Belfast Inv. Co. v. Commissioner , 17 B.T.A. 213 ( 1929 )

BELFAST INVESTMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

KANSAS CITY LEASEHOLD & IMPROVEMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

NEW MARKET INVESTMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

SIMCOE REALTY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ONTARIO REALTY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Belfast Inv. Co. v. Commissioner

Docket Nos. 19128, 29439, 35718-35721.

United States Board of Tax Appeals

17 B.T.A. 213; 1929 BTA LEXIS 2334;

September 11, 1929, Promulgated

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1. Held that in the absence of evidence of the true tax liability of the petitioners for the year 1918, the Board will not attempt to apportion a proposed overassessment between an assessment made in May, 1924, collection of which is barred by the statute of limitations, and an assessment made in March, 1925, collection of which is not barred.

2. Held that amounts paid by the petitioners to the City of Kansas City, Mo., as the result of assessments made against petitioners' property located within certain benefit districts, are not deductible under section 234(a) of the Revenue Act of 1918 and section 234(a) of the Revenue Act of 1921.

3. Held that amounts paid by one of the petitioners to the City of Kansas City, Mo., for repaving and recurbing streets on which was located property which it was the business of this petitioner to lease, are not deductible as ordinary and necessary expenses of the business.

4. Held that the petitioner is entitled to a deduction for amortization of a hay warehouse constructed and rented to the United States Government during the time of the World War. The amount of such deduction determined.

5. The March 1, 1913, value of a farm determined for purpose of determining the amount of gain or loss on a sale thereof.

6. Upon the evidence held that the stock of the Simcoe Realty Co. was subscribed for $250,000 cash in the year 1905 and that that amount represents its invested capital for the year 1918.

7. Held that in the absence of evidence to the contrary we must assume that the stock was subscribed in the manner provided by law. Washington Post Co.,10 B.T.A. 1077">10 B.T.A. 1077 followed. In the absence of evidence that petitioner is entitled to a greater invested capital than the respondent has allowed his determination will be upheld.

8. The March 1, 1913, value of a leasehold determined for purpose of depreciation.

9. Depletion of clay lands and depreciation on buildings and equipment determined in accordance with stipulations between the parties.

Maurice H. Winger, Esq., and Alton Gumbiner, Esq., for the petitioners.

E. W. Shinn, Esq., and Edwin M. Niess, Esq., for the respondent.

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SIEFKIN

These are proceedings duly consolidated for hearing and decision, for the redetermination of deficiencies in income and profits taxes asserted against the various petitioners as follows:

Name.	Docket No	Year	Deficiency
Belfast Investment Co	19128	1918	$10,505.39
		1919	4,071.47
		1920	5,608.56
		1921	9,198.95
	29439	1922	6,868.63
	1923		3,949.85
Kansas City Leasehold & Investment Co	35718	1922	833.54
		1923	711.05
New Market Investment Co	35719	1923	400.33
Simcoe Realty Co	35720	1923	72.81
Ontario Realty Co	35721	1922	6,647.61
		1923	3,249.12

The errors alleged in the Belfast Investment Co. Docket No. 19128, relating to the years 1918, 1919, 1920, and 1921, are as follows:

(a) The Commissioner erred in refusing to permit the petitioner to deduct certain so-called "special taxes" paid by the petitioner, which were levied by the City of Kansas City, Mo., for general citywide municipal improvements, of a type usually paid for out of general taxes, such as schools, parks, waterworks, intercity viaducts, etc., and failed to distinguish said type of city-wide municipal improvements from the type of local public improvement such as original pavement, sidewalk, curbing, etc., the cost of which is assessed only against the property benefited; and further erred in refusing to permit as a deduction in the nature of an expense incurred in business, assessments made against and paid by petitioner for the purpose of maintenance or repair of local benefits where the payment of such assessment represented the cost of repairs necessary to the conduct of petitioner's rental business, all as authorized and permitted by article 133 of Regulations 62 and 45.

(b) The Commissioner erred in refusing to permit to the petitioner a proper deduction for loss of useful value or for amortization of facilities created for purposes of carrying on and prosecuting the war, on a certain hay shelter temporary building erected especially by the petitioner for the Government, at its request, in the wartime emergency, and for the specific purpose of sheltering and storing enormous quantities of hay, recompressed into ship-cargosize bundles for transportation overseas to the Army, the Government having canceled and repudiated its agreement of use and occupancy June 30, 1918, and both the Government and the petitioner having on that date abandoned the use of the special hay shelter temporary building for the purpose for which it was especially built, the said temporary building having since been mostly vacant and only partially usable or rentable, and that part, of necessity, being thereafter permanently devoted to a radically different use from that for which it was specially built.

(c) The Commissioner erred in refusing to allow a March 1, 1913, value as a basis for determining the gain or loss from the sale by the taxpayer of certain land located at Versailles, Morgan County, Mo., which was sold during the years in controversy by the taxpayer.

(d) The Commissioner erred in the computation of the invested capital of the Ontario Realty Co., an affiliated company of this corporation, and failed to allow said company as much invested capital as that to which it was by law entitled for 1918.

(e) The Commissioner erred in the computation of the 1918 invested capital of the Simcoe Realty Co., an organization affiliated with this corporation, and failed to allow it as much invested capital as that to which the company was by law entitled.

(f) The Commissioner erred in failing to allow a March 1, 1913, value for amortization purposes of a certain leasehold belonging to the Kansas City Leasehold & Improvement Co., a corporation affiliated with petitioner, said leasehold located at 12th Street and Grand Avenue, Kansas City, Mo.

(g) The Commissioner erred in failing to allow as a deduction to the taxpayer and affiliated companies correct, sufficient and adequate depletion on certain clay pits belonging to the Ontario Realty Co.

