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Allocation of Basis in Common Improvements After the Tax Court's 'Norwest' Decision

by David E. Kahen, Ronald A. Morris
Published: March 01, 1999
Source: Journal of Taxation

Should it matter whether a common improvement was undertaken to improve sales or to enhance a property's ability to generate rental income? The Tax Court apparently thought it did matter, in examining the precedents known as the "developer line of cases." Although Norwest failed, similarly situated taxpayers might avoid a similar result by selling the improvement along with the adjoining property, or properly accounting for any easements or other transferred rights.

A recent decision of the Tax Court provides an opportunity to reexamine the rule that the cost of a common improvement incurred by a developer may in certain cases be allocated to the basis of the properties benefiting from the common improvement. In Norwest Corp.,(1) the Court reached a result that probably is correct, but did so in a manner that raises some troubling questions regarding the proper treatment of costs incurred to construct a common improvement.

The Atrium

The taxpayer in Norwest was the successor to United Banks of Colorado, Inc., the common parent of an affiliated group of corporations (collectively, the "Bank"). Throughout the years at issue and for some time prior thereto, the Bank owned a 22-story office building in downtown Denver (2UBC). The Bank also owned another, four-story office building (3UBC) located on the same block as 2UBC, and a third building ("Motorbank I") on an adjacent block. 2UBC was primarily leased to non-Bank tenants, while 3UBC was wholly occupied by the Bank, serving as its headquarters until 1983. Motorbank I housed a parking garage as well as two floors of office space.

In the late 1970s the Bank was in need of additional space and was planning the development of a new office tower (1UBC) to be located on the same block as Motorbank I, directly across from 2UBC. In connection with the design of 1UBC, the architects proposed the construction of an enclosed glass structure (the "Atrium") in the area between 2UBC and 3UBC and an elevated, enclosed pedestrian walkway (the "Skyway") to connect the Atrium to 1UBC.

The Atrium and the Skyway were intended to meet several objectives. First, the Bank wanted to connect 1UBC to its existing properties, which were located on Broadway in Denver's central business district. The location upon which 1UBC was to be built, although only a short distance away, was on the fringe of the central business district. The Atrium and Skyway would link 1UBC to the existing properties and place the "front door" to 1UBC on Broadway. Second, the Atrium would unify the Bank's properties as a single "center" and increase rental rates for 2UBC and 3UBC. Initial projections prepared for the Bank showed that the creation of the center would increase the values of 2UBC and 3UBC by approximately $9 million. Third, the center would have a distinctive shape that would create a strong identity in the minds of potential customers of the Bank. The Bank expected that the creation of the center would enhance the image of the Bank and would enable it to increase its market share.

The development plan, which included construction of the Atrium, was approved by a special committee of the Bank's Board of Directors on September 8, 1980. During the next several years, the Bank entered into a series of transactions involving the Denver properties. On February 5, 1981, the Bank granted a 70-year lease (the "Ground Lease") to a partnership (the "1700 Partnership") apparently affiliated with the developer previously selected by the Bank.(2) The 1700 Partnership agreed to construct 1UBC, and a parking garage on an adjacent block, and to pay the Bank both a fixed rent and a rent based on the net cash flow generated by 1UBC and the garage. The construction of 1UBC and the garage was completed in 1983.

Concurrently with the execution of the Ground Lease, the Bank entered into another agreement with the 1700 Partnership whereby the Bank, at its sole expense, would construct the Atrium. The agreement stated that the Atrium and the Skyway were being built to integrate 1UBC with the existing Bank properties, and that the 1700 Partnership and the developer would not have agreed to build 1UBC if the Bank had not committed to building the Atrium. At the same time, the 1700 Partnership agreed to construct the Skyway, with the costs of construction and maintenance to be shared equally by the Bank and the 1700 Partnership. The Bank granted to the 1700 Partnership, and to the current and future fee owners of the 1UBC land and improvements, an easement for pedestrian access through the common areas of the Bank's property, including the Atrium. The 1700 Partnership granted to the Bank an easement for pedestrian access through the common areas of 1UBC. Concurrently with the execution of the Ground Lease and the related agreements, the Bank also agreed to lease from the 1700 Partnership approximately 500,000 square feet of space in 1UBC.

