*1797 1. Due to the bad faith or incompetence of a contractor labor and materials furnished for the making of a certain alteration were wasted as the result of which the cost of the alteration was in excess of what it should have been and also in excess of the fair and reasonable value of such alteration when completed. Held, under the facts here presented, that such additional cost over what another contractor estimated the cost should be and its fair and reasonable value does not constitute a deductible loss.
2. Held that an amount paid by a lessee to his sublessee for cancellation of a sublease constitutes a capital expenditure and therefore is not allowable as a business expense.
*789 This proceeding is for the redetermination of deficiencies in income tax of $4,651.80, $1,403.53, and $986.24 for 1922, 1923, and 1924, respectively. The only matters put in issue by the petition are (1) the respondent's failure to allow as a loss in 1923 the amount of $13,187.99 representing the difference between*1798 the cost of making certain alterations in buildings, of which Weinstein was lessee, and the amount which it should have cost to make such alteration and which was also the fair and reasonable value thereof when completed, and (2) the respondent's failure to allow as a deduction in 1923 the amount of $5,000 paid in that year by Weinstein to his sublessee, for the cancellation of the sublease. From the pleadings and from an agreed statement of facts which was filed at the hearing, we make the following findings of fact.
*790 FINDINGS OF FACT.
The petitioners are the executors of the estate of Morris Weinstein, deceased, and each has his principal office in New York City.
During 1922, 1923, and 1924 Morris Weinstein, hereinafter referred to as the decedent, was engaged in the real estate business and this was his only business. The decedent's books were kept on the cash receipts and disbursements basis and his income-tax returns were filed on the calendar year basis.
The decedent was the lessee of the entire premises located at 140-142 West 30th Street, New York City. These premises consisted of a plot of ground approximately 50 feet in the front and the rear by*1799 181 feet in depth on the westerly side and 176 feet in depth on the easterly side. The decedent undertook the alteration of the improvements on this parcel of real estate so as to convert them from two 5-story tenement houses into a 5-story business building for store and factory purposes.
The decedent contracted with one Abraham Silverson to conduct the alteration work on a cost-plus-commission basis. Actual operations began about September, 1922. The entire job was left in the hands of Silverson who employed the labor and purchased the materials. The labor was paid directly by Silverson, but the decedent from time to time advanced the money therefor. Bills for materials were paid by the decedent. During most of the time that Silverson was conducting the alteration the decedent was in Europe.
On or about February 7, 1923, the contract with Silverson was terminated and one Herman Knobloch was employed to complete the alteration. From October, 1922, and up to and including February 7, 1923, Knobloch repeatedly inspected the job for the owner. Knobloch had been engaged in the real estate business for upwards of 25 years and during this time had taken charge of numerous*1800 construction and alteration jobs actively supervising such work and contracting for the labor, materials and supplies used in the work. He was also experienced in preparing estimates for building alterations and in appraising property.
In December, 1922, Silverson permitted the second floor of the premises to become overloaded with refuse, consisting mostly of old plaster and of considerable weight, and due to this the building caved in in the center and the two buildings had to be shored from one end to the other.
In January, 1923, an extension roof which was to be put in the court between the front and rear buildings of the premises was found not to comply with the plan, in that it did not allow for a fire exit from the front building as required by law. This extension roof, after being completed to framing and roof boards, was taken *791 down and rebuilt. After this roof had been rebuilt it was again found to be defective and was again taken down and rebuilt in compliance with the plan and the requirements of the Department of Building.
The roof of the extension on the easterly building, which was built as a fireproof exit, was made of cinder concrete. The concrete*1801 was put down in freezing weather and froze and had to be taken up and replaced.
Silverson put down a new flooring on the ground floor of the premises without proper examination of the timbers on which the flooring was laid. After Knobloch took charge and upon examining the beams he ascertained that the beams of the entire rear floor were rotten at both ends. The flooring was ripped up, new beams were put in and the floor was reset.
