author: Trammell:

text:
    Appeal of ENSLEY MOTOR CO.
    Docket No. 4269.
    Submitted September 14, 1925.
    Decided February 15, 1926.

      Held, that the deduction on account of the exhaustion of a lease held by the taxpayer as determined by the Commissioner was reasonable.

      H. G. Kilpatrick, Esq., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before GeatjpneR, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency for the calendar years 1920 and 1921 in the sum of $2,667.61. The appeal involves the proper amount to be allowed as a deduction, for the amortization of a lease.
    FINDINGS OP PACT.
    1. The taxpayer is an Alabama corporation, with a capital stock of $10,000 divided into 200 shares of the par value of $50 each. It was engaged in the automobile and garage business at Ensley, Ala. The principal stockholder, president, and manager of the taxpayer was one D. P. Knapp, who owned 191 out of 200 shares, the balance being held by two stockholders who took no ■ active part in the business.
    2. In the year 1919 the taxpayer was desirous of securing another location for its business. D. P. Knapp, the president, negotiated with the firm of Ramsay & McCormack, owners of a suitable site, with a view to securing a lease and constructing a new building upon the property. The negotiations resulted in an agreement whereby a building was to be constructed by Knapp at a cost of $30,000, he to be given a lease for nine years at a nominal rental of $1.00. It was provided that in the event the cost of the building amounted to more or less than $30,000 the lease should be made on the same ratio as $30,000 is to nine years. It was also provided that in case Ramsay & McCormack should decide to terminate the lease they would pay for the cost of the building, less the said credits, and execute a five-year lease at a monthly rental based on the ratio of $350 per month on an investment of $30,000. The contract was made with D. P. Knapp personally because of his financial standing and prestige and with a desire to avoid the possibility of undesirable tenants in case of transfer of the stock of the taxpayer. The preliminary contract was as follows :
    June 27th, 1919.
    Mr. D. P. Knapp,

      president Ensley Motor Company, Ensley, Alabama.

    Deak Sie: Your proposition that you construct a building 75x140 ft., two stories high, to be used for a garage and automobile sales room, on Lots 13, 14 and 15 in Bloch 19 D, Ensley, has been submitted to Messrs. Ramsay & Mc-Cormack and accepted by them.
    This proposition, as we understand it, is:
    The building is to cost approximately $30,000 and based on this cost you are to be given a lease for nine years for a consideration of $1.00. This building is to be erected entirely at your expense and plans and specifications for same must first be approved by Messrs. Ramsay & McCormack. Should the building cost more or less than $30,000, your contract will be made on the same ratio as $30,000.00 cost is to nine years lease. Messrs. Ramsay & Mc-Cormack reserve the right at any time to reimburse you for your expenditure, less a credit of $350.00 per month plus interest at 6% on the net amount you had in the building at the time, these debits and credits to be ascertained monthly.
    Should Messrs. Ramsay & McCormack reimburse you at any time on the above basis, they are to execute you a lease on the property for five (5) years from that date at a monthly rental of $350.00, more or less, based on the ratio of $350.00 per month on an investment in buildings of $30,000.00.
    Mr. E. J. Smyer will draw up this contract for us in duplicate and same will be submitted to you at an early date.
    Very truly yours,
    (Signed) M. H.. McDowell.
    The building was completed and the taxpayer took possession February 1, 1920. The total cost was $48,914.37, which included $1,237.09 expended for shelving, bins, and other improvements for the special use of the automobile trade and not included between the parties as capital cost of the building. The cost of the building was financed by the taxpayer and Knapp jointly, but the cost was set up on the books of the taxpayer as a capital expenditure.
    3. On April 12,1921, in pursuance of the preliminary contract, the said Kamsay & McCormack leased the premises to D. P. Knapp as of February 1, 1920, to May 15, 1934, a term of 171.5 months, for a nominal consideration of $1. The basis of the investment was $47,637.28. It was provided that the lease might be terminated at any time by the lessors upon paying the cost of the building, less credits of $555.76 per month from February 1, 1920, and that a new lease would be executed by the lessors for a term of five years at a rate of $555.76 per month. The pertinent parts of the lease were as follows:
    This Lease and Conteact made and entered into by and between Erskine Ramsay and G. B. McCormack, hereinafter called parties of the first part, and D. P. Knapp, hereinafter called party of the second part.

