Harris Amusement Co. v. Commissioner , 15 B.T.A. 190 ( 1929 )

HARRIS AMUSEMENT CO. OF MICHIGAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Harris Amusement Co. v. Commissioner

Docket Nos. 17841, 17842.

United States Board of Tax Appeals

15 B.T.A. 190; 1929 BTA LEXIS 2898;

February 5, 1929, Promulgated

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March 1, 1913, fair market value of a leasehold determined.

W. A. Seifert, Esq., Charles H. Sachs, Esq., and Frank C. Miller, C.P.A., for the petitioner.

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

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MURDOCK

These proceedings involve deficiencies in income and profits taxes for the calendar years 1918, 1919, and 1920. The amounts of the deficiencies for the respective years are as follows:

1918	$1,846.50
1919	741.30
1920	875.40

All but one of the issues raised have been abandoned, the sole question for determination being the value of a leasehold for depreciation purposes.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the State of Michigan, with its principal office in the Davis Theatre Building, Pittsburgh, Pa. During the taxable years in question it maintained a moving picture theatre in Detroit. The premises upon which such theatre was located were leased by Charles E. Kanter to John P. Harris on the 19th of December, 1908, and on the same day such lease was assigned by Harris to the petitioner in consideration of the issuance to him of $55,000 par value of its capital stock. The lease contained, inter alia, the following provisions:

* * * The said party of the second part does hereby hire the said premises for that term of forty (40) years as above stated and does covenant and promise to pay to the said party of the first part, and his representatives and assigns for rent of the said premises during the first twenty (20) years of said term, the sum of twenty-one thousand dollars ($21,000.00) for each year, payable monthly in advance on the first day of each month during the said twenty (20) years, in sums of seventeen hundred and fifty dollars ($1,750.00) the first of said payments to be made on the first day of January, A.D. 1909. And during the last twenty (20) years of said term, the sum of twenty-seven thousand dollars ($27,000.00) for each year, payable monthly in advance on the first day of each month, during said second period of twenty (20) years in sums of twenty-two hundred and fifty dollars ($2,250.00).

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AND, it is further covenanted and agreed between the parties hereto that the said party of the second part is to have the right to repair and make necessary alterations in the building on said land, and that if any structural changes are made affecting the strength of the said building, such changes shall be made only subject to the approval of the building Commission of the City of Detroit and the Fire Marshall and that he will pay the entire cost of all changes and alterations he may make in said building so that said land and building shall not be subjected to any liens of any kind therefor. And that within four (4) months after the first day of January, 1909, he will expend the sum of thirty-five thousand dollars ($35,000.00) in altering and improving said building so as to transform it into a theatre.

The petitioner upon entering into possession on January 1, 1909, made extensive alterations in the premises and when the theatre was opened the price of admission was fixed at 10 cents. The theatre was known as the Family Theatre. It was situated in a thickly populated section of the city, in what was known as the Campus Martius. The City of Detroit had grown 100 per cent from 1908 to 1913. It was unnecessary to advertise as the small price of admission and the location drew what was known as "drop in trade." The price of admission was originally 10 cents. It was raised to 20 cents at a later time. During the period 1910 to March 1, 1913, the net earnings were as follows:

For the fiscal year ending April	30, 1910	$70,922.88
	30,1911	75,919.02
	30,1912	46,915.17
	30,1913	38,016.02
Total		231,733.09
Average		57,943.27

On March 1, 1913, the petitioner had invested in improvements in the building the sum of $74,447.90. On the same date its cash balance was $10,922.05, making a total of improvements and cash balance amounting to $85,369.95.

For the years subsequent to 1913 the earnings were as follows:

1914	$ 27,566.56
1915	2,503.18
1916	14,570.51
1917	49,282.14
Apr. 30, 1917, to Dec. 31, 1917	17,998.27
For the calendar year ended Dec. 31, 1918	31,946.07
1919	77,287.52
1920	$103,622.61
1921	42,614.50
1922	43,766.98
1923	94,993.97
1924	107,148.23
1925	147,289.39
1926	152,035.45
1927	82,225.33

The net earnings from the theatre from the time of opening throughout 1927 were $1,218,613.80, and the average annual net earnings throughout the same period were $64,137.40. In ascertaining the net earnings the yearly rental was subtracted from gross earnings and all expenses were taken into consideration in reaching the net figure. The outstanding capital stock of the petitioner at March 1, 1913, was $100,000 par value.

The value of the leasehold on March 1, 1913, was $300,000.

OPINION.

MURDOCK: The sole issue for determination in this proceeding is the value as of March 1, 1913, of a leasehold of theatre property located in the City of Detroit, Mich. The petitioner claims depreciation on such leasehold for the taxable years in question. The respondent denied all value for the leasehold for lack of evidence.

The petitioner produced three witnesses to give opinions as to the value of the lease. The respondent claimed that none of these witnesses was qualified to express an opinion on the question of value. They were all, however, men of experience in their particular fields. Two of them were men of some years' experience in the theatrical and moving picture business and knew the importance in that business of advantageous locations. The third was a real estate man of a considerable number of years' experience in the City of Detroit, who had dealt in business properties and in long-term leases on such properties. We feel that the opinions of these witnesses are entitled to some weight, although the conclusions arrived at by them as to value are not conclusive.

In view of all the evidence we are of the opinion that the fair market value of the leasehold in question, taking into consideration improvements, was, as of March 1, 1913, $300,000.

Judgment will be entered under Rule 50.