Page images
PDF
EPUB

Reporter's Statement of the Case

"Your outline of same appears to be in line with my understanding, except we desire the privilege of other tenants occupying space with us, provided they are of a character that would maintain the standard of the bank and the building."

IV. Pursuant to this arrangement the National City Bank entered into possession of the premises in question, consisting of the first floor of the Marion Building, on October 1, 1918, and installed therein certain bronze cages, painted the walls and ceiling, and installed wainscoting and marblework. Such permanent improvements cost the plaintiff bank $33,413.99.

V. These permanent improvements were not required by the lessor, but were installed by the bank for the proper conduct of its business. There was no arrangement between the bank and the lessor whereby either or both was bound to make any improvements, temporary or permanent, for the benefit of the other. There was no deposit of money by the plaintiff to secure the payment of rent, and there was no consideration by the lessee for the privilege of occupying the premises other than the monthly rental therefor.

VI. The sum of $33,413.99, spent by the plaintiff bank in equipping and decorating the room of the Marion Building for bank purposes in the year 1918, was deducted by the bank from gross income for that year in computing its net income, subject to the provisions of the revenue act of 1918. Said sum was deducted by plaintiff on the theory that same was an ordinary and necessary expense incurred by it in the year 1918, and plaintiff claimed it should be allowed as a deduction under section 234 (a) (1) of the revenue act of 1918.

VII. The Commissioner of Internal Revenue disallowed the said sum of $33,413.99 to be deducted as an expense as comprehended by section 234 (a) (1) of the revenue act of 1918, but held that said sum was a capital expenditure upon which the taxpayer was entitled to claim a deduction for exhaustion for each of the tax years to the end of the term of the lease. This decision and ruling was approved by the United States Board of Tax Appeals in a proceeding brought by the same plaintiff herein. (1 B. T. A. 139; Decision No.

Opinion of the Court

64, Docket No. 95, appeal of the National City Bank of Seattle, Commerce Clearing House, vol. II, 1925, p. 2096.) Article 109 of Regulations 45, 1920 edition, reads in part as follows:

"ART. 109. The cost borne by a lessee in erecting buildings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital an annual deduction may be made from gross income of an amount equal to the total cost of such improvements divided by the number of years remaining of the term of lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the buildings erected or of the improvements made, this deduction shall take the form of an allowance for depreciation."

VIII. The lessor and the plaintiff lessee both understood and intended that the plaintiff should have the use of the property for five (5) years in accordance with the terms of the lessor's letter of December 10, 1917. The plaintiff did have the use of the property in accordance with that agreement for the full five-year period. At the end of said fiveyear period a new lease was entered into between the same parties for another five years, and said lessee is still in possession of the property and improvements. In the new lease it was provided that the improvement made and the fixtures put in by the lessee covered by the expenditure of the said $33,413.99 are all the property of the lessee, plaintiff herein.

The court decided that plaintiff was not entitled to recover.

BOOTH, Judge, delivered the opinion of the court: The plaintiff, the National City Bank of Seattle, Washington, in December, 1917, was compelled to seek a new location and quarters for its banking operations. A lease was negotiated between the plaintiff and the owners of the Marion Building in said city. The parties finally agreed upon a fixed rental and other details of the transaction, among which the plaintiff was to expend the sum necessary to make the quarters suitable for banking business, and to

Opinion of the Court

hold possession and occupancy of the premises for a period of five years. The plaintiff expended in equipping and decorating the rooms rented the sum of $33,413.99. In making its income-tax return for the year 1918, the plaintiff having gone into possession on October 1, 1918, this sum was deducted from the gross income of the bank as an expense under section 234 (a) (1) of the revenue act of 1918 (40 Stat. 1057). The Commissioner of Internal Revenue declined to allow the deduction, holding that said sum was a capital expenditure, which entitled the plaintiff to a deduction for exhaustion for each of the tax years to the expiration of the lease. Plaintiff, displeased with this decision, appealed to the Board of Tax Appeals. The decision of the board affirmed the commissioner. Thereafter the full amount of the tax was paid, a claim for refund denied, and this suit brought to recover the same, judgment for $30,688.34, with interest, being asked. The amount of the tax imposed, if plaintiff's contention is untenable, is not disputed, and the facts are not disputed.

