*3089 1. Bonus - Advance Payment of Rent. - Where the petitioner rented property to another for a term of 15 years at an agreed rental of $5,000 monthly, and it was further agreed that the lessee should pay in addition thereto the sum of $20,000 in cash in advance at the beginning of the term, said sum of $20,000 constitutes a part of the profit to petitioner and is taxable for the year in which received and can not be apportioned over the entire term of the lease.
2. Deduction - Law Suit. - Where a number of suits were instituted against petitioner by an individual and it appeared that included therein were two notes, aggregating $15,000, given by petitioner's principal stockholder personally to the plaintiff personally, and all of said claims were compromised and settled for a lump sum of $80,000, the amount of the notes can not be allowed as a deduction because they were not an obligation of petitioner and it does not appear how much was expended in the settlement of the two notes.
3. Attorneys' Fees. - Amounts expended by petitioner during the taxable year for services rendered it are deductible as expense.
*1230 This proceeding seeks a redetermination of deficiencies in income and profits taxes for the year 1920 in the sum of $8,034.49, and for 1921 in the sum of $3,228.25. Petitioner alleges that the respondent erred (1) in including in gross income for 1920 the sum of $20,000, amount received as an advance payment of rent, and in not allowing said sum to be apportioned over the 15 years of the lease; (2) in refusing to allow as a deduction for 1921 the sum of $15,000 alleged payment in settlement of a lawsuit; and (3) failure of the respondent to allow as a deduction for 1921 attorneys' fees in the sum of $14,368.
*1231 FINDINGS OF FACT.
The petitioner is a California corporation, with its principal office and place of business in San Francisco, Calif. During the taxable years in question and for several years prior thereto it was the owner of a theatre building on O'Farrell Street, San Francisco, which it leased to the California Hippodrome Co. in 1915 for a term of five years at a rental of $3,000 a month and 50 per cent of*3091 the profits realized from its operation. In 1917 the lease was modified by changing the rental from $3,000 per month to $5,000 per month and eliminating the division of the profits, and by including therein the right of renewal on the part of the lessee for an additional term of five years at the expiration of the modified lease in 1920.
As the time approached for the expiration of the existing lease and the exercise of its right of renewal by the lessee, the parties began negotiations for a renewal lease of 15 years instead of 5 years. Petitioner was in financial difficulties, and to alleviate the same a cash payment was insisted upon when renewal of the lease was given, and it was finally agreed that a lease should be made for 15 years at the former rental of $5,000 monthly, but that lessee should pay an additional sum of $20,000 cash in advance, which both parties considered an additional rental. This was carried out by the lessee paying the sum of $20,000 to the petitioner in 1920. The lease contained no mention of this additional payment of $20,000. Petitioner claims the right to apportion this $20,000 over the 15 years of the lease at the rate of $1,333.33 per year, but*3092 respondent denied this and included the entire sum in 1920 income.
The petitioner originally was the enterprise of G. M. Anderson, a motion picture actor, who for a time had an enormous income from acting and pictures, but who was totally unacquainted with business and the management or care of large sums of money. Upon the incorporation of petitioner Anderson took in as his associate Thomas O'Day and presented him with 20 per cent of the capital stock. In 1914, while petitioner was engaged in the construction of its theatre, it became in need of funds and O'Day borrowed $5,000 each from three San Francisco banks, making $15,000 in all, which was used for the purposes of the corporation. These notes were signed G. M. Anderson, by Thomas O'Day, attorney in fact, and were subsequently paid by the petitioner prior to 1917, but they have been lost or destroyed if they were returned. O'Day claimed that in order to obtain these loans he was compelled to pledge certain securities of his own, or of a firm of which he was a member, and, in order to secure him, G. M. Anderson gave his individual notes, one for $5,000, dated May 18, 1914, payable 4 months thereafter, and another for $10,000, *3093 dated January 6, 1914, payable in 90 days. When the 3 notes of *1232 $5,000 each were paid to the banks, these last mentioned Anderson notes given to secure O'Day were not returned to Anderson or the petitioner, but were retained by O'Day.
During the period from the formation of the petitioner in 1914, its principal stockholder, G. M. Anderson, was interested in a great many financial enterprises in and around San Francisco and on account of inexperience in business became involved in a number of failures and disastrous investments, resulting in many lawsuits requiring legal services. From 1914 to April 1917 his personal legal business and that of the petitioner was attended to by Herbert Choynski, who was also secretary of the petitioner. After his employment was terminated Choynski rendered a bill for $70,000 for services rendered to the petitioner, to Anderson, individually, and to Anderson's other ventures or enterprises. This bill was ultimately settled for $32,000, $11,320 of which was paid by petitioner in 1921 for services rendered it and for which it asks deduction.
After Herbert Choynski ceased to act as attorney for the petitioner and G. M. Anderson and*3094 his many interests, I. M. Golden became the attorney for the petitioner and acted and continued as such from 1918 through the taxable years. In 1921 he was paid $2,096 by petitioner, which was for services rendered it.
