Category: Accounting Periods & Methods;
Tax Returns, Examinations & IRS Procedure Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Notes: 1. The regulations under Section 266 provide two possibly relevant categories of eligibility for capitalization under Section 266. The first is unimproved and unproductive real estate. This is clearly not applicable to the taxpayer's facts. The second is interest, taxes, and other carrying charges paid or incurred in connection with the development of real property whether improved or unimproved, productive or unproductive. Eligibility for capitalization ends when development ceases. As I understand it, the taxpayer's residence was not under development during any of the years in issue; accordingly, Section 266 is not available for this taxpayer. 2. To respond to the initial question about the applicability of Section 266 to nonbusiness items, the regulations under Section 266 specifically mention a personal residence in the context of eligible properties. See Regulation Section 1.266-1(b)(ii)(d). 3. It is extremely clear that an affirmative election must be made on a timely filed tax return. First, the statute says the election is made as per regulations prescribed by the Secretary. Second, the regulations require an explicit election statement. Regulation Section 1.266-1(c)(3). The courts have upheld this requirement. See Green, John, (1964) TC Memo 1964-113, PH TCM ¶64113, 23 CCH TCM 649; Pathe Exchange Inc v. Com., (1935, CA2) 15 AFTR 1399, 77 F2d 306, 35-1 USTC ¶9365; and Oklahoma Gas & Electric Co v. U.S., (1968, DC OK) 22 AFTR 2d 5602, 289 F Supp 98, 68-2 USTC ¶9565. |