      Whereas, the parties of the first part are the owners of lots 13, 14, and 15 block 19-D Ensley (Now in the city of Birmingham in Jefferson County, Alabama) as the same are shown and designated in a map and survey of Ensley, recorded in Map Book page ‡†:8 of the map records in the Probate Oflice of Jefferson County, Alabama, said lots together forming a rectangle 75 by 140 feet, and fronting on Avenue “ E ” as shown by said map, and
    Wheeeas, the party of the second part has erected and just completed a building on said lots at a mutually agreed cost to the party of the second part of Forty Seven Thousand Sis Hundred and Thirty Seven and 28/100 ($47,-637.28) Dollars and
    Whereas, the said building was erected by the party of the second part under an agreement that this lease and contract would be executed by and between the parties of the first part and the party of the second part, on the completion of said building.
    Now i¡sr consideration of the premises, this lease and contract is made and entered into by and between the parties of the first part and the party of the second part as follows to-wit:
    1. The parties of the first part, in consideration of One Dollar ($1.00) to them in hand paid by the party of the second part, receipt whereof is hereby acknowledged, and the further consideration of the right given to the parties of the first part and obligations of the party of the second part to the parties of the first part under the terms hereof, hereby lease to the party of the second part the lots of land hereinbefore described for a term commencing as of February 1st, 1920, and ending May 15th, 1934, unless sooner terminated under the provisions hereof.
    * * * * * * *
    7. The parties of the first part shall have the right at any time, at their option, during the existence of this lease and contract, to terminate this lease and contract, and take possession of the property hereinbefore described, together with the building and appurtenances thereunto pertaining.
    In the event the parties of the first part exercise their rights to terminate this lease and contract under the provisions hereof, the parties of the first part^ shall at the time of the termination of said lease and contract pay to the party of the second part the sum of Forty Seven Thousand Six Hundred and Thirty Seven and 28/100 ($47,637.28) Dollars, the cost of the building and improvements with interest thereon at the rate of six per cent (6%) per annum, from February 1st, 1920, up to the time of the termination of this lease and contract, less credits as on partial payments of Five Hundred Fifty Five and 76/100 ($555.76) Dollars per month at the end of each month from February 1st, 1920, up to the time of the termination of this lease and contract as an agreed rental for said property.
    Provided that if the parties of the first part elect to terminate said lease under the provisions of this paragraph, then the parties of the first part shall execute a lease to the party of the second part on said property for a period of five years from the time this lease and contract is terminated at a rental to be paid by the party of the second part to the parties of the first part of Five Hundred Fifty Five and 76/100 ($555.76) Dollars per month payable monthly at the end of each month, with the right given to the party of the second part to sub-lease under this new lease; otherwise this new lease to be in such form and contain such provisions as are usual in leases of business property in Birmingham, Alabama.
    Since February 1, 1920, the taxpayer deducted upon its books the sum of $555.76 per month from the said capital account.

      4. During the taxable years in question, the taxpayer held no formal stockholders’ or directors’ meetings; neither did it keep any records of corporate proceedings. Knapp did not make a formal assignment of the said lease or make a lease to the taxpayer, but merely kept a record of the credits upon the books of the taxpayer. The beneficial ownership of the lease was in the corportion. Subsequently, in the year 1923, taxpayer’s brother bought a portion of the outstanding stock and became interested in the business. The brother induced Knapp to make a formal lease direct to the taxpayer, in words and figures as follows:
    State op Alabama,

      Jefferson County.

