Court Opinion

ID: 4625809
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:55.354535+00
Date Added: 2024-06-11T07:59:56.538226
License: Public Domain

BATES-BOWMAN CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bates-Bowman Corp. v. CommissionerDocket No. 11357.United States Board of Tax Appeals16 B.T.A. 878; 1929 BTA LEXIS 2495; June 4, 1929, Promulgated 1929 BTA LEXIS 2495">*2495  In July, 1918, the petitioner acquired a leasehold of hotel property in exchange for all its capital stock.  Held that at the time the lease contract was paid in for stock it had no value in excess of the rentals reserved to the lessor, and the petitioner is, therefore, not entitled to an exhaustion allowance nor to include any amount in invested capital on account thereof.  H. Kennedy McCook, Esq., for the petitioner.  John D. Foley, Esq., for the respondent.  TRAMMELL 16 B.T.A. 878">*878  This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919, 1920, and 1921 in the amounts of $4,821.59, $21,150.61, and $12,393.18, respectively.  On motion of the petitioner, duly granted, the hearing was limited to the issues other than special assessment, pursuant to Rule 62(a) of the Board's rules of practice.  The only question presented for consideration here is the value, if any, of a certain leasehold for the purpose of computing invested capital and exhaustion allowances.  FINDINGS OF FACT.  The petitioner is a corporation, organized in May, 1918, under the laws of the State of New York, having its principal1929 BTA LEXIS 2495">*2496  place of business at Park Avenue and 40th Street, New York City.  The petitioner was organized for the purpose of leasing and operating the Murray Hill Hotel, and its capital stock consisted of 6,000 shares of common and 6,000 shares of preferred, all of the par value of $100 per share.  16 B.T.A. 878">*879  The petitioner issued its entire capital stock, both common and preferred, to Benjamin L. M. Bates in exchange for a leasehold for a period of 10 years on the said Murray Hill Hotel, located at 40th Street and Park Avenue, New York City.  Thereafter, 2,000 shares of the preferred stock and 2,000 shares of the common stock were transferred to John McE. Bowman.  There have been no sales of the petitioner's capital stock from the date of its incorporation to the present time.  The leasehold acquired by the petitioner in exchange for its capital stock was evidenced by a written contract dated July 3, 1918, and was for a term of 10 years and provided for an annual rental of $74,250 from May 1, 1918, payable in equal monthly installments.  The property covered by the lease included the hotel completely furnished.  The lease contract provided, among other things, that the petitioner1929 BTA LEXIS 2495">*2497  should pay all assessments, taxes, water-rents and other charges of every nature which might be levied against the property during the term of the lease, that the lessee could not transfer the leasehold without the consent of the lessor, and that the petitioner should keep the buildings and furnishings insured against loss by fire in an amount not less than $1,350,000.  The lease contract also contained the following provision: 8.  It is further covenanted and agreed between the parties hereto that in the event that the landlord sells said premises to a bona fide purchaser, that then and in that event the landlord or the purchaser may, at their option, cancel and annul this lease, upon sixty (60) days notice to the tenant; that thereupon and at the end or expiration of said notice, the said tenant will promptly vacate said premises, paying rent to the LANDLORD to the date when he shall vacate the same, and thereupon this lease shall come to an end, the same as if it had expired by limitation.  * * * The leasehold was set up on the books of the petitioner at $1,200,000, the par value of the stock issued therefor.  The Murray Hill Hotel contains 400 rooms, and has a frontage1929 BTA LEXIS 2495">*2498  on Park Avenue of 197.6 feet, 130 feet on 41st Street, and 230 feet on 40th Street.  It is 8 stories high.  It had a total assessed value of $3,780,000, the land being assessed at $1,780,000 and the building at $2,000,000.  OPINION.  TRAMMELL: On motion of the petitioner, duly granted, the hearing in this proceeding was limited in the first place to the issues other than special assessment.  In the petition it is alleged that the respondent erred (1) in disallowing deductions for replacement of furniture and fixtures; (2) in disallowing deductions for the amortization of the petitioner's leasehold; (3) in excluding from invested capital the value of the leasehold; and (4) in refusing to compute the petitioner's profits tax for the years 1919 and 1921 under the 16 B.T.A. 878">*880  provisions of section 328 of the Revenue Acts of 1918 and 1921 and in failing to allow the petitioner greater relief for the year 1920 under the provisions of section 328 of the 1918 Act.  Issue (1) was abandoned by the petitioner, and the hearing on the issue of special assessment has been deferred under Rule 62(a).  This leaves for consideration here only issues (2) and (3), which involve the question of the1929 BTA LEXIS 2495">*2499  value, if any, of the petitioner's leasehold for the purpose of computing invested capital and deductions for exhaustion.  It is alleged in the petition that the leasehold had a value, at date of acquisition, of not less than $1,200,000 in excess of the stipulated rentals.  But in its brief the petitioner asserts that its lease had a fair market value in 1918 of $976,776, and contends that it is entitled to include said amount in its invested capital and is entitled to deductions for exhaustion on the basis of that valuation.  The respondent denies that the lease had any value whatever in excess of the rentals, and declined to include any amount therefor in invested capital, or to allow any deductions for exhaustion.  The evidence discloses that the Murray Hill Hotel in 1918 was a valuable property, being located near the Grand Central Terminal and adjacent to the shopping and theatre districts of New York City.  The hotel had been kept in good condition and possessed a long established clientele.  It had 400 rooms, and was completely furnished.  Its assessed valuation was $3,780,000.  The Revenue Acts of 1918 and 1921, in section 326(a)(2), define "invested capital" as including, 1929 BTA LEXIS 2495">*2500 inter alia, the "actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment." A leasehold is tangible property, and when acquired by a corporation in exchange for its stock, prior to March 3, 1917, may be included in the computation of invested capital at its actual cash value in accordance with the provisions of section 326(a) supra.  ; . The question for consideration here is whether the leasehold, which was paid in for the petitioner's stock, had an actual cash value in excess of the reserved rentals at the time of such payment.  The lease contract provided that in the event the landlord should sell the premises to a bona fide purchaser, the landlord or purchaser, at his option, might cancel or terminate the lease upon 60 days' notice.  In view of the right thus retained by the lessor, we are unable to conclude that any reasonably prudent business man would have purchased the lease contract at a bonus, since the leasehold might be terminated at any time upon 60 days' notice.  The purchaser under 16 B.T.A. 878">*881 1929 BTA LEXIS 2495">*2501  such circumstances would have no assurance that he would be able to recover out of earnings from the operation of the hotel any amount paid for the contract, much less to make a profit on the transaction.  The petitioner offered the testimony of two witnesses, who expressed opinions that the lease contract in question had a value of $976,776 and $1,500,000, respectively.  These opinions were predicated upon the assumption that a reasonable rental for the Murray Hill Hotel was $180,000 to $200,000 per year, while the petitioner was required to pay an annual rental of only $74,250, but it is not shown that said witnesses took into consideration the cancellation provisions above referred to.  In the light of all the evidence before us, we are unable to say that the respondent erred in refusing to include in the petitioner's invested capital any amount on account of the value of said leasehold, or to allow deductions for the exhaustion thereof.  The respondent's action in respect of issues (2) and (3) is approved.  Reviewed by the Board.  Further proceedings will be had under Rule 62(b).