Chicago Lumber Co. v. Commissioner

CHICAGO LUMBER CO. OF OMAHA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Chicago Lumber Co. v. Commissioner Docket No. 28516. United States Board of Tax Appeals 18 B.T.A. 916; 1930 BTA LEXIS 2572; January 24, 1930, Promulgated *2572 1. Cost of an improvement partly on vacated streets and alleys held to be a capital expenditure. 2. A certain deposit for the purpose of guaranteeing observance of the rules of a trade organization held deductible as expense in the year in which it was forfeited. E. J. Svoboda, Esq., for the petitioner. Arthur Carnduff, Esq., for the respondent. LANSDON *916 The respondent has asserted a deficiency in income and profits taxes for the year 1920 in the amount of $6,497.02, of which approximately *917 $3,800 is in controversy. For its causes of action the petitioner alleges that the Commissioner erred: (a) In excluding from surplus in the computation of the statutory invested capital as of January 1, 1917, 1918, 1919, and 1920, an amount of $7,329.99, representing a portion of the values of depreciable assets at the various branch yards, which was not written off on the books or sustained at the depreciation rate agreed upon and approved by the office of the internal revenue agent in charge at Omaha, Nebraska, and used in connection with the following years: (b) In disallowing as a deduction from its gross income in 1920, *2573 $10,199.50, the cost of a flood wall, a portion of which was on streets and alleys not leased by the taxpayer and owned by and subject to be opened for use of the public at any time; (c) In disallowing as a deduction from its gross income in 1920 $3,000, a guaranty to the Lumberman's Service Bureau forfeited in 1920. FINDINGS OF FACT. The petitioner is a Nebraska corporation with its principal office at Omaha. In 1920 the petitioner constructed a cement flood protection wall at a cost of $10,193.50. Such wall was located on land owned by the petitioner and across two alleys which were vacated by ordinance of the city of Omaha on November 10, 1919. The petitioner owns all the property adjacent to the vacated alleys. In 1916 the petitioner deposited $3,000 with the Lumberman's Service Bureau as a guarantee that it would abide by the rules of that organization, of which it was a member. In 1920 it violated such rules and the Bureau declared the amount forfeited. The petitioner charged such amount off its books and, in its income-tax return for that year, deducted the same from its gross income as an ordinary and necessary expense incurred within the year. Upon audit*2574 of petitioner's income and profits-tax return for 1920, the Commissioner disallowed the cost of the flood wall and the forfeiture to the Lumberman's Service Bureau as ordinary and necessary expenses, made other adjustments of invested capital and income, and asserted the deficiency here in question, only a part of which is in controversy. OPINION. LANSDON: At the hearing of the proceeding the petitioner abandoned its first allegation of error. It follows, therefore, that the determination of the Commissioner in respect of the amount of $7,329.99 alleged to have been improperly excluded from invested capital for each of the years 1917 to 1920, inclusive, must be approved. The Commissioner disallowed the cost of the flood wall erected in 1920 on lands owned by the petitioner and alleys surrounded by such lands which had been vacated by ordinance of the city of Omaha as an *918 ordinary and necessary expense and held that the same was a capital expenditure. The petitioner contends that the usefulness of the wall depended on maintaining the entire structure intact; that the vacated alleys are subject to repossession and reentry by the city of Omaha at any time and, therefore, *2575 in relation to that part of the wall across such alleys it is merely a tenant at will, subject to be dispossessed at any time by the fee owner of the property. Under the laws of Nebraska title to a street or alley vacated by a city ordinance reverts to the owners of the adjacent property. Compiled Statutes of Nebraska, sec. 3574, at page 1197, construed by the Supreme Court of Nebraska in ; . We are of the opinion that the cost of the flood wall was a capital expenditure. As an incident to the operation of its business the petitioner, in 1916, became a member of the Lumberman's Service Bureau and deposited $3,000 therewith as a guarantee that it would observe all the rules of that organization. The record is clear that the amount remained in the assets of the petitioner until 1920; that it was recoverable in any year prior thereto; and that in 1920 it was forfeited by a violation of the rules of such Bureau, and charged off the books of the petitioner. The Board has hitherto held that an ordinary expense is not necessarily one that recurs regularly but is determined*2576 by the nature of the transaction in which it is incurred. . In the circumstances here we are of the opinion that the amount in question represents an expense incurred in 1920, and that it is a proper deduction from the petitioner's gross income for such year. Reviewed by the Board. Decision will be entered under Rule 50. MARQUETTE concurs in the result only. STERNHAGEN, VAN FOSSAN STERNHAGEN, dissenting: The facts are insufficient, in my opinion, to enable the Board to determine that the forfeiture of the $3,000 is an ordinary and necessary expense of carrying on the petitioner's business, as claimed. The Commissioner has officially determined that it was not and without knowing more about the deposit, the rules, the "guarantee," the violation, and the forfeiture, it seems to me that the Board can not say that the Commissioner was wrong. MORRIS, PHILLIPS, and MCMAHON agree with the above dissent. VAN FOSSAN, dissenting: In my judgment, the item arising from the forfeiture of a guaranty to the trade organization is not a proper expense deduction. It is not shown to be either an "ordinary" or a "necessary" *2577 expense within my understanding of the phrase.