Louis Pizitz Dry Goods Co. v. Commissioner

LOUIS PIZITZ DRY GOODS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Louis Pizitz Dry Goods Co. v. Commissioner Docket No. 46585. United States Board of Tax Appeals 22 B.T.A. 161; 1931 BTA LEXIS 2154; February 17, 1931, Promulgated *2154 The depreciated cost of buildings demolished allowed as a deduction. Wm. S. Pritchard, Esq., for the petitioner. L. W. Creason, Esq., for the respondent. TRAMMELL *161 This is a proceeding for the redetermination of a deficiency in income tax for the fiscal year ended January 31, 1925, in the amount of $8,271.86. *162 The question involved is whether the petitioner is entitled to a deduction on account of the demolition of two buildings. FINDINGS OF FACTS. Petitioner is an Alabama corporation, having its principal office in Birmingham. It was organized in 1897 for the purpose of engaging in the general mercantile business and has been continuously engaged in that business up to and including 1930. The corporation began business in a three-story brick building erected at the northwest corner of Nineteenth Street and Second Avenue in Birmingham within about six months from the date of its organization in 1897, and continued to occupy said building from said date to and including December 26, 1924. This building was known as the Smith building. Its legal description in "part of lots 2 and 3, block 98, according to the original*2155 survey of the City of Birmingham." This property had a frontage of 100 feet on the south side of Second Avenue, and 75 feet on the west side of Nineteenth Street. During the year 1915, the petitioner took over and opened up its business in the building known as the Erswell building. This represented merely an expansion or additional space taken over on account of the growing business. The Erswell property was improved with a four-story brick building adjoining the Smith property on the south. Its legal description is "lot 1, and parts of lots 2 and 3, block 98, according to the original survey of the City of Birmingham." The Erswell property had a frontage of 65 feet on the west side of Nineteenth Street to an alley, and had a depth of 100 feet. On March 14, 1919, the petitioner paid $100,000 as a part of the purchase price for the Smith building above described, pursuant to a contract previously entered into, and on July 30, 1920, paid the balance of the purchase price of $325,000 and received a warranty deed for the property. It was provided in the deed that the acceptance thereof by the grantee annulled and canceled the lease of the property executed by the grantor, *2156 but that the grantee would pay rent under said lease up to August 1, 1920. Under date of September 10, 1919, the petitioner acquired an option to purchase the Erswell property above described, and paid $10,000 therefor. During 1919 the petitioner made additional payments, making the total payment made during 1919, $22,000. In September, 1920, the petitioner made a payment of $46,250 on account of the purchase price. On October 15, 1921, the petitioner received a warranty deed to the property and made a payment of $167,000, making the total purchase price $235,750. *163 The petitioner set up on its books, representing the cost of the building situated on the Smith property, $30,000, and the cost of land as being $295,000, and likewise, at the date of acquisition of the Erswell property, the petitioner set up on its books as representing the cost of the building, $44,245.28 and as representing the cost of the land, $191,504.72. The parties stipulated that these allocations of the cost of the buildings were correct and we adopt the stipulation in that respect. I was also stipulated that the correct rate of depreciation is 7 per cent for the Smith property, and 5-5/9 per*2157 cent for the Erswell property and that the depreciated cost of the two buildings in question is $57,438.01. The petitioner, upon acquiring said properties, remodeled and repaired the two buildings by converting them into a single structure in order that they might better be used in the conduct of its business. The petitioner actually paid out, on account of the cost of the improvements and repairs on the two buildings, $25,000. The detail of the work done in the improvements of the buildings consisted in making the two buildings into one structure, opening up the walls between the buildings, placing iron beams and proper supports, the construction of elevators, the installation of a sprinkler system, and other remodeling work. The petitioner occupied the buildings in the conduct of its business from the date of acquisition and completion of the remodeling to and including December 26, 1924, at which time the petitioner began the demolition of the buildings in order to erect a new building. There was no salvage value on account of the demolition as the petitioner gave away whatever was left in order to have the buildings removed. The petitioner purchased the two properties*2158 here involved on account of the continual rise of rents which the petitioner desired to save and considered that it would be a good investment for the corporation. The petitioner, at the time of the acquisition of the properties here involved, did not have the intention of demolishing the buildings and rebuilding, but intended to conduct its business therein. The petitioner claimed a deduction in its income tax return on account of the demolition of the buildings, the depreciated cost as set out above, which amount the respondent disallowed. OPINION. TRAMMELL: The petitioner claimed a deduction in the taxable year 1925 on account of the demolition of its two buildings. In our opinion, the question as to whether the deduction is allowable depends upon a question of fact, that is, as to whether the petitioner intended *164 at the time of the acquisition of the buildings to demolish them and rebuild. On this question the regulations of the Commissioner, article 142, Regulations 45, 62, 65, and 69, provide as follows: When a taxpayer buys real estate upon which is erected a building which he proceeds to raze with a view to erecting thereon another building, it will*2159 be considered that the taxpayer sustained no deductible loss by reason of the demolition of the old building. As the Court said in the case of (Seventh Cirucit): We think the true test, in this and in similar cases, is the intention of the taxpayer. If he intends, at the time of purchase, to demolish and rebuild, then the cost of so doing must be considered as part of capital investment, which is consistent with the statute and the regulation. In this case we think it is clear that the petitioner, at the time of the acquisition of the properties, had no intention of demolishing the buildings. This view is supported by the fact that the petitioner paid out, very soom after the acquisition of the properties, $25,000 in improvements and betterments in order to make the properties more suitable for its trade or business. We also have the fact that the petitioner actually conducted its business in the buildings acquired for some years after acquisition, and from all the testimony we are convinced that the petitioner did not acquire the buildings with a view or intention of demolishing them, and we think*2160 that it must follow that as the buildings were demolished in 1925, the petitioner is entitled to a deduction from its income in that year of the depreciated cost of the buildings which amount is stipulated and set out in our findings of fact. Judgment will be entered under Rule 50.