(h) The Commissioner erred in the computation of the 1918 invested capital of Kansas City Leasehold & Improvement Co., a corporation affiliated with petitioner, and failed to allow said company as much invested capital as that to which it was by law entitled.

At the hearing the petitioner further amended its petition in Docket No. 19128 to include the following assignments of error:

(i) Although the five-year statutory period under the Revenue Act of 1921, permitting the collection of 1918 income taxes assessed prior to June 2, 1924, was extended one year by waiver, to wit, to June 16, 1925, said assessment of $41,047.79 (having been assessed May 27, 1924) was not collected on, or prior to, June 16, 1925, and is still uncollected, and said sum so assessed is, therefore, barred from collection by the applicable statute of limitations, and was so barred prior to the date of filing of the original petition of appeal to the Board in this cause, to wit, August 4, 1926.

(j) The jeopardy assessment of $5,869.51, made March 19, 1925, was erroneous and baseless and the result of an undercalculation of the petitioner's invested capital by the respondent, and the identical adjustment by which the respondent produced its erroneous computation of $5,869.51 additional tax was reversed by the respondent in his Bureau letter of June 11, 1926.

At the hearing the respondent admitted error as stated in assignment of error (i).

At the hearing the petitioner abandoned assignment of error (d) relating to the invested capital of the Ontario Realty Co.

In Belfast Investment Co. Docket No. 29439, relating to the years 1922 and 1923, the petition sets forth the following assignments of error:

(a) The Commissioner erred in classifying certain deductible taxes as "non-deductible special taxes," which were levied by the City of Kansas City, Mo., upon the property of taxpayer and paid by the taxpayer, and which taxes are in reality assessments for (1) general expenditures for the benefit of the city at large and not for special benefits to taxpayer's property, and (2) repairs to and changes in existing pavement and curbing, and further erred in disallowing said taxes as deductions in the computation of said taxpayer's income.

(b) The Commissioner erred in failing to allow as a deduction to the taxpayer and affiliated companies, in the computation of their income, correct, sufficient and adequate depletion on certain clay pits belonging to the Ontario Realty Co., an affiliated corporation.

(c) The Commissioner erred in failing to allow a fair March 1, 1913, value for amortization purposes of a certain leasehold belonging to the taxpayer's affiliated company, and located at 12th and Grand Avenue, Kansas City, Mo., and in failing to allow a sufficient deduction as the current year's allocation of said amortization.

(d) The Commissioner erred in failing to allow, in the computation of the taxpayer's income, a fair and proper deduction representing the depreciation sustained on certain buildings and equipment owned by Velie Realty Co., an affiliated corporation, and located on the so-called Velie Farm.

(e) The Commissioner erred in failing to allow, in the computation of this taxpayer's income, a proper deduction representing the depreciation sustained on certain buildings owned by Ark-Mo-Realty Co., an affiliated corporation.

(f) The Commissioner erred in failing to allow, in the computation of this taxpayer's income, a proper deduction representing the depreciation sustained on certain equipment contained in and installed in said building referred to in the paragraph above, and owned by the said Ark-Mo-Realty Co., an affiliated corporation.

The Kansas City Leasehold & Improvement Co., in Docket No. 35718, New Market Investment Co., in Docket No. 35719, and Simcoe Realty Co., in Docket No. 35720, and Ontario Realty Co., in Docket No. 35721, each contend that the respondent erred in determining the respective amounts as deficiencies against such for the reason that he had previously asserted the same deficiency against the Belfast Investment Co. and affiliated corporations. The petition in each of these proceedings contains an assignment of error stating that the respondent erred in his determination of the respective deficiencies for the reasons set forth in the appeal of the Belfast Investment Co., Docket No. 29439.

FINDINGS OF FACT.

The petitioners are Missouri corporations and were affiliated during the years in controversy. Belfast Investment Co. is the parent company.

(1) The petitioner, Belfast Investment Co., filed its return for the year 1918, on June 16, 1919.

On February 9, 1924, the petitioner, Belfast Investment Co., executed the following instrument in writing:

KANSAS CITY, MO., February 9th, 1924.

INCOME AND PROFITS TAX WAIVER.

In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Belfast Investment Co. of Kansas City, Mo., and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said company for the year 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned.

(Signed) BELFAST INVESTMENT CO.,

Taxpayer.

By FRED L. DICKEY, President.

(Signed) D. H. BLAIR, Commissioner.

Like instruments were filed by each of the subsidiary companies for the year 1918. No other waivers were filed by the consolidated group for the year 1918.

The original return showed on its face net income for the consolidated group of $2,790.36, on which a tax of $94.84 was paid.

Based on the office audit, as set forth in Bureau letter of January 12, 1924, the net income reported in the return was increased by the respondent to $79,736.23, on which an additional tax of $41,047.49 was assessed on May 27, 1924. This assessment was based on invested capital of $315,454.88. The revenue agent's report, made under date of September 4, 1923, was not taken into account in this determination.

Later the revenue agent's report was made the basis of a revision of the letter of January 12, 1924, and a new letter dated July 2, 1925, was received by petitioner from respondent.

The revenue agent disallowed $728.12 depreciation, $6,976.54 special improvement taxes, $3,706.32 profits on the sale of real estate and $450 amortization on New Market Investment Co. leasehold, but allowed $1,000 as amortization on the Kansas City Leasehold & Improvement Co.'s leasehold, the net increase being $10,860.98.

In Bureau letter of July 2, 1925, the respondent reversed his previous disallowance of depreciation in the amount of $2,375, increased the allowance for depletion by an amount of $7,611.02, set up a greater profit from the sale of real estate to the amount of $1,581.18, disallowed $1,000 annual amortization on the Kansas City Leasehold & Improvement Co.'s leasehold which had been allowed by the revenue agent and allowed depreciation on the hay barn in the amount of $1,412.59. The amended net income stated in the letter of July 2, 1925, was $81,779.78, and invested capital was reduced from $315,454.88 to $256,000.

