Rowan v. Comm'r of Internal Revenue
| Decision Date | 13 July 1954 |
| Docket Number | Docket No. 21439. |
| Citation | 22 T.C. 865 |
| Parties | ALBERT L. ROWAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. A taxpayer who inherited a one-third interest in property on which a building had been constructed by the lessee without cost to the lessor, under a 66-year lease was not entitled to a depreciation allowance on the building. The term of the lease extended beyond the useful life of the building and since the taxpayer would not sustain any economic loss as the building wore out and could not sell his interest in the building apart from the land or the rentals, he has no statutory basis for a depreciation allowance. Commissioner v. Pearson, 188 F. 2d 72, and Commissioner v. Moore, 207 F. 2d 265,certiorari denied347 U. S. 942, followed. J. Charles Pearson, Jr., 13 T. C. 851; Mary Young Moore, 15 T. C. 906; and Charles Bertram Currier, 7 T. C. 980, overruled.
2. When the lease referred to in headnote 1 above was entered into by the parties there were two buildings situated upon the property, which had an adjusted basis to the lessor of $35,000. They were demolished by the lessee to make way for the construction of the new building. The lessor, Ellen Rowan, until her death in 1940 claimed, and was allowed, on account of the demolition of these buildings an annual amortization deduction of $583.33 based on recoverable cost and the remaining 60-year period of the lease. Petitioner in his returns for each of the taxable year claimed for depreciation or amortization $194.45, which represented his alleged one-third interest in his mother's adjusted basis ($35,000) in the demolished buildings which she had been amortizing at $583.33 per year. Held, the unrecovered basis of the decedent in the demolished buildings was an income tax advantage to which she was entitled and which was not wholly availed of in her lifetime. Held, further, this tax advantage was not of such nature as to be subject to transmission by inheritance to her heirs. An heir, such as petitioner, acquires basis in an inherited interest by virtue of section 113(a)(5), Internal Revenue Code. The Commissioner is sustained in the disallowance of this deduction. S. L. Mayo, Esq., and J. Edwin Fleming, Esq., for the petitioner.
J. Clifton, Maxwell, Esq., for the respondent.
The Commissioner has determined deficiencies in petitioner's income tax as follows:
+----------------+
¦Year¦Deficiency ¦
+----+-----------¦
¦1943¦$1,010.61 ¦
+----+-----------¦
¦1944¦1,023.82 ¦
+----+-----------¦
¦1945¦901.51 ¦
+----------------+
The deficiency for 1943 is due to three adjustments made by the Commissioner which were as follows:
+--------------------------------------+
¦(a) Attorney's fee disallowed¦$166.66 ¦
+-----------------------------+--------¦
¦(b) Capital loss disallowed ¦3,125.00¦
+-----------------------------+--------¦
¦(c) Depreciation disallowed ¦194.45 ¦
+--------------------------------------+
Only adjustments (b) and (c) are contested and similar adjustments for 1944 and 1945 are contested. These adjustments were explained in the deficiency notice for 1943, as follows:
(b) The deduction of $3,125.00 claimed as a capital loss is not allowable for the reason that the value at date of inheritance of the property inherited by you, upon which the claimed deduction is based, consists solely of the value of the land which is non-depreciable.
(c) The deduction of $194.45 claimed by you on your return as depreciation is not allowable.
The same type of disallowance of the deductions for 1944 and 1945 is explained in the deficiency notice in the same manner as the above.
The petitioner assigned error as to the foregoing adjustments as follows:
(a) For each taxable year the Commissioner erred in denying a deduction, labeled a capital loss, for depreciation or amortization, of $3,125.00, or other appropriate sum, on his property rights in land and improvements known as the Gulf States Building, Dallas, Texas (a building built by the tenant under a lease for a term of years extending beyond the life expectancy of the building).
(b) For each taxable year the Commissioner erred in denying a deduction for depreciation or amortization, of $194.45, or other appropriate sum, on his remaining, adjusted cost basis, inherited from the original lessors, in leased improvements demolished by the tenant during the term of the lease.
Some of the facts are stipulated and are found accordingly. Petitioner, a single individual during the tax years 1943 to 1945, inclusive, was a resident of Dallas, Texas. He filed individual income tax returns for the years involved with the collector of internal revenue, Dallas, Texas.
