Allen W. Hinkel Dry Goods Co. v. Commissioner

ALLEN W. HINKEL DRY GOODS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Allen W. Hinkel Dry Goods Co. v. Commissioner Docket No. 9841. United States Board of Tax Appeals 10 B.T.A. 228; 1928 BTA LEXIS 4146; January 26, 1928, Promulgated *4146 A leasehold with four years to run from March 1, 1913, is not, in the circumstances of this proceeding, converted into a 14-year lease by reason of a conditional renewal clause therein. Stanley Spurrier, C.P.A., for the petitioner. P. M. Clark, Esq., for the respondent. LANSDON *228 The respondent has asserted deficiencies in income and profits taxes for the fiscal years ended January 31, 1921, and January 31, 1922, in the respective amounts of $422.31 and $4,328.36. The petitioner asserts that the respondent erred (1) in certain adjustments of invested capital, and (2) in disallowing any value of a certain leasehold at March 1, 1913, for amortization purposes. At the hearing the petitioner abandoned its contention as to the first alleged error and the only question submitted to the Board is the value at March 1, 1913, of the leasehold in question. FINDINGS OF FACT. The petitioner is a Kansas corporation, with its principal office at Wichita. On June 8, 1906, it leased a certain 6-story building and basement, to be erected by the lessor, and the lots on which such building was to be constructed, for a term of 10 years running from*4147 April 1, 1907, with conditional renewal privilege for a second term of 10 years. The rental for building and lots as above set forth was based on a return of 6 per cent on the value of the land, which it is agreed was $90,000, plus a 6 per cent return on the cost of the building and equipment, which is not disclosed by the record. The lessees were to pay all taxes and bear the cost of ordinary repairs. The renewal clause provided for a second 10-year term with rentals reserved at the rate of 6 per cent per annum on the value of the land and the cost of the buildings as ascertained by a revaluation as of the date of the expiration of the original lease. The renewal privilege was exercised at April 1, 1917, without any revaluation of the property. The second lease had no renewal clause. No bonus, other than the rentals reserved, was paid either for the original or the second lease. OPINION. LANSDON: The petitioner having abandoned its allegation of error as to adjustments of invested capital, it remains only for the Board to determine, for amortization purposes, the value, if any, of the *229 leasehold here involved at March 1, 1913. The record is clear that at*4148 the basic date such leasehold had a remaining life of only 4 years and 1 month. The petitioner contends that the renewal privilege in the original lease in effect extended the terms thereof for an additional 10 years and that the Board should find that whatever value there was in the lease at March 1, 1913, is exhaustible over a period of 14 years. If the renewal clause of the original lease had been unconditional, the petitioner's contention might be sound. Such, however, was not the case. The renewal privilege was conditional upon a revaluation of the property at the date of the expiration of the first lease. How such a revaluation was to be made is not in evidence, but it is clear that when made the petitioner, the resulting rental being satisfactory, might renew, but there is nothing to indicate that it was required so to do. On the other hand, had the new rental rate been uneconomic as related to the petitioner's purposes, it would have been at liberty to vacate the property without sacrifice or cost. We have heretofore held that a 99-year lease with a revaluation or recapture clause has no value that can be determined beyond the next succeeding revaluation date. *4149 . We think the same principle applies with even more force in the circumstances herein, and therefore hold that at March 1, 1913, the renewal privilege in the petitioner's lease was not a factor in the determination of value at that date. Since the only lease owned by the petitioner in the taxable years was acquired without cost subsequent to March 1, 1913, there is no basis for the computation of amortization. Judgment will be entered on 10 days' notice, under Rule 50.