On the basis of this amended net income and reduced invested capital an additional tax of $5,869.51 in March, 1925, was assessed, making the total assessment $47,012.14.

A reexamination was made by the revenue agent and his report, dated October 31, 1925, was approved by the Bureau and made the basis of a new amended net income and a new allowance of invested capital. There was a net decrease in income of $1,009.91, which included an allowance for annual amortization of the Kansas City Leasehold & Improvement Co.'s leasehold in the amount of $767.16. The amended consolidated net income was set at $80,688.87, and invested capital was allowed in the amount of $916,301.76, being so increased from $256,000 as shown in the previous Bureau letter.

In the deficiency letter the respondent proposed to allow an overassessment of $36,411.91, resulting in a deficiency of $10,505.39.

(2) During the years 1918 to 1923, inclusive, the petitioners paid to the City of Kansas City, Mo., certain assessments which were as follows:

Improvement for which assessment was made.
1918
Grade 26th Blvd	$200.90
12th St. Viaduct	8.23
Widening of the Paseo	74.54
Extension North Terrace Park & Gladstone Blvd.	141.45
Ashland Sq., Lykins Sq., N. Terrace Park	148.30
Van Brunt Blvd	367.63
Curbing, Jackson Avenue	69.04
Union Station approaches	5,646.82
Repairs, curbing, Balto. Blvd.	38.48
Locust St. connection	158.72
Total	6,854.11
1919
12th St. Viaduct	6.57
Widening of the Paseo	315.48
N. Terrace Pk. & Gladstone Blvd	210.53
Ashland Sq., Lykins Sq., & Sheffield Park	153.91
Van Brunt Blvd	417.57
Locust St. connection	202.51
Union Station Approaches	7.20
Total	1,313.77
1920
Intercity Viaduct	811.56
12th St. Viaduct	5.26
Widening of the Paseo	25.14
N. Terrace Park & Gladstone Blvd	166.98
Ashland Sq., Lykins Sq., & Sheffield Park	140.51
Van Brunt Blvd	372.25
Locust St. connection	102.36
West Terrace Extension	46.63
Paving Belmont Blvd	1,045.42
23rd St. Trafficway	181.95
6th St. Trafficway	647.80
Norton Avenue	132.40
Total	3,678.26
1921
Jackson Avenue	183.22
Montgall Avenue	106.52
Norton Avenue	329.96
Intercity Viaduct	902.61
12th St. Viaduct	5.26
Widening of the Paseo	$4.20
N. Terrace Park & Gladstone Blvd	220.98
Ashland Sq., Lykins Sq., & Sheffield Park	150.82
Van Brunt Blvd	527.25
Chestnut Street Parkway	35.81
Repairs, Paving Belmont Blvd	1,045.42
23rd St. Trafficway	1,766.87
Creation Cleveland Ave	2,189.12
Locust Extension	49.29
Creation of Parkways	32.52
Baltimore Avenue	79.10
Total	10,095.58
1922
Intercity Viaduct	780.24
Pershing Road	321.12
Widening of the Paseo	35.55
Ext. of N. Terrace Pk. & Gladstone Blvd	138.63
Ashland Sq., Lykins Sq., Sheffield Park	123.50
Van Brunt Blvd	451.39
Locust St. Connection	15.59
Chestnut St. Parkway	37.45
23rd St. Trafficway	42.57
Repairs, paving 12th St., Main St., Balto. Avenue, Norton St.,
21st St., Montgale, Waldron, curbing Cleveland Avenue	3,575.97
Repairs, paving Jackson, Holmes	218.59
Belmont Blvd	1,045.42
Total	6,786.02
1923
Intercity Viaduct	712.16
Pershing Road	261.57
Memorial Park	261.45
Widening of the Paseo	78.72
Extension N. Terrace Pk. and Gladstone Blvd	160.42
Ashland Sq., Lykins Sq., and Sheffield Park	177.42
6th St. Trafficway	51.70
Belmont Blvd	1,045.42
Van Brunt Blvd	352.79
Repairs, paving Forest Ave., Tracy Ave., Balto. Ave., Norton,
21st St., Montgate, Grade Holmes	$2,255.19
Repairs, paving Jackson, Waldron	447.90
Chestnut St. Parkway	$9.00
Locust Street connection	20.14
12th St. Trafficway	1.80
Total	6,035.68

The repaving and recurbing items referred to and printed in italic in the above tabulation were repairs to streets which had been in existence and paved for many years. The properties of the Belfast Investment Co. and affiliated corporations against which these assessments were made were business properties located on those streets. The Belfast Investment Co. acts as lessor of these properties. These properties could not be rented to the best advantage unless the curbing and paving of the streets upon which they are located are in good condition. The City of Kansas City, Mo., pays for such repaving and recurbing and assesses special taxes against the abutting property. These taxes were deducted by the petitioner on the theory that they were necessary expenses in connection with its business of leasing real estate.

General public improvements in Kansas City, Mo., are not paid for in full out of general taxes. The levy for taxes for city purposes is limited by the state law and it is impossible for the city to levy a general tax sufficient to pay for the general public improvements that are carried on in the city. In order to provide sufficient money to make various improvements the city resorts to creating special benefit districts. The property within such districts is then taxed in proportion to the benefit which the city determines the property derives from the improvement. The benefit district is passed upon by the common council. There is then a public hearing.

The project known as the "Liberty Memorial Park" is a memorial to the soldiers of the World War, a part of the cost of which was paid by popular subscription. It consists of two buildings, on each side of a shaft, and is surrounded by walls, walks, etc. One of the buildings is a museum and the other is a meeting place for various purposes and various bodies. It is open to the entire public. None of the property of petitioner is within three blocks of this improvement, while most of it is farther away.

