occupancy requirement. There are certain exceptions under section. 1034, but these have been carefully specified in the statute. For example, in cases where the taxpayer begins construction of his new residence within the required one-year period, the statute allows him 18 months in which to occupy the property (sec. 1034 (c) (5)). Also, members of the Armed Forces who serve on extended active duty are allowed a 4-year period under the statute in order to comply with the purchase and occupancy requirements (sec. 1034 (h)).

In the most relevant case (cited by the President's counsel on this point), United States v. Sheahan, 12 AFTR 2d 5654, 323 F. 2d 383 (5th Cir. 1963), the court held that the taxpayer was not entitled to nonrecognition treatment. There the taxpayer, a civilian Army doctor, sold his home in Missouri in anticipation of his retirement from his Army post. The Army told him that he would be free to leave as soon as a replacement physician could be found. The taxpayer then purchased a residence in Atlanta, Georgia. He did not occupy the premises within the required period, however. Although the court did not question the taxpayer's good faith and intent to occupy the property, it held that this was not enough to override the clear statutory mandate concerning occupancy. 12 See also Rev. Rul. 69-434, supra (where the taxpayer's failure to comply was not excused even though he was prevented from occupying his new property because he was on a 2-year assignment in another city).

Basis adjustment for "allowable" depreciation

The President reported $142,912 of gain from the sale of his New York apartment on his 1969 tax return (then seeking nonrecognition treatment of this gain). This figure was based on the sales price for his cooperative apartment of $312,500 less $169,588, consisting chiefly of the President's acquisition cost of the stock, the costs of certain improvements to the apartment and miscellaneous items. There were no downward adjustments made to this basis because of depreciation resulting from the claimed partial trade or business use of the property. As discussed above, for the years from 1963 through and including 1968, the President deducted a portion (approximately one-fourth) of the maintenance expenses of the apartment as trade or business deductions. Thus, the President was entitled to deduct an allowance for depreciation based on approximately one-fourth of the value of the apartment and its improvements (under sec. 167 of the Code).14

13

In fact, the President did not claim a deduction for depreciation in 1968 or earlier years. Nonetheless, the allowable depreciation must reduce the President's basis in his stock and other property. Section 1016(a) (2) of the Code provides for an adjustment to basis for depreciation and amortization to the extent that such depreciation and amorti

12 At least part of the delay in occupying the new residence was caused by the fact that the taxpayer was not released from his Army post as quickly as he had expected. The taxpayer apparently did not rely on this argument, but the court was aware of this fact when it made its decision.

13 The staff has examined the President's tax returns and/or the accountant's work papers for the years 1964 through 1968 and has confirmed or is satisfied that maintenance expenses were taken as business dedu ctions for each of these years. The staff has asked for the tax return and/or the accountant's work papers for the taxable year 1963 (in which the cooperative apartment was purchased by the President), but have not been furnished either of them. Based on what the staff has examined for the taxable years 1964 through 1968 and from its interview with the President's accountant, the staff has no indication that a similar deduction for business use of the apartment was not taken in 1963 and, accordingly, has used this year as well in recomputing the allowable depreciation.

This result is not changed because the President held the apartment through means of stock in a cooperative housing corporation since section 216(c) of the Internal Revenue Code allows a pass-through of otherwise allowable depreciation to the tenant-stockholder of a cooperative housing unit, in this case the President.

zation were allowed as a deduction in computing taxable income (and results in a reduction of the taxpayer's taxes), but provides that in any event the adjustment is to be "not less than the amount allowable under this subtitle or prior income tax laws." Thus, it is quite clear under the statute that an adjustment to basis on account of allowable depreciation and amortization is required even where the taxpayer did not claim such depreciation and amortization on his tax return. This conclusion is supported by a long line of precedents; the leading case, for example, is Virginian Hotel Corp. v. Helvering, 319 U.S. 523 (1943). Regulations under section 1016 provide that where no deduction for depreciation is claimed (or has been claimed in prior years), the straight-line method of depreciation shall be used for purposes of computing the amount of depreciation which was allowable (Regs. 1.1016-3 (a) (2)).

Thus, it is clear that the President's basis should have been adjusted downward during the years 1963 through 1968 in the amount of $8,936, computed as follows:

1 Depreciation is computed in accordance with Regs. § 1.216-2, relating to the treatment of stock of a tenant-shareholder (in a cooperative housing corporation) as depreciable property. Depreciation was computed using the straight-line method based upon the following factors: (1) 10,600 shares of stock issued by the cooperative corporation; (2) 770 shares purchased by the President for $100,000; (3) an indebtedness of the corporation to be taken into account in the amount of $230,000; (4) land in the amount of $425,142, and (5) a 35-year building life. The staff has not examined the facts and determined the taxpayer was entitled to deduct 25 percent of the maintenance expenses at the apartment as business expenses. Rather, the staff has merely applied the statute governing adjustments of basis to the taxpayer's own determination that there was a 25-percent business use of the apartment.

Leasehold improvements were amortized using an estimated life of 15 years.

a A half year's depreciation was computed because the apartment was purchased on May 14, 1963.

