*1349 1. The amount paid by petitioners in 1923 as consideration for the cancellation of a lease on property owned by them, held not a business expense deductible entirely from income for the year in which paid, but a capital expenditure, recoverable through deductions prorated over the unexpired term of the canceled lease contract.
2. Held, the cost of permanent partitions installed during 1923 in the Borland Building, which did not increase the value of the building as a whole, did not constitute an ordinary business expense deductible in its entirety from income of said year, but was a capital expenditure to be recovered through deductions spread ratably over the remaining life of the building.
3. A commission paid to a real estate broker in 1924 for negotiating a long-term lease on property owned in part and held under lease in part by two of the petitioners constituted a capital expenditure, to be spread ratably over the life of the lease contracts.
*539 These are consolidated proceedings for the redetermination of deficiencies*1350 in income tax as follows:
| Docket No. | Petitioner | Year | Deficiency |
| 31288 | Harriet B. Borland | 1923 | $6,552.84 |
| 31289 | Chauncey B. Borland | 1923 | 3,939.41 |
| 1924 | 5,857.76 | ||
| 31290 | Bruce Borland | 1923 | 3,865.63 |
| 1924 | 5,313.87 |
The issues are, (1) in all three cases, whether or not amounts paid by petitioners in 1923 to secure the cancellation of a lease on a portion of the Borland Building, owned by the petitioners, constituted expense deductible from gross income for the year; (2) in all three cases, whether or not the cost of installing partitions during 1923 in the Borland Building to suit the requirements of new tenants constituted a business expense deductible from gross income for said year; and (3) in the cases of Chauncey B. Borland and Bruce Borland, whether or not the amount of a commission paid in 1924 by the petitioners to a broker for negotiating leases on property owned in part and held under lease in part by them to a tenant for a term of 64 years and 4 months, is deductible from gross income for said year.
FINDINGS OF FACT.
The following facts were stipulated by the parties:
The petitioners, a mother and her two sons, during the*1351 taxable year 1923 owned the Borland Building, which is an 18-story store and office building located at the southwest corner of Monroe and LaSalle Streets, Chicago, Illinois. At all times referred to in these cases, the petitioner, Harriet B. Borland, was the owner of the north 110 feet of said building, and Chauncey B. Borland and Bruce Borland each was the owner of an undivided one-half interest in the south 78 feet of said building.
In 1923 the Chicago Surface Lines occupied the entire sixth, seventh and eighth floors of said Borland Building and practically all of the south 78 feet of the tenth floor, under a ten-year lease expiring February 1, 1927. In 1923 both the lessors and the lessee *540 desired to cancel the lease. An agreement was reached under which the lessors paid $36,292.20 to the lessee, and the lease was terminated and canceled. Harriet B. Borland's share of the payment was $19,960.71; Chauncey B. Borland's share was $8,165.75; and Bruce Borland's share was $8,165.75. Each petitioner deducted his or her share of the payment from gross income for 1923 as a business expense, and in each case the respondent disallowed the deduction and spread it over*1352 the unexpired term of the lease.
When the Chicago Surface Lines began their tenancy in the Borland Building, partitions were erected by the petitioners, some ceiling high and some transom high, to suit the needs of the tenant. When the lease was canceled these partitions were of no value in adapting the space to the tenants to whom the space was subsequently leased. New partitions were erected for the tenants when they moved into this space. Harriet B. Borland's share of the cost of the new partitions erected in 1923 was $8,951.46; Chauncey B. Borland's share of the cost of the new partitions erected in 1923 was $4,456.47; and Bruce Borland's share of the cost of the partitions erected in 1923 was $4,456.47. Each petitioner deducted his or her share of the cost of erecting partitions in 1923 as an expense of that year. The respondent in each case disallowed the deduction and prorated the cost of the partitions over the remaining life of the building as a capital expenditure.
