Court Opinion

ID: 4605960
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:37:29.021435+00
Date Added: 2024-06-11T07:53:17.306700
License: Public Domain

THE CITIZENS NATIONAL BANK OF KIRKSVILLE, MISSOURI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Citizens Nat'l Bank v. CommissionerDocket No. 96808.United States Board of Tax Appeals42 B.T.A. 539; 1940 BTA LEXIS 984; August 15, 1940, Promulgated *984  In 1923 petitioner contracted with the life tenant of the building it occupied for the continued use and possession thereof in consideration of an agreement to pay the life tenant $200 per month during his lifetime.  Later, in 1923, petitioner also acquired the remainderman's interest in said property for a lump sum consideration.  During 1936 petitioner paid the life tenant $2,400 under the 1923 agreement.  Held, such payments are capital in nature and are not deductible.  Henry J. Plagens, Esq., for the petitioner.  Angus R. Shannon, Esq., for the respondent.  ARNOLD*540  This proceeding involves a deficiency in income tax for 1936 in the sum of $624.93, only $360 of which is in controversy.  The issue is whether respondent correctly disallowed a deduction of $2,400 claimed by petitioner as rent paid on business property.  The record made consists of a written stipulation of facts, with attached documentary evidence.  We adopt the stipulated facts as our findings of fact and set forth herein the portions thereof pertinent to the issue presented.  FINDINGS OF FACT.  The petitioner is a corporation, organized and existing under the laws*985  of the State of Missouri.  It was incorporated June 26, 1906, and has ever since that date been engaged in the general banking business, with its principal place of business located at Kirksville, Missouri.  It filed its return for the taxable year with the collector of internal revenue at St. Louis, Missouri.  The return was filed on the cash receipts and disbursements basis.  From 1906 to 1912 petitioner rented the premises it occupied from William T. Baird.  In 1912 William T. Baird died, and under his will his son, Frank Baird, was to receive the income of the property during his lifetime.  The said will further provided that after the death of Frank the property was to pass to Alta Baird Belshe, daughter of William, and that, in case of destruction of the building by fire or tornado, Alta Baird Belshe was given the right to rebuild, using the insurance money in such rebuilding, and would thereafter own the property. 1 From the date of William Baird's death and up to April 21, 1920, the income of the property was paid to Frank Baird by the petitioner.  *986  Early in 1920 the building petitioner occupied was old and badly in need of repairs.  There was at this time a threatened contest of the Baird will and certain domestic difficulties in the family of Frank Baird.  Negotiations were commenced to acquire the interest *541  of Frank Baird in the property.  These negotiations were successful, Frank Baird's interest being acquired April 21, 1920.  In the acquisition of Frank Baird's interest petitioner entered into two writings, both under the date of April 21, 1920, the first of which provided in part as follows: KNOW ALL MEN BY THESE PRESENTS That I, Frank Baird, devisee under the will of William T. Baird, deceased, late of Adair County, Missouri, in consideration of the sum of one dollar to me paid, and other valuable consideration by me received, do hereby sell and convey to the Citizens National Bank of Kirksville, Missouri, the twenty-one and three-fourths feet off of the entire east side of Lot Five, Block Ten, original town, now city, of Kirksville, in Adair County, Missouri, and the building situated thereon, together with all the rights and privileges I have in said property by virtue of the provisions of the will of*987  said William T. Baird, deceased.  The second writing covered the consideration to be paid and provided as follows: Whereas, Frank Baird has executed to the Citizens National Bank, of Kirksville, Missouri, an instrument of writing, copy of which is hereto attached and marked Exhibit A, now therefore it is agreed by and between the said Frank Baird, first Party, and the said Citizens National Bank of Kirksville, Missouri, second party, as follows: That said first party shall repair the roof and paint and decorate the hallway of the building referred to in said attached instrument, and shall hereafter during the life of this agreement keep the roof on said building in repair, and the said second party may make such other repairs in said building as it may desire.  It is further agreed that the said second party will pay to first party during the term of his natural life the sum of two hundred dollars per month, payable on the last day of each calendar month, the first payment to be made on May 31st, 1920.  It is further agreed that first party shall keep the said building insured in the amount for which it is insured at this time, and should the said building be destroyed or*988  become untenantable, then the obligation to make said monthly payments of two hundred dollars shall cease and determine, and in event said building is destroyed by fire or storm, the rights and liabilities of said second party herein granted and created shall end, and the parties hereto shall stand in the same relation to each other as if this agreement had never been made.  On August 17, 1920, Alta Baird Belshe and her husband conveyed all of their right, title, and interest in the property to the petitioner for a cash consideration of $10,000.  The amount paid to Alta Baird Belshe is carried on petitioner's books as part of the cost of the building.  The property aforementioned consisted of a lot with a frontage of 21 3/4 feet by 108 feet, and a two-story building situated thereon.  Petitioner occupied the first floor of the old building from 1906 until the building was torn down in 1923.  On December 4, 1920, petitioner authorized the sum of $5,000 to be set aside for "improvements of *542  building fund" and additional sums were set aside in 1921 and 1922, making a total of $15,000 for this purpose.  