Court Opinion

ID: 4593674
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:11:18.939592+00
Date Added: 2024-06-11T07:51:06.481718
License: Public Domain

David Hoffman, Petitioner v. Commissioner of Internal Revenue, Respondent; Robert Hirsch and Jeanne Hirsch, Petitioners v. Commissioner of Internal Revenue, RespondentHoffman v. CommissionerDocket Nos. 3906-65, 3943-65United States Tax Court48 T.C. 176; 1967 U.S. Tax Ct. LEXIS 106; May 16, 1967, Filed *106 Decisions will be entered under Rule 50.  Sec. 167 -- Depreciation -- Exhaustion of Property Used in a Business.  -- The cost of a contract or a lease for the use of space, for a definite period, in which to place vending machines is deductible over the period of the lease as depreciation under sec. 167 of the Internal Revenue Code of 1954.  Abraham M. Stanger, for the petitioners.Wallace Musoff, for the respondent.  Murdock, Judge.  MURDOCK *176  The Commissioner determined deficiencies in income tax as follows:YearHoffmanHirsch1957$ 15,540.31$ 960.7719583,732.761,550.32The parties, by stipulation, have settled all of the issues raised in the petitions except one.  That one is whether contracts purchased by the petitioners partnership for the location of cigarette vending machines are subject to *107  depreciation. The costs and values of those contracts have been stipulated and it has also been stipulated that the amounts of depreciation deducted on the returns are correct if any depreciation is allowable.FINDINGS OF FACTDavid Hoffman filed his returns for the taxable years with the director of internal revenue at Brooklyn, N.Y.  He then resided at Plainview, N.Y.Robert and Jeanne Hirsch, husband and wife, filed their joint returns for the taxable years with the director of internal revenue at Brooklyn, N.Y.  They then resided at Syosset, Long Island, N.Y.David and Robert formed a partnership known as County Cigarette Service on January 1, 1957.  The partnership was engaged, during 1957 and 1958, in the business of selling cigarettes through vending machines in the New York metropolitan areas of Nassau and Queens.  It had contracts for the various locations in which it placed its vending machines. Most of the contracts were in writing and each was originally for a 3-year period stated in the contract.  None contained any provision for renewal. If a machine remained in the same location after the expiration of the contract period it would have to be under a new contract obtained*108  by negotiation between the partnership and the owner of the location for which contract the partnership would have to pay the newly agreed upon purchase price.*177  A few agreements for locations were oral and were terminal at will by either party.Hoffman had been engaged in this same business as an individual since April 1947 and Hirsch had been his employee prior to the formation of the partnership. The partnership purchased Hoffman's assets on January 1, 1957, and purchased assets from others on September 19, 1957, August 7, 1958, and October 13, 1958.  The costs of the contracts or leases thus acquired are stipulated as follows:January 1, 1957$ 67,875.03September 19, 195724,625.00August 7, 195819,435.00October 13, 195848,720.36The written agreements thus secured are generally referred to as leases or contracts.Hoffman and Hirsch, before making each of those purchases for the partnership, considered thoroughly the locations, the contracts for locations and their remaining lives, the sales volumes at each location, the commission rates, the types and conditions of the machines, and other elements entering into the prices to be paid.  They considered *109  the price to be paid for contracts to be the most important element involved.  They considered the life of oral contracts to be 1 year and their value to be small.The partnership kept a file showing the expiration date of each contract and as that date approached the partners again reviewed all of the factors affecting the value of the contract before negotiating with the owner of the location for a new contract and the amount to be paid for it, knowing that they would be open to competition in securing a new contract. They then negotiated with the owner of the location for a new lease or contract at a new cost.All stipulated facts are incorporated herein by this reference.OPINIONThe Commissioner in the deficiency notices stated that amortization under section 167 is not allowable with respect to the cost of the location contracts because they "are of such an indefinite character that no probable useful life can be determined." The evidence shows the error of that reasoning.The unrefuted testimony is that each written contract or lease was for a definite period of years stated in the contract, could be enforced at law by either party for those years but for those years only, *110  and carried no provision for or promise of renewal. Also it is clear that the entire value of each contract expired as those years elapsed and no goodwill was involved.  As the term of each contract expired, the partnership could only negotiate for a new contract to replace the old *178  one.  It had to agree upon and pay a new consideration for a new contract. In that negotiation the partnership was open to strong competition and the most important consideration was the amount it would offer to pay for a new contract.Thus it seems clear that these contracts were wasting assets and in order to compute the partnership annual profit from the operation of the machines in their locations during the life of the contracts permitting them to operate in those locations, the proportionate costs of the contracts for the locations for the year, would have to be deducted from the gross sales of the machines for the year.  Sec. 167, I.R.C. 1954.  Cf.  Commissioner v. Seaboard Finance Co., 367 F. 2d 646, affirming a Memorandum Opinion of this Court; Patterson v. The Birmingham News Co., 345 F. 2d 531; United Benefit Life Insurance Co. v. McCrory, 242 F. Supp. 845">242 F. Supp. 845.*111 1 The contracts for the location of the vending machines are leases of space and the costs of those contracts are rent.  Counsel for the Commissioner conceded at the trial that the cost of a single contract paid directly to the owner of the space thus obtained for a stated period of years would be deductible in full over the period covered by the contract.  Here a number of such contracts were obtained by the partnership by its payments, to the owners of the contracts, of amounts herein stipulated.  The method of computing and the amount of depreciation, if the contracts are subject to depreciation, have been agreed upon by the parties hereto.  No reason why they are not subject to depreciation appears in this case and on this issue the decision herein is for the petitioners.*112 Decisions will be entered under Rule 50.  Footnotes1. The costs of the contracts here involved are in addition to and unrelated to any commissions of so much per package of cigarettes sold by a vending machine which are payable to the owner of a location under the contracts now under consideration, and cases relating to such commissions are not in point.  Other cases cited by the Commissioner but not mentioned in this opinion involved facts not here present and are clearly not determinative of this case.↩