PLANTERS'OPERATING CO. v. COMMISSIONER OF INT. REVENUE

• Decision Date: 25 January 1932
• Docket Number: No. 8789.,8789.
• Citation: 55 F.2d 583
• Parties: PLANTERS' OPERATING CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

55 F.2d 583 (1932)

PLANTERS' OPERATING CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 8789.

Circuit Court of Appeals, Eighth Circuit.

January 25, 1932.

Phil D. Morelock, of Kansas City, Mo. (Perry W. Shrader, of Kansas City, Mo., Dudley Doolittle, of Strong, Kan., Llewellyn A. Luce, of Washington, D. C., and Walsh & Aylward and Shouse, Doolittle, Morelock & Shrader, all of Kansas City, Mo., on the brief), for appellant.

Helen R. Carloss, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Dean P. Kimball, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for appellee.

Before VAN VALKENBURGH, BOOTH, and GARDNER, Circuit Judges.

BOOTH, Circuit Judge.

This is a petition for review of a decision of the Board of Tax Appeals which affirmed the holding of the Commissioner of Internal Revenue in refusing to assign any value to a lease of certain hotel property in St. Louis, Mo.

The case involves income and profits taxes for the years 1919 and 1920, and income taxes for the years 1919 to 1922.

The main undisputed facts are briefly as follows: In 1918, the Planters' Operating Company, the petitioner, a corporation of Missouri, acquired a lease on the Planters' Hotel in the city of St. Louis. The lease had been made by the owner, the Commonwealth Realty & Hotel Company, to Theodore B. Baker in August, 1918; and in November, 1918, Baker assigned the same to the petitioner for $200,000 par value of stock in petitioner corporation. In November, 1922, the owner of the property and the petitioner entered into an agreement by which the lease was canceled and the possession of the property returned by the petitioner to the owner; and, in consideration thereof, the Commonwealth Realty & Hotel Company, the owner, paid to the petitioner the sum of $200,000.

The Commissioner of Internal Revenue, in computing the petitioner's tax liability for 1922, counted the whole sum as profit, taking the position that the lease had cost the petitioner nothing, and that it had no value when acquired. He also allowed the petitioner no deduction for exhaustion of the leasehold during the taxable years 1919, 1920, 1921, and 1922.

The relevant statutes, so far as here material, read as follows:

Revenue Act of 1918, c. 18, 40 Stat. 1057, 1077.

"Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * *

"(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence."

Revenue Act of 1921, c. 136, 42 Stat. 227, 229.

"Sec. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that — * * *."

Section 234 (a) (7) of the Revenue Act of 1921 (42 Stat. 255) contains the same provision as section 234 (a) (7) of the Revenue Act of 1918, above quoted.

If the lease had cost the petitioner any amount, then, under the law, the profit would be the difference between the cost of the lease and the amount received on the sale or cancellation thereof; and, further, if the lease had cost the petitioner any amount, then this amount should be allowed as the basis for determining the annual amortization allowance on the leasehold for each of the years that it was held by the petitioner.

The petitioner claimed an allowance for the exhaustion of this lease, based upon a value of $200,000 as of November 12, 1918, the date of acquisition thereof. Inasmuch as the lease ran for ten years, the petitioner claimed that one-tenth of $200,000 was a reasonable allowance for the exhaustion, to be deducted each year upon petitioner's tax return. Petitioner also claimed the valuation of $200,000 for the leasehold as the basis for determining whether any gain or loss resulted from the $200,000 consideration received during the year 1922 for the relinquishment of the lease.

The Commissioner disallowed both claims. The Board of Tax Appeals affirmed the ruling.

The cost of the lease to petitioner was $200,000 par value of its stock. It does not appear from the record that the stock had a readily ascertainable market value. The Commissioner of Internal Revenue therefore apparently undertook to determine its value by determining the value of the lease. In his letter dated February 26, 1925, stating a deficiency, he says: "The action of the Revenue Agent has been sustained in a ruling of the Commissioner which states that no value should be assigned to the leasehold for depreciation purposes or as a basis for the computation of the profits realized upon its sale in 1922."

This same method was followed by petitioner and respondent before the Board of Tax Appeals; so that the real question determined by that Board was whether the lease, at the time of its acquirement by petitioner, had any fair market value. The Board of Tax Appeals found that it had not.

