Brown v. Commissioner

H. C. BROWN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MAUDE BROWN PLETTNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Brown v. Commissioner

Docket Nos. 33343, 33345.

United States Board of Tax Appeals

25 B.T.A. 631; 1932 BTA LEXIS 1496;

February 25, 1932, Promulgated

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">*1496 Where petitioners inherit an estate in real property limited in duration to the life of a person then in being, they are entitled to a deduction from 1925 income for depreciation on the improvements situated on said real estate, equitably apportioned between them and the remaindermen. Section 214(a)(8), Revenue Act of 1926. Deduction for depreciation apportioned in the same way also allowed from 1923 and 1924 income under Revenue Acts of 1921 and 1924. Rose v. Grant, 39 Fed.(2d) 338, followed.

James D. Benedict, Esq., for the petitioners.

J. E. McFarland, Esq., for the respondent.

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BLACK

">*631 In these proceedings, which have been consolidated, the petitioners seek a redetermination of their income-tax liability for the calendar years 1923 to 1925, inclusive, for which the respondent has determined deficiencies as to petitioner H. C. Brown in the amounts of $237.90 for 1923, $207.58 for 1924, and $208.14 for 1925, of which latter amount $13.07 is admitted to be correctly due, and as to petitioner Maude Brown Plettner, in the amounts of $119.55 for 1923, $70.83 for 1924, and $74.96 for 1925.

The issue presented is whether">*1497 under section 214(a)(8) of the Revenue Acts of 1921, 1924 and 1926, the petitioners are entitled to deductions for exhaustion of the value of an estate pur autre vie inherited by them in equal shares from their mother. The petitioners each claimed deductions on this account in the taxable years in the amount of $2,712.28, based on the value of their interests at the time of inheritance and the life expectancy of the cestui que vie. The respondent disallowed the deductions on the authority of section 215(b). By an amendment filed at the hearing, the petitioners contend that, in the event they are not allowed the above mentioned deductions, they should be allowed depreciation on the buildings and improvements during each of the years in question based on their fair market value and probable life from date of acquistion (date of the death of their mother) apportioned between the life interest and the remainderman.

FINDINGS OF FACT.

The petitioners are individuals residing in Denver, Colorado, who acquired by bequest from their mother an estate in certain real estate ">*632 limited in duration to the life of Mary E. Fowles. The real estate in question was formerly">*1498 owned by Freeman Waugh, who died in 1893 and in his will bequeathed a life estate in lots 17 to 20, Block 209, East Denver, Colorado, to Mary E. Fowles, with remainder to her children or issue surviving in fee simple. In 1899 Mary E. Fowles, the life tenant, to secure an indebtedness owing by her encumbered her life estate by a deed of trust. Upon default in the payment of the indebtedness secured by the deed of trust the life estate was foreclosed and at the foreclosure sale Charles Cortland Brown became the purchaser. Brown obtained a trustee's deed for the premises in May, 1903, and in November, 1903, Mary E. Fowles, for a valuable consideration, conveyed her life estate and all her right, title and interest in the lots to Brown. In December, 1907, Brown conveyed the life estate to his wife, Anna Brown, but the deed was not recorded until after his death. Brown died in 1908, devising all his property to his wife, Anna Brown, who by reason of the conveyance and the will was the owner of the life estate when she died on April 1, 1918. Anna Brown, by her will, devised the life estate to the petitioners herein, share and share alike, who continued to own such estate until the">*1499 death of Mary E. Fowles, the original life tenant, which occurred in 1927.

At the time of the death of Anna Brown on April 1, 1918, Mary E. Fowles, the original life tenant, was fifty-five years of age, and had an expected period of life of 15.243 years. The life estate had a value at the time of the death of Anna Brown of $81,384.39 and was returned for estate-tax purposes at that amount. The property in question was improved by two buildings, one known as the 16th Street Building and the other as the Court Place Building. The 16th Street Building was constructed in 1886 and had an estimated life from the date of its construction of 50 years. The Court Place Building was constructed in 1888 and had an estimated life from the date of its construction of 50 years. In 1918 the value of the 16th Street Building was $7,048.50 and the value of the Court Place Building was $14,115.50. The 16th Street Building had a further life in 1918 of 18 years and the Court Place Building had a further life of 20 years.

The petitioners each received from the estate of their mother one-half interest in the life estate in said property of a value of $40,692.20 to each, and each deducted from">*1500 his annual income for the years in question $2,712.82, which represented the estimated annual exhaustion of the value of such estate, including land and improvements received by them, based on the expectancy of the life of Mary E. Fowles.

