Huron Bldg. Co. v. Commissioner

HURON BUILDING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

THOMAS H. TRACY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Huron Bldg. Co. v. Commissioner

Docket Nos. 18127, 15152.

United States Board of Tax Appeals

15 B.T.A. 1107; 1929 BTA LEXIS 2731;

March 26, 1929, Promulgated

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">*2731 Value at March 1, 1913, of land and building determined for the purpose of ascertaining profits derived upon sale in 1921.

George D. Welles, Esq., and Ray C. Zackman, Esq., for the petitioners.

E. W. Shinn, Esq., for the respondent.

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LOVE

">*1107 The two appeals in this proceeding were consolidated for hearing. The decision in the case of Thomas H. Tracy, Docket No. 15152, is dependent on the decision in the Huron Building Co., Docket No. 18127. The findings of the Board in the appeal of the latter case will result in a basis for determining the tax liability of the petitioner in the former case.

The Huron Building Co. seeks a redetermination of its income and profits taxes for the calendar year 1921, for which the Commissioner has determined a deficiency of $43,739.05. Thomas H. Tracy seeks a redetermination of his income taxes for the calendar year 1921, for which the Commissioner has determined a deficiency of $5,154.76.

The Huron Building Co. alleges error on the part of the Commissioner (1) in failing to accept a figure of $211,000 as the fair market value on March 1, 1913, of a certain piece of property acquired by the petitioner">*2732 prior thereto and sold in the year 1921 for $225,000; (2) in deducting an amount of $8,594.81, representing depreciation sustained on the property during the period from March 1, 1913, to the date of the sale; (3) in increasing the taxable income of the petitioner for the year 1921 by the sum of $284.51 explained as income tax, 1920, disallowed.

Petitioner, Thomas H. Tracy, alleges error on the part of the Commissioner in determining that the entire sum of $15,000 received by him as a distribution from the Huron Building Co. in the year 1921 constituted a taxable dividend instead of finding that $9,913 thereof represented a return of capital.

">*1108 FINDINGS OF FACT.

The petitioner, the Huron Building Co., is a corporation organized under the laws of the State of Ohio, having its office at 1001 Ohio Building, Toledo, Ohio.

About the year 1902 the Huron Building Co. purchased for $45,000 a lot described as Lot No. 251, Port Lawrence Division, Toledo, Ohio, which is located on the north side of Jefferson Street between Huron and Superior Streets, next to the alleyway in the center of the block. The lot had a 60-foot front on Jefferson Street and extended back 120 feet. ">*2733 In 1903 and 1904 the petitioner constructed a building on this lot, known as the Manhattan Building, at an initial cost of $84,565.22. The building was rather unusual for Toledo, in that the construction was superior to that usually found in buildings used for retail stores and loft purposes. It had a stone masonry foundation which was quite thick, brick side walls except the front, which was in part brick and part terra cotta, with a great many glass windows. The ground floor had the usual construction for retail stores, the second floor had large plate glass windows with intermediate smaller or swinging hinge-windows, and the third, fourth, fifth, and sixth floors were equipped with pivot-windows. The roof was of composition, and the basement had a concrete floor.

At March 1, 1913, the building was equipped with elevators, both passenger and freight, which were electrically operated. A fireproof stairway in the rear extended from the basement to the roof. The inside stairs were of wood. The building was equipped throughout with an automatic sprinkler system with a pressure tank, and the necessary pump for furnishing both air and water pressure. The heating plant was a">*2734 low-pressure steam boiler, tubular type. The front of the building was tastefully decorated and gave an unusually neat appearance.

The building was of a type which when built might be said to have been many years in advance of the times, so that even upon the date of the hearing before the Board the building was considered to be modern.

