A Tax Court case out of Des Moines last week tells a tale of mayhem, music, and strip clubs. Oh, and basis, gain and loss. Judge Holmes sets the stage:
Robert Willson opened a bar in 1986, and it gave him nothing but trouble. He's seen lawsuits, endless repairs, and even a catastrophic fire. One might say the City of Des Moines did him a favor when it finally condemned the land in 2000 to expand its airport -- right around the time Willson began serving a federal prison term. But the Commissioner wouldn't let things be and says that the condemnation triggered a large capital gain that Willson didn't correctly report. This meant the bar would give him one more headache -- because, though Willson represented himself at trial, the facts as he described them would be worthy of an advanced exam problem in tax accounting
After being shot in the arm by a burgler, the taxpayer had do give up car repair work, so he turned to tavern ownership, buying a bar near the Des Moiens Airport that he renamed "City LImits." He fixed it up and catered to Des Moines' insatiable desire for rock acts whose popularity had waned elsewhere:
With these new stages, the bar became a local mecca for a type of "rock and roll" called "glam metal." While the Court took no expert testimony on the nature of such groups, it did allow into the record Willson's own explanation of this genre of musical entertainment. We also took judicial notice that "hair bands" had lost much of their popularity with the coming of something called "grunge rock" (another type of "rock and roll" music) in the early nineties. This was important to Willson's business because "hair bands," with such unlikely names as Head East, Great White, and Saturn Cats could still draw large crowds to a bar on the outskirts of Des Moines but had become affordable providers of live entertainment.
Can't say I ever made it to that incarnation of the bar, or to a successor business launched after a fire wrecked the place:
One night in 1994, a few band members did something to a smoke machine that sparked an enormous fire. This fire engulfed everything except the parking lots, the shed, and the property's original house. It also forced Willson to make a choice -- sell to the City as part of its airport expansion, or rebuild. Willson was unable to sell, so he had to rebuild. He rented out the old house to a tenant who installed minor improvements (e.g., poles) and opened an establishment felicitously -- and paronomastically -- called the "Landing Strip," in which young lady ecdysiasts engaged in the deciduous calisthenics of perhaps unwitting First Amendment expression.
Do you suppose Judge Holmes tells his wife he's going to visit a deciduous ecdysiast when he heads to the strip club? If I used all of those big words in one sentence, my wife might get a restraining order on me, just to be safe.
Eventually he got to sell out to the airport when it expanded, and the IRS was there with its hand out for some of the gain. The judge sorted through the messy facts and made three points worth noting:
- The seller has to take depreciation into account in determining gain on the sale. The more depreciation you take, the less basis you have, and the higher the gain (or lower the loss).
- The gain is on the depreciaton allowed or "allowable." Since the records available didn't show how much depreciation was taken, the judge backed into it.
- The IRS has to let you allocate some basis to land. This helped the taxpayer because land isn't depreciable, so its basis wasn't reduced by any depreciation allowable. The Tax Court used the relative assessed values of the land and buildings at the time to determine how much of the purchase price was allocable to the land.
The Moral? Des Moines' love of hair bands outlasted that of the outside world, and it lingers still. Keep good records, because the IRS gets the benefit of the doubt if you don't. And just because the IRS assesses you, that doesn't mean that's what you owe. The allocation to the land will save the taxpayer some real cash.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to