Court Opinion

ID: 4495278
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:14.925385+00
Date Added: 2024-06-11T15:04:02.608112
License: Public Domain

*912OPINION.
Arundedl :
The only question here is the amount of the deduction to be allowed to petitioner for depreciation of the building erected at its expense on leased premises. Section 23 (k) of the Revenue Act of 1928 provides for a reasonable allowance for exhaustion, wear and tear of property used in a trade or business, including a reasonable allowance for obsolescence. On petitioner’s leasehold it has erected a building at a cost of $235,000 and it maintains the right to exhaust its cost over the original term of the lease, a period of 21 years, without regard to the life of the building, or the privilege of renewal. Petitioner relies on Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, decided by the Court of Appeals for the Second Circuit, and also cites 719 Fifth Avenue Co. v. United States, recently decided by the Court of Claims, 5 Fed. Supp. 909.
The respondent has found that the useful life of the building erected by petitioner is 40 years, and based on such a finding has allowed deductions for depreciation at the' rate of 214 percent per *913annum on the basis of cost. Petitioner does not dispute the respondent’s finding as to the useful life of the building and offers no evidence of earlier obsolescence nor any facts that would in any way suggest that the allowance made by the respondent is not reasonable. It stands squarely on the ground that, whatever its cost and whatever the circumstances surrounding the outlay, it is entitled to recover its capital sum over the original term of the lease. With this view we cannot agree, nor do we believe that Bonwit Teller (& Co., supra, stands for such a broad principle.
It is our view that each case must be decided on its own facts, however desirable administratively it may be to have a rule of thumb. Taxpayers doing business in the manner of petitioner must ordinarily recover their capital from the income of the leasehold. To say that this must be done under all circumstances over the original term of the lease .is as unreasonable as to require that in all cases the cost must be spread over the original term plus all renewal periods. It may be assumed that business men will not ordinarily place valuable improvements having a long and useful life on land that they can use but a brief period, and we see no reason why the presumption should be indulged in that such is the case. Cf. Gladding Dry Goods Co., 2 B.T.A. 336. An illustration will serve better to bring out the point we are considering. A is the lessee of property the original term of which expires in two years. He erects on the property a building at a cost of $1,000,000, the annual rental of which would be $50,000. He has the right, however, to renew the lease for an added period of 30 years. To insist, under such circumstances, that A must recover his entire outlay over the two-year period would not be reasonable, for against the income not more than one tenth of the cost would be recovered. A fair statement of the case would make it clear that the large expenditure was made in the light of the renewal privilege and the reasonable allowance contemplated by the statute could be had only by spreading the cost over the renewal period, unless the useful life of the structure was less.
The Bonwit Teller case did not involve the facts we have here. In that case the improvements on the leased premises were made by the lessor at its expense, the lessee paying only interest on the cost of construction. Thus the lessee had no capital investment in the building to exhaust. The question before the court, in so far as the lessee was concerned, was whether the March 1, 1913, value of the lease should be exhausted over the original term of the lease or such term plus the possible reneivals. When a case arose in the same court involving similar facts and the same question as we have here the court did not base its decision on the Bonwit Teller case, *914but examined the evidence to determine what constituted a reasonable allowance for exhaustion of the portion of the building cost borne by the lessee. 379 Madison Avenue, Inc. v. Commissioner, 60 Fed. (2d) 68. That the court did not overlook its earlier Bormit Teller decision is shown by the citation of the case on another question decided, and this is persuasive that it did not intend in the Bonwit Teller case to lay down an arbitrary rule to be applied to all cases of exhaustion on leased property. In the 379 Madison Avenue case the evidence indicated that by reason of changed conditions in the neighborhood to which the building on the leased premises could not be conformed the building would be valueless by the end of the original term. On these facts the court concluded it was “ highly improbable that either party to the lease will insist upon a renewal at a time when the building upon the property will be unable to earn a return on the value of the ground ”, and allowed exhaustion on the lessee’s share of the cost over the original term. Similarly in the case in the Court of Claims, 719 Fifth Avenue, supra, it was found as a fact that the renewal privilege was of no value to the lessee. When the 719 Fifth Avenue case was before this Board the evidence did not satisfactorily establish the value, or lack of value, of the renewal privilege. We said in part that “ The. word ‘ reasonable ’ in the statute implies an appraisal of the probabilities. An examination of the lease in its entirety indicates that the parties contemplated that the lessee would continue to occupy the premises and that provision should be made for an alteration from time to time of the rental.” (5 B.T.A. 565, 569.) In the instant case, as above pointed out, petitioner offered no evidence that the building erected by it would be of so little value at the end of the original term as to make renewal unlikely, and in this respect the facts differ from those in the 379 Madison Avenue case, and the 719 Fifth Avenue case in the Court of Claims.
The facts and the question here are the same as in 353 Lexington Avenue Corp., 27 B.T.A. 762. In that case we pointed out that there is no requirement in the statute that the cost of a leasehold and the cost of improvements made by the lessee should be exhaustible over the same period. In that case as here the rental under any renewal was to be based on the value of the land without reference to the improvements, and we said that the land and improvements should be regarded as separate pieces of property, and deductions for exhaustion allowed accordingly. That case is controlling here. As said above, the language of the statute is that a reasonable allowance for exhaustion shall be made. Where the respondent has made a determination of what constitutes a reasonable allowance, that deter-*915initiation on the presumption of correctness must prevail in the absence of sufficient evidence to establish error. In this case we have no evidence that the building will not earn sufficient income to meet rentals or of any other facts indicating the improbability of renewal. Consequently, we cannot say that its useful life to petitioner will be any shorter than that determined by the respondent, nor can we find what is more directly in point that the useful life of the building will be limited to the original term of the lease.
Reviewed by the Board.

Decision will be entered, for the respondent.

Tkaiumell and Van Fossan dissent.