Between 1903 and 1913 land values increased considerably in the section in which Lot 251 was located. This was due in part to the fact that the LaSalle & Koch Co., which operated the largest and highest-grade department store in the City of Toledo, moved into a building directly to the east of the Manhattan Building. About 1913 the LaSalle & Koch Co. increased its store space and added to its departments. About 1907 and 1908 the Secor Hotel was built, located less than 200 feet from the Manhattan Building. This hotel was the leading hotel of the city at March 1, 1913. Also some time ">*1109 between 1904 and 1913 the Holmes-Snowflake Building was built on Lot 260, located on Jefferson Avenue between Erie and Huron Streets. This was a six-story building equipped for stores and lofts.

The B. F. Wade Building was sold October 18, 1912, for">*2735 $92,500, the land being priced at approximately $1,600 per front foot. The value of land in this section was approximately the same as the value of land where the petitioner's property is located.

The original cost of Lot No. 251 to the petitioner was $45,000, in addition to which there were legal and recording expenses, incidental to the purchase, of $21.69. The petitioner also added to the cost of land in its balance sheet payments made to the LaSalle & Koch Co., amounting to $214.29 a year, for four years. These payments represented a bonus paid to induce the LaSalle & Kock Co. to locate on Jefferson Avenue. A further amount of $163.49 was added to the cost of the land in the petitioner's balance sheet. This amount represented the payment of a paving assessment. At March 1, 1913, the cost of the land with the additions above noted stood on the petitioner's books at a figure of $46,256.63.

The cost of the building at the close of 1905 stood on the petitioner's books at figure of $84,565.22. To this amount petitioner carried as assets on its books and added to the cost of the building the following amounts:

1906	Inclosing elevator shaft	$60.24
1907	3 windows on third floor	120.00
	Inclosing elevators	70.75
	Fire shutters	97.31
	Lights on elevator shaft	6.75
1908	Water connection for sprinkler system	70.63
	Architect's services regarding same	15.00
	Car fare regarding installation	.60
	Payable by company, upon sprinker system, to be
	deducted from Ransom and Randolph rent during remainder of
	rent, 1908 to 1914, inclusive	3,300.00
1909	Placing partitions in basement	349.66
	Lettering doors	1.75
	Increasing feed pipe to boiler and installing closets	63.06
1912	Fire escape	319.00
	Weather stripping 4th floor	39.60
	Guard plate elevator openings	6.00
1914	Improvement of entrance partition and equipment for
	shoe-shining parlor	745.79
	Additional sprinkler supervisory equipment and moving	51.16
	Equipment for shoe-shining parlor	45.39
	Wiring shoe-shining parlor	73.40
	Awning for shoe-shining parlor	23.50
	Balance cost of above	213.61
	Gas stove for shine parlor	13.82
1921	One-half cost Tel Auto Call	414.10

">*2736 ">*1110 The sprinkler system, exclusive of water connections and architect's fees, cost slightly in excess of $5,000, of which amount $1,700 was paid by the petitioner's lessee.

The net earnings of the petitioner from the operation of the building, before deductions for interest paid, as shown by the accounts of the petitioner, and before taking any deductions for depreciation, were as follows:

1908	$5,402.04
1909	5,217.60
1910	5,699.08
1911	5,138.77
1912	2,361.54
1913	4,237.75
1914	5,287.21
1915	$5,341.21
1916	6,571.11
1917	5,586.91
1918	2,043.25
1919	7,085.94
1920	7,845.12
1921	6,935.09

In 1911 the taxing authorities of Lucas County, Ohio, valued the Manhattan property for tax purposes at $128,800, which was 60 per cent of the actual value. The same value was in effect on January 1, 1913. The board of review which determined the values for taxing purposes sought to obtain the actual value of land, and also the actual cost of reproduction new of the building. They thereupon took 60 per cent of this value as the value for taxing purposes.

The petitioner placed upon its books as of January 1, 1913, in lieu of the actual cost">*2737 of the land and building which had previously been recorded on the books, the amount of $128,800 determined by the taxing authorities as the assessed value of its property.

