WAYSIDE FURNITURE COMPANY INC. v. Commissioner
| Decision Date | 29 March 1967 |
| Docket Number | Docket No. 4671-64. |
| Citation | 1967 TC Memo 59,26 TCM (CCH) 316 |
| Parties | Wayside Furniture Company, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
James W. Pyles, 213 Main St., P. O. Box 87, New Martinsville, W. Va., for the petitioner. John H. Menzel, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's income tax for the year 1961 in the amount of $602.47 and for the year 1962 in the amount of $393.97. Petitioner has abandoned its objection to a minor adjustment, so that the only issue for decision is whether petitioner properly amortized the cost of a building constructed on leased property over the term of the lease or must depreciate the building over its remaining useful life determined without regard to the term of the lease.
The stipulated facts are found as stipulated.
Petitioner is a corporation organized in January 1959 under the law of West Virginia. Petitioner filed its income tax returns for the calendar years 1961 and 1962 with the district director of internal revenue, Parkersburg, W. Va.
Petitioner was authorized to issue 5,000 shares of common stock with a par value of $10. At all times material to this decision, the issued and outstanding stock of petitioner has been held as follows:
Shareholder Number
of shares
Leo M. Herrick .................. 249
Doris Herrick (wife of Leo) ..... 1
Gilford Frazee .................. 249
Oris Frazee (wife of Gilford) ... 1
Petitioner is engaged in the retail furniture business in New Martinsville, W. Va., which business was formerly conducted by Leo Herrick and Gilford Frazee as a partnership. The land on which petitioner's business is located was leased on August 31, 1956, for a term of 10 years from October 1, 1956, to October 2, 1966, by Leo Herrick (referred to hereafter as Herrick) and Gilford Frazee (referred to hereafter as Frazee) from Herrick's parents. Frazee and his wife are not related to Herrick or his wife or his parents. The lease between Herrick and Frazee and Herrick's parents (sometimes referred to hereinafter as the 1956 lease) is quoted below in its entirety:
/s/ Leo Herrick /s/ Mary Herrick /s/ Leo M. Herrick /s/ Gilford Frazee The building in which petitioner conducts its business was constructed by Herrick and Frazee. The original portion of the building was completed on October 1, 1956, at a cost of $8,516.51, and an addition was completed on October 1, 1958, at a cost of $9,352.49.
Until petitioner was organized, Herrick and Frazee utilized the original building and the addition in operating a retail furniture business as a partnership. When petitioner was organized in January 1959, Herrick and Frazee transferred to petitioner all of the assets, and petitioner assumed the liabilities, of the business formerly conducted by the partnership. The 1956 lease was not expressly assigned to petitioner. Petitioner has made rental payments directly to the lessors, Herrick's parents.
On its 1961 income tax return petitioner claimed deductions in the amount of $456.41 for county property taxes and $1,170.62 for repairs. On its 1962 income tax return petitioner claimed deductions in the amount of $425.59 for county property taxes and $1,400.66 for repairs. These deductions are not in dispute. Petitioner owns no real estate and no buildings other than the building in which it conducts its business.
The parties have stipulated that the adjusted basis of petitioner's building as of December 31, 1960, was $11,619.11. In preparing its tax returns for 1961 and 1962, petitioner deducted depreciation computed by amortizing the adjusted basis of $11,619.11 over the remaining years of the term of the 1956 lease.
In the notice of deficiency for 1961 and 1962 respondent determined that petitioner was entitled to a deduction for depreciation with respect to the building computed by depreciating the adjusted basis of the building over the estimated remaining useful life of the building (determined without regard to the remaining term of the lease), which the parties stipulated to have been 189 months as of December 31, 1960.
OpinionThe only issue is whether petitioner is entitled to a deduction for depreciation of its building constructed on leased premises computed by amortizing the cost of the building over the original 10-year term of the lease or over the estimated useful life of the building. The parties have stipulated petitioner's basis in the building as of December 31, 1960, and the remaining useful life of the building.
The general rule is that where a lessee constructs improvements on leased property, begun prior to July 28, 1958,1 which have estimated useful lives longer than the original term of the lease the lessee is entitled to depreciate or amortize the cost of the improvements over the remaining term of the lease, unless the facts show with reasonable certainty that the lease will be renewed. Sec. 1.162-11(b) and sec. 1.167(a)(4), Income Tax Regs. Where the tenancy of the lessee is for an indefinite period, or at will, depreciation of the cost of the improvements by the lessee is recoverable only over the estimated useful life of the property. Standard Tube Co. Dec. 15,132, 6 T. C. 950. Whether the lease is for an indefinite term or there is a reasonable certainty that it will be renewed beyond its original term is a question of fact to be determined in each case.
Although the issue involved is primarily a question of fact the Court is severely handicapped by an almost complete lack of evidence with respect to the factual matters involved. Neither Herrick nor Frazee testified, nor did either of the lessors, Herrick's parents. The only witness offered by either party was the manager of petitioner's business who had been associated with petitioner for less than a year at the time of the trial and was not qualified to testify with respect to any understanding which the lessors and the original lessees may have had concerning petitioner's occupancy of the leased premises.
Petitioner's principal argument seems to be that the building will become the property of the lessors at the end of the original term of the lease and consequently it is entitled to amortize the cost of the building over the term of the lease. The only evidence offered to support this argument is the 1956...
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