Starr v. Comm'r of Internal Revenue (In re Estate of Starr), Docket No. 59307.
| Decision Date | 30 June 1958 |
| Docket Number | Docket No. 59307. |
| Citation | 30 T.C. 856 |
| Parties | ESTATE OF DELANO T. STARR, DECEASED, MARY W. STARR, EXECUTRIX, AND MARY W. STARR, INDIVIDUALLY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Roy B. Woolsey, Esq., for the petitioners.
J. Earl Gardner, Esq., for the respondent.
Held, certain payments made under a ‘Lease Form of Contract’ for a sprinkler system are not deductible as rental expenses under section 23(a)(1)(A), I.R.C. 1939, but were capital expenditures.
Respondent determined deficiencies in income tax and additions to tax of Delano T. Starr and Mary W. Starr as follows:
+--------------------------------+
¦Year¦Deficiency¦Additions to tax¦
+----+----------+----------------¦
¦ ¦ ¦sec. 294 (d) (2)¦
+----+----------+----------------¦
¦1951¦$1,939.86 ¦$831.73 ¦
+----+----------+----------------¦
¦1952¦1,155.14 ¦429.05 ¦
+--------------------------------+
Delano T. Starr died after the petition was filed and his widow, Mary W. Starr, executrix of the last will and testament of Delano T. Starr, was substituted in his stead.
The sole issue for decision is whether payments made for the installation of a building sprinkler system in the amount of $1,240 for each of the years 1951 and 1952 are deductible as rental expenses within the meaning of section 23(a) (1)(A), I.R.C. 1939, or whether these payments are capital expenditures.
Delano T. Starr and Mary W. Starr were husband and wife during the years involved and resided at 131 East Hillcrest, Monrovia, California.
For the calendar years 1951 and 1952 Delano T. Starr and Mary W. Starr filed joint income tax returns with the collector of internal revenue at Los Angeles, California.
Throughout the period here involved Delano owned and operated the Gross Manufacturing Company, a sole proprietorship. Early in 1950 a general manager of the Gross Manufacturing Company suggested to Delano that insurance premiums on the building occupied by the company were quite large and should be reduced. The general manager suggested that some sort of sprinkler system be established in the building. Insurance premiums on the building occupied by the company were estimated to be in excess of $1,000 per year if the building was not protected by a sprinkler system. If the building was protected by a sprinkler system, the insurance premiums per year were estimated to be only $126.29.
On or about April 3, 1950, Delano T. Starr, doing business as Gross Manufacturing Company (hereinafter called petitioner), and ‘Automatic’ Sprinklers of the Pacific, Inc. (hereinafter called Automatic), entered into a written agreement which provided for the installation of a sprinkler system. The sprinkler system was installed under and pursuant to said written agreement. This written agreement provided in part as follows:
LEASE FORM OF CONTRACT
INDENTURE OF LEASE, Made this 3rd day of April 1950 by and between the ‘AUTOMATIC’ SPRINKLERS OF THE PACIFIC, INC., A corporation of the State of California, with an office at Los Angeles, California, hereinafter called the LESSOR and DELANO T. STARR, DBA GROSS MANUFACTURING COMPANY, having principal office at Monrovia, California, hereinafter called the LESSEE.
WITNESSETH:
That in consideration of the mutual covenants LESSOR and LESSEE hereto agree as follows:
ON THE PART OF LESSOR:
1. To install and lease for and during the term of five years from and after approval a wet pipe system of fire extinguishing apparatus, hereinafter referred to as the ‘system’ in certain buildings all as indicated on the plan and shown in the specifications hereto attached in the property owned and occupied by the LESSEE located in Monrovia, California. Legal description of the property is as follows:
2. The system to be installed by LESSOR will be in accordance with the provisions and conditions of the specifications attached hereto and made a part hereof consisting of two sheets, with the exceptions noted, if any. All materials will be of standard quality and the work herein specified will be done in a thorough and workmanlike manner under the rules and regulations of NATIONAL FIRE PROTECTION ASSOCIATION and subject to inspection and approval by PACIFIC FIRE RATING BUREAU acting as agent of both LESSOR AND LESSEE.
3. LESSOR shall inspect the system at least one (1) time per year after its completion and approval and LESSOR shall repair or replace at its own expense any part if found to be defective or worn out under ordinary usage, provided LESSEE has used due diligence in maintaining the system in proper working order.
