damaged by vandals and the Gateses discovered asbestos in the floor tiles
and heating system. In 1991, the Gateses demolished the building and
subdivided the underlying land into residential lots.
In 1995, the couple filed an amended tax return for 1991, claiming a
deduction for the loss of the building. The IRS disallowed the deduction,
and the Gateses filed this refund suit. The taxpayers relied on De Cou v.
Commissioner, 103 T.C. 80 (1994) (94 TNT 164-14), in which the Tax Court
ruled that the limitations on deductions imposed by section 280B doesn't
apply to losses occurring before a structure is demolished.
Chief District Judge Sylvia H. Rambo noted that the taxpayers in De
Cou were allowed the loss deduction because they took affirmative steps to
withdraw their building from use in the year they claimed the deduction,
and because they claimed a deduction in the same year that they discovered
the defects in the building. Here, Judge Rambo said, the Gateses took no
affirmative steps to withdraw the school building from use in 1991, and the
events that caused the school to lose its value (the asbestos and
vandalism) occurred before 1991. Thus, Judge Rambo found De Cou
distinguishable.
The Gateses alternatively contended that a tax-significant event
occurred when a potential buyer of the building withdrew interest, but the
court pointed out that the sale negotiations broke down before 1991.
Moreover, the "breakdown of sales negotiations is not a closed or completed
transaction giving rise [to] a deductible loss."
Judge Rambo noted that section 280B would be rendered meaningless if
the court adopted the Gateses' contention that their unilateral decision to
withdraw an asset from service entitles them to a deduction in that year.
If a taxpayer's decision was itself sufficient, Judge Rambo reasoned,
"section 280B would never apply because every structure would be withdrawn
from use before its demolition." (For the full text of this decision,
Linden Gates, et ux. v. United States,81 AFTR2d Par. 98-629, No.
1:CV-97-0676, see Doc 98-13202 (9 pages) or 98 TNT 79-13.)
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