Court Opinion

ID: 4625663
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:39.461856+00
Date Added: 2024-06-11T07:56:44.862515
License: Public Domain

STATE SAFETY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.State Safety Co. v. CommissionerDocket No. 12641.United States Board of Tax Appeals13 B.T.A. 1385; 1928 BTA LEXIS 3056; November 2, 1928, Promulgated *3056  March 1, 1913, value of leasehold interest determined.  Raymond H. Schultz, Esq., and David Bluford, Esq., for the petitioner.  Brice Toole, Esq., for the respondent.  SIEFKIN*1386  This is a proceeding for the redetermination of deficiencies in respective amounts of $3,519.64 and $3,699.06.  The error alleged is respective amounts of $3,519.64 and $3,699.06.  The error alleged is that the respondent erred in refusing to allow depreciation sustained on a leasehold owned by the petitioner on the basis of its March 1, 1913, value.  FINDINGS OF FACT.  Petitioner is an Illinois corporation with its principal place of business at Chicago.  On January 26, 1926, the deficiency letter on which this appeal was taken was mailed to the taxpayer stating a deficiency of $3,519.64 for the calendar year 1920, and $3,699.06 for the calendar year 1921.  In its returns for said years, the petitioner deducted the amount of $8,416.57 for amortization of ground lease and building.  In his determination of the deficiency the respondent disallowed $6,528.35 of such amount in each year and allowed $1,888.22 in each year.  In 1894 the petitioner acquired a lease*3057  for 97 years and three months (expiring July 31, 1991) on the premises known as: Sub-lots 1 and 2 of lot 10 in block 7 in fractional section 15 addition to Chicago in Cook County, Illinois, except the west 27 feet of said lots taken for the widening of State Street, at an annual rental of $30,000.  On October 10, 1905, the premises were sublet by the petitioner to Rothschild & Co. from October 10, 1905, to February 28, 1986, a term of 80 years and 5 months, at an annual rental of $63,000.  The sublease provided for the payment by the sublessees of all taxes, special assessments, repairs, insurance, etc.  The leased premises comprise a ground area of 11,041 square feet, being 144.8 feet on Van Buren Street, by 76.42 on State Street, and were on March 1, 1913, improved with a steel skeleton fireproof department store building equipped with sprinkler system on concrete caissons going down to bedrock.  The building contained 10 stories, an attic, and two basements and was designed to carry 7 additional stories.  The cubic content of the building was 2,500,000 feet.  The value of the land under the building on March 1, 1913, was approximately $3,000,000.  The value of petitioner's*3058  leasehold as of March 1, 1913, was $528,000.  OPINION.  SIEFKIN: The position of the respondent on which the deficiencies asserted in this proceeding were based was that exhaustion of the *1387  petitioner's leasehold interest must be based upon cost.  That position was abandoned and at the hearing respondent's counsel admitted that the petitioner was entitled to an exhaustion allowance based upon the March 1, 1913, value.  The respondent further admitted at the hearing that the petitioner's leasehold interest had a value on March 1, 1913, of $528,000, and in his brief, therefore, reduces the deficiencies to $1,290.89 for 1920 and $1,395.89 for 1921.  The petitioner, however, contends for a value of $721,965, basing such amount on the testimony of the two real estate experts who testified at the hearing and who placed that value upon the petitioner's interest as of March 1, 1913.  The petitioner, also, at the close of the hearing, filed a motion asking the Board to enter judgment upon the basis of such a value based upon the theory that such testimony was uncontradicted and must be adopted verbatim.  This position is not sound.  In the hearing of fact cases we concede that*3059  it is our province to act as a jury, and, while we have no right arbitrarily to ignore or discredit the testimony of unimpeached witnesses, it is still our province, when the question is purely one of value, to exercise our own judgment on the facts as to which the experts give their opinions.  In this proceeding the experts, in reviewing the basis for the value which they placed on the property, listed a large number of sales or leases of property within the loop district in Chicago.  Two of these leases and sales were as late as 1923 and 1926.  Nor were the transactions proved independently of the testimony of the experts whose testimony with respect to such transactions was pure hearsay.  It further appears that the value obtained by the two experts for the petitioner was obtained by capitalizing the annual return of $33,000 over a period of 78 years and 5 months upon a straight discount formula, using 4 1/2 per cent compound interest.  Such a method takes no account of the speculative possibilities over the long period which the lease had to run.  It may be true, as testified by the experts, that the buildings upon the property standing back of the payments as security minimized*3060  that risk.  Considering all the circumstances, we are inclined to the view that a method which makes provision for a safe interest rate and a speculative rate more nearly reflects the value than a method which makes no provision for the element of risk.  The respondent's calculation used such a method and results in a value of $528,000.  The petitioner has not satisfied us that the amount should be larger.  Judgment will be entered for the respondent for a deficiency of $1,290.89 for the year 1920, and $1,395.89 for the year 1921.