The Bank retained two consulting firms in 1984, prior to construction of the Atrium, to evaluate the Bank's real estate holdings and to make recommendations regarding the possible sale of properties. Both these reports concluded that the increase in the rental value of the adjoining properties did not justify the cost of constructing the Atrium, which was estimated at that time to be $25 million. The reports also suggested that the Bank should not build the Atrium unless it was obligated to do so, and that the Bank consider whether it could avoid that obligation for an amount less than the excess of the $25 million estimated cost over the present value of the projected net cash flow from the Atrium ($2.7 million). Both consultants also suggested, however, that the Bank take into account the "recognition" value and enhancement of image anticipated from the Atrium. Shortly after receiving these reports, the Bank decided to offer 2UBC and the Ground Lease (relating to 1UBC) for sale, but also decided to proceed with the Atrium (for reasons noted below). Construction of the Atrium commenced in 1985 and was completed in 1987, with the Atrium structure being placed in service in 1986. The total cost of the Atrium, Skyway, and related equipment, furniture and fixtures through 1987 was approximately $34 million.

The Bank owned and operated a cafe in the Atrium, leased the retail space in the Atrium to a convenience store, and leased the other space for "espresso carts." The revenue from these operations was not sufficient to cover the operating expenses relating to the Atrium, and the Bank incurred operating losses of $493,000 in 1989 and in excess of $500,000 per year in each of the succeeding years.

In the meantime, however, the Bank had sold 2UBC and a 50% interest in Motorbank I in 1985 for $35.5 million. It agreed to complete the construction of the Atrium and the Skyway and to maintain them and certain other nearby improvements at the Bank's sole expense, for 35 years, with a right to terminate the Bank's obligations relating to the Atrium after 15 years upon payment of a termination fee to the purchaser.(3) The Bank and the purchaser also granted to each other reciprocal easements pertaining to ingress and egress of pedestrians through common areas, including the Atrium. The Bank recognized a substantial gain on the sale of these properties.

In the view of the court, this sale meant that the Bank would not enjoy most of the increase in the value of the adjoining properties that was projected to occur as a result of the construction of the Atrium. The Bank nevertheless decided to proceed with the construction of the Atrium because (1) management believed the Atrium would enhance the Bank's image (it retained a major presence in 1UBC), and (2) the Bank estimated that it would cost at least $16 million to avoid its obligations under the Ground Lease to build the Atrium.

In a series of transactions pursuant to agreements dated December 31, 1987, the Bank sold the 3UBC building to the law firm that was the Bank's legal counsel, for a nonrecourse note, and leased the land underlying 3UBC to the law firm for a term of approximately 35 years. At the same time, the Bank leased back all of the space in 3UBC pursuant to a lease under which the Bank agreed to operate the building, insure it, and replace the building if destroyed. The Bank treated the transaction as a sale of 3UBC, and reported a substantial gain on the sale in 1988 under the installment method. The Bank and the law firm granted each other reciprocal easements of access, and the Bank also agreed to maintain the Atrium (presumably for the term of the 3UBC ground lease).

By agreement dated December 30, 1988, the Bank sold the land underlying 1UBC together with its interest in the Ground Lease (relating to 1UBC). The Bank reported a capital loss on that sale.

Also on December 30, 1988, the Bank sold an undivided 48% interest in the Atrium for a promissory note of $17.1 million. Contemporaneously, the buyer contributed the interest in the Atrium to a newly formed partnership of which the Bank was the general partner, and the partnership and the Bank leased their interests in the Atrium to a Bank entity for a term of 30-1/2 years, with declining rent of approximately $38 million in the aggregate payable to the partnership with respect to its 48% interest. The sales agreement obligated the seller and buyer of the 48% interest and the tenant to report the transactions for income tax purposes as a sale and a lease. In its 1988 federal income tax return, the Bank reported a gain on the sale of the 48% interest in the Atrium and Skyway, and the Bank as tenant under the lease claimed deductions for rent in 1989 and succeeding years.

