Court Opinion

ID: 4600075
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:24:42.80239+00
Date Added: 2024-06-11T07:52:13.976208
License: Public Domain

OHIO STATE MORTGAGE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ohio State Mortg. Co. v. CommissionerDocket No. 21428.United States Board of Tax Appeals22 B.T.A. 1162; 1931 BTA LEXIS 1998; April 10, 1931, Promulgated *1998  Petitioner's claim for depreciation disallowed for failure of proof.  J. wilbur Corry, Esq., and Dale W. Black, C.P.A., for the petitioner.  Arthur Carnduff, Esq., and A. E. Giesey, Esq., for the respondent.  VAN FOSSAN *1162  This proceeding is for the redetermination of deficiencies in tax for the years 1921, 1922, and 1923 amounting, respectively, to $1,318.30, $2,573.55, and $4,560.51.  The petitioner alleges that respondent erred by "disallowing a deduction from gross income in the years 1921, 1922, and 1923 of that proportion of the cost of certain buildings, acquired by taxpayer in 1921, which each year or part of a year bears to the total period during which taxpayer was permitted the enjoyment, use, and ownership of these buildings." FINDINGS OF FACT.  The petitioner was incorporated under the laws of the State of Ohio and was engaged in the business of buying and selling real estate and interests in real estate.  On or about May 16, 1921, the Union Trust Company, as lessor, and the petitioner, as lessee, entered into an agreement by which the lessor leased to the lessee certain premises in the city of Cleveland, State of*1999  Ohio, for a term of 99 years "renewable forever." The plot of land leased was irregular in shape and, according to the description contained in the lease, was located at the southwest corner of Huron and Erie Steets and had a frontage of 61 1/2 feet on Huron Street and 196 feet on Erie Street.  (Erie Street is also known as East Ninth Street.) The plot of land was made up of three separate parcels described in the lease.  One of these parcels described in the lease had no frontage on Huron or Erie Streets but fronted only on an alley which ran paralled to Erie Street.  The lease recited that it was "dated for convenience and by actual agreement between the parties" the first day of April, 1921, but was actually signed and executed on May 16, 1921.  Among other provisions the lease contained the following: 4.  The Lessee hereby further covenants and agrees, at its own expense, within four (4) years after the commencement of the term of this lease, to commence the erection of a new building or buildings upon said premises to cost not less than Two Hundred Thousand Dollars ($200,000.00), said building or buildings *1163  to be complete, ready for occupancy and fully paid for and*2000  free from materialmen's, mechanics', laborers' or other similar liens on account of the construction thereof prior to the first day of April, 1926.  Upon first furnishing the security hereinafter in this paragraph provided, the Lessee may tear down and remove all or such part of the existing buildings as it may desire, converting the materials thereof to its own use; provided, however, that prior to the time at which said Lessee shall commence the erection of said new building or buildings hereinabove provided for, said Lessee shall not remove or cause to be removed buildings now on said premises without the written consent of the Lessor being first had and obtained, and said Lessee will, at its own expense, keep said buildings in proper repair and in as good condition as at the date of this lease, natural wear and tear only excepted.  Prior to entering upon the work of removing or demolishing said present existing buildings, said Lessee shall furnish Lessor with a good and sufficient bond of a responsible surety company or companies satisfactory to the Lessor, conditioned upon the erection and completion, free from liens incident to construction, of the new building or buildings*2001  on said premises as above provided within eighteen (18) months from date upon which the work of removal or demolition of the old buildings shall be begun.  PROVIDED, HOWEVER, that in lieu of furnishing such a surety bond, Lessee may, at its option, deposit with The Union Trust Company, of Cleveland, Ohio, or such other responsible trust company in the City of Cleveland as the Lessor may designate, as Trustee, the sum of Two Hundred Thousand Dollars ($200,000.00) in cash or marketable securities satisfactory to such Trustee, to be held in trust by such Trustee to guarantee the erection of such new building, and may be paid out by such Trustee from time to time on bona fide architects' or builders' estimates showing the application of the amount paid to said new building, provided, however, that it first be made to appear to the satisfaction of the Trustee that the amount necessary to provide for the construction of any such building according to the plan adopted therefor which may be in excess of the amount so deposited with the Trustee, has been provided by the Lessee for such purpose and its application to such purpose assured.  