Cotton v. Commissioner

ANNA J. COTTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Cotton v. Commissioner Docket Nos. 45005, 51393. United States Board of Tax Appeals 25 B.T.A. 1158; 1932 BTA LEXIS 1416; April 15, 1932, Promulgated *1416 1. Held, that the evidence fails to support a claim for accelerated depreciation of hotel property owned by petitioner in the taxable years. 2. In the circumstances herein a mineral lease abandoned in 1926 resulted in loss, if any, in that year. M. A. Matlock, Esq., for the petitioner. Nathan Gammon, Esq., for the respondent. LANSDON *1158 Income tax deficiencies for 1927 and 1928 in the respective amounts of $210.65 and $4,219.66 are at issue in these consolidated appeals. In each case the proper rate of depreciation and obsolescence allowable to petitioner upon hotel property is an issue; also, the further question of whether or not a net business loss was sustained in 1927 which could be carried over as a deduction from income in 1928. *1159 FINDINGS OF FACT. The petitioner is the widow of Almon Cotton, who died March 5, 1922, leaving certain property and interests to which she succeeded. Included in such property was a mining lease in the State of Arkansas, which decedent acquired in 1919, and was engaged in developing at the time of his death. She continued such work until the fall of 1926, at which time, being*1417 convinced that the project was too expensive for profit, she abandoned it. From its acquisition in 1919 to September, 1926, when the petitioner abandoned it, she and the decedent together expended $139,675.38 in development work on this lease. For those years petitioner and her husband each claimed and were allowed deductions for such expenditures from their Federal income-tax returns as business expenses. Other expenditures, amounting to $19,619.40, made in the building of a flotation plant, mill and foreman's cottage, were capitalized and exhausted through deductions claimed and allowed as depreciation at the rate of 20 per cent per annum, the final deduction on such account being for 1927, following abandonment of the lease. Involved in our inquiry is certain community property which the petitioner and her husband owned at the time of his death. Included therein was a ten-story concrete and brick hotel, located in the heart of the business district of Houston, Texas, which was leased upon a profit-sharing basis. This hotel was built by Almon Cotton in 1913 and was then modern in every respect. Two years later the Rice Hotel, was built three blocks away; and more recently*1418 the Texas State Hotel of 10 or 12 stories has been erected just across the street. Within a radius of three blocks including petitioner's hotel are located a number of modern skyscraper office buildings, including the Second National Bank and the Gulf and the Eperson buildings, the latter two being respectively twenty-five and twenty-eight stories in height. The yearly rentals derived from the Cotton Hotel, based upon its earnings, from 1920 to 1928, inclusive, were as follows: — 1920 — $52,280.70 — 1921 — 44,448.21 — 1922 — 46,329.54 — 1923 — 44,715.08 — 1924 — 43,639.93 — 1925 — $37,941.21 — 1926 — 34,993.03 — 1927 — 31,006.50 — 1928 — 20,762.37 Based upon a cost of $302,992, the petitioner and her husband before her have claimed and been allowed as deductions from gross income in each year prior to 1927 an amount equal to 2 per cent of such valuation representing depreciation and obsolescence of the hotel building. For the years in question the petitioner claims the right to increase such deductions to 3 per cent on account of accelerated *1160 obsolescence of such property brought about by business changes affecting its economic usefulness. This claim has been disallowed*1419 by the respondent. OPINION. LANSDON: The petitioner contends that changed conditions have accelerated obsolescence and shortened the useful life of her hotel property by one-third. She therefore claims the right to depreciated deductions on such account from net income in each of the taxable years at the rate of 3 per cent on the cost thereof. No evidence has been introduced to show that conditions have permanently changed for the worse in respect to the petitioner's property since it was opened up as a hotel in 1913. That it has not greatly suffered from destructive competition is indicated by the fact that its greatest earnings were in 1920, five years after the building of the Rice Hotel. The evidence also shows that the operation of the Texas State Hotel across the street helped rather than injured its business. The falling off of revenues, of course, is no evidence, per se, of a shortening of the property's economic life. The witness, E. C. Cotton, who was petitioner's business manager, testified that in his opinion the hotel business was overdone in Houston. Even if this is true, it would not establish obsolescence or accelerated depreciation of petitioner's*1420 properties. In the absence of proof to show that the true economic life of this property is shorter than determined by the respondent, we affirm the respondent's determination on this issue. ; ; ; . The petitioner contends that she sustained a business loss in 1927 in the amount of $139,675.38 as a result of expenditures made by her deceased husband and herself in developing a mine which was abandoned in September, 1926. Although the abandonment was in 1926, she contends that, because of a provision in the lease which allowed a six-month suspension of work before subjecting her interests in it to forfeiture, the loss did not occur until after the lapse of that period, which ended in 1927. In this contention she has overlooked the fact that her interests in that property were not terminated by forfeiture, but that she voluntarily abandoned it on September 8, 1926. Her son, who was her manager and in full charge of the work at the mine, when asked the question: "Was it your intention*1421 to go back and resume operations later?" answered: "No, I did not go back for it cost too much money to get the equipment." This voluntary abandonment, with the intent indicated, terminated the petitioner's interests in the lease, as and from that date without awaiting further lapse of time or invoking involuntary forfeitures. ; ; ; ; ; ; ; ; ; ; ; ; . Inasmuch as the petitioner has failed to establish the loss contended for in 1927, it follows that there was no resulting net loss which she was entitled to carry forward in reduction of her taxes in 1928. Decision will be entered for the respondent.