In determining its basis in 2UBC, Motorbank I, 3UBC and the land underlying 1UBC, the Bank did not initially allocate any part of the cost of the Atrium to these properties. The Bank first claimed that it was entitled to allocate the cost of the Atrium to the bases of adjoining properties in 1992, in a letter to the IRS appeals division, presumably sent after or in the course of an audit. This issue was one among several that ended up before the Tax Court, where the IRS sought to sustain asserted tax deficiencies for various years ranging from 1977 to 1991 and the Bank alleged overpayments in the same years.

The Bank's Arguments

Norwest argued that the cost of the Atrium should be allocated among the bases of the properties that adjoined and benefited from it, because the purpose of the Bank in constructing the Atrium was to enhance the values of those properties. Although the Bank's tax returns reflected a sale of a 48% interest in the Atrium in 1988, it appears that by allocating the cost of the Atrium to the bases of the adjoining properties the Bank was attempting to recover the remaining 52% of its basis in the Atrium, and perhaps attempting to shift a portion of the basis recovery from 1988 back to 1985 and 1987, when some of the properties were sold.(4)

The Bank's argument relied precedents commonly referred to as the "developer line of cases." The seminal case on this issue is Kentucky Land, Gas & Oil Co. v. Commissioner.(5) The taxpayer in that case was a corporation engaged in the business of selling lots in a tract of land that contained oil deposits. Purchasers were entitled to a proportionate share of any income resulting from the extraction of oil from any portion of the tract. The taxpayer obligated itself to each purchaser to drill one well in the tract. The taxpayer took the position, and the Board of Tax Appeals agreed, that the taxpayer was entitled to include in the basis of lots sold during the tax year a proportionate share of the estimated cost of drilling the well, since the cost of drilling the well was in effect an additional cost of each lot sold.

Cambria Development Co. (6) was the first case to apply the holding of Kentucky Land to a developer of residential properties. In Cambria, the developer sold individual lots in a residential tract and agreed with each purchaser to construct streets and install water mains throughout the tract. The court allowed the developer to add the estimated cost of those improvements, to be incurred after the sales, to its bases in the lots as computed at the time of each sale.

Cambria was followed by several cases, all of which involved costs of one kind or another incurred by residential developers. For example, in Laguna Land & Water Co.,(7) the cost of streets to be built by a developer were permitted to be added to the basis of residential lots. In Country Club Estates, Inc.,(8) a developer who donated land to a country club for use as a golf course was permitted to add the cost of the donated land to the basis of adjacent residential lots because "the basic purpose of [the taxpayer] in transferring the land was to bring about the construction of a country club so as to induce people to buy nearby lots."

Subsequent cases imposed some limits on the scope of this rule. In Colony Inc.,(9) the court held that the cost of a water supply system could not be added to the cost of lots in the development for which the system was built because the developer retained full ownership and control of the water system.(10) The court in Colony relied on an earlier case, Biscayne Bay Islands Co.,(11) which held that the cost of land set aside by a developer as a playground in a residential subdivision could not be added to the basis of lots in the subdivision because the developer retained a reversionary right in the playground effective upon the expiration of a ten-year period.

The principles of the foregoing cases were distilled by the Tax Court in Estate of Collins.(12) There, a developer constructed a sewage system and transferred title to a trustee while retaining a reversionary interest in the event the local municipality undertook to extend its sewage system to the development. The court concluded that under the developer line of cases, if a developer constructs a facility the "basic purpose" of which is to induce sales of the lots in the development, then the cost of the facility is added to the basis of the lots, even though the developer retains "tenuous rights without practical value" to the facility. However, if the developer retains full ownership and control of the facility, then the cost of the facility is not includible in the basis of the lots.

