Court Opinion

ID: 4617182
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:36:03.657242+00
Date Added: 2024-06-11T07:55:15.724222
License: Public Domain

SHELBY D. SCOTT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Scott v. CommissionerDocket No. 6180.United States Board of Tax Appeals9 B.T.A. 1219; 1928 BTA LEXIS 4266; January 13, 1928, Promulgated *4266  1.  Value of improvements erected on leased premises by lessee determined as of the date of the expiration of the lease.  2.  Insufficient evidence to determine value of buildings demolished and altered.  Frank J. Albus, Esq., for the petitioner.  George G. Witter, Esq., and T. W. Lardner, Esq., for the respondent.  ARUNDELL*1219  This appeal is from the determination of deficiencies in income taxes for the years 1922 and 1923 in the respective amounts of $335.88 and $270.61.  The petitioner alleges as errors (a) the addition to his income in each of the taxable years of the sum of $2,711.83, which amount was determined by the Commissioner as the yearly income derived from improvements made by the lessee on real property leased by him from the petitioner, and (b) the disallowance of deductions of $10,000 and $1,500, the alleged value of buildings demolished and/or altered by the lessees during the course of making the improvements.  FINDINGS OF FACT.  By an agreement dated December 1, 1919, the petitioner, an individual of Norfolk, Va., together with Alan G. Trigant, and Geraldine D. Burrow, owners of adjoining property of equal dimensions, *4267  leased *1220  to three individuals for a period of 10 years from January 1, 1920, parcels of improved real property having a frontage of 96 feet on Granby Street, Norfolk, and a depth of approximately 207 feet to Monticello Avenue, for the purposes of erecting and maintaining thereon a building suitable for a theatre or moving picture business.  The lessees further agreed to pay all taxes, levies, etc., on the land and improvements and to insure the buildings in a sum satisfactory to the lessors.  By a supplemental lease dated April 21, 1921, the W.W.V. Company, Inc., became an additional party to the lease, the term of which was extended to December 31, 1939, with an option of renewal for 10 years, and the annual rental was increased from $30,000 to $40,000, of which petitioner was to receive one-half, the same as under the prior agreement.  The supplemental lease also provided that the provisions in the lease dated December 1, 1919, "as to the construction of any special class of buildings shall not be binding, so long as said buildings to be constructed shall be suitable for commercial purposes.' At the time the lease was executed a portion of the petitioner's property*4268  at 326 and 328 Granby Street was improved by a 2-story building, having a frontage of 25 feet and depth of 75 feet, and the remainder was occupied by the Dozier Building, a one-story structure, 115 feet deep.  The portion of his property facing on Monticello Avenue was covered by a 2-story brick building which burned some time between the date the lease was entered into and the date on which operations were commenced for the erection of the theatre.  Insurance in the amount of $6,000 was received by petitioner on account of this fire, which insurance was paid to the lessees.  During the course of the erection of the theatre, known as the Norva, the depth of the Dozier Building was reduced from 115 feet to 81 feet and what remained of the building on Monticello Avenue was demolished.  The buildings on Granby Street were otherwise altered by constructing a terra cotta front the same height as, and to harmonize with, the theatre building.  The lease gave the lessees the right to alter or destroy any of the buildings on the premises.  The theatre was completed in 1922 at an approximate cost of $325,000.  A considerable portion of this cost was attributable to changed plans after the*4269  original lessees had made large outlays.  The theatre has an entrance on Granby Street, 21 feet wide and 81 feet deep, finished with marble, and an auditorium and stage on the rear of the lots 80 feet by 125 feet.  The entrance is located on the Burrow property, immediately south of petitioner's land, and the auditorium and stage are evenly divided on the two parcels.  Due to the building regulations of the City of Norfolk, the lessees were required to, and did, leave a lane 8 feet on either side of the outer walls of the auditorium and stage part of the building.  The ground *1221  floor of the building ascends several feet in the entrance and descends in the auditorium.  The balcony extends the full width of the building and all the boxes are located on the petitioner's side of the theatre.  The roof of the theatre has a large dome in the center.  At the time the lease was entered into the lessors agreed in writing that upon the termination of the lease by default or otherwise, the respective owners shall have the sole and exclusive title to, and right to the possession of, any part of the theatre on his or their property, and the right to divide the building according to*4270  the party line and for that purpose to erect a dividing wall and take such further steps as may be necessary for the separation of the building.  The history of the motion-picture business in Norfolk is that as new and more modern theatres are built, other ones become less valuable or entirely obsolete.  Three motion-picture theatres were closed prior to the construction of the Norva, and a fourth, formerly used to show high-grade pictures, is now being used to display cheap pictures.  Three of these theatres were located on Granby Street, south of the Norva.  At the present time the Loew motion-picture interests are erecting a large modern theatre in the neighborhood of the Norva.  Ten years ago the block two and one-half squares south of the Norva was considered the best block on Granby Street.  Since then business has gradually moved northward and if that condition continues, within 15 years the squares north of the block in which the Norva theatre is located will be the best section of the street.  The section of the improvements on the property of the petitioner is not suitable in design to use commercially except as part of a theatre, and if it becomes necessary to use the*4271  property for other purposes, the cost of removing the buildings on the petitioner's land will equal the salvage value of the material.  The Commissioner valued the improvements upon completion at $203,387.25, of which three-eighths, or $76,279.22, was assigned as petitioner's interest upon the audit of his returns for the taxable years in dispute.  The Commissioner then depreciated the appraised value of the building at the rate of 2 per cent over the remaining leasehold period of 18 years and by this method determined petitioner's share in the residual value to be $48,812.94, which latter sum he held to be taxable income.  Pursuant to his regulations this sum was prorated over the life of the leasehold, making a yearly income of $2,711.83.  OPINION.  ARUNDELL: The theory that improvements placed upon leased property by the lessee result immediately in income to the lessor has been established by the courts.  ; . *1222  Petitioner does not question the value placed by the Commissioner on the property at the date of its completion in the amount of $203,387.25, *4272  nor does he offer any proof sufficient to warrant us in changing the apportionment as made by the Commissioner wherein he assigned to petitioner three-eighths of the whole value so determined, nor does he complain because the Commissioner prorated the income so determined over the life of the lease instead of requiring that it be reported all in the year 1922.  His contention is that he is in receipt of no income because the theatre building will be obsolete upon the termination of the lease in 1940, and that if it be then necessary to convert the theatre into commercial property the cost of removing the building will be as much as the salvage value of the material.  To this view we can not agree.  The building was substantially constructed and there is no evidence to overcome the Commissioner's findings that it would have a normal life of 50 years.  There is evidence that the trend of development is away from this location and that the economic life of theatres of this sort is much shorter than the physical life of the building.  From all the evidence we are of the opinion that petitioner's interest in the building should be depreciated at the rate of 3 1/3 per cent per annum over*4273  the life of the lease in determining its residual value at the expiration of the lease.  There is no evidence in the record which would permit us to pass on the second assignment of error.  The Commissioner must, therefore, be sustained on this point.  Judgment will be entered on 10 days' notice, under Rule 50.