Helvering v. Manhattan Life Ins. Co.

• Decision Date: 11 June 1934
• Docket Number: No. 382.,382.
• Citation: 71 F.2d 292
• Parties: HELVERING, Commissioner of Internal Revenue, v. MANHATTAN LIFE INS. CO.
• Court: U.S. Court of Appeals — Second Circuit

71 F.2d 292 (1934)

HELVERING, Commissioner of Internal Revenue, v. MANHATTAN LIFE INS. CO.

No. 382.

Circuit Court of Appeals, Second Circuit.

June 11, 1934.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, Sp. Assts. to the Atty. Gen., for petitioner.

John F. McCabe, of New York City, for respondent.

Before L. HAND, SWAN, and CHASE, Circuit Judges.

L. HAND, Circuit Judge.

This is a petition to review an order of the Board of Tax Appeals, determining an overpayment in favor of the respondent for the year 1928. Two questions are presented: The first, whether the respondent, a life insurance company, may deduct from its gross income a depreciation allowance upon so much of its furniture as it used in producing the income of its underwriting department. This is ruled by the decision of the Supreme Court in the case of Rockford L. I. Co. v. Helvering, Com'r, 292 U. S. 382, 54 S. Ct. 761, 78 L. Ed. 1315, which held that such a deduction was not allowable; otherwise as to depreciation upon furniture used in the investment department. As the Board allowed both, the order must be reversed pro tanto.

The second question arises under the following facts: The respondent was the owner of real estate subject to a lease which expired on August 1, 1928. By a payment not here in question it succeeded in getting this lease cancelled on October 1, 1927, and thereafter let the premises to a tenant for a period of ten years. The broker's commissions for procuring the new lease were $9,990 which it paid in the year 1927. On June 28, 1928, the lease was "terminated * * * by court order"; and presumably the respondent re-entered. The Commissioner amortized the whole commission over the period of the lease, dividing it into ten equal annual parts. For the year 1927 he allowed one-fourth, and for the year 1928 substantially one-half, of one annual part; the first corresponding to the last three months of 1927, and the second to the first six months of 1928. He disallowed any further deduction for that year, for which year the respondent claimed all the unamortized commission under section 203 (a), subdivisions 6 and 7 of the Revenue Act of 1928, 26 USCA § 2203 (a) (6, 7).¹ The Board took the respondent's view and the Commissioner appealed.

It has been uniformly held in a number of decisions that the commission of a broker, who secures a tenant for a lessor, may not be deducted in the year in which it is paid, but must be amortized by successive deductions over the span of the lease. Bonwit Teller & Co. v. Com'r, 53 F.(2d) 381, 82 A. L. R. 325 (C. C. A. 2); Central Bank Block Ass'n v. Com'r, 57 F.(2d) 5 (C. C. A. 5); Atwell v. U. S., 1 F. Supp. 720 (Ct. Cl.); Tonningsen v. Com'r, 61 F.(2d) 199 (C. C. A. 9); Spinks Realty Co. v. Com'r, 61 App. D. C. 321, 62 F.(2d) 880; Meyran v. Com'r, 63 F.(2d) 986 (C. C. A. 3); Home Trust Co. v. Com'r, 65 F.(2d) 532 (C. C. A. 8); Griffiths v. Com'r, 70 F.(2d) 946 (C. C. A. 7). The grounds given have been somewhat various. In several cases, our own among others, the court did not commit itself as to whether the payment was an "ordinary and necessary expense," or a capital cost, amortizable out of the rents, the right to which was conceived as a wasting asset. Substantially all of the decisions have considered this second view tenable, and most have repudiated the first. Of course it is true that by and large rents are not capital assets at all; they are the quid pro quo for the lessor's surrender of the usufruct of the land pending the term. Though they end with it, the reversion restores the enjoyment to the lessor, and there has been meanwhile no capital loss to be amortized; the analogy is apt of interest upon a loan. This is not true of a wasting asset. If such an asset has an initial value which ends with the last installment, the owner must recoup himself as he goes; he cannot credit the whole return to income without confusing that concept. Not all initial payments are indeed capital costs, and to be deducted as such, but a broker's commission seems to us pretty plainly such. It is for services which make possible the sale, so to say, of the term, and without which indeed the term could never come into existence; services that therefore help to create the...