The tests set out in Collins were applied in two subsequent decisions. Willow Terrace (13) permitted a developer who constructed a water and sewage system to include the cost of those systems in the basis of subdivision lots. The court found that even though the water and sewage facilities were ultimately sold at a profit, the basic purpose of the developer in constructing the facilities was to induce sales of the lots. In Noell,(14) a developer constructed an "air park" facility, in which homes abutted an airstrip, so that homeowners in the air park could keep private planes in their backyards directly off the airstrip. All of the homes in the development were constructed on one side of the airstrip. The other side of the airstrip was purposely left vacant so that it could be used in the future as a site for a commercial hangar. The court ruled that the basic purpose test was not met as a result of the planned future commercial use of the airstrip, and the developer was not allowed to allocate the cost of the airstrip to the cost of the adjacent homes.

The Tax Court's Analysis in Norwest

In Norwest, the IRS argued that the principle of the developer line of cases is limited to developers of residential real property. The court, however, agreed with the Bank that the principle of the developer line of cases is not to be construed so narrowly and could apply to any owner of property who builds a "common improvement" to benefit adjoining properties.

Thus, the court held that if the Bank could show both that it (1) had constructed the Atrium with the basic purpose of inducing sales of the Bank's adjoining properties and (2) had not retained full ownership and control of the Atrium, the cost of the Atrium should be added to the basis of the adjoining properties. The analysis of the court focused primarily on the first prong of this test.

The court found that the Bank did not meet the basic purpose test. The Bank was unable to show that at the time the Atrium concept was initially presented to the Bank's board of directors, in the late 1970s, the Bank had any plans to sell any of the adjoining properties. Therefore, the court concluded that the initial approval of the Atrium was clearly not for the purpose of inducing sales of the adjoining properties. Furthermore, reports prepared for the Board before the ultimate approval of the budget for construction of the Atrium indicated that the Atrium should not be built if the Bank could escape from its obligations to build the Atrium, unless the Bank believed that the enhancement to the Bank's image made it worthwhile to proceed. Moreover, one of the reports concluded that the construction of the Atrium would impede further development of the block on which it would be situated and thereby probably reduce the maximum selling price of the adjoining properties.

Accordingly, the court concluded that the primary purpose of the Atrium was to "address certain design issues" (i.e., to counteract the off-Broadway location of 1UBC and to create a major center consisting of 1UBC and the existing Bank properties) and to enhance the Bank's image, rather than to enhance the value of the adjoining properties for the purpose of inducing sales of those properties.

Impact of the Decision

The Tax Court appears to have reached the correct conclusion in holding that the rule of the developer line of cases regarding the treatment of costs of common improvements is not limited to developers of residential real property. One aspect of the court's decision is very troubling, however.

The court appears to concede that the Bank intended to benefit the adjoining properties by solving design issues relating to the off-Broadway location of 1UBC and by enhancing the rental value of all of the adjoining properties. Nevertheless, according to the court, this motivation did not satisfy the basic purpose test. This result appears to flow from the court's framing the basic purpose test as requiring the taxpayer to have intended to induce sales of the adjoining properties. The court noted that "[the taxpayer] apparently acknowledges that a pivotal question is whether the basic purpose of the Bank in constructing the Atrium was to induce sales of the Bank's adjoining properties." The existence of this purpose was indeed a crucial fact in all of the developer cases upon which the court relied, where the adjoining lots were held by the taxpayer for sale. None of those cases, however, stated that the allocation of basis to adjoining properties could occur only if the benefited lots are intended by the taxpayer to be held for sale when the expenditures are incurred.