It is well established:

(1) That the findings of the Commissioner are prima facie correct, and the burden is on petitioner to produce evidence to overthrow them. Brown v. Commissioner (C. C. A.) 22 F.(2d) 797; Austin Co. v. Commissioner (C. C. A.) 35 F.(2d) 910; Taplin v. Commissioner (C. C. A.) 41 F.(2d) 454; Williams v. Commissioner, 44 F.(2d) 467, 469 (C. C. A. 8), and cases cited; Nichols v. Commissioner (C. C. A.) 44 F.(2d) 157; Williams v. Commissioner (C. C. A.) 45 F. (2d) 61; Ruud Mfg. Co. v. Commissioner (C. C. A.) 45 F.(2d) 63; Louisville, etc., Co. v. Commissioner (C. C. A.) 47 F.(2d) 599.

(2) That where the decisive question in the case is whether a finding of the Board of Tax Appeals is justified, this court will not weigh the evidence but will sustain the finding, if supported by substantial evidence. Lucas v. Mercantile Tr. Co., 43 F.(2d) 39, 41 (C. C. A. 8), and cases cited; Powers Mfg. Co. v. Commissioner, 34 F.(2d) 255 (C. C. A. 8), and cases cited.

(3) That it is reversible error for the Board of Tax Appeals to disregard competent relevant testimony when it is not contradicted. Chicago, etc., Co. v. Blair (C. C. A.) 20 F.(2d) 10; Boggs & Buhl v. Commissioner (C. C. A.) 34 F.(2d) 859; Citrus Soap Co. v. Lucas (C. C. A.) 42 F.(2d) 372; Pittsburgh Hotels Co. v. Commissioner (C. C. A.) 43 F.(2d) 345; Dempster, etc., Co. v. Burnet (App. D. C.) 46 F.(2d) 604; Conrad & Co. v. Commissioner (C. C. A.) 50 F.(2d) 576.

The petitioner assumed the burden of proof and introduced evidence before the Board of Tax Appeals. That evidence tended to show, and it was largely uncontradicted, the following facts: The petitioner was incorporated under the laws of the state of Missouri in September, 1918, with an authorized capital of $250,000 par value; $30,000 of this was issued for cash; and $200,000 for the lease which it took by assignment from Baker. The lease ran for ten years to Baker as lessee and covered the property in St. Louis known as the Planters' Hotel. This hotel had been operated for almost one hundred years, and had a national reputation. In 1918, the Planters' Hotel Company, which was then operating the property, was unsuccessful and surrendered its lease by agreement with the owner, the Commonwealth Realty & Hotel Company. The owners of the property then operated the hotel for a short period, but without much success, for the reason that they were not experienced in that line of business. They began looking for a person of suitable financial responsibility and experience to operate the hotel, and who would also put his own capital into a rehabilitation of the property. They decided on Mr. Baker, and a lease was made August 29, 1918. Among its provisions were the following: The rent was to be 10 per cent. of the gross receipts, with a guaranteed minimum of $55,000 for the first 2 years, and $65,000 for the succeeding years; by article 17, the lessee covenanted that he would spend of his own money during the first year $50,000 in betterments and improvements, and in renovating the furniture, etc.; by article 18, the lessee covenanted that he would further advance, within two and one-half years, not less than $50,000 nor more than $100,000, to be spent for betterments and improvements; this amount, however, to be repaid by the lessor with interest; by article 21 it was provided: "The Lessee shall have the right to assign this lease to a corporation to be organized under the laws of the State of Missouri, for the purpose of conducting a hotel business, the said corporation assuming all of the obligation of the Lessee."

Mr. Baker began operating the hotel, and on November 12, 1918, assigned the lease to the petitioner. In connection with the assignment of the lease, Baker and C. C. Nelson guaranteed to petitioner that the net profits earned by operation of said hotel would furnish sufficient funds to carry out the provisions of paragraphs 17 and 18 of said lease, and that if the net profits above mentioned should be insufficient to enable the Planters' Operating Company to fully comply with all of the terms of said paragraphs 17 and 18 in said lease, they would, at their own expense, pay any deficit on account thereof,...