*967 These proceedings involve deficiencies in income tax of $2,520.01 for 1924, $2,491.32 for 1925, and $1,587.05 for 1926. The figure to be used as the basis of a reasonable allowance for depreciation of petitioner's interest in two buildings is in issue for all years; petitioner's right to deduct attorneys' fees paid in procuring a tax adjustment is raised for 1925.
FINDINGS OF FACT.
Petitioner is an individual residing in Kansas City, Mo. Prior to 1918 he, with his brother, A. M. Gloyd, was a member of a partnership engaged formerly in the lumber business and later in the real estate business.
The partnership owned a two-thirds interest in an office building known as the Gloyd Building, located at 921-923 Walnut Street, Kansas City. The value of the building without the land was $350,000 on May 22, 1922.
The partnership also owned a warehouse known as the Ward or Traders' Building, on the southwest corner of Nineteenth and Campbell Streets, Kansas City. The value*2291 of the building without the land was $400,000 on May 22, 1922.
In 1918 A. M. Gloyd died, and petitioner, the surviving partner, undertook to wind up the affairs of the partnership under court direction. Its real estate, including the Gloyd and Ward buildings, was, on October 30, 1920, sold at public auction. In October, 1920, less than a month prior to this sale, petitioner and another brother, S. M. Gloyd, incorporatedthe Gloyd Realty Co. for the purpose of bidding up or buying in the partnership's interests in the two buildings. The capital stock of the Gloyd Realty Co. was $50,000, represented by 500 shares held as follows:
| Shares | |
| F. E. Gloyd | 330 |
| T. G. Gloyd | 44 |
| S. M. Gloyd | 125 |
| G. G. Read | 1 |
At the sale held October 30, 1920, said company did buy the partnership's interests in the two buildings for $700,000, petitioner advancing three-fourths and S. M. Gloyd one-fourth of the necessary money. The widow of the deceased partner contested the sale, which was finally approved by the Supreme Court of Missouri in May, 1922. As surviving partner, petitioner had managed the properties pending final approval of the sale, and after such approval he deeded*2292 them to the Gloyd Realty Co., which immediately dissolved, and on May 22, 1922, made distribution of assets to its stockholders. In this manner petitioner obtained an undivided three-fourths interest in the Ward Building and a one-half (3/4 X 2/3) interest in the Gloyd Building, which he continued to hold throughout the years 1924, 1925, and 1926.
*968 In the computation of petitioner's taxable income for the said years the Commissioner of Internal Revenue allowed annual depreciation on the two buildings at the rate of 2 1/2 per cent on $475,000, "representing the cost to the corporation, Gloyd Realty Company, of the buildings instead of on the cost of such buildings to the partnership." Petitioner's tax return for 1922 and prior years included no loss or gain from sale or a liquidating dividend from the corporation.
On October 6, 1925, petitioner paid to a law firm of Washington, D.C., $2,457.17, representing three-fourths of the amount of a fee charged for services in resisting a claim for additional taxes asserted by the Commissioner against the Gloyd Realty Co. after its dissolution. S. M. Gloyd paid the other one-fourth. This sum was disallowed as a deduction from*2293 petitioner's gross income for 1925.
OPINION.
STERNHAGEN: Both parties agree that for the years in question, 1923, 1924, and 1925, a reasonable allowance for exhaustion, wear and tear and obsolescence of petitioner's property in the Gloyd and Ward buildings is measurable at the rate of 2 1/2 per cent. The dispute exists as to the proper base to which the percentage rate is to be applied, the respondent having used $475,000 for the depreciable value of the entire two buildings and petitioner claiming $1,200,000 as their value, $350,000 for the Gloyd and $850,000 for the Ward. The petitioner's fractional interests were one-half in the Gloyd Building and three-fourths in the Ward Building.
The respondent's determination was arrived at by using as the depreciable base an amount representing his allocation to the buildings out of the $700,000 paid for the land and buildings at the auction sale in 1920, the theory being that although that purchase was ostensibly by the corporation, the corporation must be disregarded as a mere fictitious cloak and the purchase treated as actually that of petitioner and his brother individually. If this were correct, the petitioner's base for depreciation*2294 would be the cost of his investment, and this would be his fractional part of the cost to be attributed to the buildings exclusive of the land. How the respondent computed the allocation of the $700,000 between land and buildings does not appear.
We can not find from the evidence that the corporation was other than a vital legal entity which did in the eyes of the law buy the property for $700,000, receive deeds for it and later distribute its assets, including these properties, to its stockholders, including petitioner. Since the distribution took place May 22, 1922, the petitioner then acquired his share of the property. Upon these juristic facts, the petitioner's basis is the value of his property when received by way of liquidation and not the cost to the corporation in 1920.
*969 The petitioner, taking the burden of proving the value of the buildings on May 22, 1922, has introduced various sorts of evidence, including the facts as to the age, nature and location of the buildings, the receipts from them and the opinions of experienced real estate dealers. As to the Gloyd Building, we are of opinion that the evidence supports the valuation claimed of $350,000, and*2295 that petitioner is entitled to deduct depreciation at the agreed rate of 2 1/2 per cent on his one-half interest of $175,000 or $4,375.
The evidence in respect of the Ward Building supports a value of $400,000. The witnesses who gave their opinions gave too little consideration to the fixed rentals and the duration and terms of the lease. For nine years the gross rent was fixed and the owner was required to bear substantial expenses. This would undoubtedly have held the value down in 1922 below the figure which might have been arrived at if the property were economically free. The evidence does not, and perhaps could not, supply a definite figure of value in these circumstances. We think that $400,000 is a fair market evaluation of the building. Petitioner's interest was $300,000 and his depreciation deduction for each year in therefore $7,500.
The petitioner's failure to treat the effect of the liquidation correctly in his earlier returns does not affect the depreciation deduction for the years now in issue.
The deduction of $2,457.17 paid in 1925 as attorneys' fees in adjusting the corporation's tax liability is proper. *2296 ; .
Judgment will be entered under Rule 50.