The improvement known as "Union Station Approaches" consisted of the widening of certain streets in the neighborhood of Union Station. None of the property of petitioner against which the special taxes were assessed abuts those improvements.

The improvement known as the "23rd Street Trafficway" consisted of grading and the building of retaining walls on both sides of the trafficway. It makes a connection with 23rd Street Viaduct which has access to Kansas City, Kans. None of the property of petitioner against which special taxes were assessed abuts this improvement.

"Sixth Street Trafficway" gives access to the Intercity viaduct which connects Kansas City, Kans., with Kansas City, Mo. It is a part of the national highway system. The Sixth Street Trafficway was widened by tearing down a row of buildings on the north side of the street. An amount of $370,000, a part of the cost of the Sixth Street Trafficway, was borne by the city at large. None of the property of petitioner against which special taxes were assessed abuts this improvement.

The "Intercity Viaduct" is a steel and concrete viaduct more than a mile in length and connects Kansas City, Mo., with Kansas City, Kans. It is used by vehicles as well as pedestrians. It was originally built by private interests and a toll was charged. It was later purchased by Kansas City, Mo., and Kansas City, Kans. None of the property of petitioner against which special taxes were assessed abuts this improvement.

The "12th Street Viaduct"' is a double-deck viaduct starting in Kansas City, Mo., and ending in the West Bottoms. It connects with another trafficway which leads into Kansas City, Kans. An amount of $325,000, a part of the cost of the construction of the 12th St. Viaduct, was paid by the city at large. None of the property of petitioner against which special taxes were assessed abuts this viaduct.

"Lincoln Boulevard Extension" is a cross city arterial trafficway. It serves as a connection between Main Street and Broadway, which are two of the municipal arterial thoroughfares. None of the property of petitioner against which special taxes were assessed abuts this improvement.

"North Terrace Park" is a public park on the north side of the city. It was extended to Gladstone Boulevard. None of the property of petitioner against which special taxes were assessed abuts this park.

"Lykins Square, Ashland Square and Sheffield Park" are three public parks in the northeastern part of the city which are a part of the general municipal park system of Kansas City, Mo., and are used principally as play grounds for children. None of the property of petitioner against which special taxes were assessed abuts these improvements.

"Van Brunt Boulevard" is an arterial trafficway running north and south from North Terrace Park and Lynnwood Boulevard and is at least two miles long. None of the property of petitioner against which special taxes were assessed abuts this boulevard.

"Belmont Boulevard" is an arterial trafficway serving the northeastern part of the city. It connects the eastern terminus of Gladstone Boulevard and North Terrace Park with Independence Boulevard. The Belfast Investment Co. owns about 10 acres known as the "West Tract," which abuts Belmont Boulevard.

"The Paseo" is one of the principal arterial highways of the city running north and south and is situated within a few blocks from the center of the city. None of the property of petitioner against which special taxes were assessed abuts this improvement.

"Lynnwood Boulevard" is an arterial highway. None of the property against which special taxes were assessed abuts this improvement.

"West Pennway Terrace Extension" is an arterial thoroughfare. None of the property of petitioner against which special taxes were assessed abuts this improvement.

"Pershing Road" is a connecting parkway and traffic link between McGee Street on the east and Wardway on the west. It is immediately in front of the Union Station. None of the property of petitioner against which special taxes were assessed abuts this improvement.

"Locust Street Trafficway" is another link in the traffic system. None of the property of petitioner against which special taxes were assessed is within three blocks of this improvement.

"Chestnut Street Trafficway" is also a link in the general trafficway and boulevard system. None of the property of petitioner against which special taxes were assessed is within three blocks of this improvement.

(3) During the year 1917 the petitioner, the Belfast Investment Co., entered into a contract with the United States Government, whereby it agreed to construct and equip a building to be used for the purpose of storing, baling and shipping hay destined for the American Expeditionary Forces in France.

Petitioner, pursuant to the contract, built a warehouse about 912 feet long, about 96 feet wide, 22 feet high at the eaves, and about 26 or 27 feet high at the center. The walls were built of curved, hollow tile, 4 inches thick, held together by mortar and heavy wire. The roof was constructed of 7/8-inch sheathing wood and was supported by 2 by 12 inch joists on 8 by 10 inch timbers. The roof did not rest on the walls. There were no windows built into it originally although later some were added. The light was furnished by skylights in the roof. The floor was of wood over cinders. No heating plant was installed. On the south side of the warehouse is a concrete loading dock about 8 feet wide. It runs nearly the whole length of the building. Petitioner also constructed a railroad switch track which was submerged so that the loading dock would be on a level with the floors of freight cars. The total cost of the building and equipment was $84,750.31.

The contract with the United States Government was for a period of 18 months, commencing January, 1918, at a specified rental per month, but the contract was canceled by the United States Government on June 30, 1918. For the period during which the Government occupied the building petitioner received rent in the sum of $27,333.33. As a result of the cancellation of the lease a controversy arose between the parties, which was settled in 1921 by the acceptance on the part of the petitioner, the Belfast Investment Co. , of a lump sum of $10,000.

During the 6-month period while the Government leased the building tenants of the Government installed a hay-baling machine. Petitioner did not engage in the preparation of the hay for shipment. It was simply the lessor of the building.

After the Government terminated its occupancy of the building, petitioner rented two sections of the building to the Simmons Bed Co., of Kenosha, Wis., for a depot and shipping room. They occupied it for about three years. Two sections were also rented temporarily for the storage of automobiles. Two sections are now occupied by the Creo Dipt Shingle Co., of Tonawanda, N.Y. The three remaining sections are unoccupied. Petitioner has advertised the building for rent, but has been unable to keep all of it rented. There is little demand for such a building. The walls are not capable of withstanding much pressure and parts of them have fallen.

