*2149 1. The owner of certain real property and the petitioner entered into an agreement on May 19, 1920, whereby the owner leased to petitioner such property for a period of two years at a stipulated rental and in said agreement the owner contracted and bound herself to sell to petitioner the premises leased to him at any time within two years from June 15, 1920, for the sum of $30,000; $10,000 in cash and the remaining $20,000 to be evidenced by two promissory notes of the petitioner upon the execution of the deed for $10,000 each, bearing interest at 6 per cent annually until paid and the petitioner bound and obligated himself to purchase said property upon the terms above set forth within the time specified. This agreement and the provisions therein set forth with reference to rental and the obligation of the owner to sell and the petitioner to buy was extended and continued in force from time to time and remained in force throughout the taxable years here involved.
2. Held that the cost of improvements made upon the premises by the petitioner during the taxable years, the life of which improvements extended beyond the term of the agreement and lease in effect during the year*2150 in which said improvements were made, should be exhausted over the life of the improvements rather than the term of the agreement then in force.
*1302 The Commissioner determined deficiencies for the fiscal years ended June 30, 1922, June 30, 1923, June 30, 1924, and June 30, 1925, in the respective amounts of $1,785.67, $701.84, $4,230.70, and $1,338.82. The principal question at issue is whether certain capital expenditures which were made by the petitioner while occupying certain premises under a lease agreement should be allowed as deductions on the basis of a proration over the physical life of the assets acquired by the capital expenditures or over the term of the lease.
FINDINGS OF FACT.
Petitioner is an individual and a resident of Nashville, Tenn., where, during the years in controversy as well as prior thereto, he was engaged in the publishing business.
In 1920, when his business had grown to the extent which required that larger quarters be secured, petitioner sought a new location for his publishing plant. In the first place he*2151 was unsuccessful in purchasing a certain building in the business section of Nashville on which he had gotten an oral option. Later, and after he had failed to find a suitable location elsewhere, he entered into the following agreement with his sister-in-law, Mary Ellen Rankin, for the use and occupancy of her residence for his business purposes:
THIS AGREEMENT executed in duplicate at Nashville, Tennessee, this, the 19th day of May, 1920, between Mrs. Mary Ellen Rankin, a widow, Party of the First Part, and B. Kirk Rankin, Party of the Second Part.
WITNESSETH AS FOLLOWS:
1. Mrs. Mary Ellen Rankin, Party of the First Part, has leased to B. Kirk Rankin, the Party of the Second Part, a certain parcel of land located in Nashville, Davidson County, Tennessee, described as follows:
One Hundred (100) feet on the South side of Broad Street, upon which a residence is now located, known as No. 1523.
And the said Mrs. Mary Ellen Rankin is to deliver possession of said property to the said B. Kirk Rankin on June 15, 1920.
The term of said lease shall be until such time as the said B. Kirk Rankin shall exercise the right of purchase hereinafter specifically set forth but not exceeding*2152 a period of two years from June 15, 1920.
2. The said Mrs. Mary Ellen Rankin grants as a part of the consideration of this lease, the right of purchase hereinafter specifically set forth.
*1303 The said B. Kirk Rankin, Party of the Second Part, as consideration for said lease agrees to pay rental as follows:
For each year or part of a year that this lease is in effect to pay to the said Mrs. Mary Ellen Rankin, One Hundred Fifty ($150.00) Dollars per month, which is the equivalent of six per cent (6%) per annum on Thirty Thousand ($30,000.00) Dollars, the agreed valuation of the property, said payments to be made until such time as the said B. Kirk Rankin shall exercise the right of purchase hereinafter specifically granted and described, or until the expiration of two years from June 15, 1920.
And the said B. Kirk Rankin further agrees to pay the insurance upon the buildings and improvements upon said property during his occupancy of said premises as lessee, and to pay all taxes upon the property that are assessed and accrue for the year 1921 until the termination of the lease, but the said Mrs. Mary Ellen Rankin is to pay all taxes assessed for the year 1920.
*2153 And the said B. Kirk Rankin further binds himself to expend at least Ten Thousand ($10,000.00) Dollars in improvements upon said property as herein set forth.
