*2027 A broker's commission paid by the petitioner as lessor for obtaining a lease is not deductible in the year paid as an ordinary and necessary business expense, but is in the nature of a capital expenditure which is deductible pro rata each year as the lease is exhausted. The unpaid portion of the commission which the petitioner was obligated to pay also held to be properly included as a part of the capital cost of the lease in computing the yearly deduction for exhaustion, although the petitioner was on the cash receipts and disbursements basis of accounting.
*973 This is a proceeding for the redetermination of a deficiency in income tax for the year 1927 in the amount of $624.38. The following errors are alleged in the petition:
1. The Commissioner of Internal Revenue has disallowed as a deduction, as an ordinary and necessary business expense, a certain payment of $5,000.00 made to a real estate broker and representing an installment payment of commission for leasing a certain real property of the taxpayer*2028 for the term of forty years.
2. The Commissioner, in lieu of this deduction has allowed the taxpayer a deduction of $375.00 representing 1/40 of $15,000.00, to total commission accrued on the transaction and of which the aforesaid $5,000.00 payment made in the year 1927 constituted a part.
By motion made on behalf of petitioner, which was duly granted, the proceeding was submitted on the pleadings.
*974 At the hearing the respondent moved to amend the answer to allege that the deficiency should be increased by allowing as a deduction in the taxable year a proportionate part of $5,000 rather than a proportionate part of $15,000. This motion to amend the answer was granted.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of California, with its principal place of business at 625 Market Street, San Francisco, Calif.
The petitioner maintains its accounts and made its 1927 tax return on the basis of actual receipts and disbursements.
The petitioner, in the year 1927, paid the sum of $5,000 as commission to a broker for services in leasing a certain real property belonging to it.
In computing the deficiency the respondent*2029 disallowed an amount of $4,625 of this $5,000 claimed by the petitioner as a deduction on account of commissions paid. The respondent's explanation in the deficiency letter of this disallowance was as follows:
Commissions paid for obtaining a lease running for forty years have been prorated over the life of the lease. * * *
OPINION.
MCMAHON: The first question presented is whether the respondent erred in disallowing the deduction of $5,000 claimed by the petitioner as an ordinary and necessary business expense, representing the amount paid by the petitioner in the taxable year to a real estate broker as an installment payment of commission for leasing for a term of 40 years certain real property belonging to the petitioner.
This Board has decided, in , and other cases, that commissions paid by a lessor for procuring a lease do not constitute deductible expenses in the year paid, but are in the nature of capital expenditures which are deductible pro rata each year as the lease is exhausted. It is clear, then, that the respondent did not err in disallowing the claimed deduction. In lieu of the $5,000 deduction claimed by the*2030 petitioner, the respondent has allowed petitioner a deduction of $375, representing one-fortieth of $15,000. The respondent has thus held that the total commission on the lease was $15,000 and that the life of the lease was 40 years. There is no evidence to show that the respondent erred in so holding. This being true, the petitioner has failed to sustain his burden of proving that the respondent's determination was erroneous.
The respondent, however, affirmatively alleges that he erred in allowing as a deduction from income of the taxable year a proportionate part of $15,000. He claims that he should have allowed as *975 a deduction a pro rata portion of only $5,000, the amount of the commission which was actually paid in the taxable year. The respondent does not contend that the total amount of the commission contracted to be paid was less than $15,000. He has held that the commission contracted to be paid amounted to $15,000 and at the hearing counsel for the respondent admitted it. His contention is that since only $5,000 of the commission was paid in 1927, the petitioner is entitled to a deduction of a pro rata portion of only $5,000. While the contention was*2031 not renewed by respondent in his brief, we deem it advisable to discuss it briefly.
This situation, as we see it, is similar to one in which a taxpayer purchases a building upon the installment or deferred payment plan. It seems never to have been doubted that such a purchaser has a right to annual depreciation deductions computed in the usual manner of dividing the total capital cost by the number of years of probable life of such asset. Obviously, the total capital cost is determined without reference to the basis of accounting employed by the purchaser. The same reasoning holds true in the case of an exhaustible asset such as is involved in this proceeding. Since the total amount of the broker's commission, both that portion already paid and that portion contracted to be paid, constituted a part of the capital cost of the lease, it is our opinion that the respondent did not err in prorating the full amount of the commission, $15,000, over the life of the lease, 40 years.
There being no showing that the deficiency of $624.38, as determined by the respondent, is incorrect, such determination is approved.
Judgment will be entered accordingly.