In 1923, before the lease to the Chicago Surface Lines was canceled, the lessee stated definitely to the lessors that it would seek space in another building at the end of its lease where it could have*1353 its entire office on one floor. Several tenants of the Borland Building, including Ames, Emerich & Company and Wm. R. Compton & Company, were demanding more space. Ames, Emerich & Company wished an entire floor; Wm. R. Compton & Company wished one-half a floor. The building was about 100 per cent occupied. The lessors could not grant these demands unless some leases were terminated. These demands of tenants who seemed more permanent than the Chicago Surface Lines induced the lessors to pay a cash bonus to the Chicago Surface Lines for the cancellation of the lease.
Immediately following the vacation of the premises by the Chicago Surface Lines, Ames, Emerich & Company moved from another floor of the building and occupied the entire sixth floor. About the same time Wm. R. Compton & Company moved from its space on another floor and occupied the entire north half of the eighth floor.
The shifting of tenants caused an unusual amount of changes in partitions during the year 1923. The partitions constructed were no more permanent than the ordinary partitions set up for tenants.
*541 It is the universal practice of building owners in Chicago to adjust partitions to*1354 suit the needs of tenants. The Borland Building is now 26 years old.
In 1924 the petitioners, Chauncey B. Borland and Bruce Borland, were the owners in fee of certain improved real estate on South Dearborn Street, Chicago, Illinois, and were the owners of a leasehold on adjoining land. The remaining term of the leasehold was 64 years and 4 months. In 1924 they executed two leases covering the fee and leasehold for a term of 64 years and 4 months. They paid $38,000 as a commission to a real estate broker in securing said leases. They kept their books and filed their income tax returns on the cash receipts basis. Each petitioner deducted $19,000 (one-half of $38,000) as a business expense in 1924 in the operation of these properties. The respondent disallowed each deduction in 1924 and spread it over the term of the lease.
In addition to the foregoing stipulated facts, the petitioners offered oral testimony to establish the following facts:
The space in the Borland Building vacated by the Chicago Surface Lines in 1923 was not all leased again during that year. It was subsequently occupied by seven separate tenants, four moving in from other parts of the building and three*1355 from the outside. The new leases made of this space were not all for the same period of time; they varied from three to five years.
The Borland Building bears a good reputation in Chicago, and has desirable tenants who usually stay five, ten or fifteen years. The petitioners considered that 1923 was an opportune time to fill the Surface Lines space with smaller tenants who would be more permanent. The petitioners were moved to secure cancellation of the lease to the Chicago Surface Lines in 1923 because it was believed they could get more desirable tenants who would pay more rent.
The partitions subsequently built in the space vacated by the Surface Lines were constructed of building tile and covered with plaster. They were firmly fixed to the building, "tightened" to the floor and ceiling; they were soundproof and could not be swayed or moved. When it became necessary to move the partitions, they had to be wrecked. They were permanent partitions, in no case movable or temporary. When partitions were put in for a new tenant, it was with the understanding that such partitions would remain for the term of the lease. In order to secure leases it was necessary to arrange*1356 the partitions to suit the desires and needs of the new tenants. In the case of half-floor tenants or those occupying 3,000 feet or more, the partitions were sometimes changed during the term of their leases in order to rearrange their space. The changing of partitions in office buildings in Chicago is a problem common to all owners of such property.
*542 The Borland Building has, on an average from year to year, forty or fifty tenants when it is filled. In every year of its operation some of its partitions have been changed for tenants. The value of the Borland Building did not fluctuate according to the amount expended in each year for partitions. The money expended in 1923 for partitions did not affect the value of the building as a whole.
OPINION.
TRAMMELL: The first issue here, which is common to all three of the present consolidated cases, is whether the aggregate amount paid by the petitioners in 1923 to secure cancellation of the lease to the Chicago Surface Lines on a portion of the Borland Building constituted business expense deductible from gross income for that year, or whether the amount should be treated as a capital expenditure, to be returned through*1357 deductions prorated over the unexpired term of the canceled lease. Each of the petitioners deducted his or her proportionate part of the payment from 1923 income, and contends that the action of the respondent in disallowing these deductions was erroneous, citing in support of such contention our decision in Higginbotham-Bailey-Logan Co.,8 B.T.A. 566">8 B.T.A. 566.
