Question

thical Issue 9-1 Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land. Requirements 1. Explain the tax advantage of allocating too much to the building and too little to the land. 2. Was Western's allocation ethical? If so, state why. If not, why not? Identify who was harmed. seccse l i nesnied

Answer 1

1.Western Bank and Trust purchased land and building for a lumpsum of $3000000.To get maximum tax deduction, western allocated 90% of the purchase price to building and only 10% to Land.

Land can never be depreciated. Since land provides no current tax benefit through depreciation deductions, a higher allocation to building is taxpayer-favorable.

Hence there,s a great tax advantage . 20% of lumpsum amount can be claimed as depreciation which in turn will reduce the Profits earned thereby reducing the tax payment on profit.

2.Western's allocation was unethical.
REASON : When acquiring real estate, a taxpayer is acquiring non-depreciable land and depreciable improvements (excluding raw land, land leases, etc. for this discussion). In transactions that result in a transfer of depreciable property and non-depreciable property such as land and building purchased for a lump sum, the cost must be apportioned between the land and the building (improvements).
But in this case Western Bank and Trust has made a unrealistic allocation to avail tax benefit.
The REVENUE DEPARTMENT of the STATE/ PROVINCE has been harmed in this entire process of allocation of amount among the assets.