First Nat. Bank of Kansas City v. Nee

• Decision Date: 07 June 1951
• Docket Number: No. 14248.,14248.
• Citation: 190 F.2d 61
• Parties: FIRST NAT. BANK OF KANSAS CITY v. NEE.
• Court: U.S. Court of Appeals — Eighth Circuit

190 F.2d 61 (1951)

FIRST NAT. BANK OF KANSAS CITY v. NEE.

No. 14248.

United States Court of Appeals Eighth Circuit.

June 7, 1951.

John H. McEvers, Kansas City, Mo. (Reece A. Gardner, G. Lee Burns and Stinson, Mag, Thomson, McEvers & Fizzell, all of Kansas City, Mo., on the brief), for appellant.

Harry Marselli, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, A. F. Prescott and Louise Foster, Sp. Assts. to Atty. Gen., Sam M. Wear, U. S. Atty. and Sam O. Hargus, Asst. U. S. Atty., Kansas City, Mo., on the brief), for appellee.

Before COLLET and STONE, Circuit Judges, and DELEHANT, District Judge.

DELEHANT, District Judge.

The bank's appeal presents the question whether, under the facts, as either admitted or established, the bank in its temporary position as executor in possession was entitled in the determination of its income tax for the years 1940 and 1941 to deduct from gross income, depreciation on the value of an asserted interest in a building erected by the tenant under a long term lease and located on a parcel of real estate belonging to the estate of the decedent, who was lessor in the lease. The situation in which the controversy arose will now be recalled as briefly as seems appropriate.

Mrs. Lydia S. Williams, owner in fee simple of a then improved parcel of real estate located at 40th and Main Streets in Kansas City, Missouri, on July 31, 1934 entered as lessor into a written lease of the property for the term of ninety-nine years from September 1, 1934, with Fortieth & Main Corporation (a wholly owned subsidiary of Katz Drug Company) as lessee, for a cash bonus of $15,000.00, and at an agreed net annual rental payable in advance for the first year, and monthly thereafter, of $7,500.00 during the first three years of the term, $9,000.00 during the next five years, and $10,000.00 during the remainder of the term. The lessee was required to pay all taxes and charges against the premises, to make repairs and maintain insurance, all with the effect of assuring to the lessor and her successors an undiminished annual ground rental from the property (subject, of course, to income taxes) in the amounts successively prescribed, supra. The lease accorded to the lessee the right to, and clearly contemplated that it would, raze the building then on the premises and erect thereon a new modern business building at a cost of not less than $50,000.00.

It was not contemplated by the lease that the structure initially to be erected on the land by the lessee in pursuance of it, which was so erected and, is still there, should necessarily remain on the premises throughout tht term of the lease. On the contrary, and with due safeguards for the protection by bond of the lessor's interests in the event of, and during, demolition and reconstruction, the lease provided that: "The lessee shall have the right to demolish and remove in whole or in part, any building or improvements now or hereafter erected on the leased premises, only for the purpose of remodeling, altering and/or repairing the same so as to be fireproof and as valuable as the building or buildings to be constructed by the lessee as herein provided, or to replace same with new fire proof buildings and improvements to be fortwith (sic) constructed herein provided for."

The lease contained ample provisions for the forfeiture of the lessee's interests in the event of its default. As security for the lessee's performance of its covenants it contained the following language:

"All buildings and improvements SECURITY hereafter located or erected on such premises at

any time during the term of this lease, shall be and remain charged with a lien in favor of the lessor as security for the enforcement of all the covenants of this lease by the lessee to be kept and performed. Such lien shall be prior to all other contracts, liens, or other incumbrances whatsoever affecting the demised premises."

That provision was followed in the same paragraph by this sentence: "In case of forfeiture or termination of this lease on account of any default of the lessee, or at the end of the demised term of Ninety-nine (99) years, all buildings and improvements then on said premises, without compensation to the lessee, shall pass to and become the property of lessor, free of all liens and incumbrances."

And a somewhat related additional provision was included:

"SURRENDER At the end of the term of AT END OF this lease, lessee and the TERM: tenants and subtenants under lessee will surrender

possession of the demised premises and all buildings and improvements thereon to lessor, of at least the value and maintained as herein provided for and free of and from any claims thereto by lessee."

