Panhandle State Bank v. Commissioner

Panhandle State Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent Panhandle State Bank v. Commissioner Docket No. 90606 United States Tax Court 39 T.C. 813; 1963 U.S. Tax Ct. LEXIS 194; February 14, 1963, Filed *194 Decision will be entered for the petitioner. Held, at the time of purchase, petitioner did not intend ultimately to demolish the building situated on the property purchased by petitioner in 1952 and an allocation of the purchase price between the building and the land was proper. Petitioner's purpose in subsequently removing the building was due to a change in circumstances that made use of the building for a drive-in banking area and for a bookkeeping department economically unfeasible. Held, further, the value allocated by petitioner to the building for purposes of depreciation was reasonable. The undepreciated cost of the building demolished in 1957, less amount which petitioner received for salvage, is deductible as a loss incurred. Wentworth T. Durant, Esq., Leslie C. Hackler, Jr., Esq., and George S. Atkinson, Esq., for*195 the petitioner. Roy E. Graham, Esq., for the respondent. Black, Judge. BLACK *814 Respondent determined a deficiency in petitioner's income tax for 1957 in the amount of $ 6,309.62. The only adjustment is explained in the notice of deficiency as follows: (a) It has been determined that you did not sustain a loss of $ 12,133.89 from demolition of building as claimed in your income tax return for the taxable year 1957. The single issue presented for decision is whether or not petitioner sustained a deductible loss due to the demolition of a building in 1957 and, if so, how much was the loss sustained. FINDINGS OF FACT. A stipulation of facts, together with exhibits attached thereto, was filed by the parties and is incorporated herein by this reference. Petitioner is a state bank organized and existing under the laws of the State of Texas with its principal place of business in Borger, Tex. Petitioner filed its Federal income tax returns for the calendar years 1952 through 1957 with the district director of internal revenue, Dallas, Texas. On April 8, 1952, the board of directors of the Panhandle State Bank authorized the bank to purchase a 2-story frame stucco building*196 located on lots 1, 2, and 3, block 35, original townsite, Borger, Tex., from L. J. Vogle for a consideration of $ 40,000. The building was one-half block away from the bank's existing bank building. The lower portion of the building was built prior to 1936 and was used as a bowling alley at the time petitioner acquired the building. The second floor of the building was added to the original building about 7 or 8 years prior to the bank's purchase of the building but the second story covered only about half of the lower floor. The second story had four apartments in it. The bowling alley was rented for $ 350 per month at the time the bank purchased the property. The four apartments on the second floor of the building were also rented, but the record is silent as to the amount of rent collected from the apartments. The bank purchased the property on April 8, 1952. It purchased it for banking use and at that time had no intention to demolish the building. At that time the board of directors of the bank intended to use the existing building for drive-in banking and as a bookkeeping department. The board considered constructing a tunnel from its main building under the offices*197 of another concern to the newly purchased *815 building. Under State banking laws a tunnel between two noncontiguous bank facilities is required. At the time of purchase the building was insured for $ 20,000. On December 12, 1952, the bank obtained real estate appraisals on the property from two realty companies. The realty companies' appraisals separated the values of the first and second floors of the building. The bowling alley on the first floor was estimated to be worth $ 18,000 and the second floor was estimated to be worth $ 7,500. These valuations were reasonable. The appraisals were silent as to the useful life of the building. The bank filed its 1952 income tax return on March 9, 1953, and claimed depreciation on the building based on an 8-year useful life at a value of $ 25,500. It claimed and was allowed depreciation on the building in the same manner in subsequent years up to 1957. Sometime after purchasing the property the board of directors determined that it would not be economically feasible to construct a tunnel to the newly acquired building. Petitioner, a state bank incorporated within the State of Texas, is allowed to acquire and hold land for only*198 three purposes: (1) The bank may own land for its own bank buildings, (2) may acquire land for debts, and (3) can own real estate for a future bank site. Petitioner repaired the building's roof in 1953 at a cost of $ 1,400. In 1954 the tenants of the bowling alley moved out and the bank converted the first floor of the building into an indoor parking area at a cost of $ 4,289.43. The bank put overhead doors on the north and east sides of the building for ingress and egress of automobiles. By 1957 the condition of the building was deteriorating rapidly. Children and vandals were entering the parking area and causing damage. The parking