12.  It is mutually understood and agreed that this*2002  lease is made upon the express condition that the Lessee shall punctually perform each and all of the covenants herein set forth, and if at any time the rents, taxes, assessments, insurance premiums, or other charges or payments, as hereinabove set forth, or any of them, or any part thereof, shall be in arrears and unpaid for a period of two (2) calendar months, or if there shall be a breach of any other of the covenants herein devolving upon the Lessee for a period of thirty (30) days after written notice of the same upon the Lessee, then and in such case the said Lessor shall have full right, at its option, to avoid this lease and to enter upon the above described premises, and thenceforth from the time of such entry this lease shall become void and all improvements on said premises shall be deemed to be the sole and absolute property of the Lessor, and said Lessee shall have no further right, title or interest therein, and in addition thereto, the said Lessor may bring suit for and collect all rents which may have accrued up to the time of such entry, and all other sums which may have become due and payable from the Lessee hereunder or which should have been paid by the Lessee hereunder*2003  according to the terms of this lease; or the Lessor may, at its option, sue for and collect the same without avoiding this lease.  16.  No waiver of any condition or covenant hereof, or any breach of the same, shall be deemed to constitute a waiver of any other condition or covenant, or of any subsequent breach of the same condition or covenant.  *1164  The Union Trust Company, the lessor, held the legal title to the premises leased for the benefit of a group of individuals who were associated together under the name of the Grace Church Syndicate.  On May 16, 1921, which was the date of the actual execution of the lease, a memorandum in writing was signed by the petitioner and by persons described as agents for the Grace Church Syndicate.  This memorandum is, in part, as follows: On this 16th day of May, 1921, there has been executed a certain Indenture of Lease for ninety-nine (99) years, renewable forever, between THE UNION TRUST COMPANY as Trustee under a certain agreement known as the Grace Church Syndicate Agreement, as Lessor, and THE OHIO STATE MORTGAGE COMPANY, as Lessee, covering certain property located at the southwest corner of Huron Road and East 9th Street*2004  in the City of Cleveland, Ohio.  This lease has been formally executed and acknowledged by both parties, but has not been delivered by the Lessor to the Lessee and is not to be delivered until the actual payment of certain additional considerations hereinbelow more fully specified.  On this date, The Ohio State Mortgage Company has paid to M. B. & H. H. Johnson as agents for the individuals who are the equitable owners of the property collectively known as THE GRACE CHURCH SYNDICATE, the sum of Twenty Thousand Dollars ($20,000.00) in cash, receipt whereof is hereby acknowledged by M. B. & H. H. Johnson as such agents.  In consideration of said payment of Twenty Thousand Dollars ($20,000.00), M. B. & H. H. Johnson have turned over an original executed copy of said lease to The Union Trust Company, with specific instructions contained in a letter a copy of which is attached to this Memorandum and marked "Exhibit A," and to the precise terms of which The Ohio State Mortgage Company in all respects agrees, which provides in substance that said lease shall be delivered to The Ohio State Mortgage Company upon payment of an additional sum of Thirty Thousand Dollars ($30,000.00) on or*2005  before August 1, 1921.  It is understood that the consideration of Twenty Thousand Dollars ($20,000.00) already paid and the further consideration of Thirty Thousand Dollars ($30,000.00) to be paid pursuant to the terms of the aforesaid letter, may be regarded by The Ohio State Mortgage Company as payment for the existing buildings on the leased premises, said buildings so sold, however, to be in all respects subject to the terms of said lease and not to be altered, torn down, demolished or removed except in the manner provided in said lease, and to be subject to forfeiture in the event of any non-payment of rent or non-compliance with any of the other terms, covenants and conditions in said lease contained.  It is further the distinct understanding between the parties that in the event that said additional sum of Thirty Thousand Dollars ($30,000.00) is not paid within the time mentioned, and time shall be of the essence, and pursuant to the conditions mentioned in the aforesaid letter to The Union Trust Company, said executed lease may be returned by said The Union Trust Company to M. B. & H. H. Johnson, and may be entirely nullified, and said Twenty Thousand Dollars ($20,000.00) *2006  consideration may be retained by M. B. & H. H. Johnson as agents for THE GRACE CHURCH SYNDICATE, and shall be regarded as paid THE GRACE CHURCH SYNDICATE in consideration of their having agreed to withhold their said property from the market from the date hereof until August 1, 1921, and on the return and nullification of said lease, said The Ohio State Mortgage Company shall have no further right, title or interest of any *1165  kind or nature whatsoever in said property or in respect of the consideration money paid this date, nor will it claim any.  