Spinks Realty Co. v. Commissioner

SPINKS REALTY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Spinks Realty Co. v. Commissioner Docket Nos. 29879, 42185. United States Board of Tax Appeals 21 B.T.A. 674; 1930 BTA LEXIS 1816; December 12, 1930, Promulgated *1816 1. The depreciated cost of a certain building owned by the petitioner, removed in 1923 in order to obtain a 99-year lease upon the land held to represent cost of said lease to the petitioner, which should be capitalized and exhausted over the term of the lease. 2. Fees paid by the petitioner for services in securing said lease are capital expenditures and should be exhausted ratably over the term of the lease. Raymond R. Hails, Esq., for the petitioner. J. Arthur Adams, Esq., for the respondent. MARQUETTE *674 These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income tax asserted by the respondent in the amounts of $3,870.82 for the year 1923; $4,887.61 for the year 1924; and $720.09 for the year 1925. The facts were stipulated, from which we make the following findings of fact. FINDINGS OF FACT. The petitioner is a corporation, organized under the laws of California on June 24, 1919. Later in the year 1919 it issued a part of its capital stock in exchange for certain real estate located at the northeast corner of Fifth and Hill Streets in the city of Los*1817 Angeles, Calif., on which stood a three-story frame building. The fair market value of said frame building when the petitioner acquired it was $75,000 and the fair market values of the hot water equipment and lighting equipment therein were, respectively, $2,000 and $1,500. To and including October 31, 1923, the petitioner sustained depreciation on said building and equipment in the amount of $14,312.50. The depreciated cost of said building and equipment on November 1, 1923, was $64,187.50. When the petitioner acquired the real estate mentioned the building thereon was under lease to several tenants at rentals, the total of which was $58,350 per year. The gross rentals from said building for each of the years 1920, 1921, and 1922 were approximately $58,350. The operating expenses, including taxes, insurance and depreciation, for each of said years were about $10,000. Said leases expired in the year 1923. Prior to their expiration the petitioner was offered for renewals thereof for a five-year period, gross rentals of approximately $123,000 per year. The petitioner had been advised in the year 1923 and prior thereto that said building was considered a fire menace by the*1818 authorities of Los Angeles and that condemnation proceedings were contemplated. *675 On October 10, 1923, the petitioner leased said real estate to Glenn N. Deuel and G. M. Scofield for a term of 99 years, beginning November 1, 1923, at a rental of $4,000 per month for the first twelve months and $7,500 per month thereafter, the lessees to assume and pay all taxes and assessments on said property during the term of the lease. The lease also provided that the lessees should demolish and remove the said frame building then on said property and replace it at their own cost and expense with a 13-story fireproof building, and that said building or any other building that might thereafter be erected on the leased premises by said lessees should, upon the termination of said lease, whether by lapse of time, forfeiture or otherwise, "be and remain the absolute property of the lessor." The said lessees, or their assigns, in accordance with the terms of the said lease, demolished and removed said frame building in November, 1923. The petitioner in the year 1923 paid to the Charles G. Andrews Co. $6,500 and to Louis T. Clark $3,500 as commissions for their services in negotiating*1819 said 99-year lease, and it also paid, in 1923, $230.05 for miscellaneous expenses in connection with the negotiation of said lease. In the year 1924 the petitioner paid to the Title Insurance & Trust Co. $2,876.36 for services rendered by said company in connection with the negotiation of said lease. The petitioner, in its return of income for the year 1923, deducted as a loss the amount of $67,037.50, representing the depreciated cost at January 1, 1923, of the said frame building and equipment, and it also deducted as ordinary and necessary business expenses the amount of $10,230.05 paid in that year as commissions and miscellaneous expenses in connection with the negotiation of said 99-year lease. In its return for 1924 the petitioner deducted as an ordinary and necessary business expense the amount of $2,876.36 paid to the Title Insurance & Trust Co. in that year for services in connection with the negotiation of said 99-year lease. The respondent allowed as a deduction from income for 1923 the amount of $2,850 for depreciation of said frame building and equipment for the period January 1 to October 31, 1923, inclusive. He also determined that the depreciated cost of said*1820 frame building and equipment as of November 1, 1923, $64,187.50, together with the cost and expense incurred in connection with the negotiation of said 99-year lease, should be amortized over the life of said lease, and he allowed deductions therefor in 1923, 1924, and 1925 computed on that basis and determined deficiencies as above set forth. OPINION. MARQUETTE: The parties hereto have agreed that the petition in Docket No. 42185 should be dismissed, in so far as it relates to the year 1925 and an order to that effect will be entered. *676 The first question presented is whether the depreciated cost to the petitioner of the frame building and equipment which were demolished and removed from the premises which the petitioner leased to Deuel and Scofield should be capitalized and deducted ratably by the petitioner over the term of the lease, as contended by the respondent, or deducted in 1923 as a loss sustained in that year, as claimed by the petitioner. The respondent relies on the decisions of this Board in ; *1821 , and (affd., ), in which it was held that the unextinguished cost of certain buildings removed, or permitted to be removed, in order to obtain a long-term lease of the land on which the building was situated, represented cost to the lessor of such lease and should be deducted ratably over the term of the lease. The petitioner urges, however, that the Manning case, which was approved and followed in the Ward and Anahma Realty Co. cases, was predicated on the fact that the income of the taxpayers from the property under the 99-year lease was considerably better than their income from the property prior to the execution of the lease, and also better than they had any prospect of securing elsewhere, and that their only motive in entering into the lease was that of bettering their income from the property. The petitioners further say that during the year 1923, and prior thereto, they had been advised that the authorities of Los Angeles considered the building then on their property a fire menace and contemplated condemnation proceedings, and that*1822 the property with the old building on it was capable of producing greater annual net revenue than the petitioner received under the 99-year lease. Assuming that the Manning decision is susceptible of the narrow interpretation placed on it by the petitioner, it does not follow that the petitioner has placed itself outside of the scope of the case. The stipulated facts, which constitute the only evidence before us, show that the petitioner had been advised in 1923, and prior thereto, that its building was considered a fire menace by the authorities of Los Angeles, and that condemnation proceedings were contemplated, but they do not show that such proceedings were imminent or that they in any way induced or impelled the petitioner to enter into the 99-year lease which provided for the demolition of the building. Furthermore, the stipulated facts do not show that upon the execution of the 99-year lease the petitioner was in a less favorable position than it was before. It is true that the 99-year lease provided for a smaller annual rental than the petitioner could have secured for its frame building for the next five years, but it does not follow that a 99-year lease for $90,000*1823 per year is less favorable than a 5-year lease on the same property at $113,000 per year. We are unable to see any essential *677 difference between the facts of the instant proceeding and those of the cases cited, and we are of opinion that those decisions are decisive of this issue, and that the depreciated cost of the building and equipment in question represent cost to the petitioner of the 99-year lease and should be amortized over that period. The only other question is whether the several amounts expended by the petitioner in connection with the negotiation of the 99-year lease should be deducted as ordinary and necessary business expenses or capitalized and deducted ratably over the period of the lease. The status of expenditures of this kind has been before the Board on a number of occasions and the conclusion has been definitely reached and announced that they are capital expenditures and should be amortized over the terms of the leases in connection with which they were made. ; *1824 ; and . Decision will be entered for the respondent.