    Know all MEN by these peesents : That, for and in consideration of the sum of One ($1.00) dollar, i,n hand paid to me, the undersigned D. P. Knapp by the Ensley Motor Company, a corporation, Ensley, Alabama, the receipt whereof is hereby acknowledged, together with other good and valuable considerations, I, the undersigned D. P. Knapp, do hereby grant and convey to the Ensley Motor Company the privilege of occupying the two-story building now occupied by said corporation on the corner of Avenue E and 20th Street, situated on Lots 13, 14, and 15, in Block 19-D, Ensley, Alabama, recorded in Map Book 4 on page 3 of Map of Records in the Probate Office of Jefferson County, Alabama ; said lots and building forming a rectangle seventy-five by one hundred forty feet fronting on Avenue E, as shown by said Map.
    I do grant to the said Ensley Motor Company the privilege of occupying said building for a time beginning from the 1st day of August, 1923, to the 25th day of March, 1927, covering a period of forty-three (43) months and twenty-five (25) days.
    The said Ensley Motor Company is to keep said building in repair by reason of damage by accidents or any other cause, ordinary wear and tear and fire excepted.
    Witness our hands and seals in duplicate this 16th day of August 1923.
    (Sgd.) D. P. Knapp. [l. s.]
    Ensley Motor Company, [l. s.] (Sgd.) By G. E. Knapp, Vice President.

    5. The taxpayer for the year 1919 made a deduction of $7,294.69. Of this sum $1,237.09 represented expenditures for shelving, bins, and other improvements peculiar to the automobile trade, which was not included as a capital expenditure as between the lessor and lessee of the building; $6,057.60 purported to represent an amortization of the lease at the rate of $555.76 per month, based on a life of a lease of approximately 85 months. For the year 1921 the taxpayer claims a deduction, as an amortization of the lease, based on the monthly payment of $555.76 on a lease with a life of approximately 85 months.
    The Commissioner refused to allow such deduction, but did allow a deduction for amortization of the lease on the basis of a life of 171.5 months, the term of the lease between Knapp and the said Ramsay <⅞ McCormack. He allowed amortization on the total sum of $48,914.37, spread over a period of 171.5 months, at a monthly rate of $284.98.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Trammell:

The question involved in this appeal is solely one of fact. We are to determine whether the amortization of the cost of the improvements on the leased property should be spread over a period of 171.5 months, as determined by the Commissioner, or 85 months, as claimed by the taxpayer. The Commissioner’s calculation is based on the lease entered into by and between Knapp, the president and principal stockholder of the taxpayer, and Ramsay & McCormack. The period of this lease is 171.5 months. The taxpayer’s claim is based upon an alleged verbal understanding between Knapp and the taxpayer and the terms of the lease subsequently executed August 16,1923.

There is no question that the taxpayer raised the money and paid the cost of the improvements, although the credit of Knapp was utilized in securing the funds. In keeping the books and in all its transactions with respect to the lease with Ramsay & McCormack the taxpayer acted as if it were the lessee, although the lease was in form made with Knapp. As Knapp was practically the sole owner of the stock of the taxpayer, there evidently appeared to him no necessity for a formal transfer of the lease to the corporation, but, as a matter of fact, the beneficial ownership of the lease was in the corporation, and Knapp was acting for it and in its behalf. During the taxable years in question the only lease in existence provided for a term of 171.5 months, or approximately 14 years. There was no payment of rent to Knapp or any indication or evidence that he was considered the lessor and the taxpayer a sublessee. Under the theory of the taxpayer its lease expired in 1927, while the original lease ran until 1934. This would result in the cost of improvements being fully amortized in 1927, and Knapp personally receiving the benefit of the lease for seven years more, although the cost of improvements sought to be amortized was paid by the taxpayer corporation. We are convinced from the evidence that Knapp, at the time of the negotiations for the lease and the subsequent execution of the remaining lease with Ramsay & McCormack, had no idea of personal benefit but acted solely for the taxpayer, and that it was intended that the taxpayer should have the benefit of the lease for the entire period of 171.5 months, subject, of course, to the provisions for its termination. It is true the payment of $555.76 per month would amortize the total cost of improvements in 1927, but this is not material to the question at issue, as the lease itself and the benefits thereunder run until 1934. We are of the opinion that the contention of the Commissioner is correct, under the circumstances of this appeal.