As a theoretical matter, it is hard to see why it should matter whether a taxpayer intends to sell improved lots in a development or instead to operate them in order to generate rental income.(15) Concededly, this issue would ordinarily not arise if the taxpayer were not selling the lots, since the cost of the common improvement could presumably be depreciated by the developer regardless of whether its basic purpose was to benefit the lots in the development or to operate the common improvement at a profit (though there may be differences in the applicable recovery period and method of depreciation). As the facts in Norwest show, however, a taxpayer may construct a facility to benefit an adjoining property, initially planning to operate the adjoining property for rental income, but later decide to sell the property instead. The issue could also arise if the taxpayer claims a casualty loss as a result of the destruction of the property by fire. Arguably, a taxpayer in those situations should be treated no differently from the developer who initially planned to sell his properties. It would seem that a more correct statement of the basic purpose test should be whether the basic purpose of the taxpayer in constructing the common improvement was to benefit the adjoining property. Thus, the Tax Court's finding that the Bank constructed the Atrium for the purpose of solving the "design issues" that obviously affected the potential rental income from the adjoining properties should, at least arguably, have been helpful to the taxpayer's position.

It is not clear what the result in the case would have been in Norwest if the court had treated the Bank's desire to resolve the design issues and thereby enhance the rental income of the adjoining properties as being an acceptable purpose under the basic purpose test. It appears that the Bank probably would not have prevailed even if the court had concluded that enhancement of the Bank's image alone was the basic purpose of the Atrium. The opinion states, although the court's finding with respect to basic purpose made further analysis of the Bank's retained interest in the Atrium unnecessary, that the court believed an analysis of the Bank's retained interest would lead to the conclusion that the Bank had not given up sufficient control of the Atrium. In support of that belief, the Court cited the Bank's sale of an undivided 48% interest in the Atrium for $17.1 million in 1988, which suggested that the Bank retained substantial ownership rights in the Atrium.

The taxpayer might have prevailed on the ownership and control issue if the court had accepted the view that the sale-leaseback transaction was really a disguised financing. As noted above it seems likely that the Atrium had no independent economic value to the Bank, once it sold the adjacent properties. But the Bank's shifting positions with respect to the tax treatment of seemingly uneconomic transactions did not help to persuade the court of the merits of the Bank's views.

The court's narrow view of the scope of the basic purpose test might have been justified if the court were viewing the costs incurred by a developer for the purpose of inducing sales of adjoining properties not as an expenditure increasing the basis of the adjoining lots, but rather as a cost of making the sale, which ordinarily would reduce the amount realized on the lots sold. For example, it is hornbook law that commissions paid on the purchase of property increase the taxpayer's basis in the property, and that commissions paid on the sale of property reduce the amount realized. (See, e.g., Treas. Reg. Search7RH1.263(a)-2(e), with respect to the treatment of commissions paid in connection with the sale of securities. Such commissions are treated as an offset to the sales price of the securities rather than an adjustment to basis.) If this were the theory of the developer line of cases, it would make sense to limit the application of the rule to cases where the developer constructed the common improvement in an attempt to sell the adjoining properties. Only in such cases is it fair to describe the common improvement as a cost of the sale eligible to reduce the amount realized on the sale.

The developer cases, however, clearly state that the cost of a common improvement increases the basis of the adjoining property rather than decreasing the amount realized. Moreover, the court in Norwest specifically stated that "the developer line of cases addresses the basic problem of what constitutes a proper adjustment to the basis of property in the context of a common improvement that benefits lots in a subdivision."

There is a superficial resemblance between treating an item as an addition to basis and treating it as a reduction of the amount realized since, by definition, basis is the amount by which the amount realized by a seller must be reduced to arrive at the seller's gain. However, there are significant differences between treating an item as an addition to basis and treating it as an offset to the amount realized.(16) The court's description of the cost of the Atrium as an addition to basis is clearly inconsistent with viewing the cost as merely a reduction in the sale proceeds. Furthermore, the treatment of the common improvement as an addition to basis is theoretically correct, since the common improvement enhances the value of the adjoining properties. Courts have applied a similar analysis to fix-up costs incurred by an owner of real estate in anticipation of a sale of the property, treating such costs as additions to basis and not merely as reductions in the amount realized.(17)

