*1699 EXPENSES. - Petitioner was one of several persons who entered into an agreement with the owners of certain property to act as agents for the owners in platting, surveying and preparing their property for sale as lots. The contract provided, inter alia, that the agents were to advance all necessary funds to carry out the contract up to a limited amount, and that, after the owners had received $400,000 from the sale of lots, the agents were entitled to all the lands remaining unsold. Petitioner, during the taxable year, and before the owners had received their $400,000, expended $7,921.62 as his share for platting, surveying and preparing the real estate for sale. Held, petitioner was entitled to deduct the amount so paid as an ordinary and necessary business expense.
*75 This proceeding is for the redetermination of a deficiency in income taxes for the calendar year 1923, in the amount of $1,199.36.
The only error assigned is the disallowance by the respondent of an amount of $7,921.62 claimed by petitioner on his*1700 return as an ordinary and necessary business expense. The facts were stipulated.
FINDINGS OF FACT.
Petitioner is an individual with his place of business at 304 Grand Rapids Trust Building, Grand Rapids, Mich.
On June 1, 1922, petitioner, together with three other individuals, entered into an agreement with the owners of a certain piece of land situated in and around the city of Grand Rapids, whereby the petitioner and the three other individuals, as agents, agreed to divide the property into residence lots and to sell such lots.
The contract with the owners provided, inter alia, that "It is purposed by the parties hereto to plat the lands above described and sell the same"; that "For the purposes of this contract, a price of Four Hundred Thousand ($400,000) Dollars is placed upon the lands hereinbefore described, and the Agents undertake to plat said land and place the same upon the market for sale, in manner as fixed by this agreement"; that "The interest of the Agents in the subject-matter of this contract are in the following proportions, viz.: One-sixth to each of the above named S. R. Fletcher, Harold T. Fletcher and Adrian Dooge, and three-sixths to said William*1701 H. Gilbert"; that *76 "While the plat of the property is to be made by the Agents, it is agreed that the same shall be subject to the approval of the Owners"; that "The prices at which lots shall be sold, the terms of payment, restrictions as respects the type of improvements to be made upon lots when sold, the cost and character of such improvements, and the use and location of buildings to be erected upon the premises, shall be established by mutual agreement of the Owners and Agents"; that during the life of the contract the agents would pay all the taxes and assessments levied or assessed awgainst the said lands after July, 1922; that the agents would advance in the same proportion as their interest in the subject-matter of the contract all moneys necessary to plat and market the said lands, to pay the taxes mentioned above, and the cost of "maintenance, care and sale of said property"; that the agents would not assume any personal liability for such advances except to the extent of the sum of $30,000; that "it is understood, however, that in contracting to advance the sums herein mentioned, each of said Agents is contracting for himself alone and is not answerable for his*1702 co-Agents"; that "The Agents are to place the lands on the market and sell the same, giving contracts or deeds for the lots when sold, and taking back mortgages for portions of the purchase price"; that "All deeds, mortgages and contracts are to be prepared by the Agents and are to be executed by the Owners, and the form and terms thereof are to be satisfactory to the Owners"; that the mortgages were to bear interest at the rate of 6 per cent per annum; that "Out of the moneys received upon the sale of lots, the Owners are to be paid, as and for the purchase price of the lands" the sum of $400,000 in cash; that for the first 2 1/2 years the owners were to receive, in addition to the ultimate amount of $400,000, all interest collected on the deferred payments so far as would be necessary to pay the owners interest at the rate of 6 per cent per annum on the amount of $400,000 or such part thereof as might from time to time remain unpaid; that after the first 2 1/2 years the agents would become liable to the owners personally for interest at the rate of 6 per cent per annum on any part of the $400,000 not then yet received in cash by the owners; that if the agents employed other real*1703 estate brokers to sell some portion of the lots, which they were given authority to do, the commission of any such real estate broker was to be deducted from the price which would otherwise be realized for the lot in making the adjustment between the owners and the agents; and that:
It is understood that the Owners shall receive the aforesaid sum of Four Hundred Thousand ($400,000) Dollars in cash, plus all interest to which, under the terms of this agreement, they are entitled, in payment for said lands and in full satisfaction and discharge of their interests under this contract, and that what then remains in lands, contracts, notes, mortgages or otherwise, as *77 the proceeds of the venture, shall belong to the Agents, and be their property absolutely, and shall be received by them in full payment of all services rendered and disbursements made by them under this agreement, or in or about the lands herein described.
