Cowell v. Commissioner

I. M. COWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

H. E. COWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

S. H. COWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cowell v. Commissioner

Docket Nos. 17430, 17431, 23372-23374.

United States Board of Tax Appeals

18 B.T.A. 997; 1930 BTA LEXIS 2558;

January 31, 1930, Promulgated

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1. The taxpayer owned a certificate of deposit payable after notice and surrender on or before one year from date which expressly provided that interest ceased at maturity. No interest was drawn. Held, since no right to interest accrued after the expiration of one year, interest after that time was not constructively received. Held, further, interest for one year from the date of the certificate was constructively received at the expiration thereof.

2. A contract was made for the complete reconditioning and general improvement of a hotel building, which included numerous small items of repair. Held, that the expenditure for the entire contract was a capital investment and no part thereof is deductible as expense.

Max Thelen, Esq., for the petitioners.

R. W. Wilson, Esq., for the respondent.

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STERNHAGEN

These proceedings were consolidated for hearing. The amounts of the deficiencies and the amounts in controversy are as follows:

	Docket No.	Year	Amount of deficiency	Amount in controversy
		1920	$3,856.56	$3,856.56
I. M. Cowell	17430	1921	4,388.58	4,388.58
	23372	1923	9,100.08	5,593.67
		1920	3,210.67	3,210.67
H. E. Cowell	17431	1921	3,780.66	3,780.66
	23374	1923	8,534.91	5,314.57
S. H. Cowell	23373	1923	8,645.09	4,571.77

The issues are: (1) Whether the respondent erred in including in the taxable income of I. M. Cowell and H. W. Cowell for 1920, 1921, and 1923, interest on certain time certificates of deposit; and (2) whether the petitioners, I. M. Cowell, H. E. Cowell, and S. H. Cowell, are entitled to deduct for 1923 their proportionate shares of certain expenditures for the repair and remodeling of a hotel building owned jointly by them.

In Docket Nos. 17430 and 17431, issues pleaded as to the inclusion of certain rents and salaries in gross income were not urged at the hearing and are, therefore, regarded as abandoned.

In Docket Nos. 23373 and 23374, the respondent determined over-assessments for 1922 and contests the jurisdiction of the Board.

FINDINGS OF FACT.

The petitioners are individuals with principal office at 2 Market Street, San Francisco, Calif. During the years 1919 to 1923, inclusive, they kept their books on the cash receipts and disbursements basis.

The Wells Fargo Nevada National Bank of San Francisco, now the Wells Fargo Bank & Union Trust Co., issued to Isabella M. Cowell five time certificates of deposit: Nos. 1514, 1515, and 1516, dated April 10, 1919, for $50,000 each; No. 1517, dated April 10, 1919, for $37,396.84; and No. 1577, dated January 21, 1920, for $27,396.88. It issued to Helen E. Cowell two similar certificates, No. 1518, dated April 10, 1919, for $50,000, and No. 1520, dated April 10, 1919, for $43,233.53. Certificate No. 1514 is typical and is as follows:

SAN FRANCISCO, CAL.Apr. 10 1919 191 - ISABELLA M. COWELL has deposited with

No. 1514

WELLS FARGO NEVADA NATIONAL BANK of San Francisco.

11-16

FIFTY THOUSAND 00/100 Dollars $50000oo/100 payable to the order of SELF ON TEN DAYS NOTICE FROM EITHER THE PAYEE OR THE BANK ON OR BEFORE ONE YEAR AFTER DATE after date, on the return of this Certificate properly endorsed, with interest at the rate of THREE per cent per annum.

This Certificate is not Payable Until Due, and Interest Ceases at Maturity.

J. E. JACKSON

Cashier.

E. L. ROURKE

Accountant.

Time CERTIFICATE OF DEPOSIT Not Subject to Check

All of the certificates were issued on the printed form generally used by the bank for time certificates of deposit, and were identical with those generally issued, except for the words and figures shown in italics in the certificate set out above. The words specifying time of payment varied according to the terms under which each certificate was issued and the time at which it was payable.

The bank maintains a certificate of deposit register covering certificates issued by it. Therein the record of the aforesaid certificates of deposit is as follows:

Date	Number	Favor	Time
Apr. 10, 1919	1514	Isabella M. Cowell.	On 10 days' notice from either the
			payee or the bank, 1 year after
			date.
Do	1515	do	do
Do	1516	do	do
Do	1517	do	do
Do	1518	Helen E. Cowell.	do
Do	1520	do	do
Jan. 21, 1920	1577	Isabella M. Cowell.	10 days' notice on or before 1 year.

Date	Amount	Rate, percent	Interest due	Interest paid	Paid
Apr. 10, 1919	$50,000.00	3
Do	50,000.00	3
Do	50,000.00	3	1,175.34	1,175.34	Jan. 21, 1920
Do	37,396.84	3	879.19	879.19	Do.
Do	50,000.00	3
Do	43,233.53	3
Jan. 21, 1920	27,396.84	3	20.27	20.27	Jan. 31, 1920

The register is the only record maintained by the bank relating to certificates of deposit. When a certificate is paid, the date of payment is entered in the "Paid" column. The payment on the date appearing in that column always includes the payment of the principal, plus whatever interest may be due, and the entry of the date always indicates a complete liquidation of the account. Certificates Nos. 1514, 1515, 1518, and 1520 have never been paid; and the bank has not paid, nor has it credited on its books or set apart, to the holders, any interest on the certificates. Certificates Nos. 1516, 1517, and 1577 were cashed in January, 1920, and interest thereon from the date of issuance to date of payment was paid at the same time.

