THE MANHATTAN LIFE INSURANCE COMPANY v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 17 May 1933
• Docket Number: Docket No. 60827.
• Citation: 28 BTA 129
• Parties: THE MANHATTAN LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

28 B.T.A. 129 (1933)

THE MANHATTAN LIFE INSURANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 60827.

Board of Tax Appeals.

Promulgated May 17, 1933.

John F. McCabe, Esq., for the petitioner.

James K. Polk, Esq., and Harold F. Noneman, Esq., for the respondent.

OPINION.

ARUNDELL:

This proceeding involves the redetermination of a deficiency of $879.19 in income tax for 1928.

In its income tax return for 1928 the petitioner, a New York corporation engaged in the life insurance business, claimed a deduction for exhaustion on furniture and fixtures used in both the investment and underwriting departments of its business. In his audit of the return the respondent allowed the sum of $1,169.08 as a deduction for exhaustion on the portion of the assets used in the investment department, and disallowed the remainder on the ground that the statute made no provision for deducting depreciation on property employed in the production of income in the underwriting department. The refusal of the respondent to allow exhaustion on assets used in both departments, which the parties have stipulated amounted to $4,143.44, is claimed by the petitioner to be error.

We had the identical question in Lafayette Life Ins. Co., 26 B.T.A. 946. We there held, based upon the lack of any indication of legislative intent to the contrary, that life insurance companies were entitled to take depreciation on assets used in the underwriting as well as the investment departments of their business. The respondent recognizes that this case is opposed to his contention and asks us to reconsider the question. We think the Lafayette case was properly decided and we adhere to the rule announced therein. Following that decision, exhaustion of the assets will be allowed in the amount of $4,143.44.

In 1926 the petitioner acquired title to a building subject to a lease expiring August 1, 1928. A cancellation of the lease was obtained, effective October 1, 1927, by a payment of $25,000 to the lessee. On the same day the property was leased to a new tenant at a higher rental for a term of 10 years from October 1, 1927. The petitioner paid a commission of $2,490 for services rendered by a broker in connection with the cancellation of the old lease and fees aggregating $9,990 to brokers for obtaining the new lease. The new lessee defaulted in the payment of rent, with the result that the lease was terminated on June 28, 1928, by court order.

Of the total of $37,480 paid by petitioner in 1927 in connection with the cancellation of the old lease and the acquisition of a new tenant, it appears that the respondent has allowed $1,561.67 as a deduction in that year. The remainder, $35,918.33, petitioner claims as a deduction in 1928 as "real estate expenses" under section 203 (a) (6) of the Revenue Act of 1928. Such expenses, where allowable, are those "paid during the taxable year," and so, assuming for the moment that the expenditures are of this kind, it is clear that the petitioner may not have the deduction in 1928, inasmuch as they were paid in 1927.

In the alternative petitioner asks that it be allowed exhaustion deductions for that part of the cost of canceling the old lease that is allocable to the period from January 1, 1928, to the date of expiration of that lease, August 1, 1928, and for that portion of the cost of securing the new lease which is allocable to the period from January 1, 1928, to the termination of the lease on June 28, 1928.

Counsel for the respondent now concedes that under the decision in Henry B. Miller, 10 B.T.A. 383, petitioner is entitled to deduct in 1928 seven tenths of $27,490, which represents the cost of canceling the old lease. The lease when canceled, effective October 1, 1927, had 10 months to run, and 7 months of that period fell within the year 1928.

The remaining question is whether the cost of securing the new lease, $9,990, is deductible in 1928. Counsel for respondent concedes that the...