Court Opinion

ID: 4598090
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:20:33.406709+00
Date Added: 2024-06-11T07:51:54.517526
License: Public Domain

AUTOMATIC EXPOSITION CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Automatic Exposition Co. v. CommissionerDocket No. 12705.United States Board of Tax Appeals11 B.T.A. 1397; 1928 BTA LEXIS 3630; May 15, 1928, Promulgated *3630  The respondent's computation of the allowance for the exhaustion of a certain leasehold which the petitioner is entitled to deduct in computing its net income for the year 1923, approved.  A. J. Ryan, Esq., for the petitioner.  Brice Toole, Esq., for the respondent.  MARQUETTE *1397  This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1923 in the amount of $159.87.  FINDINGS OF FACT.  The petitioner is a corporation duly organized under the laws of the State of Illinois and is located in Chicago.  In 1911 the petitioner entered into a 99-year leasehold of the premises known as 114 South State Street, Chicago, by the terms of which the petitioner was obligated to pay an annual rental of $22,500, and was also obligated to pay $40,000 for the building then on the land.  The lease further provided, in part, as follows: Eighth: Lessees further covenant and agree that in case of damage to the building now standing upon said demised premises, or in event of destruction thereof, they will either repair or rebuild same within six months thereafter, *1398  or will proceed to erect*3631  upon said demised premises or upon said premises and other land adjacent thereto, a modern fireproof building and if they shall elect to erect said modern fireproof building that they will construct and complete same in full compliance in every particular with the provisions hereinafter contained relating to the construction of modern fireproof building; and that they will keep and maintain upon said premises at all times a building at least as good as the one now located thereon until such time as they shall enter upon the construction of the modern fireproof building in accordance with the terms hereof, and that they will at all times during the continuance of this lease and after the erection of said modern fireproof building on said premises in accordance with the terms hereof, keep and maintain upon said demised premises a building which shall conform to the requirements of this lease in regard to the modern fireproof building to be erected thereon as herein provided, and will at all times at their own expense keep the building on said demised premises in good repair and condition so that the security furnished by said building for the rents and agreements herein contained shall*3632  not at any time be impaired or diminished in value and also that the building can be surrendered in good order and condition to lessors at the termination of this lease by forfeiture or lapse of time.  * * * Tenth: If lessees shall tear down, remove, or destroy any building that is now or may hereafter be erected upon or over the premises hereby demised for the purpose of building, construction or erecting on or over the premises and land hereby demised or on and over the land hereby demised and other land adjacent thereto a modern fireproof building, or, if on account of damage to or destruction of the building now upon said premises they shall desire to replace the building now upon said demised premises or which may hereafter be erected thereon, for the purpose of erecting upon said land and premises or upon or over the land hereby demised and other land adjacent thereto a modern fireproof building as hereinabove provided, then and in such case lessees shall build said building upon said premises or on and over said premises and other land adjacent thereto in strict compliance with all the laws of the State of Illinois and ordinances of the City of Chicago then in force * * *3633  *.  Twelfth: It is hereby covenanted and agreed by and between the parties hereto that said lessees may sell and convey their interest in said premises and in the building thereon at any time when they shall not be in default in any of the covenants and agreements herein contained to be kept and performed by them, and shall have paid all rents and taxes, assessments, insurance premiums and other charges of every kind which shall have accrued under this lease at the date of any such assignment; provided such assignment by lessees shall be evidenced by an instrument in writing duly executed under seal and acknowledged by the assignee or assignees, and duly recorded in the Recorder's Office of Cook County, Illinois, wherein and whereby such assignee or assignees shall expressly accept and assume all the terms and covenants in this lease contained to be kept and performed by lessees, and become bound personally to comply therewith.  Said lessees covenant and agree that they will not make any assignment of this lease except in the manner and upon the conditions above set forth.  It is further covenanted and agreed that in event any assignment shall be made at the times, under the conditions*3634  and in the manner hereinbefore set forth, the assignee or assignees shall be subject to the terms and conditions as to future assignments as are herein contained in regard to assignments by original lessees, and to all covenants, agreements, provisions and conditions contained *1399  in this lease, but such sale and assignment of the interest of lessees herein shall not release or discharge lessees hereunder from any of the covenants, obligations and agreements in this lease contained until a modern fireproof building has been erected upon the premises as in Paragraph Tenth provided in conformity with the requirements hereof, free and clear of all mechanic's or other liens or possibilities thereof, from and after which time lessees herein, if any sale or assignment shall be made in the manner herein provided and such assignee shall have complied with the provisions hereof accepting and assuming the terms and covenants of this lease by lessees, to be kept and performed, shall be released and discharged from any and all of the covenants, obligations and agreements in this lease contained, and not otherwise.  