*2060 1. Where a 99-year lease is made with the purpose of erecting a new building, the unextinguished cost of the old buildings is not deductible by lessor as a loss in the year of their demolition, but should be exhausted over the term of the lease.
2. A commission and fees paid by the petitioners to procure a 99-year iease held not to constitute deductible expenses in the years in which paid, but capital expenditures to be ratably deducted over the term of the lease.
*693 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes asserted by the respondent against Mary C. Young of $2,825.63 for 1924 and $2,091.21 for 1925, and against Mary Young Moore of $2,930.06 for 1924 and $2,117.42 for 1925. The facts were stipulated, from which we make the following findings of fact.
FINDINGS OF FACT.
Mary Young Moore is the daughter of Mary C. Young. They both reside at 1001 South Hoover Street, Los Angeles, Calif. They are joint owners of certain land in the city of Los*2061 Angeles, located at the southeast corner of Seventh and Figueroa Streets, extending east on Seventh Street to the southwest corner of Flower and Seventh Streets. The petitioners are equal owners.
During the years 1917 and 1918 the petitioners erected on this land several brick store buildings at a cost of $50,000. These buildings were rented or for rent until their demolition.
In 1924 a lease for the term of 99 years was entered into by the petitioners with the Sun Realty Co., whereby the brick buildings erected during 1917 and 1918 should be demolished and a new building erected to be occupied by Barker Brothers. The buildings were demolished in 1924.
The full amount of the depreciation sustained on the brick store buildings, from the time of erection to the time of demolition in 1924, was $7,785, and the undepreciated cost thereof to the petitioners at the time of demolition was $42,215.
The buildings were not salvaged or otherwise disposed of, and the petitioners received no insurance or other compensation on the demolition of the buildings.
Each of the petitioners, in her income-tax return for the year 1924, claimed a deduction in the amount of $21,107.50, representing*2062 her one-half of the undepreciated cost. These deductions were disallowed by the respondent and the sum of $21,107.50 was added back to the income of each of the petitioners.
On October 1, 1924, the petitioners granted a ground lease of the premises at Seventh and Figueroa Streets to the Sun Realty Co. for the period of 99 years, on the basis of a monthly rental of $10,000 *694 from October 1, 1924, to June 30, 1926, and of a monthly rental of $20,000 thereafter until the end of the term of the lease. This lease was obtained for the petitioners by a real estate agent who charged as his commission therefor the sum of $50,500, which commission was paid during the years 1924 and 1925. During the year 1924 there was paid $21,500, and the sum of $29,000 was paid during the year 1925. These amounts were paid by the petitioners in equal sums and each paid $10,750 in 1924 and $14,500 in 1925.
Each of the petitioners claimed as a deduction in her income-tax return for 1924 the sum of $10,750, representing the amount actually paid by her to the real estate agent during that year. These deductions were disallowed by the Commissioner.
In addition to the commission paid to the*2063 real estate agent, the petitioners were required to pay attorney fees in the amount of $5,500, and the expense of obtaining certificate of title in the amount of $4,502.85.
Each petitioner, in her income-tax return for 1924, claimed a deduction in the amount of $2,750, being one-half of the attorney fees, and a deduction in the amount of $2,251.43, being one-half of the cost of obtaining certificate of title. These deductions were disallowed by the respondent.
The respondent considered the loss sustained on the demolition of the brick buildings to be a part of the cost to the lessor of the 99-year lease, and further considered the sums expended by the petitioners as commissions, attorney fees, and cost of obtaining certificate of title, to be capital expenditures to be amortized and deducted over the term of the lease, and as a result thereof allowed a deduction to each of the petitioners for the year 1924 in the amount of $513.59.
In his adjustment of the income of the petitioners for the year 1925, the respondent disallowed the deduction claimed by each in the amount of $14,500, representing the sum paid by each as commission to the real estate agent in 1925, and allowed*2064 a deduction for amortization of the cost of the lease in the amount of $513.59.
Each of the petitioners kept her books and rendered her incometax returns for the years 1924 and 1925 on the basis of cash receipts and disbursements.
OPINION.
MATTHEWS: The petitioners assert that the respondent erred in two particulars. First, in refusing to allow as a deduction in 1924 the unextinguished cost of the brick store buildings which were demolished in order that a new building might be erected on the premises. Second, in refusing to allow as deductions in 1924 and 1925 the amounts paid by the petitioners in those years in connection *695 with the negotiation of a 99-year lease on the property owned by petitioners, such amounts representing the commission paid to a real estate agent, attorney fees, and the expense of obtaining a certificate of title.
The first issue is governed by our decision in , in which we held that the unextinguished cost of buildings removed in order to obtain a 99-year lease upon the land represented the cost to the lessor of such lease and should be exhausted over the term of the lease. This decision*2065 was followed in , in which case the same question was presented. See also ; , affirming our decision in this case, .
With respect to the second issue, the petitioners take the position that the amounts paid in connection with the procuring of the 99-year lease do not constitute capital expenditures, but represent necessary expenses and that, since they were on a cash receipts and disbursements basis, they are entitled to deduct from income the amounts paid in cash in 1924 and 1925. The respondent contends that the expenditures in question resulted in the acquisition of a capital asset and that any deduction allowable is by way of amortization over the life of the lease.
In , and , this question was considered at length. These decisions were cited and followed in *2066 , in which it was held that the commission paid by a lessor to procure a long-term lease does not constitute a deductible expense in the year paid, but is a capital expenditure to be ratably deducted as the lease is exhausted. See also , and . On authority of these decisions, the respondent's action in prorating the expenditures over the term of the lease is approved.
Judgment will be entered for the respondent.