1930 BTA LEXIS 2461">*2461 Amounts paid in the taxable years under lease of coal property which was to continue until the coal was exhausted, which time was estimated at from 10 to 12 years, may not be deducted in their entirety in the taxable years.
19 B.T.A. 169">*169 The Commissioner determined the following deficiencies in the petitioner's tax liability:
| 1926 | $6,756.65 |
| 1927 | 4,591.97 |
The petitioner alleges that the Commissioner erred in disallowing "as deductions from gross income for the years 1926 and 1927, rentals paid to the Shenango Furnace Company in the amounts of $50,000 and $51,250, respectively."
19 B.T.A. 169">*170 FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the Commonwealth of Pennsylvania, with its principal office in Pittsburgh.
On November 2, 1925, it leased certain coal properties, hereinafter more fully described, from the Shenango Furnace Co., for a term of one year. As consideration for this lease it agreed to pay $40,000 in quarterly payments of $10,000 each, royalty at the rate of 251930 BTA LEXIS 2461">*2462 cents per ton, with a minimum royalty of $50,000, and taxes on the property. It made the payments pursuant to the lease.
On November 14, 1926, it entered into a new lease for this same property, to run from November 1, 1926, until the exhaustion by mining and removal of all the Pittsburgh vein of coal. The lease also provided that the lessee agree to pay "as rental" $50,000 upon the execution and delivery of the agreement of the lease and $51,250 on the first day of May, 1927. The lease further provided that the lessee should pay royalty at the rate of 13 cents per ton for all coal mined and shipped from the premises, with a minimum royalty of $26,000 per annum; that it should pay the taxes on the property and should pay to the lessor one-half of its net profit from the operations. The property included about 4,000,000 tons of the Pittsburgh seam of coal, over 100 coke ovens, a coal plant and all the necessary tipples, tenant houses, railroad cars, tracks, and sidings for the mining of coal. The petitioner estimated that it would require from 10 to 12 years to extract the coal from the property. The payments were made in accordance with the lease for each of the years 19261930 BTA LEXIS 2461">*2463 and 1927.
The Commissioner disallowed a deduction of $50,000 for each of the taxable years and gave as his reason therefor that these amounts represented a bonus "paid in connection with the attaining of the lease and should be capitalized and the cost recovered over the life of the asset." For each year he allowed the petitioner a deduction for depletion based on the number of tons mined, on the theory that 3,465,000 tons had been acquired in 1926 at a cost of $100,000.
OPINION.
MURDOCK: Instead of disallowing the amounts set forth in the petitioner's allegation of error, it appears from the deficiency notice that the Commissioner has disallowed a deduction of $50,000 for each year and has also allowed deductions for depletion which the petitioner did not claim in its returns. Our question is to determine whether there is any error in this action of the Commissioner.
19 B.T.A. 169">*171 The president of the petitioner testified that at the time of entering into the lease of November 2, 1925, times were somewhat unusual in that although ordinarily the margin of profit on such an operation would not be very great, the lease was very profitable, due to the fact that there was a1930 BTA LEXIS 2461">*2464 strike in the anthracite coal region. He further testified that at or about the time that the first lease expired there was a strike in the coal fields in England, which led him to believe he could profitably enter into the lease of November 14, 1926, with its new terms and make a profit out of it, and that the coal strike in England "was the principal reason for agreeing to pay the rental at the time." His counsel argued that if the total amount paid in each of the three years is computed, it will appear that the rental for each year was reasonable when the $50,000 is included for each of the years 1926 and 1927. We are not satisfied, however, that the payment of $50,000 in each of the years 1926 and 1927 really represented rental for those years alone. Where expenditures are in part a consideration for the use of rented premises for years other than the taxable years, the whole thereof can not properly be considered ordinary and necessary expenses of carrying on the business during the taxable years, and only the part thereof properly attributable to the process of earning income during the taxable years may be deducted from gross income for those years. 1930 BTA LEXIS 2461">*2465 ; affd., ; ; ; ; ; ; ; .
Whether the $50,000 paid in each of the taxable years was a bonus or advance payment of rental, these payments should not be deducted in their entirety in the taxable years.
Judgment will be entered for the respondent.