Schubert v. CIR
| Decision Date | 17 January 1961 |
| Docket Number | No. 8164.,8164. |
| Citation | 286 F.2d 573 |
| Parties | Rosalie M. SCHUBERT, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Fourth Circuit |
LeRoy R. Cohen, Jr., Richmond, Va. (John F. Kelly, Richmond, Va., on brief), for petitioner.
Fred E. Youngman, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and A. F. Prescott, Attys., Dept. of Justice, Washington, D. C., on brief), for respondent.
Before SOBELOFF, Chief Judge, BOREMAN, Circuit Judge, and STANLEY, District Judge.
This case is here on petition to review the decision of the Tax Court of the United States which affirmed the determination by the Commissioner of Internal Revenue of deficiencies in federal income taxes of the Petitioner. The facts hereinafter stated were stipulated and accordingly found by the Tax Court. Petitioner will be referred to as taxpayer.
Taxpayer's mother, Gazelle K. Millhiser, hereinafter sometimes referred to as testatrix or lessor, owned real estate in Richmond, Virginia, described as 409 East Broad Street, located about sixty-one feet from the intersection of Broad and Fourth Streets, having a frontage of 19.04 feet and extending 138 feet to an alley in the rear. On October 2, 1941, testatrix leased this property to G. C. Murphy Company, hereinafter called Murphy. At about the same time Murphy entered into two other leases with the owners of adjacent properties, each of the three leases being for a term ending January 31, 1973. Murphy was authorized to demolish the building on each of the three properties, use or sell the salvage materials and construct one building on the three parcels in accordance with certain plans and specifications.
The Millhiser lease began November 1, 1944, and provided for rentals thereafter of $1,000 per month through January 1948, §1,145.83 1/3 per month thereafter through January 1958, and $1,208.33 1/3 per month thereafter through January 1973. Some of the other provisions of the lease may be summarized as follows:
(a) Murphy was obligated to reimburse lessor for all real estate taxes and charges against the property during the term in excess of $2,445.91 annually and for the cost of fire insurance on the improvements during the term in excess of $184.09 annually.
(b) Murphy agreed to surrender and deliver to lessor, at the end of the term, any new building which might be erected on the property, unencumbered by it, and in as good order, repair and condition as when completed, ordinary wear and tear and accidents by fire or other casualty excepted.
(c) Murphy agreed, at the end of the term, to erect individual walls along the boundary lines of the property, to restore separate water, sewer and power lines and other facilities so as to make the building upon the demised premises a separate rentable unit.
(d) Murphy was to make all exterior and interior repairs during the term.
On or about May 1, 1947, demolition of existing improvements was begun by Murphy and was immediately followed by the construction of one department store building on all of the several demised properties. This building, consisting of a basement and five stories, was completed about July 1, 1948, at a total cost of $1,442,969 and had an estimated useful life of fifty years from July 1, 1948.
The estimated cost of that part of the building constructed on the property of testatrix was from $150,000 to $180,000 and was borne by Murphy, except to the extent of salvage value recovered by Murphy from the demolished building.
The cost to testatrix of the old improvements upon her property at the time of demolition on May 1, 1947, after depreciation was $6,200. For income tax purposes she claimed on account of depreciation of the demolished improvements a deduction at the rate of $240.77 annually from May 1, 1947, until her death.
Testatrix died on August 31, 1953, and, by her will, nominated her son, hereinafter called "trustee," as executor thereof and as trustee of the residual estate. Pursuant to the authority conferred by the will, trustee allocated the property at 409 East Broad Street to the residual estate devised to the taxpayer in trust for life. A federal estate tax was paid on this property at an appraised value of $200,000.
The trustee paid to taxpayer the annual income as computed by him since August 31, 1953, and, as her attorney-in-fact, filed income tax returns for her for the years in question. These returns report as income the net rents from 409 East Broad Street, computed by the trustee, as follows:
1953 1954 1955
Gross rents ........ $4,583.32 $17,422.61 $17,422.31
Less
Real Estate Taxes 6,118.56 6,118.22
Insurance ....... 7.54 12.32 93.59
Commissions ..... 275.00 825.00 825.00
Depreciation .... 1,666.67 5,000.00 5,000.00
_________ __________ __________
Net rents .......... $2,634.11 $ 5,466.73 $ 5,385.50
(Note: We are not concerned here with the deductions for real estate taxes for the years 1954 and 1955.)
The Commissioner disallowed the deductions for depreciation as shown above for the years in question, thereby increasing the net income distributable to taxpayer from the trust estate. It is this adjustment which alone gives rise to the asserted deficiency.
Taxpayer contends that she should be allowed a deduction for depreciation in each of her taxable years (adjusted for 1953 from the date of her mother's death to end of year):
(1) In an amount equal to the value of the improvements as of August 31, 1953, as determined for estate tax purposes, divided by the number of years of then remaining useful life; or
(2) In the alternative, in an amount equal to the commuted or capitalized value at the date of her mother's death of the right to receive favorable premium rentals, divided by the number of years remaining of the term of the lease. (Testimony was presented to show that such commuted or capitalized value at August 31, 1953, was not less than $38,685 and that the lease then had 19 5/12 years to run.)
The Tax Court rejected both contentions and upheld the Commissioner.1 We find no error.
The statutes asserted by taxpayer as applicable here in support of her claims to an allowance for depreciation are set forth below.2
It is taxpayer's first theory that she acquired a basis for depreciation purposes upon the death of testatrix; that it is not the estate tax which gives rise to a "basis" in the heir but rather the then fair market value of the asset upon which the tax is paid; that of the $200,000, which was the appraised value of the land and improvements for estate tax purposes, approximately one-half, or $100,000, was the value of the Murphy-constructed building on the land; that when a taxpayer has a "basis" in an income-producing asset which diminishes in value by lapse of time through wear, tear, obsolescence or exhaustion, such taxpayer is entitled by statutory right to recover that basis by a reasonable allowance for depreciation over the remaining period of useful life; that it is simple justice to permit deductions from income sufficient to restore wasting principal; that section 167 of the 1954 Code and section 23 of the 1939 Code, allowing depreciation, refer to "property" which may be a physical building or a favorable leasehold; and, if it is once established that taxpayer has a basis in a wasting asset, the sole remaining problem is the appropriate measure to be applied.
An early line of Tax Court decisions supported the theory that the prescription of a "basis" in and of itself would permit the allowance of a deduction for depreciation. In the first such case involving depreciation of inherited leased improvements constructed by the ancestor's lessee under a long term lease, Charles Bertram Currier, 1946, 7 T.C. 980, it was held at page 984:
Two subsequent Tax Court decisions involving parallel fact situations approved and followed the Currier decision and adopted the language as above quoted. J. Charles Pearson, 1949, 13 T.C. 851; Mary Young Moore, 1950, 15 T.C. 906. Each of these subsequent approvals of the Currier decision was reversed on appeal. Commissioner of Internal Revenue v. Pearson, 5 Cir., 1951, 188 F.2d 72, certiorari denied 1951, 342 U.S. 861, 72 S.Ct. 88, 96 L.Ed. 648; Commissioner of Internal Revenue v. Moore, 9 Cir., 1953, 207 F.2d 265, certiorari denied 1954, 347 U.S. 942, 74 S.Ct. 637, 98 L.Ed. 1091. In reversing the Moore decision, the Ninth Circuit clearly dispelled the notion that "basis" alone would permit depreciation, stating:
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