Under date of March 1, 1919, petitioner's parents, Charles T. Rowan and Ellen Rowan, executed a lease on their community property described as lot 8, block 69 1/2, according to the official map of the city of Dallas. This property is in the center of downtown Dallas and is now known as the Gulf States Building property. The lease was for a term of 66 years and 10 months, beginning March 1, 1919, and ending December 31, 1985.
On July 14, 1919, Charles T. Rowan executed a warranty deed conveying his entire interest in the property to his wife, Ellen Rowan. Charles T. Rowan died July 30, 1924.
On August 10, 1924, Ellen Rowan, then a widow, executed a warranty deed conveying her interest in the property in equal shares to her son, Albert L. Rowan, the petitioner, and her two daughters for a recited consideration of $10, love and affection, and other considerations paid. The deed was filed for record July 16, 1940, and was recorded in the deed records of Dallas County, Texas. Ellen Rowan, petitioner's mother, died June 20, 1940.
The Federal estate tax return filed for the estate of Ellen Rowan did not include the Gulf States Building property but reference was made in Schedule A thereof to the ‘Property at Main & Akard * * * not part of estate by reason of Deed from Ellen Rowan to Albert L. Rowan, et al.’ and in Schedule G entitled ‘Transfers During Decedent's Life’ of the return appears the same property, that is ‘50 feet North side Main, 100 feet West side Akard, Block 69 1/2 City of Dallas.’ However, no value for the property was included in the gross estate because of the deed dated August 10, 1924, referred to above, whereby Ellen Rowan conveyed her interest in the property to her three children, her two daughters and petitioner.
On the ground that there was no delivery of the deed to the children, and other grounds, respondent adjusted the Federal estate tax return of Ellen Rowan to include the Gulf States Building property in her gross estate, assigning a total value of $412,500 to the property, giving the following explanation:
This property was under a 66-year lease at $16,500 per year net rental, payable monthly; is centrally located and improved with an excellent office building of about fourteen stories and any improvements on the lot will revert to the lessors at the expiration of the lease in 1985. Recommended value based upon allowance to the estate of a four per cent return on their investment.
The respondent also included in this estate other property, not involved in this proceeding, which was not included in the estate tax return as filed, assigning thereto a value of $25,000. These adjustments were agreed to and as a result of the adjustments a substantial additional estate tax in the amount of $70,649.05 was paid accordingly. Interest due on the estate tax deficiency from September 20, 1941, to January 20, 1942, was assessed in the amount of $1,412.98, and paid. $On the basis of the estate tax return which was filed, no State inheritance taxes were due; but after the estate tax return was adjusted, State inheritance taxes in the amount of $10,169.71 were assessed and paid. The estate tax deficiency, interest thereon, and State inheritance taxes amounted to a total of $82,231.74. The estate of Ellen Rowan had been distributed to her children at the time these adjustments were made and each child, including petitioner, paid one-third of the total amount, or $27,410.58.
The lease, dated March 1, 1919, was a type commonly referred to as a net lease and provided that the lessee pay to the lessor the sum of $15,000 as yearly rental for the premises each year from March 1, 1919, to and including December 31, 1925, and the sum of $16,500 as yearly rental for the premises for each and every year from January 1, 1926, to and including December 31, 1985.
At the time the lease was entered into on March 1, 1919, there stood on the property two 3-story buildings. It was provided that the lessee would cause to be constructed upon the leased premises a building of steel and fireproof construction, the building to cost not less than $100,000 and to be not loess than 4 stories in height and built sufficiently strong to support a total of 10 stories.
The lease provided that all improvements in existence and those to be constructed were immediately to become and remain the property of the lessors and stated as follows:
All improvements now on said premises and from the beginning continuously down to the completion and thereafter of any improvements put upon the leased premises shall become and remain the property of the Lessors, free of any liens thereon or interest therein granted by or claimed through Lessees. * * *
The lessee further covenanted:
ARTICLE XIV. Upon the termination or forfeiture of this lease peaceable possession of the premises in question shall be delivered over to the Lessors or their representatives, wear and tear excepted, in a good tenantable condition.
The lease, however, contains no penalty provisions against lessees for failure to maintain the premises in good tenantable condition or to return to lessors a property of value equal to that originally leased.
In order to construct the new building as provided in the lease, lessee, without...
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