Anahma Realty Corp. v. Commissioner ( 1929 )

ANAHMA REALTY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Anahma Realty Corp. v. Commissioner

Docket No. 24709.

United States Board of Tax Appeals

16 B.T.A. 749; 1929 BTA LEXIS 2523;

May 28, 1929, Promulgated

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">*2523 Charles N. Manning,7 B.T.A. 286">7 B.T.A. 286, followed.

Virgil Y. Moore, Esq., A. T. Smith, Esq., and William Dickinson Hart, Esq., for the petitioner.

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

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LITTLETON

">*749 The Commissioner determined a deficiency in income and profits tax of $50,289.46 for the calendar year 1920. The petition places the entire deficiency in controversy, but at the hearing petitioner abandoned all of the allegations of error except three, all of which question the disallowance of a deduction claimed as a loss sustained by reason of the demolition of certain buildings.

FINDINGS OF FACT.

Petitioner is a New York corporation with it principal office and place of business in New York City.

August Heckscher, a citizen of New York, acquired about the year 1913 five lots with buildings thereon, between 56th and 57th Streets on Fifth Avenue in New York City. The building on one of the lots was immediately destroyed and replaced with a modern building at a cost of $115,000. The other buildings were altered and rented for commercial uses.

Heckscher allocated a certain part of the purchase price of those properties">*2524 to buildings, except in the case of the building constructed by him and on which he had actual cost figures. He claimed depreciation in his income-tax returns for the years 1914 and 1915 at the rate of 25 per cent per year on the cost figures so arrived at, but the Commissioner of Internal Revenue disallowed his claim and allowed depreciation on his cost figures at the rate of only 2 1/3 per cent per year.

On the basis of Heckscher's original cost figures, depreciated at the rate of 2 1/2 per cent per annum, as fixed by the Commissioner, the buildings had a depreciated cost as of January, 1920, of $250,099.30; the cost to Heckscher of the lots on which they were located was $2,795,964.73, a total of $3,046,064.03.

In January, 1920, the stock of petitioner was owned by Heckscher, his family and employees, about 80 per cent belonging to him and the remainder to his family and employees.

On January 30, 1920, Heckscher conveyed to petitioner the property above described for a total consideration of $3,046,064.03, arriving at this figure by calculating the cost of the land to him, viz., ">*750 $2,795,964.73, and the cost of the buildings to him less depreciation as allowed">*2525 by the Commissioner, viz., $250,099. The consideration was paid Heckscher by the assumption by petitioner of a mortgage of $2,265,000, then encumbering the property, and by its payment to him of $781,064.03.

At the time of the conveyance the buildings on the property were under lease by Heckscher to various tenants, and petitioner continued to lease them to such tenants and realize income therefrom until they were later destroyed.

Petitioner, on May 29, 1920, leased these properties to Heckscher Building Corporation, for a term of 21 years (renewable for an additional 21 years) at the option of either party, and at the option of the lessee for a third term of 21 years, executing at the time a building and loan agreement with that corporation, under which it was to proceed to destroy the buildings then on the property and erect in their stead a new 24-story office building, for which purposes petitioner agreed to loan the lessee a sum not to exceed $3,250,000. The lessee was entitled to the salvage from the old buildings. The annual rental for the term of the lease was $250,000 for the first seven years, $275,000 for the next seven years, and $200,000 for the last seven years. ">*2526 In the event of renewal the lease provided for "annual net rental, for building rent, of two hundred and sixty thousand dollars ($260,000) and for ground rent, of three hundred thousand dollars ($300,000), or such other greater sum as shall be fixed upon" by arbitration.

Pursuant to said agreement, said buildings were demolished in June and July, 1920, and the new building immediately begun. In the year 1920, the buildings so demolished were assessed for city tax purposes by the City of New York at a total value of $204,000. Their value in 1920 was at least $204,000.

Petitioner, in 1920, wrote off on its books as a loss on account of the demolition of said buildings, the sum of $250,099.30, and claimed a deduction of that amount in its income and profits-tax return. The deduction was disallowed by the Commissioner and resulted in a portion of the deficiency asserted by him.

OPINION.

LITTLETON: This proceeding raises again the question decided by the Board in . There we held that lessors, under a 99-year lease, were not entitled to deduct the unextinguished cost of a building as a loss in the year of demolition, such building">*2527 being demolished to make way for a new building paid for by the lessee under the terms of the lease. In this proceeding ">*751 we have a lessor claiming a similar deduction on account of the demolition of buildings in 1920 by the lessee under a long-term lease, such lease providing for the demolition by the lessee and the erection of a new building. The petitioner concedes that the facts are similar but asks us to reconsider the question.

We find no reason for departing from the decision reached in , and on the authority of the decision of the Board in that proceeding, the determination of the Commissioner is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.

SIEFKIN

SIEFKIN, dissenting: It seems to me that the majority opinion, which follows the Manning case, is an attempt to apply an inflexible rule of law to a considerable group of cases which involve a number of questions, the answers to which depend upon the particular facts of those cases. The decisions in the Manning case and in the Ingle case, 1 B.T.A. 595">1 B.T.A. 595, give approval, in part at least, to article">*2528 142 of Regulations 45, which creates a presumption as follows:

* * * When a taxpayer buys real estate upon which is located a building which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible loss by reason of the demolition of the old building, and no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building.

It seems to me that the matter is not one for presumption but depends upon the facts. I also object to presuming that the intent at the date of purchase is irrevocable and fixes the basis for tax liability. See .

In deciding the question involved in this proceeding, it is well to consider the closely related question of realization of income by the lessor, in a case where he permits a lessee to tear down old buildings to make way for new ones, as such question relates to the further question whether the lessor suffers a taxable loss in such a case, as well">*2529 as the difficult questions dealing with depreciation and undepreciated cost under such circumstances. The problems raised are entirely too complicated and far-reaching in their consequences to be dealt with by the use of a formula such as that contained in the regulations which are approved in the majority opinion.

STERNHAGEN agrees with this dissent.