Under the lease, the lessee punctually demolished the buildings on the property, and constructed on it a new and modern store building at a cost of approximately $147,000.00. It promptly subleased the premises with its improvements then under construction to its parent corporation, Katz Drug Company, for a defined term and at an ascending rental scale with an eventual maximum of $2,250.00 per month, the sublessee to pay for maintenance, repairs, insurance and general taxes on the entire premises. The prime lessee then assigned its interest under the Williams lease to another Katz corporate subsidiary, which, shortly thereafter, secured a lease from a stranger to this case on neighboring premises for use as a parking space obviously incident to the operations on the Williams property by Katz Drug Company, as sublessee. The situation thus resulting still obtains.

Mrs. Williams died testate on September 23, 1939. Her will designated the bank as her executor. The probate court seasonably appointed the bank to that office in which it promptly qualified. The will, among many presently irrelevant provisions, devised the leased premises to the bank as trustee for designated beneficiaries with comprehensive power of management.

On December 18, 1940 the bank, as executor, made and filed its final federal estate tax return for Mrs. Williams' estate. In it item 4 of Schedule A, alone had reference to the property under consideration. That item consisted of an exact description by metes and bounds of the real estate only and with no reference to any improvements upon it followed by the supporting statement: "Ground leased to Fortieth & Main Corp. for 99 years from 9-1-34 to X-XX-XXXX. $9,000 per annum from 9-1-37 to 8-31-42, thereafter $10,000 per annum, payable monthly. On May 26, 1938 the lease was assigned to Westport Investment Co." and by the further words:

"Appraised at................ $125,000.00". The tendered valuation was accepted by the federal estate taxing authorities and the estate's liability for federal estate tax was determined upon the basis of that value.

Meanwhile, pursuant to order of the probate court dated February 8, 1940, the bank as executor had taken possession of the estate's interest in the property for the purpose of collecting the rents therefrom to provide money for the payment of the estate's debts. In that relation and capacity for the years 1940 and 1941 it received income for which it was required to account and to pay a federal tax. For each year it seasonably made its income tax return, making therein no claim of any right to deduct from gross income anything in the way of depreciation on improvements on the leased property. The returns were audited in due course and adjustments were made which, for the two years, considered together, involved a slight additional tax, which the bank paid. The adjustments resulted in the determination of a deficiency in tax for one of the years and of an overpayment for the other year. In making the adjustments the taxing authorities did not give, and were not theretofore requested to give, credit for the depreciation now in litigation.

In due time the bank, as executor, filed claims for refund of taxes claimed wrongfully to have been assessed and paid for the two years, and based its claims upon the failure of the bank to demand, and of the taxing authorities to grant, for each of the years the item of depreciation now in controversy. The claims were disallowed. This suit was thereupon brought in proper time by the bank, as trustee, in which capacity it had theretofore succeeded to any right of recovery by the executor upon the final settlement of the Williams estate which had intervened.

At the time of Mrs. Williams' death the building then and now on the leased premises had a remaining useful life of only forty-five years. The then remaining term of the lease, in the absence of an earlier voluntary surrender or cancellation for default, was a few days less than ninety-four years.

The action was tried to the court without a jury, upon the pleadings, certain stipulations of counsel and unchallenged documentary evidence, and the oral testimony, within a narrow area, of witnesses in behalf of both parties. The facts, in so far as they reflect actual happenings, are not in dispute. The divergent oral testimony was oriented to the conflicting views of the parties upon questions of value as of the date of Mrs. Williams' death, and, in behalf of the several parties, was substantially interwoven with their respective interpretations of the relationship of the bank in its representative capacity to the Williams land and to the building thereon arising out of the factual history already recited. The substance and significance of that testimony will be considered briefly hereafter in an appropriate place.

The trial judge announced his decision of the case in an opinion, First National Bank of Kansas City v. Nee, D.C.Mo., 85 F. Supp. 840, accompanied by formal findings of fact and conclusions of law, whose verbal pattern generally accorded with requests of counsel, to the extent of their judicial adoption, and a judgment. The decision and judgment rejected the bank's demand and dismissed the action...