The opinion
WILLIAM H. WANAMAKER, JR., AND BESSIE D. BREMER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Wanamaker v. Commissioner
Docket Nos. 11136, 12689.
United States Board of Tax Appeals
9 B.T.A. 557 ; 1927 BTA LEXIS 2555 ;
December 12, 1927 , Promulgated
*2555 1. OBSOLESCENCE. - Evidence respecting a building structure maintained for the purpose of producing fixed carrying charges of city land found to be insufficient to support a determination of when such structure may become obsolete.
2. LOSS. - A deductible loss arising from the sale of household furniture determined and allowed.
Joseph H. VanDorn, C.P.A., and Randolph W. Child, Esq., for the petitioners.
Frank W. Gibbs, Esq., for the respondent.
TRUSSELL
*558 These actions, which by agreement of counsel were tried and submitted together, involve deficiencies in income taxes in the case of Bessie D. Bremer for the year 1920 in the amount of $2,429.08, and for the year 1921 in the amount of $238.14, and in the case of William H. Wanamaker, Jr., for the year 1920 in the amount of $1,818.07, and for the year 1921 in the amount of $711.61. The main issue presented and common to both cases is the alleged failure of the Commissioner to allow adequate depreciation and obsolescence on a building property owned by the two petitioners. In the case of Bessie D. Bremer there is the additional claim for a loss on the sale of household furniture. *2556 The facts respecting the property upon which depreciation and obsolescence are claimed are stipulated.
FINDINGS OF FACT.
The cost of the land and building in 1920 was $525,000. The present value of the land, exclusive of the building, is from $720,000 to $797,500. The building is two stories in front with an addition on the rear of one story, the addition measuring 40 by 50 feet, making a total floor space of approximately 13,600 square feet, the building being located on a lot 39.4 feet by 145 feet 6 inches. The walls of the building are of brick construction and the floors are wood over hollow tile. The property is insured for $110,000 on an 80 per cent basis, or a valuation of $137,500. This valuation was allowed by the examining officer.
The building was constructed in 1911 and purchased in 1920. The assessed valuation of the land and building in 1920, 1921, 1922, and 1923 was $480,000 and this was increased to $500,000 for 1924 and 1925.
The property was owned in the years 1920-1921 jointly by taxpayers William H. Wanamaker, Jr., and Bessie D. Bremer, each on a 50 per cent basis. The results of operations for the five years from 1920 to 1924 are as follows: *2557 Year Rental income Expenses Net
1920 $65,000.00 $39,237.26 $25,762.74
1921 50,000.00 44,717.76 5,282.24
1922 50,000.00 43,393.14 6,606.86
1923 50,000.00 43,699.48 6,300.52
1924 50,000.00 45,623.98 4,376.02
The property was rented to Wanamaker & Brown, Inc., for $65,000 per annum for the year 1920, but it was found that this was more than the corporation could afford to pay, taking into consideration the size of the building, location and character of the business; *559 the business consisting of men's clothing and furnishings. The rental was therefore reduced to $50,000 for the year 1921 and subsequent years.
The average net return for the above five years was $9,665.67 or 1.84 per cent on $525,000, the cost of the property. If the rental for 1920 had been $50,000 the average return would have been $6,665.67 or 1.27 per cent on $525,000, the cost of the property.
During the year 1920 Bessie D. Bremer sold certain household furniture acquired after March 1, 1913, which had cost $1,689. During the year 1919 this furniture had been contained in and rented with a house, and in adjusting her income-tax for the year 1919 she *2558 was allowed depreciation upon this furniture in the amount of $375. The furniture was sold in the year 1920 for $1,000. The deductible loss sustained in the year 1920 is $314.
OPINION.
TRUSSELL: These cases have been presented and argued on the theory that the building maintained by the petitioners on land located at 1217-1219 Chestnut Street, Philadelphia, was a temporary building maintained only for the purpose of producing such an amount as would meet the fixed carrying charges upon the land and building, and that as such a building its useful economic life should be estimated as not more than 11 years from the time the petitioners acquired it in 1920. It has been argued on behalf of the petitioner that the practice of maintaining temporary buildings on land in the larger cities only for purposes of producing a sufficient amount to pay taxes and fixed carrying charges on the land is a well established practice and must be given consideration in the adjustment of exhaustion allowance under the income-tax acts. In this case the Commissioner has allowed an exhaustion deduction based on a life of 40 years. Petitioners appear to concede that that allowance is fair and reasonable *2559 if ordinary wear and tear alone is considered but that it is not reasonable when considered in connection with obsolescence.
Much stress has been laid upon the admitted facts that the income produced by this property is a wholly inadequate return upon the investment. This may be readily conceded. We believe, however, that owners of land located as is the land here under consideration, are not looking to the net rents from property for their return upon their investment but are looking to the increased value of the land, when the same may be sold at a satisfactory profit or its uses changed, and there is nothing in this record and we know of no basis upon *560 which to estimate when a satisfactory profitable sale of this property may become probable or when business and financial conditions may appear to warrant the present owners in so improving their property as to produce adequate money return upon their investment.
The record shows the total of expenses which the owners have charged against the rents of this property but it does not show what items are included in that total and whether there are other items than local taxation and ordinary building repairs. The *2560 record also shows that during the years 1920 to 1923, inclusive, the assessed valuation of this property was $480,000, and for the years 1924 and 1925 it was $500,000, but petitioners have failed to furnish any other evidence respecting any gradual increase of assessed valuations or whether the tax rate upon assessed valuations is stationary, increasing, or diminishing. And, if it may be argued that this building were to become obsolete at the time when its gross rentals will cease to meet the necessary carrying charges, we are furnished with no basis upon which we can make a finding as to whether that time will arrive at the end of 11 years as estimated by the petitioners or at some other undetermined date. We are, therefore, of the opinion that upon the present record the exhaustion allowance of 2 1/2 per cent allowed by the Commissioner can not be determined to be inadequate. The deficiencies should be recomputed in accordance with the foregoing findings of fact and this opinion.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.
Considered by LITTLETON, SMITH, and LOVE.