The letter referred to in the third paragraph of the quoted memorandum not only directed the Union Trust Company, the lessor, to deliver the lease therein described to the petitioner upon payment of the sum of $30,000 on or before August 1, 1921, but also directed the trust company to return the lease to the agents for the Grace Church Syndicate on demand in the event that petitioner did not pay the sum of $30,000 on or before August 1, 1921.  In its income and profits-tax return for 1921 the petitioner deducted the sum of $7,500 as the amount of the depreciation of the building then on the premises leased for the period from*2007  April 1, 1921, to December 31, 1921.  In its return for 1922 petitioner deducted the sum of $10,000 for depreciation of the buildings during that year and in its return for the year 1923 petitioner also deducted the sum of $10,000 for depreciation.  The respondent disallowed these deductions.  OPINION.  VAN FOSSAN: Petitioner contends that by reason of the provision of the memorandum of May 16, 1921, that the payment of $50,000 "may be regarded by the Ohio State Mortgage Company as payment for the existing buildings on the leased premises," it became the owner of the buildings.  It contends, further, that, since the lease of April 1, 1921, provided that "the leassee may tear down and remove all or such part of the existing buildings as it may desire," it (the petitioner) is entitled to depreciation on the buildings at the rate of $10,000 per year.  This period of five years for total depreciation of the buildings is based on a covenant of the lease requiring petitioner within five years to erect a new building or buildings at a cost of $200,000 or more.  Proceedings before the Board of Tax Appeals are heard de novo. During the hearing in the present case this fact was specifically*2008  brought to the attention of counsel for the petitioner.  Speaking generally, a presumption of correctness is accorded to the findings of the respondent and the burden of proving error rests on the petitioner.  This burden requires petitioner to prove all material facts essential to the establishment of its claim.  After considering the terms of the lease and the memorandum, we are unimpressed by petitioner's argument that it became the owner of the buildings located on the leased grounds.  In view of other considerations appearing on examination of the record, we do not deem it necessary, however, to rest our decision on a determination of this question.  *1166  Assuming, without approving, petitioner's first contention and passing to the second contention, it is to be noted that the lease merely gave petitioner permission to remove all or any part of the existing buildings.  It did not obligate it to do so.  No evidence was introduced to prove that the removal of the old buildings was necessary before the erection of the new buildings or that, in fact.  any of the old buildings were removed.  Nor is there any evidence that the new buildings called for by the agreement were*2009  erected.  The lease further provided that in event of removal of any part of the old buildings petitioner might convert "the materials thereof to its own use," that is to say, petitioner was to retain any salvage.  Clearly, were petitioner's proof complete in all other respects, its failure to prove the amount and value of any salvage would preclude a decision favorable to its contention.  There is no proof of the type of buildings or material, nor does it appear whether they could profitably be removed to some other site without destruction.  Proof of the value of the salvage was a material and necessary part of petitioner's case.  Looking further at the record, we find that although petitioner asserts that the old buildings were used in its business, that rents received therefrom were reported as part of its income for the years in question, and that, therefore, depreciation is deductible from income, petitioner introduced no evidence to establish these assertions.  Petitioner's returns for the years in question were not offered in evidence and there is nothing in the record proving or tending to prove that petitioner actually received rents from the old buildings or that it reported*2010  rents so received as a part of its income.  In view of the foregoing considerations we must conclude that petitioner has not sustained the burden of proving error on the part of respondent.  Judgment will be entered for the respondent.