Manning v. Commissioner

OPINION.

Littleton:

The sole question for decision in this case is whether the petitioners are entitled to a loss, on account of the voluntary demolition of certain buildings, under the provisions of section 214(a) (5) of the Revenue Act of 1921, which reads as follows:

(5) Losses sustained during the taxable year and not compensated for by Insurance or otherwise," if incurred in any transaction entered into for profit, though not connected with the trade or business * * *.

While the Commissioner, in his notice of deficiency, denied the loss as not satisfying the provisions of article 142, Regulations 62, yet in his answer to the petition, he says that the loss is not allowable since the petitioners were compensated for any loss suffered by them through the demolition of the buildings.

In this latter contention, we are constrained to concur. Prior to the execution of the lease the petitioners held certain property which they had purchased for investment purposes without any definite idea of the manner of its utilization other than that they, as prudent business men, would use it to their advantage. From March, 1920, until October 81, 1921, they derived income from the property through the rental of the buildings. After several fruitless attempts to make a satisfactory sale or lease of the property, a 99-year lease was executed for the land under which the lessee agreed to erect a building thereon, costing not less than $150,000, and to pay a net rental in excess of that which the petitioners were receiving from the structures already located on the land.

While no provision was made in the lease as to the buildings then on the land, the very nature of the building to be erected made it necessary for the existing structures to be torn down. The razing of the buildings was agreed upon at the time of the execution of the lease. The petitioners gave the lessee the option of tearing down the old buildings and retaining the salvage as compensation for its work in their destruction, or the petitioners agreed to demolish them and keep the salvage. The lessee agreed to demolish and remove the buildings on the terms offered. The cost to petitioners allocable to these structures which were demolished was $26,000. The question is whether a deductible loss of this cost less depreciation was sustained through demolition.

Prior to the execution of the lease the petitioners had land and buildings from which they were deriving income in the form of rent, and also land. After the execution of the lease, they had only the land and were lessors under a more advantageous lease than they formerly had. Did they part with the buildings, without receiving compensation therefor, quid pro quo? That the lease in question was a favorable one is admitted by the petitioners and that they improved their position thereby is shown by the fact that their rentals were substantially greater under the new lease than those being received prior to October 81, 1921, from the old buildings. But the petitioners say that they could not have been compensated in 1921 under the lease for the loss since they did not begin to receive rentals thereunder until 1922. We are not impressed by the logic of this argument. The acquisition of something from which income will be derived in futuro has a value in money’s worth in the same sense as something which will produce income m praesenti. The value may differ on this account, but this does not alter the fact that each has a compensating value which may be recognized as having money’s worth.

Taken by itself, the petitioners undoubtedly would be said to have sustained a loss in the demolition of their buildings, but when considered in connection with the entire transaction entered into on October 31, 1921, the Board is of the opinion that the removal of the buildings was fully compensated for in the rights acquired under the lease and that the cost of the buildings, less sustained depreciation, is properly allocable to the cost of securing the lease. In other words, there was in this instance what amounted to a substitution of assets; instead of an asset in the form of buildings, the petitioners now have another asset, viz., a lease, the giving up or voluntary destruction of the buildings being a necessary incident to the acquisition of the lease.

Since, however, the lease acquired had a definite life of 99 years, the cost of the buildings, less sustained depreciation, which entered into securing the lease, are properly amortizable over the life of the lease, and a deduction from gross income should be allowed under the provisions of section 214(a) (8) of the Revenue Act of 1918, for the exhaustion of this asset over a 99-year period from the date the lease was signed. Appeal of Grosvenor Atterbury, 1 B. T. A. 169.

Judgment wül be entered on 10 days' notice, under Rule 50.

MillieeN not participating.