Millinery Center Building Corp. v. Commissioner, 350 U.S. 456 (1956)
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Scribd Government DocsMillinery Center Building Corp. v. Commissioner, 350 U.S. 456 (1956)
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Scribd Government Docs350 U.S.
456
76 S.Ct. 493
100 L.Ed. 545
MILLINERY CENTER BUILDING CORP., Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE.
No. 255.
Argued March 1, 1956.
Decided March 26, 1956.
Mr. Bernard Weiss, New York City, for petitioner.
Mr. Hilbert P. Zarky, Washington, D.C., for respondent.
Mr. Justice FRANKFURTER delivered the opinion of the Court.
This case involves an interpretation of 23(a)(1)(A) of the Internal Revenue
Code of 1939, as amended 26 U.S.C.A. 23(a)(1)(A), providing for the
deduction from gross income, in computing net income, of all the 'ordinary and
necessary expenses paid or incurred * * * in carrying on any trade or business *
* *.' The Commissioner determined a deficiency in petitioner's excess-profits
tax for 1945; petitioner sought a redetermination of its liability in the Tax
Court, which made the following findings of fact. In April 1924, petitioner
leased land in New York City for 21 years, with an option to renew the lease
for two further 21-year periods. In accordance with the terms of the lease, it
erected a 22-story loft building at a cost of $3,000,000. The lease, as amended
in 1935, provided for an annual rental of $118,840. Title to the building was in
petitioner, but at the eventual termination of the lease it would vest, without
payment, in the lessor, at the lessor's option. The lessor could also require
petitioner to remove the building at that time. Petitioner had the obligation, in
case of destruction of the building, to rebuild at its own cost. During the first
21-year period of the lease, petitioner fully depreciated the entire $3,000,000
cost of the building. In April 1945, it exercised its option to renew the lease
until April 1966.
In May 1945, petitioner entered into an agreement with the owner whereby it
purchased the fee and obtained release from the obligations of the renewed
lease. The price paid was $2,100,000. The Tax Court also found that the value
of the land, as unimproved, was $660,000 when purchased by petitioner in
1945.
The principal issues raised by petitioner relate to its attempt to deduct
$1,440,000the difference between the purchase price under the May 1945
agreement and the 1945 value of the unimproved landas an ordinary and
necessary expense of doing business. The Tax Court held that the difference
could not be so deducted, that the difference could not be amortized over the
remaining term of the cancelled lease, and that no annual depreciation could be
taken because the cost of the building had already been fully depreciated and
the purchase price could not be separated into purchase price for building and
purchase price for land. 21 T.C. 817. Six of the judges of the Tax Court
dissented on the ground that '(s)ome part of the purchase price should be
allocated to the additional rights in the building acquired in the purchase * * *.'
21 T.C. at page 826.
On petition for review, the Court of Appeals for the Second Circuit reversed
and remanded. It affirmed the refusal to permit a deduction under 23(a), but
reversed the holding that no amount could be added to the asset value of the
building for purposes of depreciation. Rejecting petitioner's argument that it
should be allowed to amortize the $1,440,000 over the unexpired term of the
cancelled lease, it accepted petitioner's alternative argument that depreciation
over the remaining useful life of the building should be allowed. Stating that
'(o)n the present state of the record we cannot determine how much of the
$2,100,000 purchase price is properly to be allocated to the land and how much
to the building,' it remanded the case to the Tax Court to fix the respective
values. 2 Cir., 221 F.2d 322, 324. Petitioner sought a writ of certiorari to review
the disallowance of its claim for a deduction as a business expense or,
alternatively, as amortization over the remaining period of the lease. The
Government did not seek review of the allowance of depreciation of that
portion of the purchase price allocable to the building over its remaining
economic life. Because of the apparent conflict between the decision of the
Court of Appeals for the Second Circuit in this case and the decision of the
Court of Appeals for the Sixth Circuit in Cleveland Allerton Hotel, Inc., v.
Commissioner of Internal Revenue, 166 F.2d 805, we granted certiorari, limited
to the questions set forth in the margin.1
Under the terms of the lease, petitioner had a 21-year lease on the land, with an
option to renew, and similar rights in the building which it had constructed.