We are also of the opinion that the cost of improvements should be computed at $48,914.37, rather than $47,637.38. This difference of $1,237.09 arises from the fact that, in the adjustment of the capital cost between the lessor and lessee, this latter amount was deducted by the lessor for the reason that it represented improvements of special benefit to the automobile trade and not of general benefit to the structure. These improvements consisted of wooden shelving, bins, etc., which were subsequently replaced in 1923 by metal improvements. In whatever manner those improvements may be regarded as between the lessor and lessee, nevertheless, as to the taxpayer for income-tax purposes it was a capital expenditure, subject to exhaustion over the life of the property or the life of the lease, whichever-is shorter.


source: Caselaw Access Project

author: Moeets

license: Public Domain

text:
    Appeal of STRAND AMUSEMENT CO.
    Docket No. 648.
    Submitted July 11, 1925.
    Decided February 17, 1926
    1. On the evidence, held, that a lease of certain property to the taxpayer did not have a cash value which can be included in invested capital.
    2. The sale price of certain assets determined.
    3. The cost of a theatre erected by the taxpayer on leased premises should be amortized over the term of the original lease.

      Gharles H. English and Gharles P. Swope, Esqs., for the taxpayer.

      A. R. Mam, Esq., for the Commissioner.
    Before Ivins and Moréis.
    This is an appeal from the determination of deficiencies in income and profits taxes for the years 1917 to 1920, inclusive, in an amount in excess of $10,000. The questions raised are: (1) The extent to which a certain leasehold interest should be included in invested capital; (2) the sale price of certain assets sold by the taxpayer in 1920; and (3) the period over which the cost oí u. theatre should be amortized.

      FINDINGS OF FACT.
    The taxpayer is a Pennsylvania corporation, with its principal office in Erie.
    By an indenture of lease dated September 24, 1914, Leo Werthei-mer leased from the owner, Lydia G. Selden, certain premises in the City of Erie, Pa., known as the Selden property, for a term of 10 years, with options to renew. The premises covered land 42 feet by 142 feet, and an old brick house known as 918, 918½, and 920½ State Street, having an assessed valuation of, land, $84,000; building, $3,650; total, $87,650. The land in the rear of the building was not producing anything. The largest part of the Selden property was vacant, not producing anything. The lease of September 24, 1914, provided for a total rental for the stipulated 10-year period of $81,000, or $8,100 per year. The old brick house that stood on the front of the property was divided into three little stores, which were producing rents aggregating $6,920 per year.
    By an indenture of lease dated November 11, 1914, and a supplement thereto dated Febr'uary, 1915, Wertheimer leased from Alexander J. Jarecki and Ered C. Jarecki, as executors of the estate of Charles Jarecki, deceased, and Albert H. Jarecki, as executor of the estate of Henry Jarecki, deceased, certain adjoining premises, known as 922 State Street, for a term of 10 years, with options to renew for two succeeding terms of five years each. The leased premises covered land 20 feet 4 inches by 147 feet and a building having an assessed valuation of, land, $40,666; building, $3,900; total, $44,566. The rent of the Jarecki property prior to the lease to Wertheimer was $3,000 per year; the rent fixed in the lease to Wertheimer for the stipulated 10-year period was $40,000, or $4,000 per year.
    The combined rental for the Jarecki and Selden properties fixed in the respective leases to Wertheimer was $12,100 each year. The area covered by said leases was 62 feet 4 inches by 142 feet to 147 feet.
    By lease dated April 1, 1915, Wertheimer sublet to the Strand Amusement Co., the taxpayer herein, a portion of the assembled properties covered by the particular leases above described, to wit:
    The entire ground floor full depth of the property known as 922 State Street, having a frontage on State Street of twenty (20) feet four (4) inches and a depth of one hundred forty-seven (147) feet to an alley, and (subject to the provision for substitution hereinafter contained) the entire third floor of the building known as 918, 918½, and 920½ State Street, and also all the property in the rear, extending from the third story building on said property to an alley, and having a uniform width of forty-two (42) feet, as shown on theatre plan made by G. Morton Wolfe for party of the second part.