3. The said Mrs. Mary Ellen Rankin contracts and binds herself to sell to the said B. Kirk Rankin the premises hereinabove described at any time within two years from June 15, 1920 that the said B. Kirk Rankin chooses to purchase the same, and to execute proper conveyances to the said B. Kirk Rankin to carry out this contract. The consideration for said sale to be the payment of $30,000, $10,000 in cash to be paid when the deed is delivered, and for the remaining $20,000 the said B. Kirk Rankin is to execute his two promissory notes of even date with the execution of the deed, each note for $10,000, bearing six per cent (6%) interest per annum until paid, to secure which a lien is to be reserved upon the property.
The said B. Kirk Rankin, Party of the Second Part, binds and obligates himself to purchase the said property upon the terms herein set forth but he shall have two years from June 15, 1920 to purchase the same. When the said B. Kirk Rankin shall purchase the same, then the contract of lease contained in this*2154 paper shall terminate upon the conveyance of the property and the compliance with the terms of purchase by the said B. Kirk Rankin.
4. It is expressly agreed between the parties hereto that the said B. Kirk Rankin shall have the right to make such changes in the residence and other improvements upon said property as he may deem necessary for his business purposes, and the said B. Kirk Rankin agrees, however, to expend upon said property for such improvements not less than the sum of $10,000, which shall be expended upon said property within the year 1920.
The petitioner took over the premises with the idea of making them his permanent place of business.
The petitioner occupied the premises in question for the two-year period covered by the agreement, but the consummation of the purchase was not carried out within such time. However, on June 3, 1922, the following agreement was executed:
THIS AGREEMENT, executed in duplicate at Nashville, Tennessee, this 3rd day of June, 1922, WITNESSETH:
That WHEREAS, on the 19th day of May 1920, Mrs. Mary Ellen Rankin and B. Kirk Rankin, entered into a certain written agreement hereto attached and made a part hereof; and,
*1304 *2155 WHEREAS , it is desired by both parties to said agreement, to extend the period of the lease of the property which is embraced in said agreement, upon the same terms and conditions, for a period of one year,
IT IS AGREED between the parties hereto, said Mrs. Mary Ellen Rankin and B. Kirk Rankin, that the said B. Kirk Rankin shall have the right and privilege of occupying the premises in question until June 15, 1923, and upon the same terms and conditions as in the agreement of May 19, 1920, hereto attached.
It is further mutually agreed between the parties hereto, that as part of the consideration for the payment of the rent upon the leased premises for the year ending June 15, 1923, the said Mrs. Mary Ellen Rankin contracts and agrees with the said B. Kirk Rankin, that he shall have the same privilege of purchase described in, and upon the same terms and conditions that he had under, the agreement executed on May 19, 1920, hereinbefore referred to, it being mutually understood between the parties, that the purpose of this agreement is to extend the original contract for a period of one year, upon the same terms and conditions, and to give to the said B. Kirk Rankin the same right*2156 of purchase that he had under and by virtue of the first agreement, up to and until June 15, 1923.
WITNESS OUR HANDS at Nashville, this 3rd day of June, 1922.
Similarly, the petitioner occupied the premises under the terms of the foregoing agreement, but did not carry out the provision with respect to purchase prior to its expiration. And, likewise, another agreement was executed on June 2, 1923, of substantially the same terms as that quoted above and executed on June 3, 1922, thus extending the time for occupancy and purchase of the premises to June 15, 1924. Prior to the expiration of the agreement of June 2, 1923, and the purchase provisions not having been carried out, a third renewal agreement was executed on June 11, 1924, which was substantially the same as the two preceding agreements and which extended the time to June 15, 1925.
