Useful life? What useful life?

• Author: Levinton, Howard
• Position: Brief Article

Prior to 1981, depreciation had something to do with the useful life of property. However, beginning with the Economic Recovery Tax Act of 1981 and continuing throughout the Tax Reform Act of 1986, depreciation has been based, not on useful life, but on a mandated statutory schedule.

The taxpayer in a recent Tax Court case, Grinalds, TC Memo 1993-66, constructed specialized improvements for a tenant and attempted to recover the cost of these improvements over the term of the lease. He argued that, because the improvements would be worthless after the lease term, he should be allowed to use the five-year lease term rather than the 31 1/2 years provided by the modified accelerated cost recovery system (MACRS) as the applicable period to recover his costs.

The IRS held, and the Tax Court agreed, that the changes in the law in 1981, which provided for calculating depreciation based on statutory percentages rather than useful lives, precluded the taxpayer from using the improvements' actual useful life.

Observation: The Service issued general information in fall 1992 suggesting that the taxpayer in this case might be required...