Reference no: EM131091896

Taxpayer, LLC ("Taxpayer") bought land for $300,000 on January 17, 1988 and constructed a building containing residential rental units on a weekly, monthly, seasonal, and annual basis ("RENTACRE") which was placed in service on June 13, 1988. Taxpayer's costs to construct the building were $700,000 which include, but are not limited to, construction material costs, legal fees for negotiating the purchase of the land, and salaries for laborers in the preparation of the land and construction of the building. In 1989, a tax lawyer retained by Taxpayer for $5,000 gave Taxpayer an opinion that stated that Taxpayer could use both the cost of the land and the costs of construction of RENTACRE in Taxpayer's basis for the purpose of depreciating RENTACRE because both costs were incurred in the same tax year and were related to the same commercial venture. Taxpayer's accountant agreed with the legal opinion and filed Taxpayer's 1988 taxes using $1,000,000 as the depreciable basis for RENTACRE.

1. Is the legal opinion given to Taxpayer and the use of basis by the accountant for the 1988 tax year correct? Explain your answer.