      The term of said sublease was from April 1, 1915, to April 1, 1925; the premises were “to be used and occupied as a theatre and for no other purpose;” the rental fixed for said period was $83,-979.17, or $8,500 per year from and after June, 1915, plus all increases in taxes levied against the properities during the term, all electric light, gas, and water rents, etc. The sixteenth paragraph of said sublease provides that the Strand Amusement Co. “ will erect a theatre building upon the said premises ” and complete same prior to January 1, 1916, giving bonds to the respective owners of the property. The seventeenth paragraph of said sublease provides for a conditional option to renew for an additional term of 10 years at an adjusted rental, depending upon whether Wertheimer exercised the options to renew contained in the individual leases to him.
    In the sublease to the taxpayer Wertheimer retained the largest part of the revenue-producing portion of his two leases, namely, the first and second floors of the Selden property, comprising the three small stores, which were renting for an aggregate annual rental of $6,920. He likewise reserved all of the Jarecki building above the ground floor.
    Property in the City of Erie was assessed in 1915 at about two-thirds of its value.
    There were no known sales of leases of State Street property in the City of Erie in 1915, or about that time. There was an outright sale in 1915 of property on the northeast corner of Tenth and State Streets, which is across the street from the Strand location. That sale involved a comer lot, 24 feet by 100 feet, and the purchase price was $50,000, or about $2,080 per front foot.
    Around the corner from the Strand Theatre was situated the Perry Theatre, which is a larger building than the Strand, and which rented in 1915 at an annual rental of $9,000. The land occupied by the Perry Theatre, 85 feet by 165 feet, was assessed in 1915 at $54,400, while the land a portion of which the Strand Theatre occupied was assessed at $124,666. The building occupied by the Perry Theatre was assessed at $35,000, making a total assessed valuation of the Perry property of $89,400. The buildings on the Selden and Jarecki properties were assessed at $7,550, making a total assessed valuation of said properties of $132,216.
    The Strand Amusement Co. was organized August 3, 1915, with a capital stock of $150,000, divided into $50,000 par value of preferred stock and $100,000 par value common stock. The common stock was issued to Wertheimer for the assignment of the lease. He turned over $37,500 to one Hayes, retained a like amount himself, and gave the balance, in amounts agreed upon, to the purchasers of preferred stock as a bonus. Hayes and Wertheimer purchased $5,000 of preferred stock each.
    The construction of the theatre was commenced about August 1, 1915, and was completed about November 1, 1915.
    On September 12, 1919, certain stockholders of the Strand Amusement Co. signed a power of attorney authorizing Charles H. English, as attorney in fact, “ to sell the capital stock of said company, whether common or preferred, which we own, on the basis of the offer to purchase said stock for one hundred sixty thousand ($160,000) dollars, * * No sale was consummated as the
    result of this offer, and in 1920 further negotiations were entered into looking to the sale of the theatre.
    On February 7, 1920, a memorandum of agreement was entered into between the Strand Amusement Co., hereinafter called the vendor, and James B. Clark, of Pittsburgh, Pa., party of the second part, hereinafter called the vendee. The provisions of said contract pertinent to this appeal are:
    Fiest : That the Vendor agrees for the consideration hereinafter stated to assign to the Vendee the existing lease to the Strand Amusement Company for the premises at No. 91S State Street in the City of Erie, Erie County, Pennsylvania, together with the good will, theatre building, equipment and all other property now belonging to the Strand Amusement Company in the City of Erie, aforesaid, except the following:
    (a) All cash in bank or on hand as of March 1st, 1920.
    (b) All books of accounts and records.
    (e) All deposits on film contracts and three shares of stock of the United Theatre Company of America, as hereinafter referred to.
    It being understood that on or before March 1st, 1920, as hereinafter provided, the Vendee will pay to the Vendor in addition to the consideration herein fixed, the sum of seven hundred eiett ($750) dollars for the assignment of the franchise and three shares of stock issued by the United Theatre Company of America, and that the Vendee will further pay to the Vendor, in addition to the consideration herein mentioned, the full amount of deposits made to secure film contracts and that the Vendee will assume and agree to carry out all of the terms and conditions of said contracts. The Vendor shall not from the date of this agreement to March 1st, 1920, make any further contracts for films except such as may be necessary for the requirements of the theatre prior to March 15, 1920.
    It is further agreed that the theatre, through its officers, shall secure the certificates now outstanding for the entire capital stock of said company and cause the same to be assigned to the Vendee and the Vendee shall thereupon assign said stock to the Vendor for such disposition thereof as said Vendor may determine.
    Second. That the consideration which the said Vendee is to pay.the Vendor is the sum of One Hundred Sixty Thousand ($160,000) Dollars and is to be paid as follows:
    Five Thousand ($5,000) Dollars cash in hand on the signing of this agreement by the Vendor as a hand payment and as evidence of good faith, which sum is to be forfeited in case of the failure of the Vendee to carry out this agreement and which is to be returned in case of failure to perform on the part of the Vendor to this agreement; Fifty-five Thousand ($55,000) Dollars to be paid on March 1st, 1920, on the turning over by the Vendor to the Vendee of the premises aforementioned; for the remaining One Hundred Thousand ($100,000) Dollars the Vendor is to accept from the Vendee six negotiable notes each in the sum of Sixteen Thousand Six Hundred *Sixty-six and Sixty-six Hundredths ($10,666.86) Dollars, payable with six per cent interest thereon as follows:
    One note payable September 1st, 1920.
    One note payable March 1st, 1921.
    One note payable September 1st, 1921.
    One note payable March 1st, 1922.
    One note payable September 1st, 1922.
    One note payable March 1st, 1923.
    Interest at six per cent to be payable every six months on all unpaid notes. It is understood that the sum of Sixty-one Thousand Nine Hundred Eighteen and Sixty-eight Hundredths ($61,918.68) Dollars, being the book value of the theatre building and equipment shall be the consideration for the assignment of said lease and of said theatre building and equipment, and the residue of the consideration, to-wit, Ninety-eight Thousand Eighty-one and Thirty-two Hundredths ($98,081.32) Dollars shall be the consideration for the good will and established trade of the Strand Theatre owned and operated by the Strand Amusement Company, and as represented by the capital stock of the Strand Amusement Company purchased by James B. Clark and assigned by him to the Strand Amusement Company for retirement in the liquidation of said company; that said sum of Ninety-eight Thousand Eighty-one and Thirty-two Hundredths ($98,081.32) Dollars shall bo paid to the Vendor as agent for its stockholders and distributed among said stockholders from the proceeds of said notes.
    DECISION.
    The deficiency should be determined in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OEINION.