ON THE PART OF LESSEE:
4. LESSEE shall pay to the LESSOR, or its successors or assigns at Los Angeles, California, an aggregate rental of SIX THOUSAND TWO HUNDRED DOLLARS ($6,200.00) during the term of this lease, payable as follows:
One Rental Payment of $1,240.00 payable May 1, 1950.
One Rental Payment of $1,240.00 payable May 1, 1951.
One Rental Payment of $1,240.00 payable May 1, 1952.
One Rental Payment of $1,240.00 payable May 1, 1953.
One Rental Payment of $1,240.00 payable May 1, 1954.
All deferred rentals shall bear interest at the rate of 6% per annum after maturity.
5. LESSEE shall use due diligence in maintaining the system in proper working order and in compliance with Insurance Companies' requirements. Should the system become impaired on account of lack of diligence on the part of LESSEE in properly maintaining same, or if changes or extensions to the system should be required by the Insurance Companies' on account of changes in construction of, or extensions to the buildings, or on account of changes in the contents of the buildings, LESSEE shall notify LESSOR thereof in writing, whereupon LESSOR shall make the required changes in the system at the cost and expense of the LESSEE as soon after receipt of such notification as is practicable. The rentals becoming due and payable during the remainder of the term of this lease shall thereupon be increased in the amount sufficient to reimburse LESSOR for the materials furnished and labor performed.
6. The rentals stipulated in this lease are based on the assumption that the work of installing the system shall be done only during regular working hours. If overtime work is requested by the LESSEE, the same shall be paid for by the LESSEE as additional rental at the time the next rental payment or payments become due after the performance of such overtime work.
7. LESSEE will furnish at his own expense, as and where required by the LESSOR, all necessary space for the storage and handling of materials and proper facilities for the speedy and efficient prosecution of the work, including the services of watchman; also light, heat, local telephone service and (when available) elevator service, and unless expressly excepted, all painting, (both as to labor and materials), and permits as required by LESSOR for the installation of the system, and the sufficiency of all thereof both old and new including the property herein proposed to be equipped, is warranted by LESSEE.
8. LESSEE agrees that, if prior to the completion of the installation, the work be discontinued by reason of strikes, lockouts, action of the elements, or any cause not LESSOR'S Fault, there shall, at LESSOR'S option, be due and payable by LESSEE to LESSOR upon its demand, a sum equal to the full aggregate rentals stipulated herein less an allowance to be made by LESSOR for materials, labor and expense not supplied or incurred.
9. LESSEE will supply at his own expense throughout the term of this lease, all necessary water, steam, heat and power required to keep the system in proper working order, including sufficient heat to prevent freezing and will exercise due care and diligence in protecting the same from impairment, injury or destruction.
10. LESSEE will also promptly pay when due and payable, all taxes and assessments of every kind levied upon the land, buildings and contents protected by the system and in lieu of additional rent, upon the system itself and will keep the system (and the materials and component parts thereof during installation) at all times full (sic) insured in satisfactory insurance companies to at least an amount equal to the sum of the total unpaid rentals under paragraph 4 against loss by fire, lightning and wind storm, making ‘loss, if any, payable to ‘Automatic’ Sprinklers of the Pacific, Inc., or its successors or assigns, as its interest may appear'; and deliver to LESSOR the policies for such insurance. In the event LESSEE fails to maintain insurance and/or to deliver to LESSOR the said policies, LESSOR may so insure the premises, including the system for its own benefit to the amount of its interest at the time, and pay the premiums therefore (sic) and upon payment of such premiums by the LESSOR, the same shall forthwith become due and owing from LESSEE to LESSOR without demand. LESSEE shall bear the risk of loss of said property and system from any cause whatsoever.
11. LESSEE will not alter, remove or dispose of, or permit the use by others of, the system, or any part thereof, without the written permission of LESSOR, and no discontinuance of ownership or operation of the plant or premises by LESSEE shall terminate or affect the liability of LESSEE hereunder.
12. It is hereby expressly understood and agreed that title to the system and all its component parts and materials shall be and remain indefeasibly vested in ‘AUTOMATIC’ SPRINKLERS OF THE PACIFIC, INC., its successors or assigns, and said system shall not be or be deemed to be, a part of or incorporated into the real estate or be deemed to be a fixture.
THE LESSOR AND LESSEE MUTUALLY AGREE:
13. The following shall be deemed events of default: Failure of LESSEE to make rental payments or otherwise comply with obligations of this lease;...
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