Silverson caused to be made a cut in the middle wall of the building on the premises to allow for a stairway to the extent of six feet by fourteen feet. A girder was placed and the hole thus cut was brick finished for the stairway. After this was done it was ascertained that the hole was cut about fifteen feet away from the place at which it should have been according to the plans. This opening had to be rebuilt and a new opening cut for the stairway, new girders bought and placed, and the opening brick finished, in order that the opening would be four feet in the clear.
During the inspections made by Knobloch prior to the time he took charge, he ascertained that there were more men employed on the job than the progress of the job warranted*1802 and that the decedent was paying for the time of a great many workmen who did no work.
When Knobloch took charge of the alteration the progress made in the construction was substantially as follows:
(a) The inside of the front building had been removed leaving the wall and floor beams.
(b) As to the rear building, the side walls had been taken down to a height of about 16 feet and roof beams placed.
(c) A new front wall had been erected on the rear building and a piece of wall adjoining the front and rear buildings where the court existed.
(d) In the front building there was an elevator shaft built up to the roof. Side windows had been cut in and window frames placed on both east and west sides of the building.
(e) A new front wall had been erected and window frames set.
(f) As to the upper portion of the buildings the roof beams had been raised and the upper portion of this wall beside the parapet wall remained to be built.
(g) There were a few new floor beams in the building.
The alteration was about 33 1/3 per cent finished when Knobloch took charge.
The entire cost of the alteration, in the opinion of Knobloch, should not have exceeded $45,000, which*1803 was its fair and reasonable value when completed.
*792 The entire cost of the alteration was $58,187.99. The respondent has treated the entire amount as a capital expenditure and allowed depreciation thereon based upon the life of the lease.
The decedent was the lessee of the premises located at 151-153 West 29th Street, New York City, under a lease dated June 9, 1919, and made to him by Georgette W. Brown and another. He in turn rented or sublet the premises to various tenants.
One of the tenants was Samuel Lewis, who occupied a portion of the premises located at 153 West 29th Street under a written lease the term of which began on August 1, 1919, and expired on July 31, 1922. The lease also gave Lewis the privilege to renew for a further term of two years. The decedent and Lewis by further written agreement dated November 10, 1920, agreed that Lewis was to have a further option to renew the term of his lease from August 1, 1924, to July 31, 1925, provided that on or before April 1, 1924, he gave notice in writing to the decedent of his desire to renew the lease. On December 31, 1923, the decedent paid to Lewis the amount of $5,000 for the cancellation of the*1804 lease held by Lewis.
On or about May 1, 1924, the entire premises at 151-153 West 29th Street were sold by Georgette W. Brown and another, the owners, to Stonemor Realty Co., a corporation organized under the laws of the State of New York, and of which the decedent was the sole stockholder. On or about May 1, 1924, the decedent assigned his outstanding leasehold in the premises to the Stonemor Realty Co. and that company held the premises free of said lease. The assignment was delivered simultaneously with the acceptance of the deed by the Stonemor Realty Co. and was made by the decedent in order to clear the title to the premises so that the sellers would take back a purchase money mortgage. The decedent received no money consideration for making the assignment of the lease.
The respondent has disallowed as a deductible expense in 1923 the amount of $5,000 paid by the petitioner to Lewis for the cancellation of the lease. He has treated the item as a capital expenditure to be amortized under the remaining full renewal term of the lease to July 31, 1925, and has allowed as a deduction four-eighteenths thereof in 1924 up to the date of the assignment of the lease.
OPINION.
*1805 TRAMMELL: The petitioners contend that there should be allowed as a loss incurred in business in 1923 the amount of $13,187.99 representing the difference between the cost of the alteration of the premises at 140-142 West 30th Street, $58,187.99, and the fair and reasonable value of the alteration when completed, $45,000. The respondent contends that his action in determining that the entire amount of the $58,187.99 constituted a capital expenditure to be *793 exhausted over the life of the lease is correct and should be sustained. The respondent raises no question as to the business nature of the transaction. We think that the remodeling of the building to make it suitable for rental purposes, the petitioner being in the real estate business, may fairly be said to be in connection with his business.