The land on which the warehouse is located is industrial property. The building itself occupies about 2 1/2 acres and the balance of the tract, consisting of about 5 acres is cut off by the warehouse from switch connections.

About 1922 the tract immediately west of the tract on which the warehouse is located sold for $4,000 per acre.

The value of the tract of land on which the building was located was $30,000 in June, 1918.

If the warehouse had been wreacked at the time the Government broke the lease its salvage value would have been $5,712.94. The tile would have had no salvage value as it would have been destroyed in wrecking the building. The chief source of salvage would have been the lumber.

The petitioner, in its tax return for 1918, included as income the amount of $27,333.30 received as rent from the Government. In its return for 1921 it included as income the $10,000 received from the Government in settlement of the claim for damages resulting from breaking the lease.

The average net cash return per annum on the property during the postwar period was $4,567.10.

The hay warehouse had a value at June 30, 1918, not in excess of $62,000.

(4) In 1909 the Ontario Realty Co. purchased 304 acres of land near Versailles, Morgan County, Mo., for about $25 per acre. About 200 acres were prairie land and the remainder was wooded hill land.

Immediately after the purchase of this land, the Ontario Realty Co. cleared a portion of the prairie land that was growing up in brush. All the land was refenced except the portion bordering on the railroad. A roadway ran through the property and this also was fenced. A house was built at a cost of $950, and a house which was already on the place was converted into a servicable barn.

Some land of the same general type as that in question located about two-thirds of a mile east of this land sold in the early part of 1913 for about $30 per acre. It had less land in cultivation than the property in question. The property in question was worth $10,032 on March 1, 1913. In 1918 petitioner sold this land for about $38 per acre.

(5) The Simcoe Realty Co., an affiliated corporation, was organized under the laws of the State of Missouri on April 10, 1905, by Walter S. Dickey, with authorized capital stock of $250,000 (2,500 shares of par value of $100 each).

Under date of April 10, 1905, the capital stock was subscribed as follows:

	Shares
Fred L. Dickey	2,498
George H. Davis	1
J. A. Millsom	1
Total	2,500

The articles of association contain the following statement:

Third: The amount of the capital stock of the company shall be two hundred and fifty thousand ($250,000) Dollars, divided into two thousand five hundred (2,500) shares of the par value of one hundred ($100) dollars each; that the same has been bona fide subscribed and all thereof actually paid up in lawful money of the United States, and is in the United States, and is in the custody of the persons hereinafter named as the first board of directors.

The capital stock of the Simcoe Realty Co. was subscribed for $250,000 cash.

In the year 1918 the respondent allowed invested capital in the amount of $120,972.14 as being the cost of assets owned by the company.

(6), (7) The Kansas City Leasehold & Improvement Co. was organized under the laws of the State of Missouri on April 1, 1909, with authorized capital of $100,000 (1,000 shares at par value of $100 each). The stock was subscribed as follows:

	Shares
Albert D. Flinton	499
Frank Jones	499
B. A. Green	2
Total	1,000

The articles of incorporation contain the following statement:

That the amount of the capital stock shall be One Hundred Thousand Dollars ($100,000) divided into one thousand (1,000) shares of the par value of One Hundred ($100) Dollars each; that the same has been bona fide subscribed and all thereof actually paid up in lawful money of the United States and is in the custody of the persons hereinafter named as the first Board of Directors.

The corporation was organized to take over a lease held by Flinton and Jones in order to avoid further liability on their part on account of the lease.

Flinton was a bank clerk and Jones was a saloon keeper. They had obtained a 99-year lease on the property at 12th St. and Grand Avenue at a ground rental of $35,000 per year. The property covered by the lease fronted 86 feet on Grand Avenue and 115 feet on 12th Street. In 1912 the ground rent was in arrears as were the taxes and the insurance premiums. A notice had been given that the owners of the property were going to abrogate the lease.

In 1912 the stock of this company was purchased from Flinton, Jones, and Green by Walter S. Dickey, Perry, and Hineman at a cost between $72,000 and $75,000. Each paid $15,000 in cash or notes and assumed and immediately paid the obligations that were in arrears. Flinton was a clerk in the bank in which Dickey was an officer, and it was through this relationship that Dickey became interested in the Kansas City Leasehold & Improvement Co. At the time Dickey, Perry, and Hineman purchased the stock the only asset of the corporation was the lease.

After Perry, Hineman, and Dickey purchased the stock of the Kansas City Leasehold & Improvement Co. the property was leased to the Martha Realty Co. for the unexpired portion of the 99-year lease. As a result of the lease to the Martha Realty Co., the Kansas City Leasehold & Improvement Co. received each year $20,000 over and above all costs.

The lease was worth $140,000 on March 1, 1913.

At the time Dickey, Hineman, and Perry purchased the stock the property was not paying expenses. No income was derived from it in 1912 or 1913. There was no surplus in the treasury of the company in 1912.

For the year 1918 the respondent allowed the Kansas City Leasehold & Investment Co. invested capital of $72,944.01. This was allowed as the cost of assets owned by the corporation in 1918.

The respondent determined that the March 1, 1913, value of the lease was $72,944.01 and has allowed a deduction for depreciation for each year based upon this value.

(8) By a transaction of January 10, 1917, as of January 1, 1917, Walter S. Dickey transferred to the Ontario Realty Co. certain clay lands at the following prices:

Location	Price
St. Clair County, Mo	$57,333.06
Henley County, Mo	30,717.81
Crawford County, Kans	20,513.91
Morgan County, Mo	35,942.50
McDonough County, Ill	24,000.00
Jefferson County, Ala	22,500.00
Walder County, Ga	$60,000.00
Miller County, Ark	22,000.00
Muscogee County, Ga	17,500.00
Bexar County, Tex	45,000.00
Total	335,507.28

At the time of the transaction Walter S. Dickey was president of the Ontario Realty Co. and owned all its capital stock except two shares held by directors for qualifying purposes.