Pursuant to the terms of the agreement dated May 19, 1920, the petitioner proceeded to alter the premises to suit the needs of his business and during that period expended in this manner $13,868.17. Of this amount $6,916.69 was expended in the fiscal year ended June 30, 1921, and $6,951.18 in the fiscal year ended June 30, 1922. Similar*2157 expenditures for alterations and improvements were made in the succeeding years as follows:
| Fiscal year ended June 30, 1923 | $2,074.64 |
| Fiscal year ended June 30, 1924 | 4,484.01 |
| Fiscal year ended June 30, 1925 | 9,204.32 |
Additional expenditures were made as follows:
| Fiscal year ended June 30, 1923: | |
| Wages and expenses of an expert pressman to instruct the men in the operation of a new color press | $659.07 |
| Labor and material used in making reinforced concrete motor base and setting new motor | 82.77 |
| Fiscal year ended June 30, 1924: | |
| Wages and expenses of machinists in installing new printing press | $555.69 |
| Cost of additional parts which were purchased to replace parts of a new machine which were stolen prior to the time when the new machine was installed | 1,205.95 |
| Electric wiring, connections and material for the installation of new press | 539.59 |
*1305 The aforementioned expenditures during the fiscal year ended June 30, 1924, were made in connection with the installation of a new printing press which was purchased at a cost of approximately $15,000. The press was purchased complete and with the understanding that all necessary parts for*2158 its operation were being furnished therewith. The full purchase price was paid in advance of its delivery. When the petitioner came to set up the machine, it was found that many parts had been stolen. The parties from whom the press had been purchased refused and failed to make any adjustment on account of the missing parts. Petitioner accordingly purchased the necessary parts from other manufacturers at a cost of $1,205.95. In the meantime, the petitioner had had an employee of a printing press manufacturer come to his plant from a distant point for the purpose of installing the press which he then thought was complete and ready for installation. Considerable delay ensued before all parts were received and the installation finally completed, but the employee remained at the plant the entire time and the petitioner was required to pay this employee for his time spent at the plant even though under ordinary conditions less time would have been required to complete the installation.
The various items enumerated and explained above were treated by the Commissioner as capital expenditures and deductions allowed on the basis of the exhaustion of the physical assets over their respective*2159 lives.
OPINION.
LITTLETON: Before passing on the deductibility of the specific items in controversy, it is necessary first to decide whether the proper basis for exhaustion of the several physical assets is over their respective lives or over the term of the lease within which the expenditures were made. And this, of course, makes necessary an examination of the agreements under which the petitioner occupied the premises in question, as well as the circumstances surrounding their execution and the acts of the parties connected therewith.
The contention of the petitioner is that the agreement executed on May 19, 1920, was a lease for two years with an option to purchase within that time and that since there was no assurance that the petitioner *1306 would be allowed to occupy the premises beyond that time, and since the life of the assets was longer than two years, the amount expended for alterations and improvements should be spread over this two-year period. The foregoing conclusion is, of course, well established, but do the facts in this case justify an application of this principle? We think not. In the first place, it appears that the original agreement was*2160 more than a lease with an option to purchase within the term of the lease. On the part of the owner of the premises, there was a provision binding this party to permit the other party (the petitioner) to purchase the property at any time within the two-year term at the price therein specified, and in this respect, it might be said that the said owner merely bound herself to hold the offer to sell the property open for two years and unless the offer was accepted within that time, the lease would be considered as in full operation and no consideration need be given to the option to purchase, in determining the exhaustion on account of the capital expenditures. But there was more than an obligation on the part of the seller to keep the offer open during the two-year period; the petitioner obligated himself to accept the offer within the two-year period.
