Young v. Commissioner of Internal Revenue

• Decision Date: 24 June 1932
• Docket Number: No. 6427.,6427.
• Citation: 59 F.2d 691
• Parties: YOUNG v. COMMISSIONER OF INTERNAL REVENUE. MOORE v. SAME.
• Court: U.S. Court of Appeals — Ninth Circuit

59 F.2d 691 (1932)

YOUNG v. COMMISSIONER OF INTERNAL REVENUE.

MOORE v. SAME.

No. 6427.

Circuit Court of Appeals, Ninth Circuit.

June 24, 1932.

M. F. Mitchell and George G. Witter, both of Los Angeles, Cal. (Theodore B. Benson, of Washington, D. C., of counsel), for petitioners.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and John G. Remey, Sp. Assts. to the Atty. Gen. (C. M. Charest, Gen. Counsel, and W. Frank Gibbs, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before WILBUR and SAWTELLE, Circuit Judges and JAMES, District Judge.

JAMES, District Judge.

Mary C. Young and Mary Young Moore, mother and daughter, applied to the Federal Board of Tax Appeals for a redetermination of income tax amounts assessed against them by the Commissioner of Internal Revenue for the years 1924 and 1925. The Board sustained the Commissioner, and the matter is brought here on petition for review. The claims were consolidated for hearing and determination by the Board, and the review is presented in the same form.

Petitioners were joint owners in equal interests of certain real property located on one of the principal business streets in the city of Los Angeles. In the year 1924 they entered into a 99-year lease covering the property, under which the lessee was to erect a business building. Monthly rental of $10,000 was to be paid from October 1, 1924, to June 30, 1926, and from thence on for the remainder of the term a rental of $20,000 per month was to be paid. At the time of the making of the lease, there were on the property several brick buildings which had been erected by the owners approximately six years prior thereto. These buildings were demolished to make way for the new structure. The agreed depreciation cost in 1924 of the old structures was $42,215. No salvage resulted from their demolition. Incidental expenses were incurred by the petitioners in the matter of securing the 99-year lease, as follows: Real estate commission, $50,500; attorney's fees, $5,500; certificate of title charges, $4,502.85. One-half of the commission amount was paid in the year 1924, and the remaining one-half in 1925.

The taxpayers kept their books and rendered income tax returns on the cash receipts and disbursements basis. They claimed the right to deduct from gross income amounts in 1924 the full depreciated cost of the buildings which were destroyed, and to deduct in the years 1924 and 1925 the payments made on account of broker's commission, attorney's fees, and title certificate cost. The Commissioner held that none of the items were deductible, but that they should be considered as expense incurred in the procurement of the 99-year lease, and the total amount amortized over the lease term. Taking the years which the lease had to run, he calculated that each of the petitioners would be entitled to a deduction each year in the sum of $513.59.

The determination of the controversy seems to depend altogether on the solution of the question as to whether, by the acquisition of the long-term lease, the lessors added to their assets, or substituted property for another form of capital assets. If either of these conditions resulted, then the cost of working out the change would be an expense to be classed as a contribution to assets, and would not be immediately deductible as an expense charge against the income account. By section 215(a), paragraph (2), Revenue Act 1924, 43 Stat. 253, 271, 26 USCA § 956(a) (2), it is provided that no deduction shall be made for "any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate."

There is nothing shown in the record as to the size, character, or cost of the new buildings to be erected by the lessee. There is nothing shown as to the amount of income which had theretofore been received from the property. We can well assume that pecuniary advantage and benefit accrued to the lessors under the lease. The buildings demolished were not old. They had been in existence for a comparatively few years; they had depreciated from the original cost of $50,000 by the amount only of $7,785.

Provisions of the Treasury regulations (65, art. 142), wherein it is declared that, when a taxpayer buys...