The prices above listed were based upon the cost of the properties to Dickey and the improvements which he had made thereon. Of the total price paid, $14,000 was in cash and the balance in notes. These notes were paid off during a period of three years subsequent to the date of sale. The Ontario Realty Co. also agreed to pay two-thirds of the gross income derived from the clay pits to certain designated members of Dickey's family.

The fair market value of these properties at the time transferred was at least $335,507.28.

The parties have stipulated with regard to depreciation sustained by the Ontario Realty Co. on clay lands, as follows:

Petitioner has heretofore introduced in evidence in this cause petitioner's exhibit #21, giving the detail of the establishment of rates of composite depletion and depreciation of the clay properties involved, and it appearing that in some instances the depletion rates per ton should be carried out to additional decimal places in the mathematical computation, and it appearing that the proper mathematical calculations in this regard have now been made by the Bureau, as indicated in the depletion tables attached hereto: IT IS STIPULATED AND AGREED that the said tables showing:

1. The names of the properties,

2. The cost of each respective property,

3. The nondepletable cost of the nondepletable portions,

4. The net depletable costs,

5. The recoverable tonnage on January 1, 1917,

6. Depletion rate per ton,

are correct and may be so accepted as the basis of determinating the depletable rate per ton for clay in the computation of the composite depletion and depreciation rate claimed herein.

And it further appearing that certain mathematical errors were present in petitioner's exhibit #22 introduced in evidence, IT IS STIPULATED AND AGREED that in place of the claimed depletion suffered for the years 1918 to 1923, inclusive, as shown in said petitioner's exhibit #22, that the amounts shown in the annexed computations for the years 1918, 1919, 1920, 1921, 1922 and 1923 are correct, and that as shown by the following tables the corrected amounts set out therein may be substituted in the record for the amounts read into the record as claimed depletion for the years indicated in petitioner's exhibit #22. The following tabulation indicates the corrections to be made.

Year	Depletion suffered as shown by	Amended and corrected depletion
	petitioner's Exhibit No. 22	herein agreed to
1918	$31,095.23	$31,684.81
1919	32,504.56	32,502.46
1920	43,223.58	43,211.55
1921	39,585.97	39,584.83
1922	$38,214.25	$28,312.84
1923	30,096.03	29,756.37
	214,719.62	205,052.86

(9) At the hearing the parties stipulated with regard to assignment of error (d) in Docket No. 29439, that the proper basis for depreciation on farm buildings is $24,000, and the rate applicable to the same is 5 per cent; that the depreciable investment in farm equipment is $4,018.35, that the rate applicable to the same is 10 per cent per annum; that the depreciable investment in furniture and fixtures is $377.50 and that the rate applicable to the same is 10 per cent per annum; that these sums and these rates represent the bases and rates of depreciation for the years 1922 and 1923.

(10) At the hearing the parties stipulated with regard to assignment of error (e) in Docket No. 29439, that the correct basis for depreciation of buildings for the year 1923, belonging to the Ark-Mo-Realty Co., is $228,996.18 for the 9-month period beginning April 1, 1923, and ending December 31, 1923, and that the correct rate of depreciation applicable to the same is 4 per cent.

(11) At the hearing the parties stipulated with regard to assignment of error (f) in Docket No. 29439, that the correct basis for depreciation of equipment in connection with the Ark-Mo-Realty Co. for the same 9-month period is $282,454.44 and that the rate of depreciation applicable to the same is 5 per cent per annum.

OPINION.

SIEFKIN: The petitioners having abandoned one assignment of error, and the respondent having admitted error as alleged in one of the assignments of error, the questions remaining for consideration are:

(1) Whether the jeopardy assessment in the amount of $5,869.51 assessed by the respondent on March 19, 1925, was in error.

(2) Whether the consolidated net income for the years 1918 to 1923, inclusive, should be reduced by taxes paid to the City of Kansas City, Mo., under ordinances providing for special benefit district assessments. (This also includes the question of whether cost of repaving and recurbing in front of property belonging to petitioner is deductible as a cost of repairs necessary to the conduct of petitioner's rental business.)

(3) Whether the petitioner, Belfast Investment Co., is entitled to a deduction for amortization of the Lee Tract Warehouse in determining consolidated net income for 1918. (Petitioner, in this connection, also raises the alternate question of whether it is entitled to a deduction for loss of useful value of the warehouse, if we find it was not a war facility.)

(4) The March 1, 1913, value for purposes of calculating gain or loss upon the sale of certain land at Versailles, Morgan County, Mo.

(5) Whether the invested capital of the Simcoe Realty Co. an affiliated company, should be increased for the year 1918.

(6) The computation of the invested capital of the Kansas City Leasehold & Improvement Co. for 1918.

(7) Whether a March 1, 1913, value for amortization purposes of a certain leasehold belonging to the Kansas City Leasehold & Improvement Co., an affiliated company, should be allowed, and if so, in what amount.

(8) The proper amount of depletion and depreciation allowable on certain clay pits belonging to the Ontario Realty Co. for the years 1918 to 1923, inclusive.

(9) The proper deduction for depreciation sustained on certain buildings and equipment owned by Velie Realty Co. an affiliated corporation, for the years 1922 and 1923.

(10) The proper deduction for depreciation sustained on certain buildings owned by the Ark-Mo-Realty Co., an affiliated corporation, for the years 1922 and 1923.

(11) The proper deduction for depreciation on certain equipment owned by the Ark-Mo-Realty Co.