Plaintiff presses in this court the identical contention advanced before the commissioner and the Board of Tax Appeals. Relief from the payment of the additional tax is predicated upon the statutes of the State of Washington prescribing express formalities as to the execution of leases covering the occupancy of real property for a term of years, plaintiff insisting that under local laws the legal status of the rental transaction brings about a month-to-month tenancy, and hence precludes the action of the commissioner. The Board of Tax Appeals in a written opinion (1 B. T. A. 139) discussed the issue extensively. This court can add nothing to the discussion and finds itself in accord with what the board said.

We think the petition is without merit and should be dismissed. It is so ordered.

Moss, Judge; GRAHAM, Judge; and CAMPBELL, Chief Justice, concur.

HAY, Judge, absent.

Reporter's Statement of the Case

GEORGE NICHOLS AND MARY B. NICHOLS, AS EXECUTORS OF THE ESTATE OF JOHN W. T. NICHOLS, DECEASED, v. THE UNITED STATES 1

[No. F-81. Decided November 7, 1927]

On the Proofs

Income and estate taxes; deceased partner's earnings paid to his estate. Where the interest of a copartner, who kept his accounts on a cash receipts and disbursements basis, ceased upon his death, his share of commissions, earned by the firm prior to his death but collected thereafter and paid to the executors of his estate, who kept their accounts on the same basis, is a part of his estate and not income thereof subject to the income tax.

The Reporter's statement of the case:

Mr. David A. Embury for the plaintiffs. Mr. Henry A. Stickney and Curtis, Mallet-Prevost, Colt & Mosle were on the briefs.

Mr. Alexander H. McCormick, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant.

Mr. Arthur W. Machen, jr., for Safe Deposit & Trust Co., executor, amicus curiae. Armstrong, Machen & Allen were on the brief.

The court made special findings of fact, as follows:

I. John W. T. Nichols died April 25, 1920, a citizen of the United States and a resident of the city, county, and State of New York, leaving a will wherein and whereby plaintiffs were named as executors. Pursuant to probate proceedings subsequently had, plaintiffs were duly appointed and qualified and now are the executors of the estate of said decedent.

II. Decedent, prior to and at the time of his death, was a member of a copartnership trading under the firm name and style of Minot Hooper & Co., at No. 11 Thomas Street, New York, which firm operated as selling agents on commission. The articles of copartnership of said firm in effect

1 Certiorari denied.

109770-28-C C-VOL. 64- -16

Reporter's Statement of the Case

at the time of decedent's death contained the following provision:

"In case of the death of any partner, his interest in the partnership shall cease with the last day of the month in which he dies, and his interest in the partnership shall be liquidated and paid over to his estate as fast thereafter as the proper conduct of the business will allow."

III. Said partnership, prior to April 25, 1920, and during the lifetime of decedent and while decedent was a member thereof, had, for the account of their principals, sold certain goods, wares, and merchandise on commission.

IV. During the period from April 25, 1920, the date of decedent's death, to December 31, 1920, the close of the calendar year, said partnership received as commissions earned prior to decedent's death on sales made prior to his death certain sums of which his distributive share under the partnership agreement amounted to $78,322.36, which said sum of $78,322.36 said partnership paid over to plaintiffs as executors of the said estate.

V. In computing the Federal estate tax imposed upon the transfer of the net estate of the decedent, John W. T. Nichols, under the provisions of the revenue act of 1918, the Commissioner of Internal Revenue included in the value of the gross estate the sum of $78,322.36, which sum the said commissioner found and determined to be the value at the date of death of the said decedent's right under the provision of the partnership contract set forth in Finding II, and such Federal estate tax so computed was duly assessed and paid.

VI. The books of account of decedent and the books of account of plaintiffs as executors of the estate of decedent were kept on cash receipts and disbursements basis.

VII. On or about March 15, 1921, plaintiffs made a return of income of the estate of decedent for the period April 25, 1920, to December 31, 1920, and pursuant to rulings of the Treasury Department then in force included in Schedule C of said return as part of the gross income of the estate for said period said sum of $78,322.36. The net income shown by said return after deducting from the total amount

« PreviousContinue »