Tax Aspects of Acquisition and Disposition of Business Property
by ERNEST H. KENYON Principal, Omaha Office
Presented before the 28th Annual Tax Clinic of the Wisconsin Society of Certified Public Accountants, Milwaukee—November 1964
IN HIS TAX message to Congress in April of 1961, President Kennedy stated, "I therefore recommend that capital gains treatment be withdrawn
from gains on the disposition of depreciable property, both personal and real property, to the extent that depreciation has been deducted for such property by the seller in previous years, permitting only the excess of the sales price over the original cost to be treated as a capital gain."
The Revenue Act of 1962 included provisions that amounted to substantial
compliance with the President's recommendation, but only with respect to depreciable personal property.
Committee Reports on the 1964 Revenue Act explain the omission of real property from the previous recapture law as resulting from a recognition
of the problem in doing so where there is an appreciable rise in the value of real property attributable to a rise in the general price level over a long period of time. In other words, the impact of a rising economy was being recognized.
The Reports add that this year's Act takes this factor into account, and that it makes sure the ordinary income treatment is applied only to what may truly be called excess depreciation deductions.
This concept of excess depreciation obviously was pointed at investors who would acquire real estate with the intention of deducting accelerated depreciation against ordinary income, followed by an early sale of the property at a profit that would be taxed as capital gain.
It is the element of artificial profit created by the so-called excess depreciation deduction that is the principal target of new section 1250.
The measure of excessiveness (referred to in the law as "additional depreciation") is related to the length of time that the property was held.
If the property was held for one year or less, within the limit of the profit realized, all depreciation allowed or allowable after 1963 will be considered excessive and therefore will be recaptured and treated as ordinary income.
Although the new section uses the term "allowed or allowable" with