(1) The total tax assessed by the respondent for the year 1918 is $47,012.14, of which $94.84 was assessed on the original return. Respondent, in the deficiency letter, proposed to reduce this assessment in the amount of $36,411.91 resulting in a tax liability of $10,600.23, of which $94.84 was paid, leaving a deficiency of $10,505.39. Respondent admits that only the amount of $5,869.51 is now collectible. His contention that this amount is cllectible is based upon the fact that it was assessed in March, 1925, within the statutory period as extended by the waiver, and after the passage of the Revenue Act of 1924, which provides in section 278(d) that where the assessment is made within the period prescribed in section 277 the tax may be collected at any time within six years after the assessment. The respondent admits that an amount of $4,730.72 of the deficiency is uncollectible, due to the fact that it was assessed in May, 1924, prior to the passage of the Revenue Act of 1924.

The contention of the petitioner is that the proposed overassessment amounting to $36,411.91 should be applied first to the assessment of March, 1925, and the remainder to the assessment of May, 1924. If this procedure were followed the entire deficiency would be attributable to the assessment in 1924, the collection of which is barred.

The evidence discloses that the assessment of $5,869.51 made in March, 1925, was made within the time extended by the waiver. The collection of this deficiency is, therefor, not barred by the statute of limitations, since section 278(d) of the Revenue Act of 1924 provides six additional years for collection after assessment is made.

An accountant who testified as a witness for the petitioner stated that, if the invested capital as finally allowed by the respondent had been used at the time the additional tax liability of $5,869.51 was computed, there would have been no additional tax. Petitioner takes the position that respondent, in his final determination, has admitted error and that we should hold that the overassessment proposed by the respondent wipes out the assessment of $5,869.51. However, the respondent denies the error alleged and the question raised concerns the true tax liability of the petitioner. The function of this Board is to redetermine deficiencies in tax asserted against taxpayers, and to carry out this function it is necessary for us to have before us all of the evidence necessary to determine the true tax liability. From the meagre evidence which we have been furnished we cannot determine what the true tax liability of the petitioner was and we certainly will not attempt to apportion the proposed overassessment as between the assessments of May 27, 1924, and March, 1925.

(2) The evidence discloses that the City of Kansas City, Mo., made certain improvements in the nature of parks, trafficways, viaducts, etc., and in accordance with the statutes of the State of Missouri, created certain benefit districts, the property within which was assessed, theoretically, at least, in proportion to the benefit it derived from the improvements.

Petitioners contend that their property against which certain of these assessments were made was not benefited any more by these improvements than properties in the city which were not located within the benefit districts. They contend that these improvements did not tend to increase the value of their properties any more than any other property in Kansas City, Mo., and that under section 234 of the Revenue Act of 1918 and section 234 of the Revenue Act of 1921, the amounts so assessed against them are deductible from gross income.

Section 234(a) of the Revenue Act of 1918 provides:

That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

* * *

(3) Taxes paid or accrued within the taxable year imposed * * * (c) by the authority of any State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory, not including those assessed against local benefits of a kind tending to increase the value of the property assessed; * * *

Section 234(a) of the Revenue Act of 1921 provides:

That in computing net income there shall be allowed as deductions:

* * *

(3) Taxes paid or accrued within the taxable year except * * * (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed * * *.

Petitioner relies upon . However, in that case we clearly held that assessments made upon the theory that property was benefited to the extent of the assessments were not deductible and that we would not delve into the question as to whether, in fact, the property was so benefited.

In that case we said:

* * * If the assessment were not based upon an increment of benefit to the property assessed, resulting from the improvements, it would, by the greatest weight of authority, be invalid. This being so, Did Congress, when it added the phrase referred to above, intend to subject special assessments to the test which would be required if petitioner's contention were sustained, in order to determine their deductibility? Let us consider what the situation would be. The municipality made the improvement, determined an assessment district embracing the property suposed to be benefitted and the amount of the supposed benefits, and made assessments accordingly. It must be presumed that the municipality acted under proper legislative authority and in accordance with the grant of authority. It must be presumed further that the property owners, including this petitioner, had an opportunity to present objections to the municipal authorities, and that the courts of Kansas were open to them to correct any error or illegality in the assessment. Those are the forums in which any question affecting the validity of the assessment should be raised. If its invalidity were established, of course the assessment would not have to be paid at all. The assessment was paid and there is no evidence that petitioner or any other property owner made any protest or raised any objection to the improvement or to the assessment. We are asked now - in connection with a claim for a deduction from gross income - to consider facts which tend to show the assessment was unconstitutional, after petitioner has acquiesced in the assessment. A consequence of adopting the construction contended for would be that the question of deductibility of assessments for any local public improvements in the United States would depend upon facts which, if established, might affect the validity of the assessment, and which, if urged in the proper forum, might result in no assessment. We can not ascribe to Congress any such purpose.

See, also, , and .

In the case of , the Supreme Court of Missouri stated:

The argument is again pressed that whatever benefit may be derived from widening and extending Oak Street is city wide, and not confined to the immediate locality of the improvement. In this connection it may be said that the fact, if a fact, that Oak Street, as widened and extended, is designed to become a part of the most used thoroughfare in Kansas City, is wholly immaterial on the question of special benefits. This because the property in the immediate locality of the improvement presumptively receives a benefit entirely different from that which inures to the public at large. That an ordinance of Kansas City, which conforms to the provisions of its charter, may, without transgressing constitutional limitations, provide for the ascertainment of both the public and the private benefit, and require each to contribute to the expense of the improvement from which they are respectively derived, is no longer an open question.

We must hold that the amounts paid by petitioners as a result of assessments made by the City of Kansas City, Mo., are not deductible under section 234 of the Revenue Act of 1918 and section 234 of the Revenue Act of 1921.

Petitioners further contend that amounts paid by them for repaving and recurbing streets on which they owned properties are deductible as expense of their business of leasing properties, since such improvements greatly facilitated the renting of the properties. However, since section 234 of the Revenue Act of 1918 and section 234 of the Revenue Act of 1921 specifically preclude the allowance of these assessments as deductions, they are not deductible under any theory.