Moeets

: The first contention made by the taxpayer is that it issued $100,000 par value common stock to Wertheimer for the lease which it secured from him, and that such lease had a value of at least $75,000, which amount should be included in its invested capital. It is admitted in the answer that common stock of a par value of $100,000 was issued to Wertheimer for assignment of the lease. Section 326 (a) (2) of the Revenue Act of 1918 provides that the actual cash value of tangible property tona fule paid in for stock shall be included in invested capital. It therefore becomes necessary to determine whether this lease had any such value. On the testimony of the taxpayer’s own witnesses, we are unable to agree that the lease had a value of at least $75,000. Property was assessed in the City of Erie in 1915 at about two-thirds of its value, and it was testified that “ real estate men all over the country have agreed that 6 per cent ” is a fair return on real property. The combined assessed valuations of the Selden and Jarecki properties in 1915 was $132,216. If the assessed valuation was two-thirds of the actual value, then the actual value at that time was $198,324, and 6 per cent of that amount is $11,899.44, which is very close to the combined rental of $12,100 specified in the leases to Wertheimer. The lease to the taxpayer was at the rate of $8,500 a year after the months of April, May, and June, 1915, but Wertheimer reserved part of the property from which an annual rental of $6,920 was being received. Subtracting this amount from $12,100, the total he was obligated to pay under the leases, leaves a rental value of that portion covered by the Strand lease of $5,180, whereas the taxpayer was paying therefor $8,500, and in addition was required to construct a theatre.

Considerable importance is attached by the taxpayer to the rent of $9,000 which was paid on the Perry Theatre as evidencing the fact that its lease had such value. The assessed valuation of the Perry property was $89,400, as against $132,216 of the Strand property. The land covered by the Perry Theatre is 85 feet by 165 feet, while the land in the combined Selden and Jarecki properties is 62 feet 4 inches by 142 feet to 141 feet, but the Perry property contains a building assessed at $35,000. Considering assessed valuations to be two-thirds of actual value, the Perry property was worth in 1915 $134,100, a fair return on which at 6 per cent would be $8,046. It is thus apparent that the Perry rental is not materially disproportionate to the Strand rental, having due regard to the assessed valuations and the exclusions in the Strand lease and that the Perry lease covered a fully improved property.

In the light of all the evidence we are of the opinion that the Strand lease did not have any actual cash value when paid in for stock.

