Chicago Dock & Canal Co. v. Commissioner

CHICAGO DOCK & CANAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Chicago Dock & Canal Co. v. Commissioner Docket No. 48268. United States Board of Tax Appeals 32 B.T.A. 231; 1935 BTA LEXIS 977; March 14, 1935, Promulgated *977 1. Amounts expended by the petitioner in the fiscal year in question as brokerage fees and attorney fees incident to the execution of a 40-year lease on property owned by the petitioner constitute capital expenditures, deductible over the years of the lease, rather than ordinary and necessary business expenses, deductible in the year in which expended, even though the business of the petitioner was solely that of owning and leasing properties. 2. Amounts paid in the year in question as attorney fees and fees of an expert witness in accomplishing a reduction of a special assessment by the city of Chicago against the petitioner for alleged benefits resulting to petitioner's property from the widening of a street are ordinary and necessary business expenses and are deductible in the year in which expended. Harry B. Sutter, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. MCMAHON *231 This is a proceeding for the redetermination of a deficiency in income tax for the fiscal year ended April 30, 1928, in the amount of $4,256.66. It is alleged that the respondent erred in including in the taxable income of the petitioner an amount*978 of $23,256.73 alleged to represent commission paid by the petitioner for placing a lease on one of its properties, and an amount of $9,486.70 alleged to represent legal fees paid by the petitioner for services in securing the reduction of special improvement taxes. FINDINGS OF FACT. The petitioner is a corporation, with principal office at Chicago, Illinois. It was incorporated under a special act of the Legislature of the State of Illinois on February 12, 1857. Its charter provides that the petitioner has the power to exercise eminent domain, to erect buildings, machinery, wharves, docks, piers, etc., on the shores and in the navigable waters of Lake Michigan, to buy at private or public *232 sale and to hold perpetually any lands necessary for the purposes of the company, provided the land should lie in Kinzie's Addition to the city of Chicago and should not exceed 50 acres of land, exclusive of the land covered by water, to borrow money, to lease its land, and to sell all or any part of its lands and other property. After receiving its charter the petitioner acquired about 48 acres of land located at the mouth of the Chicago River in Kinzie's Addition to Chicago. *979 The petitioner then improved the property with docks and warehouse buildings, and proceeded to lease the same. The petitioner's income since its inception, and up to and including the fiscal year ended April 30, 1928, the year in question herein, has consisted entirely of the rent it has received from these leases, with the exception of some interest on reserve funds and similar items. Ever since its incorporation the petitioner has operated entirely through Ogden, Sheldon & Co., as agent, a company which has been engaged since 1836 in a general real estate brokerage and management business. Such company manages all the properties of the petitioner, collects its rents, takes care of the buildings, and usually negotiates the leases that are made. The petitioner has no paid employees except night watchmen. Its officers are not paid. Each director, except two, receives $5 for each directors' meeting. The petitioner did not operate its warehouses and docks as such. Its business was confined exclusively to making leases upon such property or the granting of rights of possession of such property. The petitioner did not pay commissions directly to Ogden, Sheldon & Co. for*980 procuring tenants. The services of that company were paid for on a basis of 5 percent of the amount of rents collected each year, and the charge was made at the end of each month. The duty of Ogden, Sheldon & Co. is to obtain tenants wherever possible; and where tenants are obtained through the efforts of that company, no additional charge is made. In some instances it has been necessary to obtain the assistance of outside brokers and in those cases brokers have been paid the regular real estate brokers' commission as provided for by the Chicago Real Estate Board. Where it is possible to do so the leases are drawn by Ogden, Sheldon & Co. and included in their charges, but sometimes, by reason of peculiarity of the lease, it becomes necessary to employ attorneys who make charges for drawing the lease. It has been the consistent practice of the petitioner to charge to expense these expenditures in connection with leasing. Outside of the expenses incurred for services rendered by Ogden, Sheldon & Co. and the additional occasional brokers' fees, the petitioner has had no other expenses, except such incidental expenses as it might incur in the repair of buildings, repairs on streets, *981 taxes, etc. *233 Even those items were all managed for the petitioner by Ogden, Sheldon & Co. From its incorporation up to the fiscal year in question herein, the petitioner made about 257 leases on its property. During each year there were 65 leases in effect. The 65 leases covered approximately two thirds of the property owned by the petitioner. The remaining one third of the property was unoccupied and unleased. Efforts were made by Ogden, Sheldon & Co. to procure tenants for such unoccupied premises. This company has often availed itself of the services of outside brokers. All the leading real estate brokers of Chicago in 1928 understood in a general way the conditions of occupancy of petitioner's property and understood that if they furnished a satisfactory tenant they would receive a commission therefor. During the year ended April 30, 1928, the petitioner entered into a lease of certain of its property with the Chicago Tribune Co. This tenant was furnished through the real estate brokerage firm of Clark & Trainer. That firm brought up the matter of such a lease with Ogden, Sheldon & Co. This lease was for a period of 40 years. The petitioner paid the*982 brokers a commission of $22,952 for procuring the tenant. The petitioner also employed the firm of Wilson & McIlvaine, attorneys, to draw the lease and paid them $500 therefor. The total expenses in connection with that lease aggregated $23,452.16. This amount was handled as an ordinary business expense and deducted on the petitioner's income tax return for the year ended April 30, 1928. The respondent disallowed the claimed deduction and allowed instead