DocketNumber: Docket No. 88561.
Citation Numbers: 1939 BTA LEXIS 1070, 39 B.T.A. 113
Judges: Leech
Filed Date: 1/17/1939
Status: Precedential
Modified Date: 1/12/2023
*1070 Petitioner owned a one-half interest in real estate in California which it leased in 1925 for a term of fifty years and one month. Under the terms of the lease, in addition to rental, the lessee was required to and did erect in 1926 a building thereon which then became a part of the real estate, had a life of 33 1/3 years, and, if removed, had only a salvage value. In 1932, upon default on the lease by the lessee, the lessor repossessed the premises, including the building thus erected. Respondent determined petitioner realized taxable income in 1932 in the amount of one-half the depreciated cost of the building erected by the lessee, under Regulations 77, article 63, as amended by
*114 OPINION.
LEECH: This case*1071 involves a deficiency in income tax of $441.56 for the calendar year 1932. The sole issue is whether petitioner derived income at the time of the cancellation of a lease of its property because of the fact that, during the running of the lease and pursuant to an agreement contained therein, the lessee had erected a building on the property. We find the facts as stipulated, supplemented by the ultimate finding therefrom that this building, when erected, became a part of the leased premises, and, if removed, had only a salvage value.
In 1919, petitioner acquired a one-half interest in certain real estate located in San Diego, California. It leased this property, in 1925, to the Exchange Securities Corporation for a term of fifty years and one month. Paragraph "Second" of the lease provided, for a term rental, as such, in the amount of $675,487.15, payable in definite amounts and on specific dates. The fifth paragraph,
In 1932, upon lessee's default, petitioner-lessor canceled the lease and repossessed the premises. In computing the deficiency, respondent deducted depreciation on the building at the rate of 3 percent for six years, the original cost of the building having been $22,500, and determined that petitioner received taxable income, in 1932, in the amount of $9,225, one-half of the remaining cost of the building.
The first question is whether the erection of this building by the lessee can be construed to have been rental under the lease. The Supreme Court, in the recent case of
*1074 *116 It is true the provisions of that regulation are identical with others, the validity of which has been sustained by the Board. Granting that the improvements increased the value of the building, that enhancement is not realized income of lessor. [n7] So far as concerns taxable income, the value of the improvements*1075 is not distinguishable from excess, if any there may be, of value over cost of improvements made by lessor. Each was an addition to capital; not income within the meaning of the statute. [n8] Treasury Regulations can add nothing to income as defined by Congress. [n9] [7] [8] [9]
In view of that unequivocal expression by the Supreme Court, we now hold that where, as here, the improvements to the leasehold did not constitute rent and, when constructed, became a part of the leased premises, and, if removed, had only a salvage value, no taxable income is realized by their lessor upon its acquisition of possession of such premises at the termination of the lease. 3
Reviewed by the Board.
1. ART. 63.
Except in cases where the lessor has exercised the option to report income upon basis
In all cases where the lessor has exercised the option to report income upon basis
2. ART. 63.
If the lease is terminated so that the lessor comes into possession or control of the property prior to the time originally fixed for the expiration of the lease, the lessor shall report income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he becomes entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the termination of the lease shall be included.
If the buildings or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less any salvage value subject to the lease, to the extent that such loss is not compensated for by insurance or otherwise. (See articles 130 and 204.) ↩
3. See concurring opinion of Mr. Justice Stone in the
Taft v. Bowers , 49 S. Ct. 199 ( 1929 )
Merchants' Loan & Trust Co. v. Smietanka , 41 S. Ct. 386 ( 1921 )
United States v. Phellis , 42 S. Ct. 63 ( 1921 )
Lucas v. Alexander , 49 S. Ct. 426 ( 1929 )
M. E. Blatt Co. v. United States , 59 S. Ct. 186 ( 1938 )
Koshland v. Helvering , 56 S. Ct. 767 ( 1936 )
Burnet v. Logan , 51 S. Ct. 550 ( 1931 )
Bowers v. Kerbaugh-Empire Co. , 46 S. Ct. 449 ( 1926 )
Lucas v. American Code Co. , 50 S. Ct. 202 ( 1930 )
United States v. Safety Car Heating & Lighting Co. , 56 S. Ct. 353 ( 1936 )