In Henry B. Miller,10 B.T.A. 383">10 B.T.A. 383, we specifically held that an amount paid by a lessor to his lessee as consideration for the cancellation of a lease was a capital expenditure, recoverable through deductions spread over the unexpired term of the lease, and in effect overruled our prior contrary decision in Higginbotham-Bailey-Logan Co., supra. In Charles B. Bretzfelder et al., Executors,21 B.T.A. 789">21 B.T.A. 789, we cited with approval and followed the Miller decision in holding that an amount paid by a lessee to his sublessee for cancellation of a sublease constituted a capital expenditure, and therefore was not deductible as a business expense.
An amount paid by a lessor as consideration for the cancellation of a lease represents the cost to the lessor of acquiring a valuable property*1358 right, namely, the right to the possession, enjoyment and use of his property for the remaining unexpired term of the lease, and the cost of such a capital asset should be returned through deductions spread over the life of the asset, that is, the unexpired term of the canceled lease. In its nature such an expenditure is not fundamentally different from the payment of a sum of money as a commission or other expense to procure a lease. This principle was stated by us in Julia Stow Lovejoy,18 B.T.A. 1179">18 B.T.A. 1179, where we said at page 1182:
In its essence such a disbursement is not unlike bond discount, prepaid rent, cost of acquiring of disposing of a leasehold or term contract and many other *543 transactions. They should be spread over the definite period of the loan, the lease, or contract. [Citing authorities.] This is on the theory that they result in property of a sort and its cost is being exhausted proportionately over a period of years * * *.
For the reasons indicated and on authority of the decisions above cited, the respondent's action on the first issue is approved.
The second issue, which is also common to all three of the present cases, concerns*1359 the proper method of treating the expenditures made by the petitioners in 1923 for installing new partitions in the space formerly occupied by the Chicago Surface Lines in the Borland Building. These partitions were constructed of building tile and plaster, securely fastened to the building, and were intended generally to remain in use at least during the life of the leases. They were not temporary or removable partitions, but did not increase the value of the building as a whole. The petitioners deducted from 1923 income as a business expense their respective shares of these expenditures, which deductions were disallowed by the respondent and the amounts spread over the remaining life of the building as capital expenditures. We have repeatedly held that such expenditures are capital and are not deductible as a business expense, whether or not they increase the value of the property. Popular Dry Goods Co.,6 B.T.A. 78">6 B.T.A. 78, 83; Bonwit Teller & Co.,17 B.T.A. 1019">17 B.T.A. 1019, 1026; Charles B. Bretzfelder et al., Executors, supra, at page 793. On the second issue, the action of the respondent is affirmed.
The third issue, which pertains only*1360 to the cases of Chauncey B. Borland, Docket No. 31289, and Bruce Borland, Docket No. 31290, is whether petitioners are entitled to deduct from gross income for 1924 as a business expense the amount of $38,000 paid by them in that year to a real estate broker as a commission for securing two leases on property owned in part and held under lease in part by petitioners, for a term of 64 years and 4 months. These petitioners kept their books and reported their income for tax purposes on the cash basis.
It is our settled opinion that a commission paid for negotiating a long-term lease is not a business expense, deductible entirely from income of the year in which paid or accrued, but is a capital expenditure, recoverable through deductions spread ratably over the life of the lease; and this rule is applicable whether the lessor keeps his books and reports his income by the accrual method or on the basis of cash receipts and disbursements. Bonwit Teller & Co., supra, p. 1024; Central Bank Block Assn.,19 B.T.A. 1183">19 B.T.A. 1183; affd., *1361 57 Fed.(2d) 5; Sigmund Spitzer,23 B.T.A. 776">23 B.T.A. 776, 778; Starr Piano Co.,26 B.T.A. 835">26 B.T.A. 835. Cf. Julia Stow Lovejoy, supra;Richard G. Babbage et al., Executors,27 B.T.A. 57">27 B.T.A. 57.
*544 The respondent disallowed the deductions claimed by the petitioners as business expense and prorated the commission in question over the life of the lease contracts. The respondent's action on this point is approved.
Judgments will be entered for the respondent