In the year 1923 the petitioners, I. M. Cowell, H. E. Cowell, and S. H. Cowell, were the joint owners of a hotel building in Stockton, Calif., known as the Trethaway Hotel Building. The building was in need of many repairs and replacements, and substantial alterations were made to comply with local building regulations. The electric wiring and plumbing were replaced; a new heating system was installed; the interior was reconstructed so as to provide direct light and air to rooms which did not previously have it, which involved jacking up the entire building and placing steel supports for the superstructure. The roof, forty-eight windows, the sheet metal facing on the front of the building, and the rain-water leaders and boxes were replaced; and repairs and replacements were made to the plaster, concrete in rear yard and front sidewalk, sidewalk doors, locks, and window shades. The interior and exterior of the building were painted and the walls were repapered.

A contract was entered into for the performance of this work, and the work was performed in 1923 at a total cost of $32,719.53.

The concrete in the yard at the rear of the building was cracked and uneven, and the specifications submitted to the contractor called for the repair of the yard. The cost of repairing the concrete was $122.

The sidewalk doors, which are made of iron, were buckled and the I-beams or channel iron with which they were reinforced were taken off and reriveted and the doors were straightened to follow the contour of the sidewalk at a cost of $28.

Many of the old doors had locks from which the keys were missing, and the locks were repaired and placed in working order at a cost of $22.

The plastering was cracked and marred throughout the full area from moving furniture, and was patched up by cutting out the cracks and refilling with new plaster, after which the rooms were papered over the plaster. The cost of this work was $1,300.

Decayed rain-water leaders and boxes were repaired and replaced at a cost of $150.

All of the exposed woodwork and metal work was weather-beaten, the paint was stripped off, the inside woodwork was marred and the paper was checked and coming off, and it was necessary to repaint the exterior and interior of the building and to repaper the walls. The cost of this work was $2,187. In their returns for 1923 each of the petitioners deducted $10,906.51, representing one-third of the total cost of the repairs and improvements, and the deduction was disallowed in its entirety by the respondent on the ground that the expenditure was one which should be capitalized.

OPINION.

STERNHAGEN: The overassessments for 1922, attempted to be litigated in Docket Nos. 23373 and 23374, are not within the jurisdiction of the Board and are dismissed from consideration. .

The respondent has included in income for 1920, 1921, and 1923, as interest constructively received, amounts computed as interest upon the unpaid certificates of deposit covering both the period of one year prior to maturity and the years after maturity. All four of the certificates in question were dated April 10, 1919, ran for one year, and provided for interest at 3 per cent for one year only. The certificates are apparently still unpaid and no interest whatever has been paid or credited. There is no evidence of any renewal or modification of the terms of deposit.

The mere circumstance that the certificates were not presented or the deposit withdrawn will not support the inference suggested by respondent that interest was to accumulate and accrue beyond the year, especially as this would be contrary to the express provision on the face of the certificates that "interest ceases at maturity." So far as appears from the evidence, no right to interest after April 10, 1920, accrued, and to these petitioners, whose income was determinable on the basis of receipts, it clearly can not be said that interest after maturity was received or that tax is to be measured by a constructive receipt. This would, in our opinion, be to carry too far the doctrine of constructive receipt and would introduce unnecessary confusion into the interpretation and administration of section 212. Unless this doctrine of constructive receipt is kept within the penumbra of actual receipt it will invade the field of accrual accounting, and this should not be permitted. No interest for the period beyond the maturity of the certificates should be included in the income.

As to the one year's interest provided in the instruments, it is our opinion that the respondent properly treated this as constructively received in 1920. It was due and readily available to petitioners on their demand and surrender of the certificates. The original term of the deposit expired in 1920, and although the petitioners were ostensibly required to receive the principal in order to get the interest, practically speaking, this meant only a perfunctory change in the terms of the deposit with the bank. Except for this slight burden, petitioners' failure to receive the interest was a voluntary and unhampered election on their part, for the bank would have paid it without doubt. See ; ; ; ; . The interest on the four unpaid certificates for one year should be included in 1920 income.

The petitioners claim deductions to some extent of the expenditures made for the alterations of the hotel building. We are of opinion the respondent correctly disallowed such deductions. So far as the record shows, this was an entire group of items making up a general improvement and reconditioning of the property. While the characterization of some of the items is such that standing alone or made as periodic repairs they might be deductible as ordinary and necessary expenses, it is impractical from the evidence to make such a detailed classification of the items. Such a classification is not a mere matter of what an item is called, but whether it is a part of the entire capital investment in the improved property. To fix a door or patch plaster might very well be treated as an expense when it is an incidental minor item arising in the use of the propety in carrying on business, and yet, as here, be properly capitalized when involved in a greater plan of rehabilitation, enlargement and improvement of the entire property.

Reviewed by the Board.

Judgment will be entered under Rule 50.

VAN FOSSAN dissents on the second point.

SMITH

SMITH, dissenting: I dissent from so much of the opinion as holds that each of the petitioners is not entitled to deduct from gross income his pro rata share of the cost of making ordinary repairs. In their brief the petitioners waive a claim to the deduction of the cost of alterations. They contend, however, that they are entitled to the deduction of the following:

Repair of concrete in yard area	$128
Repair of sidewalk doors	28
Repair of locks	22
Patching plaster	1,300
Repairing rain-water leaders and boxes	150
Painting	2,187
Total	3,815

The Commissioner's regulations, article 103, Regulations 62, provide:

The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditures. * * *

I am of the opinion that the repairs above listed are of this character. I can see no legal warrant for disallowing the deduction of these items as ordinary and necessary expenses.

SEAWELL agrees with this dissent.