Corporation Reimburses Depreciation: Amount "Allowable"

Technical topics regarding tax preparation.
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Chay  
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I realize we already have quite a few threads on this forum that involve corporations reimbursing depreciation expense, but I think I have a novel question on the issue deserving of a new thread.

First let's get one thing out of the way: I take the position on the returns I file that depreciation is a valid reimbursable expense. I gather that opinion isn't shared by all practitioners. If you want to argue this point, I would refer you to this post, which you can feel free to respond to in that thread or this one.

Now on to my question: in light of the disallowance of unreimbursed employee business expenses, is the shareholder's residence actually being depreciated by the shareholder in a reimbursement situation?

As far as I can tell, the only Code section where the answer to this question would have any practical application is the "allowed or allowable" provision. So let's focus on that:

Section 1016(a)(2)
Proper adjustment in respect of the property shall in all cases be made
[...]
in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount—
(A) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and
(B) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer’s taxes under this subtitle (other than chapter 2, relating to tax on self-employment income), or prior income, war-profits, or excess-profits tax laws,
but not less than the amount allowable under this subtitle or prior income tax laws. Where no method has been adopted under section 167 (relating to depreciation deduction), the amount allowable shall be determined under the straight line method.

I think it's quite clear that when the shareholder receives tax-free cash in respect of depreciation expense, the home's basis must be adjusted downwards. But the wording in the above "allowed or allowable" provision is focused on the "deductions" claimed by "the taxpayer" and the extent to which deductions are allowable to that taxpayer. The shareholder isn't claiming any deductions—it's the corporation itself that's doing so. This makes the "allowable" part seem not to apply.

At first the question seems to be one of who "the taxpayer" is in the quoted section. If we stretch the boundaries of language, perhaps the term could be interpreted to include the corporation, and therefore the corporation's deductions. But in that case, it seems that the amount "allowable" would always be computed with reference to the amounts actually paid out in accordance with expense summaries submitted by the shareholder. If the shareholder under-reports depreciation expense, there would still be no gap between the amount "allowed" per the report and the amount "allowable" to the corporation.

So now we're led back to the question of whether the shareholder himself is actually depreciating the home. Regs. 1.62-2(d)(1) provides that accountable plans are applicable to "business expenses that are allowable as deductions by part VI (section 161 and the following), subchapter B, chapter 1 of the Code". By claiming a reimbursement for depreciation, the shareholder is claiming that the depreciation is an "allowable" expense. But what does that mean?

On the one hand, we could say it means that depreciation would be allowed if it were claimed, but that it wasn't actually claimed (and could not be claimed due to the new section 67(g)), so the reimbursement claim has no effect beyond making the receipt of cash from the corporation a non-taxable return of capital. On the other hand, we could say that the only way it "would be allowed if it were claimed" is if it were first "placed in service" for purposes of section 168, meaning that the home is being depreciated whether or not full reimbursement amounts are actually claimed, notwithstanding section 67(g).

So which is the correct position?
 

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