Court Opinion

ID: 4595591
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:15:21.420028+00
Date Added: 2024-06-11T07:51:28.108385
License: Public Domain

W. H. MARTIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Martin v. CommissionerDocket No. 34138.United States Board of Tax Appeals24 B.T.A. 813; 1931 BTA LEXIS 1597; November 13, 1931, Promulgated *1597  Lessors received income from improvements made by lessee to leased premises.  Ralph S. Scott, Esq., and Edwin M. Neiss, Esq., for the respondent.  MURDOCK *813  The Commissioner determined deficiencies of $865.11 and $76.50 in the petitioner's income-tax liability for the years 1923 and 1925, respectively, but now agrees that there is no deficiency for the year 1925 and that depreciation for 1923 is a certain amount.  For 1923 the petitioner assigns as error the Commissioner's action in increasing the net income reported on a joint return filed for husband and wife by the cost of repairs and additions made in that year by a leesee to a building owned by the petitioner's wife.  FINDINGS OF FACT.  The petitioner is an individual residing in Parsons, Kans.  *814  The parties entered into a stipulation as follows: 1.  W. H. Martin, the petitioner, and his wife, Isabelle M. Martin filed a joint income tax return for the taxable year 1923.  Separate income tax returns were filed by the petitioner and his wife for the year 1925.  2.  The Ellis & Martin Furniture & Carpet Company is a corporation existing under and by virtue of the laws of*1598  the State of Kansas, with an authorized capital stock of two hundred shares of a par value of $100.00 each, or a total capital of $20,000.00 with its principal office and place of business in Parsons, Kansas.  The petitioner owned all but four shares of the said capital stock throughout the years 1923 and 1925.  3.  On October 9, 1919, the petitioner and his wife acquired by purchase at a cost of $9,000.00, real estate improved by a two-story brick building situate at 1826 Broadway, Parsons, Kansas.  The building cost $6,000.00 and the land cost $3,000.00.  The legal title to said property was taken out in the name of Isabelle M. Martin and thereafter the legal title and absolute ownership thereof vested in the said Isabelle M. Martin.  4.  This building, together with the land on which it was situate, was rented by the said Isabelle M. Martin as of January 1, 1923, to the Ellis & Martin Furniture & Carpet Company at an annual rental of $2,400.00.  The corporation also agreed to pay the taxes and insurance on said building.  There was no written lease or written agreement of any kind existing between Mrs. Martin and the corporation.  The corporation occupied the premises without*1599  any definite agreement as to tenure of occupancy.  Prior to 1923 the building was rented by Mrs. Martin to others.  5.  On October 9, 1919, the date of purchase of said building, the same was twenty-five years old.  The building was of ordinary brick and frame construction, i.e., brick walls with wooden floors and wooden stairways.  The estimated life at date it was built was fifty years.  At date of purchase on October 9, 1919, the remaining life was twenty-five years.  Depreciation sustained in 1923 was $240.00.  On the joint income tax return filed for the year 1923, the petitioner deducted $180.00 depreciation on said building being at the rate of 3% per annum on the cost thereof of $6,000.00.  6.  In the year 1923, the above-named corporation made improvements to the said building.  A new front was put up, new partitions were installed and in a general way the entire building was remodeled.  7.  The improvements were completed in the latter part of the year 1923 and thecost thereof was $10,209.34, which was charged off by the corporation to expense in the said year 1923.  The Commissioner of Internal Revenue disallowed the said loss as an ordinary and necessary expense of*1600  doing business and advised the corporation that said amount should be capitalized and accordingly assessed and collected additional tax from the corporation for said year.  The assessment and collection of this additional tax was protested by the corporation, and a claim for refund on account of this item was filed on behalf of the corporation, which was disallowed by the Commissioner.  8.  The Commissioner of Internal Revenue also increased income of the petitioner for the year 1923 by this amount of $10,209.34, giving as a reason therefor that there was no lease between the lessor, Isabelle M. Martin and the lessee corporation, and that therefore title to the improvements vested in the owner at the time made, and constituted income to her.  9.  For the years 1924 and 1925, Isabelle M. Martin received from the corporation $2,400.00 rental per year, the same as she received for the year 1923 and the corporation paid the taxes and insurance on the property, which amounts were duly reported on the tax returns.  *815  OPINION.  MURDOCK: The correct decision of the present case does not depend upon how the Commissioner, in determining the tax liability of the lessee, may*1601  have or should have treated the expenditure of $10,209.34 for the improvements.  The petitioner seeks to avoid paying the amount of the deficiency resulting from including the $10,209.34 in income by contending that there was no agreement between the lessor and the lessee in regard to these improvements.  He concedes that article 48 of Regulations 62 and a number of decided cases are correct interpretations of the law, but argues that this is so because they are predicated upon an agreement of the lessee to improve the leased premises.  This argument is certainly not persuasive where, as here, the petitioner owned all but 2 per cent of the stock of the lessee and, with his wife, was the lessor.  In such a situation the petitioner and his wife were free to do as they pleased so far as any leasing and improving of this building by the corporation were concerned.  We do not know why they proceeded without a lease providing for a definite term and for improvements, but the fact that they did is no reason why they should escape tax when improvements were made by the corporation.  They voluntarily used a lease having no definite term; consequently, they could have refused to renew it for*1602  the next year and thus have repossessed themselves of the building.  The improvements became a part of the building when made and were income to the owners at that time.  Cf. ; certiorari denied, ; . Even if this income could be reported ratably over the term of the lease, here the only term we know of is the one year, so we can not say that the Commissioner erred in this connection.  ; ; ; . Reviewed by the Board.  Judgment will be entered under Rule 50.MCMAHON concurs in the result only.  MATTHEWS dissents.