Memo
- To: Texas County Board of Supervisors
- From:
- Date:
- Re: Capital expenditure
Fact
In 2009, Sarah inherited 3 parcels of land, which were appraised at $15,750. This value was lower than what she had estimated. On challenging the valuation, she was informed that zoning on the land would only allow one residence for every 2 acres. Therefore, the resale value of the land is significantly diminished. In 2010, she appealed the decision to the Texas County Board of Supervisors challenging the County’s zoning law. However, the authorities took two years to adopt the new zoning law. By the end of the entire legal process, she had incurred $11,000 as attorney’s fees and other legal costs.
Issues
There are two main issues emanating from the case study as illustrated by being following questions.
- Is the attorney fee incurred in the process of challenging the appraisal of the land tax deductible?
- What is the appropriate tax treatment on the $11,000 incurred as attorney fees?
The legal costs incurred in the process of acquiring or improving a capital asset such as land are treated as capital expenditures under Section 24 (a) (2).
Conclusion
The cost incurred in the process of requesting a change on land zoning or rezoning is not tax-deductible. Capital expenses refer to the cost incurred in the process of acquiring or improving capital assets. The land is categorized as a capital asset. Moreover, land rezoning costs are not amortizable as they are undeterminable and indefinite with regard to the period within which they may be subject to tax consequences. The decision to categorise the legal fees incurred in the process of acquiring or improving land arises from the fact that the owner will recover the capital expenditure if the asset is sold in the future. However, the taxpayer may be rewarded a loss deduction if the land rezoning efforts do not succeed.
Authorities and Reasoning
Sec. 263 (a) and Sec. 1.263 (a) of the Income Tax Regulation postulates that there should be no deductions on any cost that is paid in the process of acquiring a new building or any other activities aimed at improving the value of an estate or property. Moreover, Section 1.263 (a)-2 (a) categorises a number of costs such as cost of property acquisition, cost of machinery and other equipments, building cost and furniture, and fixtures as capital expenditure. Section §1.263 A-2 (a) (3) (i) postulates that capital expenditure should be capitalized irrespective of whether the expense was incurred prior to, during or after acquisition of the property.
Relevant court case
One of the most notable cases relevant to the aforementioned issue relates to Von-Lusk v. Commissioner, US Tax Court. In this case, Von-Lusk filed a complaint for tax returns for the period ranging between 1988 and 1990. However, the judge argued that Von-Lusk intended to improve the property by constructing a new residential building. In accordance with §1.263 A-1 (f), the taxpayer was required to pay the impact fee. The decision arose from the fact that Von-Lusk intended to improve its property. Moreover, the impact fees were to be capitalized as indirect costs as stipulated under §1.263 A. Therefore, in line with the tax requirement under Section 263A AND §§ 263(a), the property owner was not refunded the tax returns that were being claimed.