Other Theories

While the taxpayer failed to convince the court that it was entitled to allocate the cost of the Atrium to the bases of the adjoining properties, there might have been an opportunity for the taxpayer to achieve some recovery of the cost of the Atrium on a different theory. One avenue left largely unexplored by the parties in Norwest is the extent to which the Bank, the seller of the property benefited by the common improvement, might be viewed as having also sold an interest in the common improvement. Each of the purchasers who acquired property from the Bank was granted an easement over the Atrium (relating to pedestrian access) and received covenants from the Bank regarding the continued maintenance of the Atrium. Arguably, a substantial amount of value could have been allocated to those rights by the taxpayer. The Tax Court referred to this issue, stating:

Actually, in most of the cases, the asset involved is encumbered with rights running to the property owners which significantly diminish the value of an asset which nevertheless retains substantial value. This diminution, resulting from restrictions benefitting the adjacent lots, represents a pro tanto disposal with each lot. However, there is no basis in the decided cases, and certainly none in the record before us, for making an allocation based on the rights disposed of and the property retained.

One method of making such a basis allocation might be to allocate a fraction of the cost of the common improvement to each property right sold, with the fraction determined by comparing the relative fair market value of the rights sold to the value of the rights retained. See Eileen Hunter v. Commissioner, 44 T.C. 109 (1965); Rev. Rul. 71-567, 1971-2 C.B. 309.

Another possibility would be to look to the cases that deal with sales of easements, where courts have allowed the seller to reduce its basis in the property by the entire amount of the proceeds realized from the sale of the easement, with only the excess being treated as gain.(18) It would then be necessary for a determination to be made as to what portion of the consideration for the sale is allocable to the rights granted to the purchaser in the common improvement. Given the court's favorable nod to this argument, similarly situated taxpayers would be well advised to develop a factual record upon which such an allocation could be made.

A similar approach might be taken with respect to the Bank's affirmative covenants to maintain the Atrium and to operate it in an attractive and orderly manner. Assuming that the Bank anticipated that the operating income from the Atrium would not be sufficient to cover the Atrium's operating costs, the covenants represented a liability of the Bank to which a portion of the purchase price of the adjoining properties could have been allocated.(19)

Another interesting angle that was not explored by the court or the parties is suggested by the fact that a primary purpose of the Atrium was to improve the image of the Bank. It could be argued that the Atrium was in part an expenditure for the creation of goodwill. There appears to be no authority that would treat any portion of expenditures to erect improvements on real property, whether to serve as a company's headquarters or otherwise, as not being depreciable or as a separate "goodwill" asset for tax purposes. Consideration of these issues in depth is beyond the scope of this article, but a few points may be worth noting. Even if a portion of the cost of the Atrium could be characterized as an advertising expenditure, that amount would not be immediately deductible under the circumstances of Norwest. The Atrium is a tangible asset with a significant useful life, and should not be treated in the same manner as advertising designed to create institutional goodwill.(20) As the tangible nature of the Atrium leads to the conclusion that the cost should be capitalized, the Atrium's basis should be depreciable in the same manner as any other tangible asset having a limited useful life held for use in a trade or business.

Conclusion

The effect of Norwest on similarly situated taxpayers in the future may be limited, since the issues considered by the court are now governed largely by the uniform capitalization rules of Code section 263A. Nevertheless, taxpayers who are unable to satisfy the regulatory requirements for adding the cost of a "common feature" to the bases of adjoining units may find themselves in a similar predicament to Norwest's, where an adjoining property is sold and the taxpayer is left with an asset of negligible (or even negative) value, but having a large basis that may be recoverable only by depreciation over an extended period.

A taxpayer in this position will in many cases be much better off selling the common improvement together with the adjoining property, securing an immediate recovery of the cost of the common improvement. Where this option is not available, the taxpayer should attempt to recover at least a portion of the cost of the common improvement by properly accounting for any easements or other rights in the common improvement transferred to the purchaser of the adjoining property. Taxpayers would be well advised to establish early in the planning stage of a development which improvements or empty spaces are intended to be common improvements, i.e., largely benefiting the adjoining properties. In the case of a sale of such an adjoining property, it might be helpful to spell out the values the parties are attributing to any rights in the common improvement that are transferred together with the adjoining properties, so as to establish a strong factual foundation for allocating basis to those rights. Taxpayers also should consider whether any obligations involving maintenance of the common improvement have been undertaken in the transaction to which a portion of the consideration received may be allocated.

