Facts
Martin and Vincent Zaninovich were partners in a farming business in San Joaquin Valley in California and used the cash basis method of accounting. The partnership entered into a lease of farm land from December 1, 1973 to November 30, 1993. Yearly rent of $27,000 for the period running December 1 to November 30 was payable on December 20 of each lease year. On December 20, 1973, the partnership paid $27,000 in rent for the lease year running December 1, 1973 to November 30, 1974. The partnership deducted this entire amount on its return for the taxable year 1973.
The Tax Commissioner disallowed $24,934 of the $27,000 payment—the portion of the rent payment attributed to the eleven months rental period that fell in 1974. The United States Tax Court upheld this ruling. The 9th Circuit reversed. On appeal, the court concluded that the test for determining if this rental prepayment could be fully deducted during the actual payment year (thus whether the payment was a deductible expense or a capital expenditure) depended on whether or not eleven months is "substantially beyond" the taxable year. The court decided to adopt the "one-year rule" applied by several circuits in distinguishing between currently deductible expenses and capital expenditures having a useful life extending "substantially beyond" the tax year. Under the "one year rule", an expenditure is treated as a capital expenditure if it creates an asset, or secures a like advantage to the taxpayer, having a useful life in excess of one year. The court reasoned that the overriding advantage to the "one year rule" was its ease of application. Additionally the rule eliminates pointless complexity in the calculation of the timing of deductions.
The court found that its reasoning for the "one year rule" was well illustrated by the facts of the case before it. If the taxpayers in this situation were forced to deduct their rental payments on a prorated basis, the simplicity of the cash basis method of accounting was sacrificed for an inconsequential change in the timing of deductions. Under the prorated system the taxpayers could only deduct 1/12 of their rental payment in 1973. But in 1974, and every year until 1992, the taxpayers would be able to deduct both 1/12 of the current payment (for the month of December) and 11/12 for the preceding year's payment that covered the rental period in the current tax year (January–November); thus the taxpayers would be deducting 12/12 of rental payment—an entire year's worth of payments. So there was only a difference between the prorated deduction system and the "one-year rule" for the first and last year of the lease term.
Read more about this topic: Zaninovich V. Commissioner
Famous quotes containing the word facts:
“The past is of no importance. The present is of no importance. It is with the future that we have to deal. For the past is what man should not have been. The present is what man ought not to be. The future is what artists are.
The facts: nothing matters but the facts: worship of the facts leads to everything, to happiness first of all and then to wealth.”
—Edmond De Goncourt (1822–1896)
“It is not an arbitrary “decree of God,” but in the nature of man, that a veil shuts down on the facts of to-morrow; for the soul will not have us read any other cipher than that of cause and effect. By this veil, which curtains events, it instructs the children of men to live in to-day.”
—Ralph Waldo Emerson (1803–1882)
“Had Adam tenderly reproved his wife, and endeavored to lead her to repentance instead of sharing in her guilt, I should be much more ready to accord to man that superiority which he claims; but as the facts stand disclosed by the sacred historian, it appears to me that to say the least, there was as much weakness exhibited by Adam as by Eve. They both fell from innocence, and consequently from happiness, but not from equality.”
—Sarah M. Grimke (1792–1873)