1930 BTA LEXIS 2445">*2445 A provision in a lease under which the lessor has the option of canceling the lease prior to the expiration of the term therein specified is no ground, until exercised, of allowing a deduction to the lessee on account of the cost of the improvements other than over the life of the improvements or the term of the lease, whichever is shorter.
19 B.T.A. 232">*232 This proceeding involves a deficiency in income tax for 1925 in the amount of $245.33. The only issue presented is the basis for amortizing improvements made by petitioner (lessee) upon leased property.
FINDINGS OF FACT.
The petitioner is a New York corporation with its principal place of business in New York City.
On February 7, 1924, petitioner secured a lease on certain premises for a period of 10 years beginning May 1, 1924, and ending May 1, 1934. The lease contained the following provisions with respect to improvements and the termination of the lease:
PERMISSION is hereby granted the Tenant, at its own cost and expense, to make alterations and improvements in the premises, and, if any alterations1930 BTA LEXIS 2445">*2446 be contemplated to the front of said building, plans and specifications thereof 19 B.T.A. 232">*233 shall first be submitted to and approved by the Landlord before such work is commenced, and all alterations and improvements shall be made in conformity with the rules and regulations of all Municipal, State and Federal Departments having jurisdiction.
* * *
IT is further convenanted and agreed that the Landlord shall have the right to terminate and end this lease on or after May 1, 1926, first, in case a contract of sale of the premises is entered into; second, in case it is desired to demolish the building, in either case by giving ninety (90) days' prior notice to the Tenant of his intention so to do. In the event that said notice is given, the term created by this lease shall thereupon cease at the expiration of said ninety (90) days in the same manner and to the same effect as if that were the expiration of the original term of this lease. If pursuant to such notice this lease shall be terminated on May 1, 1926, then the Landlord agrees to pay the Tenant, upon surrender of the premises, the cost, not exceeding Six thousand (6000) Dollars, of any alterations and improvements that1930 BTA LEXIS 2445">*2447 the Tenant makes in the year 1924, provided receipted bills showing the cost thereof are submitted to the Landlord by January 1, 1925. If the lease shall terminate thereafter, then, upon surrender of the premises, the Landlord will pay the Tenant according to the following schedule:
| Term ended between - | Percentage of cost | But not |
| of alterations | exceeding the | |
| and improvements | sum of - | |
| to be paid | ||
| May 2, 1926, to May 1, 1927 1 | 90 | $5,400 |
| May 2, 1927, to May 1, 1928 1 | 80 | 4,800 |
| May 2, 1928, to May 1, 1929 1 | 70 | 4,200 |
| May 2, 1929, to May 1, 1930 1 | 50 | 3,000 |
| May 2, 1930, to May 1, 1931 1 | 40 | 2,400 |
| May 2, 1931, to May 1, 1932 1 | 20 | 1,200 |
| May 2, 1932, to May 1, 1933 1 | 10 | 600 |
| May 2, 1933, to May 1, 1934 1 | None. | None. |
Provided, however, that in every case the alterations and improvements are made in the year 1924 and receipted bills showing the cost thereof are submitted to the Landlord by January 1, 1925.
Pursuant to the foregoing provisions, petitioner made alterations and improvements in 1924 at a cost of $10,874.40. The option on the part of the lessor to cancel the lease has never been exercised and1930 BTA LEXIS 2445">*2448 the petitioner is still in possession of the leased premises.
The petitioner claimed a deduction in 1925, on account of the amortization of the cost of the foregoing improvements, on the basis of the following computation:
| Cost of alterations | $10,874.40 |
| Amount to be paid if canceled May 1, 1926 | 6,000.00 |
| Loss on improvement May 1, 1924, to May 1, 1926 | 4,874.40 |
| Loss applicable May 1, 1924, to December 31, 1925 (20/24) | 4,062.00 |
| Less previously charged off in 1924 | 1,087.44 |
| Unused loss deducted in 1925 | 2,974.56 |
OPINION.
SEAWELL: The general rule for the amortization of the cost of improvements made by a lessee upon leased premises is that such cost shall be spread over the life of the improvements or the term of the lease, whichever is shorter. . We do not think the foregoing rule should be varied merely because there exist provisions under which the lessor may cancel the lease prior to the expiration of the term therein specified. When and if this contingency occurs, it will1930 BTA LEXIS 2445">*2449 then be time enough to consider the deduction allowable on account thereof. Suffice it to say that it has not occurred in the case at bar and there is no contention that the life of the improvements is less than the 10-year term of the lease.
Judgment will be entered for the respondent.
Footnotes
1. Inclusive. ↩