">*633 OPINION.

BLACK: The respondent has taken the position that the estate received by the petitioners by bequest from their mother, limited as it was in duration to the life of Mary E. Fowles, falls within the exception provided in section 215(b) of the Revenue Acts of 1921, 1924 and 1926, and accordingly precludes the taking of any deductions under section 214(a)(8) of the same acts, either for the exhaustion haustion of the value of the estate by the mere lapse of time, or for depreciation of the buildings and improvements on the land. Petitioners contend that this action of the respondent was error and that petitioners are each entitled to deduct under said section 214(a)(8) an amount of $2,712.82 for each of the taxable years, representing an amortization or exhaustion of the value of income-producing property received by each by bequest from their deceased mother. At the hearing petitioners amended their petition so as to contend">*1501 in the alternative that if not allowed the full deduction claimed, they are nevertheless entitled to a reasonable deduction for depreciation on the value of the improvements apportioned between themselves and the remaindermen. The taxable years involved in this proceeding are governed by the Revenue Acts of 1921, 1924 and 1926. The taxable year 1925, one of the years involved in this proceeding, is governed by the Revenue Act of 1926, because expressly so provided by the terms of that act. Section 215(b) of each of said revenue acts is the same and reads:

SEC. 215(b) Amounts paid under the laws of any State, Territory, District of Columbia, possession of the United States or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act for the purpose of computing the net income of an estate or trust, but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose">*1502 of computing the income to which such holder is entitled.

Section 214(a)(8) of the Revenue Acts of 1921 and 1924 is the same and reads as follows:

SEC. 214(a) In computing net income there shall be allowed as deductions:

* * *

(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

Section 214(a)(8) of the Revenue Act of 1926 reads the same as above except Congress added at the end of paragraph (a)(8) the following language:

In the case of improved real estate held by one person for life with remainder to another person, the deduction provided for under this paragraph ">*634 shall be equitably apportioned between the life tenant and the remainderman under rules and regulations prescribed by the Commissioner with the approval of the Secretary.

In Elmer J. Keitel,15 B.T.A. 903">15 B.T.A. 903, we considered the above sections in connection with a life interest in the hands of a taxpayer who had purchased the interest for a valuable consideration, and we there held that such purchase was a capital investment which should be exhausted over the life of the estate so">*1503 acquired. In that case there was no proof of the value of the estate acquired and the deduction to which petitioner was entitled could not be determined. In that case we said:

If petitioner had purchased a lease, he would under Section 214(a)(8) be entitled to an annual deduction for the exhaustion of his leasehold. Such has been the consistent holding of the Board since its decision in Grosvenor Atterbury,1 B.T.A. 169">1 B.T.A. 169. We perceive no difference in principle between the rule laid down in the above case and where one purchases a lease determinable upon the life of the lessor or any other person. In such a case the purchaser would be entitled to take his deduction for exhaustion on the basis of the life tables, if they constituted the only evidence in the case providing a method of determining the duration of the life of the lessor or other person. Nor can we perceive any difference in this respect between the purchase of a lease of a life interest and the purchaser of the life interest itself. In both cases the interest is terminable and exhaustible for income-tax purposes. This proceeding does not fall within the provisions of Section 215(b), for the reason">*1504 that petitioner did not acquire his mother's interest "by gift, bequest, or inheritance * * *." He acquired it by purchase. He purchased a terminable estate and is in the same position as one who purchases a lease, which is also a terminable interest.

The above opinion was approved and followed in Floyd M. Shoemaker et al.,16 B.T.A. 1145">16 B.T.A. 1145. See also Caroline T. Kissel,15 B.T.A. 705">15 B.T.A. 705.

It is the contention of the petitioners that their situations are the same as were the taxpayers' in the above cited cases and hence they are entitled to exhaust over a period of the life expectancy of the life tenant, Mary E. Fowles, the full value of the estate which they received just the same as if they had purchased it at that price. We do not agree with this contention. Undoubtedly the purchaser, Charles Courtland Brown, under the authority of the above-cited cases, would have had the right to exhaust the purchase price which he paid for the property over the period of the life expectancy. But petitioners are not in his situation. The property came to them not by purchase, but by bequest and hence comes squarely within the terms of section 215(b) of the">*1505 respective revenue acts, already cited. On this point we hold for respondent. But we think petitioners' alternative contention should be sustained. Under the terms of the ">*635 Revenue Act of 1926 applicable to the year 1925, one of the years involved in this proceeding, a requirement is made that in case of improved real estate held by one person for life, with remainder to another person, the depreciation permitted as a deduction under section 214(a)(8) shall be equitably apportioned between the life tenant and the remainderman under rules and regulations prescribed by the Commissioner with the approval of the Secretary. The Revenue Acts of 1921 and 1924 contain no provision requiring that depreciation should be apportioned between the life tenant and the remainderman, but nevertheless petitioners only claim depreciation for 1923 and 1924 apportioned on the same basis as under the 1926 Act.