On January 10, 1923, petitioner authorized repairs and alterations*989  to be made to said building and the installation of new fixtures.  In attempting this it was found that, due to the damaged condition of the foundation of the building and the east wall, it was more practical to tear down the entire building.  This was done, and a new building was built of brick and stone at a cost to petitioner of $43,096.96.  The petitioner has occupied the first floor of the new building since its completion.  Subsequent to the acquisition of the interests of Frank Baird and Alta Baird Belshe the land and building heretofore mentioned were carried as a capital asset on petitioner's balance sheet and all rents collected from the portion of the building not used by petitioner were received by petitioner and included in its gross income.  The expenses of the building, except such as were met by Frank Baird under the terms of the second writing of April 21, 1920, were borne by petitioner.  The petitioner made payments of $200 per month to Frank Baird in accordance with its agreement for each month, beginning with May 1920 to and including December 1936.  Under the terms of the agreement Frank Baird was compelled to pay for insurance an average of $33.84 per annum*990  for the period May 1, 1920, to and including 1936.  On April 21, 1920, Frank Baird was 61 years of age and, based on the American experience tables of mortality, had at that time a life expectancy of 13.47 years.  The value of an annuity of $197.18 per month for such period similarly computed as of April 21, 1920, was $21,918.37.  The fair market value of the land and building aforementioned on April 21, 1920, was $35,000; the fair market value of the land was $6,250.  On its 1936 return petitioner deducted the $2,400 paid Frank Baird as rent.  The respondent disallowed the deduction upon the theory that the payments represented a part of the cost of the property.  OPINION.  ARNOLD: Petitioner does not now claim that the $2,400 paid to Frank Baird is deductible as rent.  It claims that the payments so made are deductible (1) as exhaustion or amortization of the terminable interest acquired from Frank Baird, or (2) as annuity payments made in the acquisition of Frank Baird's interest.  In the alternative petitioner claims that $1,971.44 thereof is deductible as that portion of Frank Baird's interest in the building that was demolished in 1923.  *543  In determining*991  the issue presented, the situation at the time the contract was executed must be borne in mind.  Petitioner had been occupying the premises for 14 years, paying rent first to Frank Baird's father and then to Frank Baird.  In giving the income from the property to his son for life, the father's will had charged the son with making repairs to the building, carrying he insurance thereon and heating it.  In April 1920 the building was old and badly in need of repairs to make it suitable for petitioner's business.  If Frank Baird made the necessary repairs it would entail considerable expense, as evidenced by the $15,000 petitioner laid aside for alterations and repairs in 1920, 1921, and 1922.  Also at the time there were matters personal to Frank Baird which made the time opportune to negotiate for his interest in the property.  Petitioner contends that Frank Baird conveyed only a terminable interest by the instrument of April 21, 1920, and that he retained a contingent reversionary interest.  Even if this were true, we think that subsequent events, occurring prior to the taxable year, dissipated any limitation placed on the conveyance.  As the owner of the net income from the building*992  for life, Frank Baird had certain duties and responsibilities to his sister as remainderman, some of which were specifically provided for by his father's will.  Under the contract with Frank Baird petitioner acquired the right to make repairs, but it could not commit waste against the remainderman, such as would occur if it demolished the building.  After acquiring the remainderman's interest, petitioner could commit no waste as against itself as assignee of the life tenant, and when it started to make certain repairs in 1923, which ended in the construction of a new building, it constructed the building as remainderman and not as assignee of the life tenant.  It should be noted that the conveyance by Frank Baird relieved him of certain obligations which constituted additional consideration for the contract.  Furthermore, the contract fixed and determined the amount of monthly income he would receive from the property.  Thereafter the expenses of renting, repairing, except as to the roof, and heating the building fell upon the petitioner.  After the construction of the new brick and stone building it is doubtful whether the contract provision that Frank Baird should keep the roof*993  repaired had any real significance.  Certainly, the contract related to the building as it then existed in 1920, badly in need of repairs.  The provision, that if the building became untenantable petitioner's obligation to make the monthly payments should cease and determine, lost its force after the erection of the new structure.  The provision regarding the ending of petitioner's rights and liabilities upon the destruction of the building by fire or storm ceased to be a serious limitation after petitioner became the owner of the remainder interest.  *544  Thus, it appears, that, after 1923, Frank Baird's only substantial right under the contract was the right to receive $200 per month, and his only obligation was to pay certain insurance charges, which averaged $33.84 per year.  Petitioner relies upon our decision in , and , as justifying its exhausting the terminable interest acquired from Frank Baird.  These cases are distinguishable.  Frank Baird had outlived his life expectancy by 1936, and, even if petitioner were entitled to exhaust the value of the asset acquired, the*994  value thereof, as stipulated, would have been exhausted prior to the taxable year.  The cited cases capitalized the purchase price of the terminable interest in order to exhaust it, and we do not understand this petitioner to contend that the monthly payments were not capital expenditures.  