(3) The petitioner, Belfast Investment Co., during the year 1917, entered into a contract with the United States Government whereby it agreed to construct and equip a building to be used for the purpose of storing, baling and shipping hay destined for the American Expeditionary Forces in France. Petitioner did construct such a building at a cost of $84,750.31. The United States Government occupied this building until June 30, 1918. Petitioner is now claiming a deduction for amortization of the cost of this building.

Section 234 of the Revenue Act of 1918 provides:

(a) That in computing net income there shall be allowed as deductions:

* * *

(9) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as had been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income.

The respondent contends that the petitioner is not entitled to a deduction for amortization as it was not engaged in the production of articles contributing to the prosecution of the war. We do not agree with this contention. The building itself was constructed and used in connection with the production of articles contributing to the prosecution of the war. See , in which the Circuit Court of Appeals, Fifth. Circuit, held that a coal company was entitled to a deduction for amortization of cost of opening shafts in its coal mines. The court in that case stated:

* * * It is also clear that, in allowing a deduction as to "other facilities," it was not intended to restrict the meaning of "facilities" by the preceding words, "buildings, machinery, equipment," but rather to enlarge it to take in anything and everything contributing to the general result of winning the war.

Respondent cites , in which we held that the amortization section does not provide relief for taxpayers who, for investment purposes, constructed or acquired buildings or equipment for the purpose of renting or leasing the same to others who were engaged in the business of manufacturing or producing articles contributing to the prosecution of the war. That case is distinguishable because in the instant case the petitioner was renting directly to the Government. Petitioner did not build this warehouse for investment purposes.

In , we held that the deduction for amortization of war facilities is to be spread only over what may be designated as the amortization period, and this period is determined by the time when the taxpayer abandoned the facilities or ceased producing articles contributing to the prosecution of the war. See, also, , in which we stated:

It did not appear in the record of the case that petitioner's war-time production continued beyond December 31, 1918, and that date is accordingly fixed as the termination of the amortization period. The depreciation for amortization will be confined to the 1918 income.

After a careful consideration of all the evidence in the case we have found as a fact that the value of the building in June, 1918, was not in excess of $62,000. The petitioner is, therefore, entitled to a deduction for amortization in the amount of the difference between this figure and the cost, a deduction of $22,750.31.

Petitioner contends that the amount of $10,000 received from the Government in 1921 operated to reduce the amortization allowance to which it was entitled, that petitioner improperly included this amount in income in 1921 and that to rectify this error we must allow $10,000 of the amortization allowance as a deduction in 1921.

As far as the evidence shows this settlement of $10,000 was not paid by the Government as a part of the cost of war facilities, but was compensation for loss of profit on the contract. In this connection see . It follows that the $10,000 was income to the petitioner in the year in which it was received, 1921. Since it was not income during the amortization period the amortization deduction may not be applied against it.

(4) From all the evidence we have found as a fact that the March 1, 1913, value of the land in question was $10,032, and the gain or loss sustained upon the subsequent sale of this property by petitioner should be based upon that figure.

(5) Section 326(a) of the Revenue Act of 1918 provides:

That as used in this title the term "invested capital" for any year means (except as provided in subdivision (b) and (c) of this section):

1. Actual cash bona fide paid in for stock or shares.

The evidence shows that when the Simcoe Realty Co. was organized in 1905 the full amount of its authorized capital stock, $250,000 par value, was issued for $250,000 cash. This amount should be included in the invested capital of the Simcoe Realty Co.

(6) Section 326 of the Revenue Act of 1918 provides:

(a) That as used in this title the term "invested capital" for any year means (except as provided in subdivisions (b) and (c) of this section):

1. Actual cash bona fide paid in for stock or shares;

2. Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus * * *.

The evidence discloses that the Kansas City Leasehold & Improvement Co. was organized under the laws of the State of Missouri on April 1, 1909, with authorized capital of $100,000. At that time section 3339 of the Statutes of Missouri, 1909, was in effect, which provided as follows:

* * * Any three or more persons who shall have associated themselves, by articles of agreement, in writing, as provided by law, for any of the purposes included under section 3346, may be incorporated under any name or title designating such business. The articles of agreement shall set out: First, the corporate name of the proposed corporation which shall not be the name of any corporation heretofore incorporated in this state for similar purposes, or an imitation of such name; second, the name of the city or town and county in which the corporation is to be located; third, the amount of the capital stock of the corporation, the number of shares into which it is devided and the par value thereof, that the same has been bona fide subscribed, and one-half thereof actually paid up in lawful money of the United States, and is in the custody of the persons named as the first board of directors or managers * * *.

It will be noted that the law required that one-half of the authorized capital stock be paid up in lawful money of the United States. Little evidence has been introduced as to the details of the stock subscription, but, in the absence of evidence to the contrary, we must assume that the stock was subscribed in the manner provided by law. See . We, therefore, hold that $50,000 in cash was paid in to the corporation at organization. However, further than this we may not presume. Since the respondent has already allowed invested capital for the year 1918 in a greater amount than $50,000, his holding will not be disturbed.

(7) The next question deals with the depreciation of this leasehold. The respondent admits that the petitioner is entitled to amortize the cost of $72,944.01 of the lease over the remainder of its life from March 1, 1913, and the sole question for our determination is the value to be used for depreciation purposes.

We have already found that its value at March 1, 1913, was $140,000 and the depreciation should be allowed upon this basis. See , , and .

(8) The parties have entered into a stipulation with regard to the depletion sustained by the Ontario Realty Co. on clay lands as set forth in our findings of fact, and the amounts shown therein representing depletion will be allowed as deductions in the recomputation.

(9), (10), (11) The facts material to a decision on these findings have been stipulated between the parties as set forth in our findings of fact, and the depreciation sustained should be computed in conformity therewith.

Reviewed by the Board.

Judgment will be entered under Rule 50.