area was dark and the people were afraid to park there. There was also the danger of children being injured in the building. Police protection of the area was difficult to maintain. By 1957 the apartments were no longer being rented. The board of directors of the bank decided to demolish the building in 1957 and use the lot as an outdoor parking area for bank officials and customers. In petitioner's income tax returns for the taxable years 1952 through 1957, petitioner's claimed depreciation on the building was based upon a $ 25,500 value with*199 additions of $ 1,400 for a new roof put on in December 1953 and the remodeling of the lower floor in October 1954 at a cost of $ 4,289.43. Petitioner was allowed depreciation on the building and additions from 1953 to 1957, inclusive, totaling $ 18,955.54. The building was sold for salvage on April 25, 1957, for $ 100 with the agreement that the purchaser would remove the building. Sometime thereafter the board of directors decided to build a new bank building on the property. In 1957, the year the building was demolished, petitioner claimed a $ 12,133.89 unrecovered cost basis *816 in the building in its income tax return. At the time of the trial of this case, petitioner was building a new $ 800,000 combination brick, stone, glass, and marble building for a new bank building on the property through a corporate nominee. OPINION. Petitioner claims a deduction in the year 1957 in the amount of $ 12,133.89 as a loss due to the demolition of a building in that year. Such amount represents the undepreciated cost of said building at that time, less amount received for salvage. Petitioner had purchased a piece of property in 1952 with a building situated thereon. Of the purchase*200 price of $ 40,000, $ 25,500 was allocated to the building and the remainder was allocated to the land. From the date of purchase to the date of demolition, petitioner made improvements and repairs to the building totaling $ 5,689.43 and deducted $ 18,955.54 as depreciation. Respondent contends that petitioner intended ultimately to demolish the building acquired in 1952 at the time of purchase and that accordingly no part of the purchase price should have been allocated to the building and hence petitioner has incurred no deductible loss. Respondent's counsel correctly stated, we think, in his opening statement at the hearing that: the overwhelming majority of the courts have held that if property is purchased with the intention of demolishing the buildings thereon, either immediately or in the future, the entire cost of the property is allocated to the land and no allocation can be made to the buildings for depreciation, and no loss occurs when the buildings are ultimately demolished. In Lynchburg National Bank & Trust Co., 20 T.C. 670, we said at pages 673, 674: Where, as here, there is a purchase of land with the intent to demolish a building *201 situated thereon and erect a new one, no part of the price paid is allocable to the building, since it is deemed that the building has no value to the purchaser and it is the land which is purchased and which alone has value. The entire purchase price, therefore, represents the cost of the land and becomes the purchaser's basis. N. W. Ayer & Son, Inc., 17 T.C. 631. The fact that a certain value was placed on the building at the time of purchase, that the buildings were rented and rent collected, and depreciation claimed is deemed immaterial. The original intention is the determining factor. * * * We were affirmed in that case, 208 F. 2d 757 (C.A. 4, 1953). The intent of the purchaser at the time of purchase, therefore, is of controlling importance. If, at the date of purchase, there was no intent to demolish the building, an allocation of purchase price between the building and the land is proper and the loss incurred in the subsequent demolition of the building is an allowable loss. Jack M. Chesbro, 21 T.C. 123 (1953), affirmed per curiam 225 F. 2d 674 (1955),*202 certiorari denied 350 U.S. 995 (1956). If a change in circumstances *817 makes the building unsuitable for its intended use the purchaser is entitled to a demolition loss in the year of demolition equal to the adjusted basis of the building decreased by the net proceeds of salvage, cf. William Heyman, 6 T.C. 799 (1946), and Income Tax Regs., sec. 1.165-3(b). We have carefully considered all the evidence in this proceeding and it seems reasonably clear to us that when petitioner purchased the property in question it had no intention to demolish the building which was on the land and use the land as a site for its bank building. When it purchased the property it intended to use the building for banking purposes but not to erect a new bank building thereon. It contemplated the connection of its main bank building with the building purchased by means of a tunnel, after making certain improvements. However, upon investigation it found that the plan to connect the two buildings with a tunnel was not feasible and the idea was abandoned. In 1957 it was decided to demolish the building and it was done. We think, under the facts*203 and circumstances stated in our Findings of Fact, that the petitioner is entitled to deduct the loss which it claims and we so hold. Decision will be entered for the petitioner.