The case of Rose v. Grant, 39 Fed.(2d) 338, which involved much the same questions as we have before us for decision in the instant case, was first heard on demurrer and is reported in ">*1506 24 Fed.(2d) 115. The facts are very similar to those here presented. Therein Grant, a life tenant under his father's will, came into possession of an Atlanta office building. The court at page 339, 39 Fed.(2d), takes note that he makes no claim for "depletion of the land or for shrinkage in value of his property by reason of the expiration of his estate by efflux of time," citing section 215(b), 1921 Act. He did claim, however, depreciation on the building and fixtures including elevators. The first District Court decision recognized the propriety of allowing depreciation on building and fixtures, when used in a trade or business, although no deduction could be allowed under section 215(b) for exhaustion of the value of the estate because of the mere lapse of time. The case was later heard on the merits by Judge Sibley, who was then district judge, and is reported in 32 Fed.(2d) 812, wherein the basis of a fair apportionment is discussed. From this decision an appeal was taken to the Fifth Circuit, which sustained the Court below in ">*1507 Rose v. Grant, 39 Fed.(2d) 338. Thereafter certiorari was granted by the Supreme Court in 282 U.S. 821">282 U.S. 821, but subsequently dismissed on motion of the Solicitor General in 283 U.S. 867">283 U.S. 867.

On appeal the Circuit Court of Appeals gave specific recognition to the distinction between the life tenant's estate, nonexhaustive under section 215(b), and depreciating buildings and fixtures, for which deductions should be allowed under 214(a)(8), Acts of 1918 and 1921. The court took the view that the revenue acts make no distinction between property held in fee simple or for life, but grant generally a depreciation deduction on property used in a trade or business, adding that "an estate for life, even if it be pur autre vie,">*636 if so used, is property within the letter and spirit of the statute and entitled the owner, that is, the holder of the legal title in possession, to the deduction." Having considered in detail the fair apportionment between life tenant and remainderman provided in the 1926 Act, the lower court was sustained in holding that such apportionment between the two for depreciation purposes should be made even under prior">*1508 acts.

Both courts expressly distinguished cases involving trusts and leases from those in which the taxpayer, as here, was owner of a freehold estate. Said Judge Sibley in 24 Fed.(2d) 115:

Also beside the mark are cases like Baltzell v. Mitchell, 3 Fed.(2d) 428, which refused deductions for capital losses to the beneficiary of a fixed income from a trust, because the trustee, who owns the entire fee, is the taxpayer who suffers the loss and is entitled to the deduction.

This distinction in our opinion is sufficient to differentiate the instant case from Louise P. V. Whitcomb et al.,4 B.T.A. 80">4 B.T.A. 80; Whitcomb v. Blair, 25 Fed.(2d) 528; Codman v. Miles, 28 Fed.(2d) 823; Irwin v. Gavit,268 U.S. 161">268 U.S. 161.

On authority of the language contained in section 214(a)(8) of the Revenue Act of 1926, as to the taxable year 1925, and Rose v. Grant, supra, as to the taxable years 1923 and 1924, we sustain petitioners' alternative contention and hold they are entitled to depreciation in each of the taxable years on the improvements situated on said lots equitably">*1509 apportioned between the life tenant and the remainderman, such apportionment to be made as follows:

The 16th Street Building, constructed in 1886 with an estimated life of 50 years had a remaining life of 18 years in 1918 when petitioner acquired it by inheritance. The autre vie's expectancy was 15.243 years. The life tenant, therefore, would hold the building for 15.243/18 of its remaining life. This fraction of its total value of $7,048.50 is $5,968.91, which, divided by 15.243, gives a quotient of $391.58, as annual depreciation. A similar computation for the Court Place Building, built in 1888, with a life of 50 years, having a remainder of 20 years, results in a life tenant's interest of 15.243/20 of the total, $14,115.50; this interest amounts to $10,758.12, which figure, divided by 15.243, gives an annual depreciation of $705.78.

These amounts properly divided between each of petitioners should be allowed them as deductions for depreciation in determining their respective net incomes for each of the taxable years.

Reviewed by the Board.

Decision will be entered under Rule 50.