*1376 1. Broker's fees paid in connection with procuring a lease are to be deducted in pro rata amounts over the fixed life of the lease, excluding possible but not certain renewals.
2. Cost of a premium on a performance bond given to insure erection of a building on leased land should be spread over the fixed life of the lease where it is obvious that the building will outlive the lease term.
*46 Respondent determined a deficiency of $3,032.32 in income taxes for the period May 21, 1926, to December 31, 1926, of which approximately $2,979.55 is disputed. Petitioner protests the action of respondent in disallowing three items claimed by it as expense, as follows:
| 1. Organization expenses | $172.92 |
| 2. Commission paid brokers | 13,858.32 |
| 3. Bond premium paid | 8,250.00 |
Respondent disallowed item (1) and held that items (2) and (3) were capital expenditures to be prorated over the life of a certain lease plus its two possible renewals, a period of 63 years.
The parties entered into a stipulation of facts from which we make*1377 the following findings of fact.
FINDINGS OF FACT.
The Estate of George B. Leonard Holding Corporation is a corporation organized under the laws of the State of New York, having its principal office at No. 170 Broadway, in the City, County and State of New York.
On or about the 27th day of May, 1926, the taxpayer, then being the owner of certain real estate located on the northwest corner of 66th Street and Central Park West, in the City, County and State of New York, having a frontage of 150 feet 7 1/2 inches on Central Park West and 100 feet on 66th Street, entered into a lease of said premises to the Meteor Holding Corporation for a period of 21 years, at certain annual rentals provided for in said lease, with privileges on the part of the lessee at the lessee's option for two renewal periods of 21 years each under certain conditions.
*47 During the taxable year the taxpayer paid a broker's commission in the sum of $13,858.32 in connection with procuring the above mentioned lease.
During the taxable year the taxpayer paid a bond premium in the sum of $8,250 to procure a Fidelity bond to guarantee completion of new building on the demised premises.
During*1378 the taxable year the taxpayer paid the sum of $172.92 for expenses in connection with the organization of the taxpayer corporation.
OPINION.
VAN FOSSAN: The first item in controversy is denominated "organization expenses," incurred in connection with the organization of taxpayer corporation. We know nothing more about it. Such items as legal and accounting fees paid for similar purposes were held to be not deductible as ordinary and necessary expenses of the year in which incurred in . See also . Apparently these expenses were of similar character and they should be similarly treated.
The second item is identical with that considered by the court in , where it was held that such an expenditure should be prorated over the life of the lease, excluding possible, but not assured, renewal terms. A similar treatment should be had here. Respondent was correct in requiring proration, but erred in the inclusion of two possible renewal terms in the period. The correct period is 21 years. *1379 See also , affirming .
The remaining item is one-half the cost of premium on a performance bond given to insure completion of a building erected by petitioner on the leased land. This item should also be prorated over the life of the lease. The reasoning underlying the above cited cases applies with equal force to this expenditure. It was a necessary incident to the erection of a building which will be utilized over the life of the lease. It takes its character from the nature of the expenditure to which it adheres. Presumptively, the building will outlast the first term of the lease, but, since renewal thereof is optional, we are of opinion that the item should be spread over the fixed life of the lease and not over an estimated life of the building.
Decision will be entered under Rule 50.