Certainly, its claim for exhaustion contemplates that a capital expenditure was made.  Unless the petitioner can point to some deduction, authorized by statute, the capital investment must remain until the property is sold or otherwise disposed of.  Petitioner's second contention is that the monthly payments are deductible as an expense or loss.  The argument advanced is that petitioner, in effect, wrote an annuity on the life of Frank Baird at $197.18 per month ( $200 less average monthly insurance charges of $2.82); that by October 1933 the total monthly payments to Frank Baird equaled the value of the property acquired from him; and that all subsequent payments constituted income to Frank Baird and an expense or loss to petitioner under the rule announced in *995 , affirming . The premise of this contention is that petitioner ventured into the field of annuity writing for profit or loss, that a loss resulted as to each payment made after October 1933, and that the total payments made during 1936 are deductible.  If the premise be granted, the argument finds support in the cited case, but we can not agree with the premise.  In our opinion petitioner was purchasing a capital asset, the right to possession of property; it was not writing an annuity for profit.  Frank Baird was given the possession and net income from the building for his lifetime.  Petitioner had been the tenant of Frank Baird and his father before him for years.  It was possession of the property which petitioner sought and the consideration therefor took the form of monthly payments.  The contract fixed the net income from the building for Baird, relieved him from certain obligations, and transferred possession of the building to petitioner.  Likewise, the contract fixed the monthly payments to be made by petitioner for possession and enjoyment of the building and measured *545 *996  its tenure by the life of the vendor.  Except for certain contingencies, which became increasingly remote, the contract assured petitioner's continued possession and use of the property for business purposes during Frank Baird's lifetime.  By the acquisition of the remainder interest and construction of a new building petitioner practically removed all contingencies and insured its permanent possession of the property.  But for the restrictive provisions of section 23(a) of the Revenue Act of 1936 regarding payments made as a condition to the continued use or possession of this property, petitioner might justify the deduction of its monthly payments as rent.  Clearly, however, this petitioner had a substantial equity in the property during 1936 and would have a clear title thereto after the death of Frank Baird.  In these circumstances the statute precludes the deduction, and the facts of record necessarily catalogue the payments as capital expenditures.  See ; *997 ; ; ; and . Petitioner contends in the alternative that it is entitled to deduct $1,971.44 of the $2,400 payment made in 1936 as representing that portion of the payment applicable to Baird's interest in the building demolished in 1923, citing ; ; and . The cited cases hold that the fee owner is entitled to deduct losses resulting from voluntary demolition of buildings when the property was purchased with no intention of demolishing the building and erecting a new structure thereon.  None of the cited cases deal with the interest of a life tenant in a building voluntarily demolished. We doubt that petitioner would seriously contend that it demolished the building in 1923 as assignee of the life tenant, or that the entire value of the building so demolished should be allocated to the life tenant and*998  no value should be allocated to the remainderman.  It can not be presumed that a life tenant would deliberately commit waste as against his remainderman, and certainly the demolition of the building in 1923 was more properly attributable to petitioner as remainderman than as the assignee of the life tenant.  Furthermore, it is inconceivable that petitioner, as assignee of a life tenant, 64 years of age in 1923, would erect a new building of brick and stone if its tenancy would so shortly terminate.  Obviously, the new structure was erected by petitioner as remainderman, and Frank Baird was content to rely upon his personal contract with the bank for his monthly payment.  Whatever loss petitioner sustained as a result of the demolition of the building occurred in 1923, and no part of the additional payments to Baird for the right of possession *546  transferred in April 1920 was lost as a result of the demolition.  The payments were capital in nature and constituted a part of the cost of the premises occupied by petitioner.  This disposition renders it unnecessary to decide respondent's contention that a merger resulted upon the acquisition of the interest of Frank Baird and Alta*999  Baird Belshe.  In either event petitioner is not entitled to the deduction claimed.  Decision will be entered for the respondent.Footnotes1. The specific provisions of William T. Baird's will, one of the documents attached to the stipulation of facts, read as follows: * * * Third, I direct that my son Frank Baird shall have the income during his life from the Bank building and the Store building, he to have charge of the renting of the buildings paying insurance and repairs and heating of the bank building, my estate to pay the taxes on both buildings.  After his death both these properties are to go to Alta Baird Belshe and belong to her in fee simple.  He is also to have the use of the house he now occupies free of rent during his life.  He to keep up the insurance, repairs and tax on this property.  In case of destruction of any or all of these buildings by fire or tornado Alta is to have the right to rebuild using the insurance money in such rebuilding, and to pay Frank an amount monthly equal to the amount he had been realizing net out of the rentals of said properties, and if at his death he leaves Mary Ellen Baird his wife his widow, she shall be paid Five Thousand Dollars in full for all claims and demands she may have against him for money loaned or used by him, Frank Baird, belonging to her. ↩