FOOTNOTES________________________

1. 111 T.C. 105 (1998).

2. It is not entirely clear from the description of the facts contained in the court's opinion whether the 1700 Partnership was related to the Bank, though there is a hint that the Bank may have been an indirect partner. The court quotes the Eastdil report, one of the reports prepared for the Bank regarding the construction of the Atrium, as stating, "It is clear that the Bank has an obligation to its partners and to the tenants in [1UBC] to complete construction of the atrium facility . . ."

3. The Court's opinion is not entirely clear as to how long the obligation to maintain the Atrium was to run, but the language suggests that the obligation was to run for 35 years.

4. The Bank also argued before the Tax Court that the 1988 sale-leaseback transaction should be recharacterized as a loan. The facts suggest that the desired recharacterization had merit, at least as a matter of economic substance. There were substantial operating losses with respect to the Atrium for the years 1989 through 1995, and it seems unlikely that the Atrium could have been worth anything approaching the $35 million value for the property suggested by the purchase price paid for the 48% interest ($17,100,000/.48 = $35,625,000). The court addressed that argument at length and ultimately rejected it concluding that the Bank was bound to the form in which it had chosen to cast its transaction.

5. 2 B.T.A. 838 (1925).

6. 34 B.T.A. 1154 (1936).

7. 119 F.2d 112 (1941).

8. 22 T.C. 1283 (1954).

9. 26 T.C. 30 (1956).

10. The developer charged lot owners for the water provided to them.

11. 23 B.T.A. 731 (1931).

12. 31 T.C. 256 (1958).

13. 345 F.2d 933 (5th Cir. 1965).

14. 66 T.C. 718 (1976).

15. The developer line of cases has been "codified" and perhaps broadened by the regulations under section 263A, which specify when the cost of an improvement that qualifies as a "common feature" is allocated to benefited "units" of real property. Treas. Reg. Search7RH1.263A-10(b). The Atrium appears to have been largely constructed prior to the effective date of section 263A and the regulations thereunder. A discussion of the regulations is beyond the scope of this article, other than to note their mandate that the cost of a "common feature" be allocated to units of property benefited by the improvement regardless of whether the taxpayer intends to sell the property. See Treas. Reg. Search7RH1.263A-10(b)(6), Example 3.

16. For example, if property is sold in a transaction qualifying for the installment sale method of accounting, then the amount of the property's basis is relevant in determining the amount of debt that may be assumed by the purchaser without being deemed a cash payment in the year of sale. Treas. Reg. Search7RH15A.453-1(b)(3). The installment sale regulations reverse the normal rule and specify that sales commissions paid in an installment sale are treated as additions to basis rather than reductions of amount realized. Treas. Reg. Search7RH15A.453-1(b)(2)(v).

17. See e.g., Lapoint v. Comm'r, 94 T.C. 733, 735 (1990) (cost of drapes, erecting a fence, and other items incurred in anticipation of sale increase the basis of the property).

18. See e.g., Inaja Land Company v. Comm'r, 9 T.C. 727 (1947), acq., 1948-1 C.B. 2.

19. See Oxford Paper v. Comm'r, 194 F.2d 190 (2d Cir. 1952) (taxpayer's receipt of property in consideration of its assumption of an unfavorable lease does not result in income to the taxpayer).

20. Compare Rev. Rul. 92-80, 1992-2 C.B. 57 (allowing a current deduction for institutional goodwill advertising) with Rev. Rul. 68-360, 1968-2 C.B. 197 (cost of printing a trade catalogue for circulation among prospective customers must be capitalized where the useful life of the catalogue is more than one year).