To use the language of the agreement: "The said B. Kirk Rankin, Party of the Second Part, binds and obligates himself to purchase the said property upon the terms herein set forth but he shall have two years from June 15, 1920 to purchase the same." In other words, this would seem to be an executory contract, or contract of purchase, *2161 in which the purchase was to be consummated in any event, but might be postponed for as much as two years. That the original agreement to purchase was not carried out within the time specified, but was extended on three subsequent occasions, would not alter the binding character of the contract as at first executed, except to extend the time therein specified. It is, of course, true that the renewal agreements do not contain the express clause, binding and obligating the petitioner to complete the purchase within the extended periods, yet when we read these agreements along with the original agreement and consider the entire record, we are of the opinion that the fair interpretation to be given to the renewal agreements is that each amounted to an extension of the original agreement, both as to occupancy and purchase, for a period of one year. At any time during the periods of the agreements the petitioner, upon compliance therewith, could have required specific performance of the purchase contract and a similar right existed with respect to Mary Ellen Rankin, though the time when she could require specific performance would only be at the end of the several periods mentioned. In*2162 the meantime the petitioner was occupying the premises in much the same manner that would have occurred where there was *1307 a contract of purchase and the buyer was given the privilege of occupying the premises on a rental basis until the purchase was finally consummated. We fail to see where, under such circumstances, there exists any occasion to consider that alterations and improvements made after execution of the agreements would inure to the benefit of the petitioner only until the purchase was finally consummated. It is true that the purchase was not completed within the period of the original agreement or the original agreement as extended, nor does the record show that it was ever consummated, but the petitioner occupied the premises during the periods covered by the several agreements, thus receiving the benefit of the expenditures made, and the record strongly indicates that occupancy continued after the last agreement expired.
And, further, other evidence of record is opposed to the proposition that occupancy of the premises by the petitioner was intended by either party to be limited to the periods mentioned in the agreements. In the first place, the agreements*2163 do not contain clauses, commonly found in leases, with respect to the right of entry or repossession on the part of March Ellen Rankin either on the breach of the agreement or upon its termination, the language used indicating a contemplation that termination would result upon the completion of the purchase rather than upon the expiration of the periods mentioned in the agreements. The rental to be paid was 6 per cent of the agreed purchase price, with the petitioner paying taxes, insurance and the cost of alterations and improvements, and the rental terms were not changed at the expiration of the original agreement; that is, continued to be 6 per cent of the original agreed purchase price, although, in the meantime, the petitioner had made expenditures for alterations and improvements to the extent of almost half of the purchase price. And during the five-year period from June 15, 1920, to June 15, 1925, when the original agreement and the renewals were in effect, the total expenditures made by the petitioner for alterations and improvements amounted to $29,631.14, or but little less than the agreed purchase price of $30,000. Further, the petitioner testified that while he took*2164 over the premises as an emergency proposition, he did this with the purpose of making this his permanent place of business and, as heretofore stated, this purpose was apparently carried out. It is hardly probable that a man would expend the amounts here expended - particularly when we consider their comparison with the agreed value of the property at date of the execution of the original agreement - unless there was intended and assured to him more than a temporary occupany of the building. In substance, if not also in form, the transaction is one wherein the occupancy began and continued with the purpose and assurance that occupancy would be continued for an indefinite period of time. *1308 And, as we said in , "Where the weight of evidence shows, as in this case, that the occupancy of the premises by the taxpayer was for an indefinite period, the allowance for exhaustion, wear, and tear must be based upon the physical life of the property." In view of the foregoing, the action of the Commissioner in allowing a deduction for the exhaustion of the improvements over the physical life of the property is sustained.
*2165 With respect to the other deductions in controversy for the fiscal year ended June 30, 1923, we are of the opinion that the item of $659.07, wages and expenses of an expert pressman to instruct petitioner's employees in the operation of a new color press, is a proper deduction from gross income for that year, but that the item of $82.77, labor and material used in making motor base and setting new motor, is a capital item and, therefore, not deductible. As to the fiscal year ended June 30, 1924, we are of the opinion that the item of $1,205.95 fairly represents the original cost of the stolen parts and is a proper deduction for that year, but that the other items, $555.69 and $539.59, are capital expenditures and, therefore, not deductible. It is true that the amount of the item of $555.69, wages and expenses of an expert mechanic in installing new press, was greater because of the condition under which the installation was made, but we think it would be going too far in this case to say that only installation expenditures which were ordinarily required should be capitalized, but that those which arose on account of some unforeseen contingency should be treated as deductible in*2166 the year in which made. Doubtless, in installation and construction work it is not unusual for a job to be completed under other than ideal conditions, and, therefore, we think it would be going into the realm of speculation and impractical theories to say that only ideal costs should be capitalized.
Reviewed by the Board.
Judgment will be entered under Rule 50.