Court Opinion

ID: 4599523
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:23:31.942336+00
Date Added: 2024-06-11T07:52:08.601899
License: Public Domain

EMIL W. CARLSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Carlson v. CommissionerDocket No. 43702.United States Board of Tax Appeals24 B.T.A. 868; 1931 BTA LEXIS 1581; November 23, 1931, Promulgated *1581 Held, that an amount of commission paid by petitioner to A for A's services in procuring a construction loan from B to petitioner is not deductible by petitioner as an ordinary and necessary business expense in the year in which paid, but is in the nature of a capital expenditure which is deductible pro rata over the term of the loan.  L. F. Loux, Esq., for the petitioner.  W. R. Lansford, Esq., for the respondent.  MCMAHON *868  This is a proceeding for the redetermination of an asserted deficiency in income tax for the calendar year 1926 in the amount of $6,454.97.  It is alleged that the respondent erred in disallowing as a deduction the sum of $40,000.  *869  FINDINGS OF FACT.  The petitioner is an individual residing in Chicago, Ill.  During 1926 his business was that of building, renting, owning and operating apartment buildings in Chicago.  In 1926 petitioner started to build an apartment building on a lot owned by him, located at the southwest corner of Sheridan Road and Grace Street in Chicago.  Four other apartment buildings had been constructed by petitioner during a period of about 20 years previous to 1926.  In*1582  order to construct the apartment building at Sheridan Road and Grace Street, petitioner found it necessary to obtain capital in addition to that which he had available.  He therefore made application on April 21, 1926, to the Chicago Trust Company for a loan of $2,000,000.  At that time petitioner knew the Chicago Trust Company would not make the loan itself, but that it would obtain the loan from one of several other parties who made loans.  The application for the loan which the petitioner made on April 21, 1926, to the Chicago Trust Company provided in part as follows: Disbursement in this loan will be made as follows: $240,000 October 1, 1926 and $220,000 each month thereafter for 8 months.  Interest will be charged on each portion as it is drawn into but not later than the dates specified.  * * * It is understood that my only expense in connection with this loan, if accepted, will be cost of printing and certifying the bonds, revenue stamps, your fee for services of $40,000 (2%) to be paid at the time of the first disbursement on the principal of this loan, the cost of a Mortgage Guaranty Policy (or in loans outside of Chicago and suburbs, an Abstract of Title continued*1583  to show the recording of the Trust Deed securing this loan and Attorney's Opinion of Title), a plat of survey by licensed surveyor, showing location of buildings, and the recording and release fees.  * * * You may retain the proceeds of the loan and any funds deposited by me, to be paid out by you to material men and contractors on your receipt of satisfactory waivers of lien from them, and you are hereby constituted my agent for that purpose without liability on your part.  It is understood and agreed that no part of this loan shall be disbursed at any time unless: (a) The net proceeds in the balance of the loan are sufficient in the judgment of the Chicago Trust Company to complete and fully pay for the improvements, free from all rights of Mechanics' Liens; and (b) Unless the plans and specifications furnished are fully and faithfully adhered to in the judgment from time to time of the person employed by Chicago Trust Company to inspect said improvements.  The loan was eventually made by the Metropolitan Life Insurance Company of New York City on or about May 12, 1926.  The full amount of $2,000,000 was paid in instalments to petitioner by that company.  *870  On*1584  May 12, 1926, the Metropolitan Life Insurance Company wrote petitioner a letter in part as follows: In re application for loan dated April 21, 1926.  Dear Sir: Subject to approval of title by our Attorneys, our Real Estate Committee has authorized a loan of $2,000,000 to be made on bond, or note of yourself, to be secured by first mortgage, or trust deed, on premises as described in said application, located on the S.W. corner of Sheridan Road and Grace Street, Chicago, Ill., the property being of irregular shape, having a frontage of 185' 10" on Sheridan Road and of 211' 11 1/4" on Grace Street and is to be improved by a 16 story reinforced concrete, brick and stone apartment house which is to be completed by about Jan. 1, 1927.  The loan is to be made for a term ending Nov. 1, 1941 and to bear interest at the rate of 6 per cent per annum for the first five years and at 5 1/2 per cent thereafter, payable semi-annually on the first days of May and November.  Both principal and interest are to be payable at this office, at the par of exchange, and net to his Company.  The loan is to be reduced by instalments of $40,000 each, semi-annually, beginning with May 1, 1928.  * * *1585  * The construction work is to be subject to the inspection and approval of our architect and for his services he is to receive a fee of $7,000 which, together with his necessary expenses incident to the inspection of the building, is to be paid by you at or before the time the loan is closed.  This letter contains no reference to the amount of $40,000 which petitioner had agreed to pay to the Chicago Trust Company.  All of the negotiations for the loan were initiated and conducted by the Chicago Trust Company.  After negotiations for the loan of $2,000,000 by the Metropolitan Life Insurance Company had been completed and the construction of the building had been started, the Chicago Trust Company charged petitioner $40,000 for its services in procuring the loan.  This amount was paid by petitioner to the Chicago Trust Company in cash on December 3, 1926.  The petitioner kept his books of account upon a cash receipts and disbursements basis.  In determining the petitioner's tax liability for the year 1926 the respondent refused to allow the full amount of $40,000 as a deduction as claimed by the petitioner.  The deficiency letter contains the following statement: * * * *1586  It is held that since the services rendered inured to your benefit over a fifteen year period, to permit the payment to be deducted in one year would result in a distortion of income over the period.  The amount has therefore been prorated over the life of the notes disclosing an allowable deduction in this year of $2,666.67.  * * * *871  OPINIONMCMAHON: It is the contention of the petitioner that the full amount of $40,000 paid by him in 1926 to the Chicago Trust Company for its services in procuring a loan of $2,000,000 from the Metropolitan Life Insurance Company of New York to petitioner is deductible in that year as an ordinary and necessary business expense.  The respondent has held that this expenditure was in the nature of a capital expenditure which is deductible pro rata over the term of the loan, and has allowed the petitioner a deduction in the year 1926 in the amount of $2,666.67.  Upon substantially similar facts the Board has heretofore held that expenditures made by a taxpayer in procuring a construction loan are not deductible in the year in which paid, but are deductible pro rata over the term of the loan.  *1587 . The petitioner contends that , is not in point, laying stress upon the fact that the expenditures made by the taxpayer in that case were paid to the same party that made the loan to the taxpayer.  This is an immaterial distinction between that case and the instant proceeding.  In the final analysis, the expenditure made by the taxpayer in the instant proceeding was made for the purpose of procuring the loan and the benefits of such expenditure will extend over the entire term of the loan.  The expenditure is thus in the nature of a capital expenditure instead of an ordinary and necessary business expense and is deductible pro rata over the term of the loan.  See also ; ; ; and . We approve the determination of the respondent.  Judgment will be entered for the respondent.