Schubert v. Comm'r of Internal Revenue
| Decision Date | 23 March 1960 |
| Docket Number | Docket No. 70793. |
| Parties | ROSALIE M. SCHUBERT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Leroy B. Cohen, Esq., and John F. Kelly, Esq., for the petitioner.
Charles B. Norris, Esq., for the respondent.
Petitioner is a life beneficiary of a testamentary trust which includes in the corpus certain land which decedent had leased on a long-term lease. The tenant constructed one building on this and adjacent parcels of land. The estimated useful life of the building extended beyond the term of the lease. Held, petitioner is not entitled to a deduction for depreciation of the building; held, further, petitioner is not entitled to amortize the purported premium portion of the lease; and, held, further, section 275(b), I.R.C. 1939, is not applicable under the facts of this case to the year 1953.
The respondent determined deficiencies in petitioner's income tax for the years 1953, 1954, and 1955 in the amounts of $672.63, $2,938.13, and $2,782.92, respectively.
Petitioner is the beneficiary of a testamentary trust and thus required to report trust income distributed or distributable to her, including rents from land decedent had leased on a long-term lease, and on which the lessee had built a building. The questions are:
(1) Whether, in reporting such rents, petitioner is entitled to a deduction for depreciation during the years before the Court;
(2) Whether petitioner is entitled to amortize any premium value of the lease, and
(3) Whether any deficiency for the year 1953 is barred by section 275(b), I.R.C. 1939.
Some of the facts have been stipulated and they are found accordingly.
Petitioner's mother, Gazelle K. Millhiser, owned certain real estate in the business section of Richmond, Virginia. On October 2, 1941, she leased this property, described as 409 East Broad Street, to G. C. Murphy Company. This property was located about 61.36 feet from the intersection of Broad and Fourth Streets and it consisted of a frontage on Broad Street of 19.04 feet with a depth of 138 feet to an alley in the rear. At about the time of the execution of the above lease, G. C. Murphy Company entered into two other leases with the owners of adjacent property extending to the corner of Fourth and Broad Streets and to the rear fronting on Fourth Street. The three leases were all for a term ending in each case on January 31, 1973, and they permitted G. C. Murphy Company to demolish the buildings on the three properties, use or sell the salvage materials, and put up one building on the three parcels in accordance with certain plans and specifications.
The leasehold period of the Millhiser lease began November 1, 1944, FN1 and it provided for monthly rental 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:
1. The three properties had existing leases on them in 1941, the longest of which expired in 1944.
(a) The tenant was obligated to reimburse the lessor for all real estate taxes and charges against the property during the term in excess of $2,445.91 annually, that being the amount of such taxes for the year 1940.
(b) The tenant was obligated to reimburse the lessor each year for the cost of fire insurance on the building and improvements during the term in excess of. $184.09 annually, that being the amount of such premiums for the year 1940.
(c) The tenant agreed in case of a new building being erected on the property by the tenant it would deliver up the same at the end of the term in as good order, repair, and condition as the same was in at the time of completion, ordinary wear and tear, and accidents by fire or other casualty excepted.
(d) The tenant agreed at the end of the term to erect individual walls along the boundary lines of the property, to restore separate water, sewer, and powerlines and other facilities so as to make the building upon the demised premises a separate rentable unit.
(e) The tenant agreed that any building constructed by the tenant should be unencumbered by any act of the tenant and should be and become the property of the lessor upon the termination of the lease.
(f) The tenant agreed to make all exterior and interior repairs during the term.
On or about May 1, 1947, demolition of the existing improvements was begun by the G. C. Murphy Company and was immediately followed by construction of one department store building on all of the several demised properties. This building, consisting of a basement and five stories, was completed on or about July 1, 1948, at a total cost of $1,442,969. The estimated useful life of the building is 50 years from July 1, 1948.
The estimated cost of the building insofar as it was constructed on Gazelle K. Millhiser's property was from $150,000 to $180,000 and it was borne by the tenant, except to the extent of any salvage value recovered by the tenant from the demolished building thereon.
The cost to Gazelle K. Millhiser of the improvements upon the demised property at the time of their demolition on May 1, 1947, after depreciation was $6,200. She claimed for income tax purposes on account of depreciation of the demolished improvements a deduction at the rate of $240.77 annually from May 1,1947, until her death.
Gazelle K. Millhiser died on August 31, 1953, while a resident of the city and State of New York, and her will was duly admitted to probate in the Surrogate's Court of the County of New York on September 14, 1953. The will nominated decedent's son, E. Ross Millhiser, as executor and directed that the residue of the estate, after gifts of tangible personal property, be divided into two parts, one of which was $275,000 greater than the other. The larger of the two parts was devised and bequeathed to E. Ross Millhiser as trustee, for the benefit of petitioner for life (the net annual income to be paid to her in quarterly or more frequent installments) and remainder to her children, with authority in the trustee, ‘in his uncontrolled discretion’ to pay principal for the benefit of the life beneficiary or her children. In dividing the estate the executor was authorized to allocate assets in kind at the value of such assets as of the date of testator's death.
E. Ross Millhiser qualified as executor and trustee under said will and it is stipulated here that pursuant to the authority conferred upon him by the will the executor allotted the real property known as 409 East Broad Street, richmond, Virginia, to that part of the residuary estate devised and bequeathed in trust for petitioner. In the Federal estate tax return the above property was described and appraised as follows:
No. 409 East Broad Street, Richmond, Virginia, approximately 19.2 feet by 142.5 feet upon which other property not owned by deceased a department store has been built. Current annual gross rental $13,750. Owner's share of annual real estate taxes $2,445.19. Of annual insurance premiums.$184.09. Value based on appraisal $200,000.
The Federal estate tax was paid upon the above appraised value of $200,000. E. Ross Millhiser, as trustee, paid petitioner, who resides at the Hotel Surrey in New York, the annual income as computed by him since August 31, 1953. E. Ross Millhiser also, as petitioner's attorney in fact, filed income tax returns for petitioner for the years in question with the district director of internal revenue for the district of Virginia at Richmond. These returns report as income the net rents from 409 East Broad Street, which were computed by E. Ross Millhiser as 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 ¦
+-------------------------------------------------+
Respondent disallowed the deductions for depreciation in the above computations of net income for the years in question thereby increasing the net income distributable to petitioner from the trust estate by $1,666.67 for the year 1953, $5,000 for the year 1954, and $5,000 for the year 1955. The above adjustment gives rise to the entire deficiency determined in respondent's notice of deficiency.
OPINION.In Albert L. Rowan, 22 T.C. 865, the taxpayer inherited a one-third interest in property on which a building had been constructed by the lessee under a 66-year lease. We held the taxpayer was not entitled to a depreciation allowance on the building and our opinion reviews earlier opinions of this Court, Mary Young Moore, 15 T.C. 906; Charles Pearson, Jr., 13 T.C. 851; and Charles Bertram Currier, 7 T.C. 980, where upon similar facts we had reached an opposite result. Our opinions in the Moore and Pearson cases had been reversed by the Ninth and Fifth Circuits (Commissioner v. Moore, 207 F.2d 265, and Commissioner v. Pearson, 188 F.2d 72) and in our Rowan opinion we stated that we were reexamining our position and we concluded that the cited opinions of the Fifth and Ninth Circuits in the Pearson and Moore cases ‘lay down the correct rule of law’ and we specifically overruled our prior opinions in the Moore, Pearson, and Currier...
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