The contract between the owners and agents further provided that in case the agents should fail, for the period of 90 days after the maturity thereof, to pay any tax, assessment or any other charge which, under the terms of the contract the agents were obliged*1704 to pay, then "this contract, at the option of the Owners, shall forthwith be and become null and void"; and in the event of such termination all sums previously paid or advanced by the agents "shall be forfeited by them as liquidated damages for the non-performance on their part of this agreement."
The closing paragraph of the contract provided that "inasmuch as, on the part of the Agents, this contract contemplates the rendition of personal service, the contract shall not be assignable by the Agents, or any of them, except by the consent in writing of the Owners endorsed upon this agreement and signed by them."
During the year 1923, petitioner paid $7,921.62 as his part of the expenditures of the parties described as "Agents" under the said contract, in connection with platting, surveying and preparing the real estate involved for sale as lots.
Petitioner kept his books and prepared his return on the cash receipts and disbursements basis, and entered the said amount of $7,921.62 as a deduction in his return for the taxable year 1923. The respondent disallowed the deduction.
Subsequent to the taxable year 1923, the owners were paid the amount of $400,000 pursuant to the*1705 terms of the contract above referred to, and the unsold lots remaining at that time became the property of the agents.
OPINION.
LOVE: The only question involved in this proceeding is whether the respondent erred in disallowing the deduction claimed by petitioner of $7,921.62 expended by him as his share of the cost of platting, surveying and preparing the real estate for sale in accordance with the terms of the agreement referred to in our findings. The respondent contends that the amount in question is a capital expenditure and, therefore, not deductible under section 214(a)(1) of the Revenue Act of 1921 as "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."
Petitioner concedes that expenditures made by an owner of property for platting and surveying such property are not deductible as business expenses by the owner, but become a part of the cost of the *78 property. Section 215(b), Revenue Act of 1921. But in the instant proceedings petitioner was not the owner of the property for which the expenditures were made. His status was that of agent for the owners. He and three others had agreed with the owners*1706 to pay the cost of platting, surveying and preparing the property of the owners for sale, to sell the same, and, after the owners had received $400,000 in cash, together with certain interest, to receive "in full payment of all services rendered and disbursements made by them" under the agreement, all lands then remaining unsold together with all contracts, notes, mortgages, and other "proceeds of the venture." Petitioner contends that under such circumstances the amounts expended by him are nothing more than ordinary and necessary expenses paid in the course of carrying on his business.
In our opinion the petitioner's position is correct. He did not own the property for which the expenditures were made. His business was that of acting as agent for others. An agent usually receives compensation for his services which compensation is gross income under section 213(a) of the statute. Petitioner's income here was his proportion (one-sixth) of what was left after the owners had been paid $400,000 in cash. The excess over the $400,000 was in fact compensation for services rendered as truly as if the owners had agreed to pay petitioner a straight salary or set commission. The expenditures*1707 made by petitioner in producing such income were in substance no different in principle from expenditures made by a lawyer in prosecuting his client's case on a contingent basis, which in the case of the lawyer are admittedly deductible. A taxpayer on the cash basis deducts his expenses when paid and reports his income when received. If, after petitioner receives his share of the property remaining unsold after the owners have been paid their $400,000, he makes further expenditures of the same nature as the ones in question, such further expenditures must be capitalized and considered a part of the cost of the property received. But this is because he is then acting on his own account and not as the agent for others. The same rule applies in the case of the lessee of property. If the lessee makes improvements having a life in excess of the term of the lease, the lessee is entitled to deduct as additional rental the cost of such improvements spread over the remaining term of the lease, ; whereas, if such improvements were made by the owner of the property, a deduction to the owner would be based on the life*1708 of the improvements. In the instant proceedings we hold that petitioner is entitled to deduct the amount of $7,921.62 as an ordinary and necessary expense. The deficiency should be redetermined in accordance with this opinion.
Judgment will be entered under Rule 50.