Robinson v. Commissioner , 18 B.T.A. 703 ( 1930 )

W. N. ROBINSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Robinson v. Commissioner

Docket No. 27205.

United States Board of Tax Appeals

18 B.T.A. 703; 1930 BTA LEXIS 2608;

January 8, 1930, Promulgated

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Held, that under the terms of a certain lease agreement the petitioner was obligated to pay only for the use of improvements made by lessor on leased property and that at the end of the taxable year no amounts for the use of such improvements were due and accruable.

Perry W. Shrader, Esq., for the petitioner.

L. A. Luce, Esq., for the respondent.

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LANSDON

The respondent has asserted a deficiency in income tax for the year 1922 in the amount of $5,735. The only issue is whether a certain payment made by petitioner in 1922 was additional rental for property used for hotel purposes and deductible from gross income as an ordinary and necessary expense.

FINDINGS OF FACT.

The petitioner is an individual residing in Kansas City, Mo. In the taxable year he was engaged in the hotel business in Tulsa, Okla., where he operated the Hotel Tulsa as a sole proprietorship.

On January 2, 1920, the petitioner leased the Hotel Tulsa from the Robinson Hotel Realty Co., a corporation, hereinafter designated the corporation, for a period of 8 years, at an annual rental of $6,000 with certain provisions for additional rentals.

The lease agreement among other terms and conditions usual in such instruments included the following:

Should the party of the second part be in need of or require additional stationary machinery or other stationary improvements, such as terrazzo and tiled floors, brick partitions or tiled partitions, etc., upon mutual agreement, the first party will have such improvements installed, and for the use of such improvements, the second party shall pay at the rate of ten per cent per annum on the cost of such improvements as additional rental.

During the years 1920, 1921, and 1922 the corporation made improvements to the Hotel Tulsa at a cost of $47,902.10. During the same period the petitioner paid additional rentals for the use of such improvements in the amount of $8,466.85.

In December, 1922, the corporation sold the Hotel Tulsa and terminated the lease agreement of the petitioner.

In his income-tax return for 1922 the petitioner deducted from his gross income for that year the amount of $22,254.70, representing accrued taxes of the corporation at December 31 of such year. He now pleads that such amount was an ordinary and necessary expense in the nature of additional rentals due the corporation under the terms of the lease agreement. Upon audit of such return the Commissioner disallowed such deduction and asserted the deficiency here in controversy.

OPINION.

LANSDON: The petitioner contends that under the terms of his agreement with the corporation he was obligated to pay the entire cost of improvements to the hotel property which the lessor made at his request, as additional rentals. The evidence shows that such total cost was $47,902.10 and that when the lease was terminated by the corporation's sale of the hotel in December, 1922, $8,466.85 had been paid by petitioner as additional rental for the use of the improvements. It is obvious, therefore, that at the date of the sale and the termination of the lease agreement the corporation had not received the cost of the improvements as additional rentals and that the balance of such cost was $39,435.25, which the petitioner alleges was an obligation that he was required to assume and accrue under the terms of the agreement. Petitioner further alleges that in conformity with a verbal agreement between himself and the corporation he assumed the payment of the state and local taxes of the corporation for the year 1922, in the amount of $22,254.70, as a partial discharge of his alleged obligation to pay the cost of the improvements as additional rental, and was entitled to accrue such amount on his books as an ordinary and necessary expense for additional rental in 1922.

We are unable to agree with the contentions of the petitioner. Under the terms of his lease agreement he was obligated to pay only for the use of the improvements. The evidence shows that all the additional rent due under the terms of the agreement had been paid when the hotel property was sold and the contract was terminated. Upon what theory the petitioner claims the right to accrue payments for use of property long after he has ceased such use is not clear. There is as much basis for accruing the stated rentals still unearned and unpaid at the date of the sale as there is for the claim that anything remained due by the petitioner at December 31, 1922, for the use of the improvements. The leasehold agreement does not provide for the payment of the cost of the improvements by the petitioner, but for annual rental therefor, measured by 10 per cent of such cost.

Decision will be entered for the respondent.