4 Expenses for the leasehold improvements were incurred during the later part of the year and therefore no amortization was computed for 1963.

3. Summary of staff conclusion

As a result of the above analysis, the staff concludes that the nonrecognition of gain provisions on the sale of a residence (under sec. 1034 of the Internal Revenue Code) are not applicable to the gain on the sale of the President's New York apartment. In addition, the basis of the stock of the New York apartment should be reduced by $3,366 and the basis of the leasehold improvements should be reduced in the amount of $5,570 to take into account the depreciation and amortization "allowable" for 1963 through 1968. Consequently, the tax return of President Nixon for 1969 should be adjusted to reflect a long-term capital gain of $151,848 (sales price of $312,500 reduced by the adjusted basis of $157,924 and legal fees and miscellaneous expenses of sale amounting to $2,728).

PART FOUR

ITEMIZED DEDUCTIONS FOR BUSINESS USE OF RESIDENCES, DEPRECIATION OF CERTAIN FURNITURE, AND EXPENSES OF OFFICIAL PRESIDENTIAL FUNCTIONS

1. Scope of Examination

In each of the 4 years under examination, the President claimed on his tax returns deductions for certain business expenses. These deductions related to 4 different expenditure categories.

(1) A deduction was claimed for the use of the President's San Clemente residence as an office for 25 percent of the operation and maintenance of the residence, including depreciation of the residence. and furnishings.

(2) A deduction was claimed for 100 percent of operating costs, including depreciation, for the business use of one residence at the Key Biscayne compound.

(3) A depreciation deduction was claimed on a table the President personally purchased, which is used in the Cabinet room in the White House.

(4) A deduction was claimed for "expenses incurred in the performance of official functions as President of the United States of America,' which are the so-called guest fund expenditures (which primarily include expenses for the first family's food when they are away from the White House).

Table 1 shows the total deductions claimed with respect to the four categories of expenses for the four years under investigation.

TABLE 1.-ITEMIZED DEDUCTIONS FOR BUSINESS USE OF RESIDENCES, DEPRECIATION OF CERTAIN FURNITURE, AND EXPENSES OF OFFICIAL PRESIDENTIAL FUNCTIONS

All of the above expenses were claimed under the category of miscellaneous itemized deductions on the tax returns filed by the President for the years indicated.

2. Analysis of Tax Treatment

Several provisions of the Internal Revenue Code govern the deductibility of expenses of the type the President incurred in connection with the Key Biscayne and San Clemente properties or in connection with "the performance of official functions as President of the United States." Generally, there are three relevant classifications of these expenses for tax purposes: (1) expenses incurred in connection with carrying on a trade or business; (2) expenses incurred for the produc

tion of income or for the management, conservation, or maintenance of property held for the production of income; or (3) expenses incurred as nondeductible personal, living, and family expenses.

Section 162 of the Code allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."

With respect to the trade and business deductions of an employee, section 62(2) of the Code provides that certain of these expenses are deductible in computing adjusted gross income. Generally, these expenses are for (1) expenses paid or incurred in connection with the performance of services as an employee under a reimbursement or expense account allowance with his employer; (2) expenses for travel, meals, and lodging, while away from home, which are paid or incurred in connection with the performance of services as an employee; (3) transportation expenses paid or incurred in connection with the performance of services as an employee; and (4) the trade or business expenses of an outside salesman. All other "trade or business expenses" of an employee are deductible as an itemized deduction in computing taxable income rather than as a deduction in computing adjusted gross income for purposes of section 62 of the Code.

Section 212 of the Code allows, for individuals only, a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; or (3) in connection with the determination, collection, or refund of any tax."

Section 262 of the Code provides that, except as otherwise expressly provided, no deduction shall be allowed for personal, living, or family expenses. Personal and family expenses for which a deduction is expressly allowed under the Code include, for example, certain medical and dental expenses, certain household and dependent care services which are necessary to enable the taxpayer to be gainfully employed, and certain moving expenses incurred in connection with obtaining a new principal place of work.

Section 274 of the Code provides special limitations with respect to the deductibility of entertainment, amusement, or recreation expenses which would otherwise qualify as a trade or business expense.

Section 167 of the Code allows a deduction for the depreciation of property used in a trade or business (as in Sec. 162) or held for the production of income (as in Sec. 212).

Thus, any expense or depreciation amounts, which are deducted by the President, must represent ordinary and necessary expenses either for the carrying on of a trade or business or for the production of income.

Trade or business expenses

The fundamental requirements for the allowance of a deduction under section 162 are that the expense must be (1) incurred in carrying on a trade or business, (2) ordinary and necessary, and (3) paid or incurred within the taxable year.

1 With respect to this portion of the examination, the staff found the above-mentioned classifications exhaustive and, therefore, did not have to consider the classification of an expenditure as a capital expenditure for which a deduction would not be allowed under section 263 of the Code.

2 Section 162 (a) of the Code contains specific rules to determine the place of residence for a Member of Congress and limits deductible away from home living expenses to $3,000 a year. The provision does not by its terms apply to the President.