Peters v. Comm'r of Internal Revenue

• Decision Date: 30 April 1945
• Docket Number: Docket No. 4330.
• Parties: MARTHA R. PETERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

4 T.C. 1236

MARTHA R. PETERS, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 4330.

Tax Court of the United States.

Promulgated April 30, 1945.

1. In November 1939 petitioner acquired through the partial liquidation of a Massachusetts voluntary association, taxable as a corporation, an undivided interest in certain real property then under lease to the Woolworth Co. Held, the right to receive rental under the lease was acquired as an incident to the real property and the difference between the total rentals payable under the unexpired term of the lease and the estimated fair rental value for a like term was not acquired as a separate exhaustible asset (as claimed by petitioner), amortizable over the remaining term of the lease.

2. Held, prepaid insurance should be treated by a taxpayer on the cash receipts and disbursement basis as an asset to be exhausted ratably over the term of the insurance and not as an ordinary and necessary business expense of the year in which the premiums are paid. Harold L. Clark, Esq., for the petitioner.

C. A. Stutsman, Jr., Esq., for the respondent.

OPINION.

ARNOLD, Judge:

In this proceeding the Commissioner has determined an income tax deficiency for 1941 in the amount of $451.11. Two issues are presented: (1) Whether petitioner is entitled to an amortization deduction for exhaustion of the cost of ‘excess rentals‘ paid under a lease on real property, the fee of which was acquired November 14, 1939; and (2) whether petitioner is entitled to deduct prepaid insurance on various policies covering a period of three years from the date written in 1941 by a taxpayer on the cash receipts and disbursements basis, or only an

The Commissioner increased petitioner's income from rents by $1,247.76 in determining the deficiency herein, but made no adjustment with respect to exhausting petitioner's cost of ‘excess rentals,‘ as the right to this deduction was merely noted in schedule J of petitioner's return without any amount being deducted for amortization of the alleged cost to her of ‘excess rentals.‘

The term ‘excess rentals‘ referred to is the difference between the rentals payable under the existing lease and the rental value as claimed by petitioner under conditions existing at or about the time she acquired her undivided interest in the real property.

The facts were stipulated and are adopted as stipulated.

The petitioner's principal residence is Boston, Massachusetts. Her income tax return for 1941 was filed with the collector for the district of Massachusetts.

On or about June 22, 1910, petitioner acquired certain shares in the Phillips Estates Trust, hereinafter referred to as the trust, which is a Massachusetts voluntary association, created June 22, 1910, and subject to the provisions of the law of Massachusetts now contained in chapter 182, Massachusetts General Laws (Ter. Ed.). The trust is taxed as a corporation. The original corpus of the trust consisted of the real property mentioned below as distributed in partial liquidation, and other properties transferred to the trust by the recipients of shares of stock therefrom. On November 14, 1939, the trust made a partial liquidation of one of its principal assets, a parcel of real estate known as the ‘Phillips Building,‘ located in Boston, Massachusetts.

The partial liquidation was effected by the execution, delivery, and recording on November 14, 1939, of a deed dated November 13, 1939, from the ten trustees of the trust to Henry C. Brookings, to the use of the Several holders of shares or certificates of beneficial interest in the trust pro rata according to the number of shares held by each and in an exchange for the surrender to the said trustees for cancellation of one-half of the number of such shares then held by each of said beneficiaries.

The total number of shares of the trust outstanding immediately prior to the partial liquidation was 32,000, of which petitioner held 3,100 shares. Of the 16,000 shares surrendered in partial liquidation, this petitioner surrendered 1,550 shares for cancellation in exchange for the interests conveyed to her by the deed of November 13, 1939. For these shares the petitioner by said deed acquired a 155/1600 undivided interest in the property conveyed and transferred by the deed.

The property conveyed and transferred by the deed consisted of a parcel of about 16,407 square feet of land in the downtown retail shopping district of Boston. On November 13, 1939, this land had erected thereon a six-story brick and stone store and office building called the Phillips Building and numbered 120 Tremont Street.

The ‘said land and building was conveyed by said deed dated November 13, 1939, subject to a preexisting lease thereof made and executed by a predecessor sole trustee of (the trust) to F. W. Woolworth Company, a Pennsylvania Corporation, as lessor for a term of 30 years beginning September 1, 1923, and terminating August 31, 1953, and having an unexpired term, on November 14, 1939, of about 13 years, 9 months, 16 days; The lessor's interest in which lease was expressly assigned by said deed, together with the Lessor's interest under an Agreement of Guaranty duly executed by F. W. Woolworth Company, a New York Corporation, dated August 25, 1922, and annexed to said lease. This taxpayer received by said conveyance a 155/1600 interest in said land, buildings, lease and guaranty agreement.‘

Under the lease the tenant was obligated to pay for the unexpired balance of the term thereof a net rental of $130,000 per annum, payable in equal monthly installments plus the amount of municipal taxes assessed and to be assessed thereon during the term, and also the cost of insurance; plus an additional cash amount of $10,000 per annum during the last five years of the term, payable monthly.

The total cash rental to be paid over the balance of the unexpired term of the lease from and after November 14, 1939, was $1,843,277, in addition to which the lessee was obligated to pay as rent the amount of taxes and insurance payable on the demised premises.

In her 1941 income tax return petitioner claimed depreciation on the building acquired by the partial liquidation in the amount of $640.15. This amount was computed on a basis of petitioner's share of a 1939 value of $165,000 for the building and a remaining life in 1939 of 25 years. The Commissioner allowed depreciation on the building in the sum of $601.48, computed on petitioner's share of a value of $103,480.52 for the building and a remaining life in 1941 of 16 2/3 years, depreciated at a rate of 6 percent. The amount of depreciation allowed for the building is not in dispute.

In her 1939 return the petitioner, in reporting the partial liquidation, used a figure of $1,600,000 as representing a total value of the property distributed upon the liquidation. The same figure of $1,600,000 was used by the trust upon its information return, Form 996, filed pursuant to the liquidation. The Commissioner did not question the use of said valuation in petitioner's 1939 return.

On or before February 29, 1940, the property in question was appraised by two appraisers, who fixed a value for the land and buildings at $1,390,000. They valued the property without the existing lease at $500,000 and attributed the remainder of their appraised value to the earning power of the lease. The appraisal shows the assessed valuation of the property to be $1,293,000, allocated $1,184,500 to the land and $108,500 to the building. In determining the liquidating value of the land and building the Commissioner fixed the values at $1,496,519.48 and $103,480.52, respectively, based on an allowed value for liquidation purposes of $1,600,000.

The property in question was sold by the distributees during 1942 for a gross price of $1,275,000.

During the taxable year the petitioner (with the other tenants in common owning undivided interests in the Phillips Building) purchased policies of insurance upon or with respect to their interests in the Phillips Building at a cost to the petitioner of $1,601.15. The policies were each written for a term of three years. The petitioner's tax returns are made and her books of record...