The opinion
FLYNN, HARRISON & CONROY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Flynn, Harrison & Conroy v. Commissioner
Docket No. 28322.
United States Board of Tax Appeals
21 B.T.A. 285 ; 1930 BTA LEXIS 1872 ;
November 12, 1930 , Promulgated
*1872 Where a valuable contract having a definite term is acquired by purchase and is used in the business of the taxpayer, its cost may be exhausted over the remainder of the term.
Ward Loveless, Esq., for the petitioner.
Bruce A. Low, Esq., for the respondent.
MATTHEWS
*285 In this proceeding, the petitioner seeks a redetermination of its income tax for the year 1922. The petitioner claimed $31,970.65 as a deduction in its original income-tax return for that year on account of the cancellation of a contract. The respondent denied the deduction and determined a deficiency in the petitioner's income tax for the calendar year 1922 of $4,246.33. The petitioner assigns as error the disallowance of this deduction by the respondent and claims a deduction in the amount of the cost of the contract, either by way of (1) its depreciation, exhaustion or amortization, or (2) as a loss sustained in the year of its cancellation.
The facts were stipulated by counsel.
FINDINGS OF FACT.
On October 11, 1920, Joseph A. Flynn and John T. Harrison, doing business as partners under the partnership name of Flynn & Harrison, entered into a contract with the *1873 United States Fidelity & Guaranty *286 Co. which constituted said partnership a general agency of the United States Fidelity & Guaranty Co. in New York City. A copy of the contract, together with supplemental agreements dated November 18, 1920, and December 23, 1920, was put in evidence under the stipulation of facts. The Guaranty Co. agreed to furnish the partnership suitable offices free of charge for carrying on its business, to pay to the petitioner the sum of $10,000 a year for promotion and development purposes, and to pay certain commissions, to include all brokerage on various types of bond and insurance business which the partnership might bring to the Guaranty Co. The contract contains the following clause with respect to its duration:
This agreement shall commence on the first day of November, 1920, and continue for a period of two years provided either party may cancel it upon giving six months' notice in writing; and it is understood and agreed that upon the termination of this agreement, it shall continue in force from year to year unless ninety days' notice in writing be given by either party to the other prior to the expiration of any term.
While the *1874 addendum to the contract of November 18, 1920, and the Guaranty Co.'s letter of December 23, 1920, above referred to, contain certain modifications of the original contract, there is no new provision in these supplemental agreements affecting the period during which the contract shall continue in force.
Petitioner, a New York corporation, was organized on May 31, 1921. Its stock was closely held and there were no sales.
On July 12, 1921, the petitioner acquired from the partnership of Flynn & Harrison the contract mentioned above for a consideration of $50,000 par value of petitioner's common stock which was issued to the partnership.
At the time the contract was acquired by petitioner on July 12, 1921, it had a fair value of $25,346.61, and the stock issued therefor had a like value.
As soon as the petitioner acquired the contract it started to operate thereunder and continued to do so until December 31, 1922, when the contract was canceled by the parties at the order of the Superintendent of Insurance of the State of New York.
Prior to November 1, 1922, neither the United States Fidelity & Guaranty Co. nor petitioner gave to or received from the other any notice of *1875 cancellation of said contract.
OPINION.
MATTHEWS: As the contract had a fair value of $25,346.61 on July 12, 1921, the date it was acquired by petitioner, and the stock issued therefor also had a fair value of $25,346.61, the cost of the contract *287 to petitioner was $25,346.61. The petitioner operated under the contract from the date of its acquisition until December 31, 1922. Since the contract was property acquired by petitioner at a cost of $25,346.61 and was used in the business, it is necessary for us to determine only whether the contract had such a definite life as to entitle petitioner to a deduction for exhaustion of such property, or whether the petitioner sustained a loss from such cancellation which is allowable as a deduction from income in the year the contract was canceled, 1922.
Looking to the terms of the instrument, we find the clause above set forth fixing the duration of the contract. In view of this provision, we conclude that the life of the contract was so fixed and definite as to allow a yearly deduction for exhaustion under the Board's decisions. Its term was two years. We need not concern ourselves with the provisions in the contract *1876 for its extension beyond this period. In a long line of decisions this Board has held that a contract right is property, and we have allowed a deduction for the exhaustion of such property where the life of the contract was for a fixed or determinable period. ; ; ; ; and .
The contract was acquired by petitioner on July 12, 1921. Its term ended on November 1, 1922. At the time acquired, therefore, it had a remaining life of 15 months and 19 days. The cost of the contract should have been exhausted over this period. It does not appear that the petitioner claimed any deduction therefor prior to the year 1922. For the year 1922, as the contract was terminable on the first of November of that year, the deduction allowable by way of exhaustion should be calculated on the basis of 10 months' exhaustion of a contract having a life of 25-19/31 months. On this basis, since full exhaustion of the cost price *1877 is allowed over the remaining life of the contract from time it was acquired, the fact that it continued in force from November 1, 1922, until December 31 of that year is immaterial.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK dissents.