There is no controversy as to the capital nature of the expenditure. The only question is whether under the circumstances here presented the excess of the cost of the alteration over the fair and reasonable value of it when completed constitutes a loss incurred by the decedent in his business in 1923.
This contention of the petitioner must be denied. *1806 We have held that the fact that an asset may cost more than its real value or that a building may cost more to erect than it should cost does not give rise to deductible loss. The expenditure in the acquisition of such property is still cost and no loss in respect thereof may be recognized until the sale or other disposition of the property. See ; , and cases therein cited. .
The petitioner have cited the case of , in support of their view that they are entitled to the deduction claimed. But conceding for the sake of argument in this case that the views of the court in that case are correct and it is not necessary for us to express an opinion on the question as to whether or not we agree, there is not sufficient evidence in this case in any event to warrant the deduction. The record does not disclose that the difference between what the alterations and improvements should have cost or the fair market value when completed and what they actually*1807 cost represents a loss attributable to the parts destroyed and rebuilt and to the fact that wages were paid certain employees who did no work. Conceding in this case that any alterations or improvements once installed which were destroyed and which were rebuilt and any money which was paid to employees who did no work whatever constituted a loss, the record here does not disclose what that loss was.
It seems clear that the difference between what one contractor would estimate that a job should cost and what the work performed by another contractor actually cost is not a fair measure for determining a loss. We must recognize the fact that contractors of experience frequently disagree in their estimates of costs of a building or alterations and we think clearly that a taxpayer would not be entitled to a loss because one contractor would estimate that the improvements or alterations should cost one amount when another contractor would estimate different amounts.
*794 If the petitioner had shown the cost of these destroyed parts or had shown us the amount paid out to employees who did no work whatever, a different argument might have been presented in this case. But that*1808 situation is not before us.
So many different factors enter into the question of the fair and reasonable value of improvements, additions or alterations when completed that we do not think that such value should be used as a basis in determining whether a loss has been sustained. We must keep in mind the principle that the income-tax laws do not recognize a deductible loss until the property has been sold or disposed of. A taxpayer may pay more for property than it is worth, but the law does not recognize this as a loss.
The remaining question is whether there should be allowed a deduction in 1923 of $5,000 representing the amount paid by the decedent on December 31, of that year to a sublessee for the cancellation of the sublease. The petitioners contend that the amount was an expense incurred by the decedent in the ordinary course of his business and therefore is allowable as a deduction. The respondent contends that the amount constituted a capital expenditure and is not allowable.
In , we held that an amount paid by a lessor, who was the owner of property, to his lessee for the cancellation of a lease on the property constituted*1809 a capital expenditure and therefore was not deductible as a business expense. While in the instant case the decedent was not the owner, but was a lessee, we perceive no valid reason why our holding in the Miller case is not applicable here. His relation to his sublessee is substantially no different from the relationship of owner and lessee. The contention of the petitioners is accordingly denied. See also , and .
In their brief the petitioners for the first time take exception to the determination by the respondent as to the period over which the $5,000 paid for the cancellation of the lease is to be amortized or exhausted and also to the respondent's treatment in 1924 of the unamortized or unexhausted portion of the amount remaining at May 1, 1924, when the decedent assigned his lease to the Stonemor Realty Co., of which he was the sole stockholder. These additional matters were not issues in the case and while the pleadings were amended at the hearing they were not amended or offered to be amended so as to raise such matters. We therefore have not considered the additional*1810 matters presented by the brief.
While the petition alleged that the tax liability for 1922 was involved, no error was assigned as to the determination of such liability. *795 As no evidence was submitted with respect to the year 1922 and no reference made thereto in the brief of the petitioners, the respondent's determination for that year is approved.
Reviewed by the Board.
Judgment will be entered under Rule 50.
PHILLIPS dissents.