In 1915 the taxing authorities of Lucas County increased the tax value of the petitioner's land and building from $128,800 to $152,630, and the petitioner thereupon entered this new tax value on its books in lieu of the assessed value previously carried. In order to bring the books into proper balance, a journal entry was made to take care of the increased values as follows:

Property account, tax valuation	$23,850.00
Accrued taxes	952.22
	24,802.22
To betterments	2,811.26
Surplus undervaluation	1,641.58
Accrued profits and increased valuation	20,349.38
	24,802.22

The respondent, in determining the profit on the sale of the land and building in 1921, made the following computation:

Value of property as of December 31, 1920, as
shown by
balance sheet		$152,650.00
Less increased valuation		20,339.36
Cost of property		132,310.64
Value of building subject to depreciation 85/205
X
$132,310.64
Proportion given by you on Schedule A-22	$54,860.51
Depreciation at 2% for period from March 1, 1913,
to
Jan. 1, 1921 - 7 5/6 years	8,594.61
Depreciated value of building	46,265.90
NET INCOME
Selling price of property		$225,000.00
Less selling expense		11,660.00
Net amount received from sale		213,340.00
Deduct:
Cost of property	$132,310.63
Less depreciation	8,594.80
		123,715.83
Gain on sale of property		89,624.17

">*2738 ">*1111 The value of the petitioner's land at March 1, 1913, was $96,000. The value of the petitioner's building at March 1, 1913, together with the equipment therein was $80,000. The depreciation rate to be applied to the building for 1913 and subsequent years is 2 per cent.

The respondent increased the income for the year 1921 by an amount of $284.51 designated "income tax 1920 disallowed." The petitioner did not deduct from income in the year 1921 the sum of $284.51 representing income tax for the year 1920.

The petitioner, Thomas H. Tracy, is an individual residing in Perrysburg, Ohio, having a business office in the Ohio Building, Toledo, Ohio.

During the year 1921 the petitioner received, as a dividend from the Huron Building Co., the amount of $15,000. The respondent held that the entire amount of $15,000 was taxable income, whereas, the petitioner claimed that $9,913 thereof represented a return of capital and nontaxable surplus, and only $5,087 was a true taxable dividend. This issue is dependent upon the determination of the issues in the case of the petitioner, the Huron Building Co., and the computation of the net earnings of that company and the amounts">*2739 available for dividends during the years 1920 and 1921.

OPINION.

LOVE: In an effort to establish the value of the Manhattan property at March 1, 1913, petitioner introduced as witnesses various real estate men, who had dealt in properties of this character in Toledo, Ohio, and in the section of the city in which the Manhattan Building is located. None of these witnesses had actually made an appraisal of the Manhattan property in 1913, but were expressing their opinion at the present time of what the value of the property was in 1913. This testimony, then, is retrospective in its ">*1112 nature and is subject to the weaknesses of that type of appraisal. The values expressed are as follows:

Witnesses	Land	Building	Together
John F. McKenna	$96,000	115,000	$211,000
Thos. Davies	100,000	115,000	215,000
Leonard C. Price	108,000	112,000	220,000
James E. Rundell	150,000
Grant Williams	135,000	85,000	220,000
Thos. H. Walbridge	100,000	115,000	215,000
Geo. B. Ricaby	108,000	115,000	223,000

Another witness, George Valney Rhines, architect, made a retrospective appraisal of the building, which represented the reconstructive cost">*2740 new at March 1, 1913, less depreciation up to that date. The intrinsic value of the building determined by him as at March 1, 1913, was $106,341.60.

The petitioner also relies upon the assessed value of the land and building at March 1, 1913, to establish the value of the property. This assessed value which is claimed represented 60 per cent of the full value, amounted to $128,800, which was allocated land, $73,800; building, $55,000. On the basis of 60 per cent, this would represent a value of land of $123,000 and of the building, $91,666.67. Charles J. Sanzenbacher, auditor of Lucas County, Ohio, in 1913, testified as to the method used by the board of review in arriving at the values of buildings for tax purposes in 1913, as follows: "They had some kind of tables there, a certain class of building, and they would get the size of it and it would cost so much per cube to build a building of that kind, and they would figure it up - 'Well it would cost $10,000 to build this building we will put it down for $6,000 for taxation.'" Later in his testimony he emphasized the fact that the board of review determined what it would actually cost to replace the building and took 60 per">*2741 cent of such cost as the assessed value.

