Court Opinion

ID: 4590844
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:04:29.871961+00
Date Added: 2024-06-11T07:50:33.120024
License: Public Domain

THE HIPPODROME CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hippodrome Co. v. CommissionerDocket Nos. 7354, 21529.United States Board of Tax Appeals10 B.T.A. 1010; 1928 BTA LEXIS 3987; February 24, 1928, Promulgated *3987  The value of a leasehold acquired for stock determined for invested capital and depreciation purposes.  Ralph W. Smith, Esq., for the petitioner.  Brice Toole, Esq., for the respondent.  VAN FOSSAN *1010  These proceedings involve deficiencies in income taxes for the year 1921 in the amount of $2,251.68 and for the year 1922 in the amount of $1,418.71.  The proceedings were consolidated for hearing and decision.  The alleged deficiencies arise from the action of the respondent in disallowing for invested capital purposes the alleged value of a leasehold acquired by the corporation in 1913 and in refusing to allow a deduction an amount representing the yearly exhaustion of the leasehold value.  FINDINGS OF FACT.  The petitioner is a California corporation with principal office at Los Angeles.  In 1911 or 1912, Adolph Ramish build a one-story reenforced concrete theatre building.  This theatre was located at 320 South Main *1011  Street, in the theatre section of Los Angeles.  After occupancy it was found that the theatre acoustics were unsatisfactory.  After making numerous experiments to correct the defect, it was determined that by*3988  constructing therein a balcony with additional seating capacity, and by making certain other minor alterations, the problem could be solved.  These changes in the theatre were not finally completed until August, 1913.  In the meantime, however, negotiations for the leasing of the theatre were entered into and on March 28, 1913, Adolph Ramish, the owner, leased the theatre to S. Morton Cohn, trustee, on behalf of a corporation to be formed.  The lease provided that Cohn or his assignee, the corporation, as lessee, pay to Ramish, the lessor, a monthly rental of $1,650, and, upon taking possession June 1, 1913, a cash bonus of $11,000.  The lease provided for the delivery to the lessee of all equipment in the theatre and for the construction by the lessor of a balcony with a seating capacity of at least 700 seats equipped with opera chairs.  The lease was for a period of ten years from June 1, 1913, with the proviso that the lessee should have the privilege of renewal for a period of five years at the same rental and upon payment of $5,000.  On April 1, 1913, the petitioner corporation was organized and on the same date the lease was transferred to the new corporation in exchange for*3989  its capital stock, having a par value of $99,997.  The lease so acquired from Cohn was set up and carried on petitioner corporation's books at a value of $99,997.  The total stock issued by the corporation was of the par value of $100,000.  Since the date of organization the corporation has consistently carried the lease on its books at a value of $99,997, and each year has charged off as depreciation one-tenth of the book value of the lease.  About two months after the organization of the corporation, Ramish, the original builder and lessor, purchased one-half of its stock, for which he paid $37,500 in cash and canceled the obligation to pay him a bonus of $11,000.  At the time Ramish acquired this 50 per cent interest in the stock of the corporation, the stockholders consisted of S. Morton Cohn, president and director, who owned 50 per cent of the stock; Irving C. Ackerman, secretary-treasurer and director; Simon Harris, director; C. H. Brown, and a man named Oppenheimer.  Ackerman and Harris and Brown were theatrical men in business in cities north of Los Angeles.  At the time of the purchase of the lease the corporation owned no other property of any kind.  The "Hippodrome*3990  Theater" ranked as a class A building, was a fireproof construction throughout, had many exits and full equipment, and at final completion had a seating capacity of about 2,200, making it the largest theater in the city.  *1012  OPINION.  VAN FOSSAN: The only questions for our determination are the value of the leasehold at the time it was acquired by the corporation in exchange for stock and the amount, if any, which should be allowed as a deduction representing the yearly exhaustion of such leasehold value.  In support of its contention that the lease had a bonus value of approximately $100,000, petitioner relies chiefly on the opinion testimony of two witnesses, Ramish and Gore.  Ramish built the theatre and leased it on March 28, 1913, to Cohn, trustee, and assignor of petitioner.  At that time he was, according to his own testimony, familiar with the theatrical line, purchasing and leasing theatres, and well versed in the per seat value of theatres.  Fortified by such experience and knowledge he leased at a figure of $1,650 per month, plus a cash bonus of $11,000.  This lease presumably represented Ramish's best judgment at the time of the value of the property, and, *3991  in our opinion, is of greater weight than his present opinion, fourteen years later.  It is always difficult to disregard the knowledge one has gleaned from subsequent history and form an accurate nunc pro tunc judgment of value.  In the present case the difficulty is especially pronounced.  The success of a theatre depends not alone on location and physical equipment, but perhaps even more on management.  A fine theatre building may fail utterly if the management is poor and the character of its attractions does not appeal to the patrons' taste, while good management and a continued policy of high-type attractions may make a great financial success of a mediocre theatre property.  That this theatre was successful is shown by its yearly earnings.  But how much, if any, of this is due to the lease of the building and how much to successful management is difficult to tell.  The stockholders of petitioner in 1913 were men of wide theatrical experience and valuable business connections.  Ackerman, Harris, and Brown were the owners of a chain of theatres and had their own booking agency.  Petitioner's witness admitted such a situation to be of considerable advantage and that petitioner's*3992  stock would be more valuable because of the connection of these men with the enterprise.  Herein we see an explanation of the price Ramish was willing to pay for 50 per cent of petitioner's stock two months after he leased the property.  Here also we see the fallacy of the contention that the sale price of the stock is the proper measure of the value of the lease.  The lease was one thing, the stock was another and totally different thing.  The lease provided only a building while petitioner's organization provided an experienced management with all the advantage of circuit booking.  In this case there appears to be no controlling relation between the price of *1013  the stock and the value of the lease.  When Ramish bought 50 per cent of the stock he bought an interest in the experienced management provided by petitioner's organization.  The observations we have made as to Ramish apply also to Gore, whose testimony was largely in answer to hypothetical questions based on the rental per seat of theatre property.  In such a situation a general market price per seat, standing alone, is not, in our judgment, sufficient to establish the value of a lease or to overcome the effect*3993  of the actual leasing of the property in an arm's length transaction by an owner who had full knowledge of theatre values.  For reasons indicated above we can give little weight to the record of subsequent earnings.  After a careful consideration of all the evidence we are of the opinion that petitioner has not established that the lease had any bonus value when transferred to the corporation for stock.  The action of the respondent is approved.  Judgment will be entered for the respondent.