Petitioner introduced evidence to show that the rent it was paying under the
lease was greatly in excess of the fair rental value of the land as vacant,
unimproved land. Petitioner contends that it already owned the building and
that therefore the purchase agreement was entered into for the purpose of
avoiding the excessive rentals of the lease. This transaction, it asserts, involved
a current business expenditure, and the $1,440,000 in excess of the vacant land
value represents what it was willing to pay to avoid this onerous lease.
6
Petitioner's claim that it 'owned' the building is based on a loose and misleading
use of 'owned.' The only way petitioner could continue to use the building after
termination of the initial period of the lease was by renewing the lease, and the
lease also circumscribed its control over the building. It could make use of the
building for the remainder of its economic life, but only on payment of the
stated rent. Petitioner's evidence with respect to the rental value of the land as
unimproved is irrelevant. It was using the land as improved by the building; it
was paying rent for the land as improved by the building. Petitioner tendered
no evidence that it was paying excessive rent for what it was actually leasing.
A complementary feature of the purchase of the lessor's interests in the land and
building was the elimination of the obligation to pay rent on the improved land.
The purchase price presumably reflected this situation. Whatever possible merit
petitioner's contention might have were there proof of excessive purchase price
can await such a case. The purchase price paid by petitioner represents the cost
of acquiring the complete fee to the land and the building, and no deduction as
an ordinary and necessary business expense can be taken.2
Petitioner claims that even if it cannot get a deduction as an ordinary and
necessary business expense under 23(a) or as a loss under 23(f), it should be
allowed to amortize the excess of the payment of $2,100,000 above the
determined land value of $660,000 over the 21-year remaining term of the
extinguished lease. What petitioner acquired in this transaction, however, were
both rights with respect to the land and rights with respect to the building. The
Tax Court has not yet fixed that amount of the purchase price which is
allocable to the acquisition of rights in the land and that which is allocable to
the acquisition of rights in the building. These rights are assets with useful lives
having no reference to the term of the lease. Successive steps of securing or
renewing a lease and then purchasing the reversion should not result in
amortization over the term of the lease when the purchase of the whole fee at
one time would result in depreciation over the useful life of the asset, if the
asset acquired were a wasting asset.
Under petitioner's contention, if the purchase had been consummated in 1944
before the first term of the lease had expired, the whole amount of the purchase
price not allocable to the land would be amortized in one year. But it should
make no difference whether the lease is about to expire or has just been
renewed. In the one case, the value of the reversion is enhanced and the value
of the right to receive the rent fixed by the lease is depressed because the lease
is near an end. In the other case, the value of the reversion is depressed and the
value of the right to receive the fixed rent is enhanced because the lease has
many years to run. But although there might possibly be some difference in
bargaining power between the two situations, the sum total of the rights
purchased is the same in each case. Petitioner has acquired two assetsland
and a buildingwhose use it will have for the remainder of their useful lives,
and petitioner therefore cannot amortize the cost allocable to the acquisition of
the wasting asset over the term of the extinguished lease.
9
Accordingly, we affirm the judgment of the Court of Appeals for the Second
Circuit, leaving to the Tax Court the allocation still to be made.
10
Affirmed.
"1. Where a lessee, the owner of a valuable building on leased land, acquires
the fee to the land to be relieved of what it considers to be the burdensome
terms of a lease, may the lessee deduct the excess of the payment over the
determined value of the land at the date of purchase as an ordinary expense of
doing business under 23(a) of the United States Internal Revenue Code of
1939 or under 23(f) as a loss on a transaction entered into for profit and not
compensated for by insurance or otherwise.
"2. In the alternative, may the lessee-petitioner consider the excess payment
over the determined value of the land to be in the nature of a prepayment of rent
for the remaining term of the extinguished lease and amortize such amount over
21 years?" 350 U.S. 820, 76 S.Ct. 79.
Petitioner asserted, but did not argue, the permissibility of the deduction of the
$1,440,000 as a loss under 23(f). Such an assertion is apparently premised on
the assumption that the $1,440,000 represents the sum paid for commutation of
the rent payments under an onerous lease, and further discussion of this
argument is unnecessary.