Mr. Davies, who placed a value of $115,000 upon the building at March 1, 1913, testified that it was his belief that the building cost about $140,000 in 1903 or 1904, whereas, its actual cost was only about $85,000.

Walbridge, who placed a value of $115,000 on the building at March 1, 1913, placed such value in the belief that it would cost $115,000 to build a new building of this type on that date.

The values placed upon the buildings by petitioner's witnesses were shown to be purely opinion valuations unsupported by any evidence as to fair market value. The reconstructive value new at March 1, 1913, less depreciation, as determined by the architect is the only value which resulted from an investigation sufficiently thorough to have much weight as evidence. This value does not purport to be ">*1113 a fair market value, and, therefore, can not be accepted as conclusive in determining this issue, see ; .

The value of a building is dependent upon many factors and an opinion as to the value of a building is not to be lightly">*2742 expressed, nor is such opinion entitled to much weight unless it is shown that all factors relating to the value of a building have been considered. One of the elements entering into the valuation of a building which none of the witnesses appear to have taken into consideration is the earning power of the building. It is shown by the record that the annual net income from the building before making any allowance for depreciation reached a maximum of $5,699.08 prior to 1913, and from 1908 to 1913, inclusive, resulted in an average of only about $5,000. Any prospective purchaser would naturally take into consideration the earning power of the property he proposed to purchase. If we assume that 5 per cent would be a minimum return upon the investment, and that 2 per cent was a reasonable depreciation rate as of 1913, the $5,000 would represent a 7 per cent return on only $71,000. There has been nothing introduced in the record to indicate that a greater return from the building could be anticipated or that the building was not earning at March 1, 1913, as much as could consistently be derived therefrom. It was an up-to-date building occupying the proper proportion of the real estate, ">*2743 suitable for the purpose for which it was erected, and of a pleasing appearance. It appears to have been completely rented for at least a portion of the years prior to 1913 at rentals that must be assumed to be adequate.

After a review of all of the facts relating to the building and the testimony of the witnesses, we are of the opinion that the value at March 1, 1913, to be used as a basis for depreciation, and for profit on the sale in 1921, was $80,000, which includes the value of the entire sprinkler system. This value should be reduced by depreciation from March 1, 1913, to January 1, 1921, in the determination of the profit on the sale in 1921. The items claimed as additions in 1914, from the evidence submitted, seem to be more of a temporary character, properly chargeable to expense rather than to capital.

The petitioner's witnesses testified that the fair rate of depreciation based upon the reconstructive cost was 1 1/2 per cent which would indicate a life of about 67 years as of 1903 or 1904. This would leave a remaining life at March 1, 1913, of about 59 years. The respondent has determined a depreciation rate to be applied to the March 1, 1913, value of 2 per">*2744 cent. This rate appears to us to be reasonable and is not overcome by the testimony of the petitioner's witnesses.

">*1114 The valuation of lands is different from that of buildings. Practically no two buildings are alike, and, consequently, the sale of one building is not evidence as to the value of another. Lands are valuable because of their location, and their value can be obtained by comparison with sales of other lands. The petitioner's witnesses have shown a familiarity with the value of lands in 1913 in the neighborhood of the Manhattan property, and have cited sales to support their opinions. They compared the lands sold with the petitioner's land, and thus established a basis for valuing the petitioner's land.

We have carefully reviewed the testimony of these witnesses and are of the opinion that the evidence introduced is sufficient to prove a value at March 1, 1913, of $96,000 for the land upon which the Manhattan Building is located.

The determination of whether or not the entire $15,000 received by Thomas H. Tracy in 1921 was taxable as a dividend, is, according to the stipulation of the parties, dependent upon the computation resulting from the findings">*2745 in the case of the Huron Building Co.

Judgment will be entered in both cases under Rule 50.