This brings us to the' taxpayer’s next contention, that it sold certain assets for $61,918.68 for which it should account in its tax returns, while the balance of the consideration of $160,000 was a purchase of the stock and should be accounted for by the stockholders. On September 12, 1919, certain stockholders of the taxpayer authorized English “to sell the capital stock of said company, whether common or preferred, which we own, on the basis of the offer to purchase said stock for $160,000.” This offer to purchase did not go through. Further negotiations resulted in the contract of February 7, 1920, the provisions of which are determinative of the taxpayer’s contention. That contract provides that the taxpayer, for the consideration of $160,000, assigns to the vendee, James B. Clark, “the existing lease to the Strand Amusement Co. for the premises at 918 State Street, in the City of Erie, Erie County, Pa., together with the good will, theatre building, equipment, and all other property now belonging to the Strand Amusement Co. in the City of Erie,” with certain exceptions not pertinent. The taxpayer emphasizes that provision of the contract which provides:

It is understood that the sum of Sixty-one Thousand Nine Hundred Eighteen and Sixty-eight Hundredths ($61,918.68) Dollars, being the boot value of the theatre building and equipment shall be the consideration for the assignment of said lease of said theatre building and equipment, and the residue of the consideration, to-wit, Ninety-eight Thousand Eighty-one and Thirty-two Hundredths ($98,081.32) Dollars shall be the consideration for the good will and established trade of the Strand Theatre owned and operated by the Strand Amusement Company, and as represented by the capital stock of the Strand Amusement 'Company purchased by James B. Clark and assigned by him to the Strand Amusement Company for retirement in the liquidation of said company; that said sum of Ninety-eight Thousand Eighty-one and Thirty-two Hundredths ($98,081.32) Dollars shall be paid to the Vendor as agent for its stockholders and distributed among said stockholders from the proceeds of said notes.

The “ good will ” and “ established trade,” to which the $98,081.32 was allocated, were “ owned and operated by the Strand Amusement Co.,” and the consideration therefor belonged to the taxpayer just as much as that allocated to the theatre building and equipment. A corporation is not an agent for the distribution to its stockholders of all or any portion of the consideration for the sale of its own assets. There is no question in our minds that the contract was a sale of the taxpayer’s assets for a consideration of $160,000, irrespective of any provisions prescribing a convenient means of liquidation and distribution of the corporate assets to its stockholders.

The taxpayer contends that the cost of the theatre should be amortized over a period of 20 years. The lease with Wertheimer was for 10 years, and provided for an option to renew for an additional 10-year period if he exercised the option to renew contained in his leases with the owners of the property. As the taxpayer’s right to renew was conditioned upon the action of Wertheimer, we are of the opinion that the renewal privilege was too indefinite to warrant the taxpayer’s amortizing the cost of the theatre over a 20-year period, and we therefore approve the determination of the Commissioner in spreading the cost over the original term of the lease. As the theatre was not commenced until about August 1, 1915, amortization of the cost thereof should not start until that date.


author: Love

text:
    Appeal of THE NATIONAL CONCRETE CO.
    Docket No. 1018.
    Submitted September 21, 1925.
    Decided February 17, 1926.
    Tbe evidence herein fails to establish that amounts expended constituted ordinary and necessary business expenses.

      Russell T. McFall, Esq., for the taxpayer.

