Terre Haute House Co. v. Commissioner , 17 B.T.A. 384 ( 1929 )

TERRE HAUTE HOUSE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Terre Haute House Co. v. Commissioner

Docket No. 19047.

United States Board of Tax Appeals

17 B.T.A. 384; 1929 BTA LEXIS 2309;

September 20, 1929, Promulgated

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On August 1, 1924, the petitioner, which filed its return on the calendar year basis, obtained a lease for one year from that date on a certain building which it agreed to keep in a good and habitable condition. On September 12, 1924, the petitioner entered into a contract for the putting of a new roof on the building and thereafter in 1924 made expenditures in payment therefor. Held, that the amount so expended represents an investment of capital to be exhausted over the period beginning at the date the roof was put on and ending at the expiration of the lease.

M. M. Dunbar, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of a deficiency in income tax of $370.13, for the calendar year 1924. The deficiency results from the action of the respondent in allowing as a deduction for the taxable year only five-twelfths of an amount paid by the petitioner in putting a new roof on property used by it under a one-year lease running from August 1, 1924. Except for the petitioner's return for the taxable year which was put in evidence at the hearing, the case was submitted on the pleadings.

FINDINGS OF FACT.

The petitioner is an Indiana corporation with its principal office at Terre Haute. Its business is that of operating a hotel.

During 1924 and for a number of years prior thereto, the petitioner owned no real estate. The premises which it occupied were held under a lease for the period of one year from August 1, 1924. By the terms of the lease, the petitioner agreed, among other things, "to maintain all repairs to said premises, including all repairs to keep and maintain the roof and down-spouting of said premises, in good and tenantable condition." The hotel building so leased by the petitioner was very old and in a dilapidated condition. At the time the lease was entered into it was the intention of the owners to raze the building at the expiration of the lease.

On September 12, 1924, the petitioner entered into a contract for a new roof for the building and in the year 1924 expended the amount of $6,813.59 in payment therefor. This amount the petitioner deducted as an ordinary and necessary expense in its return, which was filed on the calendar year basis. In the audit of the return the respondent allowed only five-twelfths or $2,839 of the amount as a deduction.

OPINION.

TRAMMELL: There is some controversy between the parties as to the basis upon which the petitioner kept its books. The petitioner alleges that it kept its books on the cash receipts and disbursements basis, while the respondent denies that they were kept on such basis. In the view that we take of the expenditure here in controversy, we think the basis on which the books were kept is immaterial.

The petitioner contends that it is entitled to deduct as an expense in its return the full amount of the $6,813.59 expended in 1924 for a new roof on the building which it occupied under a one-year lease expiring August 1, 1925. The respondent has treated the expenditure as in the nature of a capital investment. As five of the twelve months of the lease came within the petitioner's taxable year, the respondent has allowed as a deduction in such year five-twelfths of the amount expended.

The new roof constituted a betterment or improvement having a life beyond the taxable year and its cost was a capital expenditure. . In , we had under consideration the deductibility of an amount expended for improvements to property held under a lease extending beyond the taxable year. There we said:

Payments made by a lessee for improvements upon the lessor's premises are not an annual charge. They are not "ordinary and necessary expenses" of the lessee in the transaction of business for the year in which the payments are made, provided, of course, the term of the lease extends beyond the end of the taxable year. From the standpoint of the lessee they represent an investment of capital for improvements which will inure to the benefit of the lessee for the term of the lease, or for the term of the useful life of the improvements.

We think the principle stated in the foregoing is applicable and controlling here. As the lease extended beyond the end of the petitioner's taxable year, we do not think it is entitled to deduct the full amount in 1924. ; ; ; . In our opinion the exhaustion allowance to be made the petitioner should be spread from the time the new roof was put on until the expiration of the lease. The record here does not show when the new roof was actually put on, but only shows when it was contracted for, from which we might conclude that it was not put on until some time after September 12, 1924. We are unable to determine the exact date from which the exhaustion allowance should be made and since no claim for an additional deficiency was asserted by the respondent at or before the hearing, we approve the allowance determined by him.

The petitioner has relied upon our decision in , wherein we held that the full amount of expenditures made in 1920 for alterations and improvements to property held under a one-year lease expiring at April 1, 1920, was deductible in the return for the fiscal year ended January 31, 1920. In view of the conclusion reached in the case here involved, we think our decision in , is erroneous in that it permitted as a deduction in the fiscal year ended January 31, 1920, the full amount of the expenditures instead of allocating a part of them to the unexpired portion of the lease. This part of our decision in , will therefore not be followed in the future.

Reviewed by the Board.

Judgment will be entered for the respondent.