Anderson and O'Day, after an intimate business association for a number of years, became estranged, with the result that O'Day instituted an action against petitioner and Anderson for an accounting and a receiver for petitioner, No. 114710 Superior Court for the City and County of San Francisco, in which he alleged fraud, mismanagement, and unlawful diversion of petitioner's funds on the part of Anderson and other officials of the petitioner. Three other actions were instituted against Anderson individually, as follows: No. 114709 on account stated for $20,437.95, Nos. 114711 and 114712 on the $5,000 and $10,000 notes given by Anderson to O'Day in 1914 as security for the bank loans mentioned above.
It was the contention of petitioner and its counsel that the notes of $15,000 had been paid, but, as there was no documentary proof, all of O'Day's claims, including the $15,000 in question, were settled and compromised for $80,000, and the actions mentioned above*3095 were dismissed settled. There is no evidence to show how much was paid in settlement of the actions on the notes.
Petitioner did not keep any regular books of account, and such accounts as were kept were on the cash receipts and disbursements basis.
OPINION.
MILLIKEN: On the hearing of this case the 15-year lease entered into in 1920 was introduced in evidence, but it was withdrawn upon *1233 agreement by counsel for petitioner to furnish a copy for the record. This has not been done, but we do not consider it necessary for a decision of the issues herein.
The first complaint of petitioner is that respondent included in 1920 income the sum of $20,000 advance payment of rent and refused to allow it to be apportioned over the 15 years of the lease at $1,333.33 per year.
It appears from the evidence that the written lease between the parties was for 15 years at a monthly rental of $5,000, but there was an additional oral agreement that the lessee was to pay an additional sum of $20,000 as additional rent, or bonus, which was to be paid in cash on the signing of the lease or beginning of the term. This was paid to and received by petitioner in 1920, but petitioner*3096 contends it should be taxed as if it had received said sum in regular annual installments of $1,333.33 throughout the term of the lease.
We know of no theory, or authority, by which petitioner's claim can be allowed. It is immaterial whether we call the $20,000 payment a bonus, additional rent payable in advance, or by any other term, it is a profit arising out of the transaction, to wit, the leasing of the property, and is taxable when received, as the petitioner was on the cash receipts and disbursements basis:
Petitioner is seeking to apply here the rule which permits the lessee to amortize the cost of securing a lease, or improvements on the property. The expenditure by the lessee represents a capital investment, thus differentiating that case from the one at bar.
The authorities and regulations cited by counsel for petitioner do not apply to the facts of this case, as they relate to the right of the lessee to apportion or spread over the entire term of a lease the cost of obtaining it, or the cost of improvements, and this is on the ground that it is a capital expenditure.
In the cases of *3097 , and , the Board had before it the question as to whether or not a bonus or advance cash payment of royalty was income or a return of capital, and in both cases we held that it was income and the entire amount received was taxable in the year in which received.
The second error alleged is the failure of respondent to allow a deduction of $15,000 from 1921 income for the payment of the two notes of $5,000 and $10,000 to Thomas O'Day. It is the theory of the petitioner that this sum was originally borrowed from the banks by O'Day for petitioner's purposes and that it was paid to the banks by petitioner long before the taxable year. It is contended that O'Day retained the notes given him as security and when suit was instituted thereon petitioner had nothing to show payment, and in *1234 order to avoid litigation settled or compromised these notes with other causes of action for a lump sum of $80,000. It is claimed this was an ordinary and necessary business expense and therefore deductible.
The two notes sued on are filed as petitioner's exhibits Nos. 4 and 5. Both notes*3098 are signed by G. M. Anderson as the sole maker, and were endorsed for collection by Thomas O'Day. The name of the petitioner does not appear on them either as maker, payee, endorser, surety, or in any other capacity. The suits on the notes were brought against the maker Anderson and not against the petitioner, and so far as this record shows this was purely a claim by O'Day in his individual capacity against Anderson in his individual capacity. In addition it may be observed that there is no evidence as to the amount paid by petitioner in settlement of these notes. Under the evidence it may have been any amount, and if petitioner can not show the amount we have no means of ascertainment. The respondent's refusal of this claim was correct.
The final error alleged is the failure of respondent to allow as a deduction from 1921 income the sum of $14,368, paid out for attorneys' fees for services rendered petitioner. The evidence shows that $11,320 of this amount was paid to Herbert Choynski in compromise settlement of his claim of $70,000, that it was paid in 1921 and was for services rendered petitioner. It is further shown that $2,096 of the total claimed was paid to I. M. *3099 Golden for legal services rendered petitioner in defending the accounting and receivership case and other actions. These amounts, totaling $13,416, are deductible from income for 1921. . There is no evidence of the payment of the remaining $952 of the claim to any person.
Judgment will be entered under Rule 50.