      B. E. Saunders, Esq., for the Commissioner.
    Before Love.
    This is an appeal from the determination of deficiencies in income taxes for the years 1918, 1919, and 1920, in the aggregate amount of $4,641.09.
    The taxpayer contends that the Commissioner erred in refusing to allow as deductions from gross income certain expense items.
    FINDINGS OF FACT.
    The taxpayer is an Indiana corporation, with its principal office at. Indianapolis. Its principal business during the taxable years in question consisted of the construction of public works, such as bridges, causeways, and the like, under contract with county and municipal governments.
    In obtaining such contracts the taxpayer came in competition with other concerns engaged in the same business. It sometimes occurred that one of the primary features of a contest was the location of a bridge or the character of its structure — that is, whether it should be of concrete, iron, or wood. All such questions, or at least some of them, entered into the final popular vote on the determination of construction, vel non, and issuance of necessary bonds.
    E. H. Lee was the president of the corporation. He was the politician in the business, and it was his duty to negotiate for and procure all contracts. In his efforts in this regard it became necessary to enter upon and prosecute a political campaign in the vicinity directly interested and in which the votes would be cast which would finally determine the issues. Such campaigns were always more or less expensive. In addition to printing and distributing appropriate literature, it was found necessary to the taxpayer’s interest to engage the active assistance of influential people in the community, such as merchants and bankers, to popularize the plans and proposition submitted by the taxpayer. Those influential people would not put forth their best efforts without being remunerated for their time and effort. At the same time, in demanding and accepting such remuneration, they exacted a promise on the part of Lee that he would not disclose the fact that they were being paid for their services, as such knowledge might affect their prestige in their respective communities. In deference to such promise, Lee declined to divulge to the Commissioner, and still declined at the hearing of this appeal, to divulge the names of the persons to whom he made payments in the manner above set out.
    In paying the items hereinbefore described no checks were issued to the payees by the company, but Lee paid these amounts to such persons in cash. The company issued checks payable to Lee or the secretary of the company, and the cash proceeds of these checks were paid out as first indicated.
    In its petition taxpayer alleged payments of the character under consideration as follows:
    In 1918_’_$8,250
    In 1919_ 5,200
    In 1920_ 1, 050
    At the hearing the checks listed below were identified and introduced in evidence. Testimony was introduced identifying the proceeds of such checks as money paid by.Lee to the persons and for the reasons above stated.

    It was the settled practice of the taxpayer to pay its bills by check, naming the recipient as payee, with the exception of those issued for political or propaganda purposes, as hereinabove set forth. The Commissioner only disallowed such claims as were alleged to have been paid in cash and upon which the taxpayer failed or i'efused to furnish definite information as to the names of the recipients and the services performed.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Love

: The controversy arises over the refusal of the Commissioner to allow the items set forth in our findings of fact as deductions for ordinary and necessary business expenses, under section 284 (a) (1) of the Revenue Act of 1918, which provides:

That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, ⅞ * ⅝.

It has been evidenced that the Commissioner has allowed all deductions claimed where the recipient was known to have received the money expended. The taxpayer paid its bills and obligations by check, in which the recipient was named as payee, except in the transactions in controversy. In these transactions checks totaling $12,075 were issued to the president or secretary of the taxpayer as payee, and so far as the books of the taxpayer were concerned these officers were the recipients of the money. The taxpayer now claims these amounts were given in cash to the president, Lee, who disbursed it to persons unnamed in order to facilitate the obtaining of public contracts.

The divulging of the names is not sought by the Commissioner or the Board simply to gratify curiosity or to solve a mystery, but to properly authenticate the expenditures. By not furnishing sufficient evidence of the alleged expenditures, the taxpayer has failed in its proof of ordinary and necessary business expense; also, as is pointed out, the Commissioner is unable to check up or compute the income of the unknown persons alleged to have received this money, as the taxpayer has failed to comply with section 256 of the Revenue Act of 1918, the pertinent parts of which provide:

That all individuals, corporations, and partnerships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, and employers, making payment to another individual, corporation, or partnership, of interest, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments described in sections 254 and 255), of $1,000 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Commissioner, under such regulations and in such form and manner and to such extent as may be prescribed.by him with the approval of the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment. (Italics ours.)

While it may be true that the taxpayer expended no money other than for strictly legal or legitimate purposes, the facts that the recipients were unwilling to have their names divulged, and that the taxpayer declined and refused to divulge the names of the recipients or the specific amounts or purposes, bring the transactions under suspicion, which is strengthened by the fact that the alleged recipients feared that their standing and influence in their respective communities would be injured by a knowledge of their having received money under such conditions.

But, irrespective of any suspicion, and aside from any motive prompting taxpayer to withhold the specific information as to these payments, we need only to call attention to the inconsistent position of the taxpayer in invoking a section of a statute in its own behalf to sustain a claim for a deduction, while at the same instant he ignores another section of the same title of the same Act, and even at the moment of invoking the one he declines to comply with the other. As was aptly said by Mr. Justice Holmes in Rock Island, Arkansas & Louisiana R. R. Co. v. United States, 254 U. S. 141, 143, “Men must turn square corners when they deal with the Government.”