a deduction of $195.43, holding that it constituted a capital expenditure which should be spread over the life of the lease. In respect to these items the petitioner's return was consistent with its books. The gross rentals collected in the year ended April 30, 1928, amounted to $361,237.28. The petitioner had been assessed by the city of Chicago an amount of $65,149 for alleged benefits resulting from the widening of LaSalle Street. The petitioner's property lies east of Michigan Avenue, which is the main boulevard of Chicago running north and south. LaSalle Street is about five blocks west of Michigan Avenue and is also a north and south street. Representatives of Ogden, Sheldon & Co. did not think that the petitioner*983 was benefited in any way by the widening of that street, so they employed an attorney who was an expert in cases of that kind to contest the assessment. Mason was successful in having the County Court of Cook County, Illinois, disapprove the assessment as to one lot, amounting to $634, and in having the court reduce the major assessment to $22,286.46. The court *234 finally decided that there was this latter amount of benefit to the petitioner's property. It was the petitioner and not the tenant or tenants who opposed the assessment. The attorney was paid $8,886.70 for his services and a witness was paid $600 for expert testimony, a total of $9,486.70. Those expenses were incurred solely for services rendered to this petitioner, and were solely in connection with the reduction of the assessment of $65,149 to $22,286.46, and completely eliminating the assessment on lot 13. This item was taken as a deduction on the petitioner's return for the fiscal year ended April 30, 1928. The return was consistent with the books. The respondent disallowed this deduction, holding that it was not a proper deduction as a business expense. OPINION. *984 MCMAHON: The first question presented is whether the amount of $23,452.16 expended by the petitioner in the fiscal year ended April 30, 1928, as brokerage fees and attorney fees incident to the execution of a 40-year lease on property owned by the petitioner, constituted ordinary and necessary business expense for that year and hence was deductible in that year, or whether it constituted a capital expenditure, deductible over the years of the lease. It has been repeatedly held that such expenditures constitute capital expenditures deductible pro rata over the life of the lease. , and cases cited therein; ; ; affd., ; ; ; and . The petitioner, however, contends that those cases are distinguishable from the instant proceeding, since the business of the taxpayer involved in each one*985 of those cases was not solely that of leasing its own properties. Petitioner contends that since it was in such a business, the expenditure in question constitutes an ordinary and necessary expense of such business. We fail to see a valid distinction. While it is true that such an expenditure as this might be termed an ordinary and necessary expenditure in the petitioner's business, yet it can not be said that it was an ordinary and necessary expense of the business within the meaning of the revenue act. The benefit to be derived from the income-producing asset resulting from the expenditure in question was not confined to the taxable year ended April 30, 1928, but will extend over the years of the lease. This, as we construe the intent of the revenue acts, is the distinction between an ordinary and necessary business expense and a capital expenditure. See . As to this issue, the respondent's determination is approved. *235 The remaining question is whether the respondent erred in disallowing the deduction, in the year in question, of the amount of $9,486.70 representing attorney fees and fees paid to a witness for*986 expert testimony before the County Court of Cook County, Illinois, in accomplishing the reduction of the amount of a special assessment against the petitioner for alleged benefits flowing to the petitioner's property by virtue of the widening of LaSalle Street. The amount of the original assessment was $65,149, and the result of these expenditures by the petitioner was a holding by the court that the benefit resulting to the petitioner from the widening of such street amounted to only $22,286.45, and that the assessment should be the latter amount. The question is whether this expenditure of $9,486.70 constituted an ordinary and necessary expense of the petitioner's business, and, therefore, was deductible in the year in which expended. The question of what constitutes ordinary and necessary expenses was before the Supreme Court in . The Court there said: * * * Now, what is ordinary, though there must always be a strain of constancy within it, is none the less a variable affected by time and place and circumstance. Ordinary in this contract does not seem to mean that the payments must be habitual or normal in the sense that*987 the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack. Cf. * * * See also , and . We believe that the expenditure in question must be considered an ordinary and necessary business expense and, therefore, deductible. It is to be noted that the expenditure was not made for the purpose of obtaining benefits to the petitioner's property, but was for the purpose of reducing the amount of an assessment, reflecting the cost of those benefits, and that the assessment was, in fact, reduced. In our view, it is to be considered the same as any other legal or witness fee paid to reduce liability, whatever the nature of the liability. *988 ; . By virtue of this expenditure of $9,486.70, the petitioner obtained no asset which it did not have before, nor did any benefit flow to the property itself by virtue of the expenditure. The benefit to the property is measured by the reduced assessment of $22,286.45, and not by the attorney fees or witness fees. That this expenditure was an ordinary and necessary incident to the petitioner's *236 business of owning and leasing properties cannot, we think, be denied. In our opinion, it is equally clear that it was an ordinary and necessary expense of the business rather than a capital expenditure. This expenditure is not like the expenditure to obtain a lease, such as is involved in the first issue in this proceeding, the benefit of which, barring contingencies, is certain to be reflected over a fixed number of years. The deduction should be allowed. In principle, this view is supported by , and *989 See also ;; ; , affirmed on another issue in ; certiorari denied, ; ; ; ; ; and . Decision will be entered under Rule 50.