1930 BTA LEXIS 2227">*2227 1. Decision in Mrs. E. A. Giffin,19 B.T.A. 1243">19 B.T.A. 1243, followed.
2. Commission paid by petitioner as lessor for procuring a 99-year lease held not to constitute a deductible expense in the year paid but a capital expenditure deductible ratably over the term of the lease.
19 B.T.A. 1253">*1253 The respondent determined a deficiency in income tax for the year 1925 in the amount of $1,611.47. Petitioner asserts that the respondent erred in two particulars. First, in refusing to allow as a deduction in full a commission paid on the sale of real estate in determining the taxable profit on the installment basis. Second, in refusing to allow as a deduction in 1925 the full amount of the commission paid to a broker for negotiating a 99-year lease on property owned by petitioner.
FINDINGS OF FACT.
Petitioner in 1925 sold a lot, known as lot 21, block 86 north, Miami, Fla., to one Andrews for a total contract sale price of $35,000. Title to said real estate was transferred by petitioner to the purchaser in that year by a general warranty1930 BTA LEXIS 2227">*2228 deed.
Petitioner received $8,750 of said sale price in cash in the year 1925, but no part of the balance of the sale price, to wit, $26,250, was due, payable, or paid to the petitioner in that year.
The balance of the purchase price, to wit, $26,250, was represented by a note in the sum of $3,833.34, payable subsequent to the year 1925, secured by a first mortgage on the lot, the payment of which was assumed in 1925 by the purchaser, and three promissory notes in the aggregate sum of $22,416.66, secured by a second mortgage on the lot, payable respectively in one, two and three years after date, which second mortgage and which notes were made and delivered by the purchaser to the petitioner in the year 1925.
19 B.T.A. 1253">*1254 The petitioner expended the sum of $8 in 1925 for abstract fees in connection with the sale of the above-described real estate.
In the year 1925 the petitioner contracted to pay and paid a commission of $1,750 to the Davenport & Rich Investment Co., a corporation engaged in the business of real estate brokers, for and in consideration of services rendered by said broker in negotiating the sale of the aforesaid real estate. The services so rendered were1930 BTA LEXIS 2227">*2229 the sole consideration for the contract and for the payment of the commission, and said services were completely performed in and during the year 1925. The contract between the petitioner and the broker corporation under which the commission was paid was completely performed in the year 1925, and the liability of the petitioner to pay the corporation its commission was not in any respect contingent upon the above-named promissory notes, representing the deferred payment, being paid, and in the event of default in the payment of said deferred payment notes petitioner had no claim whatsoever for the recovery of any part of the commission paid to the broker in the year 1925. The commission paid was reasonable in amount.
The cost to the petitioner of the real estate sold was $16,500.
The petitioner did not keep books of account during the year 1925, and he reported his income for said year on the cash receipts and disbursements basis.
The petitioner was not a dealer in real estate in the year 1925.
Both the petitioner and the respondent computed the profit from said sale on the installment basis, the computations being as follows:
| PETITIONER'S METHOD | ||
| Sale price | $35,000.00 | |
| Cost in 1921 | $16,500.00 | |
| Abstract | 8.00 | |
| 16,508.00 | ||
| Profit to be realized | 18,492.00 | |
| Terms: Cash | 8,750.00 | |
| First mortgage assumed by purchaser | 3,833.34 | |
| Second mortgage made by purchaser, payable 1, 2, and 3 years | 22,416.66 | |
| 35,000.00 | ||
| Sale price | 35,000.00 | |
| First mortgage assumed by purchaser | 3,833.34 | |
| Contract price | 31,166.66 | |
| Ratio of profit to contract price = 0.59326 | ||
| Selling profit realized in initial payment of $8,750 | 5,191.02 | |
| Less commission paid | 1,750.00 | |
| Taxable profit received in 1925 | 3,441.02 |
| RESPONDENT'S METHOD | ||
| Sale price | $35,000.00 | |
| Cost | $16,500.00 | |
| Abstract | 8.00 | |
| Commission | 1,750.00 | |
| 18,258.00 | ||
| Gross profit | 16,742.00 | |
| Terms: Cash (25% of selling price) | 8,750.00 | |
| Assumed mortgage | 3,833.34 | |
| Purchase money mortgage | 22,416.66 |
Gross profit $16,742 X $8,750 cash received = 0.537 X $8,750 = net profit $4,698.75. Contract price, $31,166.66
Petitioner, by an indenture duly executed and delivered on October 31, 1925, leased to the Second Avenue Leasehold Corporation, a Florida corporation, that certain parcel of real estate known as lot 4, block 5 in West Broadmoor, a subdivision in Dade County, Fla., for a term of 99 years, at a rental of $5,000 per annum for the first five years, $10,000 per annum for the next five years, $12,000 per annum for the next five years, and $15,000 per annum for the remainder of said term, said lease providing for the payment of the rental for the first and last years of said term in advance upon the execution of the lease and the payment of the rental for each of the other years of said term annually in advance.
The lessee paid $23,000 to the petitioner on October 31, 1925, said1930 BTA LEXIS 2227">*2231 amount being the rental reserved under the lease for the first and last year of the 99-year term.
In the year 1925 the petitioner contracted to pay and paid to the Davenport & Richland Investment Co. a commission of $8,900 for and in consideration of services rendered by that company in negotiating the aforesaid lease. The services so rendered were the sole consideration for the contract and for the payment of the commission, and such services were completely performed in and during the year 1925.
The contract between the petitioner and the broker corporation pursuant to which the aforesaid commission was paid was completely performed in the year 1925, and the liability of the petitioner to pay the said corporation its commission was not in any respect contingent upon the rentals being paid for any of the years of the term of the lease except only the first and last years thereof, which rentals for the first and last years were paid to petitioner in the year 1925 as aforesaid, and in the event of default in the payment of rentals 19 B.T.A. 1253">*1256 for any of the years from the second to and including the ninety-eighth year of said term, the petitioner had no claim for the recovery1930 BTA LEXIS 2227">*2232 of any part of the commission paid to the broker in the year 1925.
Petitioner claimed the commission of $8,900 paid as a deduction from income for 1925. Of the amount claimed respondent allowed $89.89 and restored the difference of $8,810.11 to income.
OPINION.
ARUNDELL: The first issue is governed by our decision in , in which we held adversely to petitioner's claim for the deduction of selling costs incident to the sale of real estate.
In support of his contention under the second issue petitioner cites , and . The Olinger case was overruled in , and the principle announced in the McNeill case has also been overruled. See ; ; ; . These later cases hold that a commission paid by the lessor to procure a long term lease is a capital expenditure to be ratably deducted over1930 BTA LEXIS 2227">*2233 the term of the lease. Accordingly the respondent's action in allowing as a deduction a sum representing one ninety-ninth of the commission paid in this case is approved.
Decision will be entered for the respondent.