In June, 1922, the petitioner leased these premises to the Favorite*3635  Drug & Candy Co., hereinafter called the Drug Company, for a period from August 1, 1922, to the end of the original leasehold, namely, April 30, 2010.  The Drug Company was obligated to pay an annual rental of $32,500 until July 31, 1933, and annually thereafter the amount of $22,500, which was the rental reserved in the original lease.  In addition the Drug Company was to pay for the building the sum of $115,000, in 44 quarterly installments.  The Drug Company also obligated itself to carry out all the provisions and requirements imposed upon the petitioner by the terms of the original and underlying lease.  In 1933 the petitioner is to assign its original lease to the Drug Company if the latter has performed all the covenants imposed on it by the sublease.  The respondent has determined and allowed a March 1, 1913, value of $150,000 for the petitioner's lease.  The petitioner, in computing its net income for the year 1923, deducted one-eleventh of such value depreciated to August 1, 1922, the date of the lease between it and the Drug Company.  The respondent has determined that the March 1, 1913, value of the lease should be spread over its remaining life from that date, and an*3636  aliquot part of such value deducted from income in each year.  OPINION.  MARQUETTE: The question in issue is whether the petitioner may exhaust the depreciated March 1, 1913, value of its lease over a period of eleven years from August 1, 1922, while it receives a profit from its tenant; or whether that value must be prorated over the entire remaining life of the petitioner's leasehold, about 87 years, although during some 76 years of that time the petitioner will receive no profit from the second tenant.  The respondent contends that the petitioner could not make a legally valid assignment of the original lease because that instrument imposed certain contingent liabilities which might run for the entire period of the lease.  That contention is based upon the second paragraph of section twelve of the original lease, as set forth in the above findings of fact.  We are not impressed by the argument.  *1400  The lease itself contemplates the possibility of its being assigned; the mere fact of assignment would not of itself release the assignor from his liabilities, which were based upon privity of contract; nor would the contractual liability set up in the lease prevent its*3637  being assigned.  (1 Tiffany, Real Property, 165, 166.) But although the petitioner had the power to assign its lease to another, it did not do so by its agreement in June, 1922, with the Drug Company.  What it did do was to make a sublease, with a promise of future assignment of the original lease provided the sublessee meanwhile carried out certain obligations.  The pertinent part of the agreement with the Drug Company is as follows: Ninth: As a further consideration for the aforesaid demise the Lessee hereby agrees to purchase from the Lessor the building now upon the demised premises, together with all the right, title and interest of the Lessor in and to the same and in and to the unexpired term of the leasehold estate created by said underlying lease and to pay therefor, in addition to the other payments provided for by this lease, the further sum of One Hundred Fifteen Thousand Dollars ($115,000) payable in forty (40) installments of Twenty-five Hundred Dollars ($2500.00) each on the first days of August, November, February and May of each year for ten years commencing August 1, 1922, and four (4) installments of Thirty-seven Hundred Fifty Dollars ($3750.00) each in the*3638  year commencing August 1, 1932, and each installment aforesaid shall bear interest at the rate of seven per cent. per annum from the time such installment shall become due and payable until the same shall be paid to the Lessor; and it is expressly covenanted and agreed that, if and when the Lessee herein shall have paid in full the purchase price aforesaid, and shall have also paid all the rental herein reserved for the first eleven years of the terms of this lease, and shall have fully performed each and all the covenants and agreements on its part to be kept and performed hereunder during that period, then the Lessor herein shall and will execute and deliver to the Lessee a good and sufficient instrument of assignment, in accordance with all the provisions of the twelfth paragraph of said underlying lease, of all the right, title and interest of the Lessor herein as Lessee under said underlying lease in and to the then unexpired term thereof.  While it is probable that the petitioner will be called upon to so assign the original lease, it is not certain that such will be the case.  Unless and until the Drug Company has faithfully performed all of the covenants and obligations required*3639  of it by its June, 1922, agreement with the petitioner, the latter is not obligated to assign its original lease.  Until that is brought to pass, the petitioner remains in the same status as regards the original lease, as when that lease first went into effect.  The obligation to assign the original lease is contingent only, not positive and inescapable.  The lease is property which is subject to exhaustion, but deductions for such exhaustion must be spread over the period of the petitioner's ownership of the lease.  ; Gladding*1401 . Such ownership, so far as we are now advised, does not terminate definitely until April 30, 2010.  It may be, as the petitioner argues, that it will receive no net income from the leasehold after August 1, 1933, from which to deduct the annual prorated exhaustion of the leasehold.  However that may be, we can not remake the contract for the petitioner.  The determination of the respondent must be approved.  Reviewed by the Board.  Judgment will be entered for the respondent.