Central Bank Block Ass'n v. Commissioner

CENTRAL BANK BLOCK ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Central Bank Block Ass'n v. Commissioner Docket No. 40984. United States Board of Tax Appeals 19 B.T.A. 1183; 1930 BTA LEXIS 2241; May 28, 1930, Promulgated *2241 The total amount of commissions paid by petitioner to its agent for services in procuring a lease contract, whereby it leased its property for a period of 50 years, should be spread ratably over such period and not deducted as an expense in the years in which paid, notwithstanding petitioner was on a cash receipts and disbursements basis. W. A. Sutherland, Esq., for the petitioner. P. M. Clark, Esq., for the respondent. TRAMMELL *1183 In this proceeding, the petitioner seeks the redetermination of deficiencies in income tax for the years 1924 and 1925 in the amounts of $1,249.99 and $58.28, respectively. The petitioner alleges (a) that the Commissioner erred in disallowing as a deduction from income for 1924 the sum of $10,000 paid in cash in said year as compensation for services rendered to the petitioner in making a lease of its property for a period of 50 years; (b) that if the Commissioner is held to have been correct in disallowing the deduction of $10,000 in 1924, he erred in allowing as a deduction from income for the year 1925 only the sum of $200 on account of commissions paid, instead of allowing a much greater sum based upon the*2242 total commissions paid for the securing of the said lease, amounting to $21,118.67, and based *1184 upon the present cash value in 1925 of the rentals under the lease for the year 1925, as compared with the then present cash value of the total rentals to be received for the total life of said lease. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of the State of Georgia, with its principal office and place of business at Atlanta. In 1922 the petitioner, through an agent, made a lease of its property for a period of 50 years, beginning in 1925, at the following annual rentals: First five years $29,948.22 Second five years 32,013.62 Third five years 34,079.02 Fourth five years 36,144.42 Fifth five years 38,209.82 Sixth five years $40,275.22 Seventh five years 42,340.62 Eighth five years 44,406.02 Ninth five years 46,471.42 Tenth five years 48,536.82 The lessor, who is the petitioner here, agreed to pay the total sum of $21,118.67 to its agent for the securing of the lease. The following amounts were paid in accordance with the agreement: $1,118.67 in 1922, $10,000 in 1923, and $10,000 in 1924, satisfying the*2243 obligation of the lessor to the agent. The petitioner deducted from income for 1922 in its return for that year the amount of $1,118.67 as an expense, and the amount of $10,000 from income for each of the years 1923 and 1924. The respondent audited the petitioner's returns for 1924 and 1925, and disallowed the deduction of $10,000 from income for 1924, on the ground that the lease did not become effective until 1925. The respondent further determined that the $10,000 paid in 1924 should be spread over the 50-year period, which was the life of the lease, and allowed one-fiftieth thereof, or the amount of $200, as a deduction from income for 1925. The deductions of $1,118.67 and $10,000 taken by the petitioner for 1922 and 1923, respectively, were not disallowed by the respondent. During the taxable years the petitioner was on the cash receipts and disbursements basis. OPINION. TRAMMELL: In the year 1922 the petitioner, acting through an agent, entered into a contract whereby it leased it leased its property for a period of 50 years at a stipulated annual rental, increasing with each 5-year period. As compensation for the services rendered in that connection, the petitioner*2244 agreed to pay to the agent total commissions of $21,118.67, which were paid in three installments as follows: $1,118.67 in 1922, and $10,000 in each of the years 1923 and 1924. The lease contract became operative in 1925, that is to say, the 50-year period began to run in that year. *1185 The petitioner contends that the amount of the commissions paid represents an expense and, since it was on a cash receipts and disbursements basis, it is entitled to deduct from income the amount paid in cash in each of the respective years. The petitioner's alternative contention is that the commission should be spread, if spread at all, to allow a deduction in each year in an amount which bears the same ratio to the total commission as the annual rental bears to the present worth of the total rental to be received and not ratably or one-fiftieth of the amount each year as contended by the respondent. The respondent takes the position that the expenditures in question resulted in the acquisition of a capital asset, and that the amount should be spread ratably over the life of the contract, resulting in an allowable deduction of one-fiftieth of the total amount for each year. The*2245 deductions of $1,118.67 taken for 1922 and $10,000 taken for 1923 were not disturbed by the respondent and those years are not before us. However, the respondent disallowed the deduction of $10,000 claimed for 1924, which is one of the taxable years, on the ground that the lease contract did not begin to run until 1925, and for the latter year the respondent allowed a deduction of $200, or one-fiftieth of the $10,000 paid in 1924. In , and , we considered at length situations which, in all material respects, involved the principle presented in the instant case. On authority of those decisions the contention of the petitioner, that it is entitled to deduct from income of each year the amount of commission paid in such year as ordinary and necessary expense, is denied, and the expenditure should be treated as in the nature of or analogous to a capital investment. The acquisition of something from which income will be derived in the future has a value in money's worth. It is property of a sort. See *2246 , and Its cost should be spread or amortized over the life of the lease contract in accordance with the factors which determine or affect the rate of exhaustion thereof. The Commissioner has treated the expenditure as a capital investment and has spread the deduction on account of exhaustion thereof ratably over the life of the lease on a time basis. The petitioner has not shown that such a deduction does not afford the "reasonable allowance" as provided by statute, nor do we find in the record evidence of any factor affecting the exhaustion of the lease other than the lapse of time. In this case it is not shown that any other factor affected the exhaustion. We therefore hold that the expenditure should be spread and allowed as deductions over the years of the lease on the time basis as allowed by the respondent. *1186 We have considered the case of Daly v. Anderson, decided by the District Court for the Southern District of New York, January 29, 1930, contrary to the view here expressed, but are unable to agree therewith. We see no reason to depart*2247 from our view as expressed in the above cited cases. The action of the respondent in denying a deduction for the year 1924 is approved, since the 50-year period provided in the lease contract did not begin to run in that year. For the taxable year 1925, the petitioner is entitled to a deduction from gross income in the amount of one-fiftieth of the amount of the total commission paid. The fact that the petitioner in good faith erroneously claimed and was erroneously allowed a deduction of $1,118.67 for 1922 and a deduction of $10,000 for 1923 can not operate to bar its right to proper deductions in the subsequent taxable years. . Reviewed by the Board. Judgment will be entered under Rule 50.