*2342 1. The petitioner purchased in fee certain Ohio real estate. Subsequently he executed a lease for 99 years, renewable forever, covering this property. At the time the lease was executed the lessees paid the petitioner, in consideration of the execution of the lease, an amount of cash. Held that such amount was income to the petitioner in the year in which received and was not a return of capital. Edward E. Haverstick,13 B.T.A. 837">13 B.T.A. 837, and O'Day Investment Co.,13 B.T.A. 1230">13 B.T.A. 1230, followed.
2. In the above mentioned lease the lessees contracted to pay a balance which petitioner owed upon the real estate. Held that such assumption by the lessees did not give rise to income to the petitioner at the time of the agreement in 1923, but that payments made under the agreement were income to the petitioner in the year in which paid.
3. Under the agreement above referred to the lessees paid amounts in 1924 and 1925. Held that, although the years 1924 and 1925 are before the Board, these amounts may not be included in petitioner's income for those years, since neither party has pleaded in this regard. Section 274(e), Revenue Act 1926.
*2343 4. Petitioner as lessor paid a real estate broker's commission for procuring the above lease. Held that such commission does not constitute a deductible expense in the year paid, but is a capital expenditure which is deductible pro rata each year as the lease is exhausted. Bonwit Teller & Co.,17 B.T.A. 1019">17 B.T.A. 1019, and Julia Stow Lovejoy,18 B.T.A. 1179">18 B.T.A. 1179, followed.
5. Petitioner as lessee under two 99-year leases, renewable forever, subleased the property covered by the two leases, in a single lease for 99 years, renewable forever. The sublessee paid petitioner a consideration in cash and notes good for their face value for the execution of the sublease. Held that such amount constituted income to the petitioner in the year received. Edward E. Haverstick, supra, and O'Day Investment Co., supra, followed.
6. Upon the evidence held that a fee paid to a broker by the sublessee under the above sublease was not one of the considerations for the execution of the sublease and was, therefore, not income to the petitioner.
7. Upon the evidence held that the amount of a check which as received by*2344 the petitioner in 1925, but was not cashed until 1926, was income to him in 1925.
8. Compensation received, under special contract, by the petitioner in 1925 from the city of Columbus, Ohio, for legal services in connection with certain gas litigation held, under the circumstances of this case, taxable income to petitioner, Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514, and David A. Reed,13 B.T.A. 513">13 B.T.A. 513, followed.
*719 This is a proceeding for the redetermination of deficiencies in income taxes determined by the respondent for the years 1923, 1924, and 1925 in the respective amounts of $1,613.71, $526.79, and $10,510.54.
The following errors are alleged in the petition with regard to the determination of the tax for the year 1923:
(1) The Commissioner erred in reporting additional interest and in transposing the petitioner's accounts thereto.
(2) The Commissioner erred in refusing the deductions for commissions paid by the petitioner on sale and lease of property.
(3) *2345 The Commissioner erred in reporting additional income for petitioner's property at 45 South Grant Avenue, respecting initial payment made by 99-year lessee.
*720 The following errors are alleged with regard to the determination of the tax for the year 1925:
(1) The Commissioner erred in reporting additional income for 1925 arising from check cashed by petitioner in 1926.
(2) The Commissioner erred in reporting as additional income a fee received by the petitioner from the city of Columbus, Ohio.
(3) The Commissioner erred in reporting additional interest as income to the petitioner and in transporting the petitioner's accounts with respect to interest received.
(4) The Commissioner erred in reporting as additional income the amount of $21,000 received by taxpayer on purchase price under 99-year lease of property.
FINDINGS OF FACT.
The petitioner is an individual residing at Columbus, Ohio. He has practiced law there since 1894, and during the last 15 to 20 years he has also engaged in dealing in real estate on his own account. In the past 10 years he has engaged in from 15 to 20 real estate transactions. His real estate transactions have not interfered*2346 with his law practice, but the two activities have at times been related, since his law clients were also involved in real estate transactions. Petitioner, however, did not have a real estate broker's license and did not receive real estate broker's commissions. He did not buy and sell real estate as agent for others. Petitioner invested his income from his law practice in real estate and of his present capital, the greater part was derived from his real estate dealings. In his income-tax returns for the years 1923, 1924, and 1925 he stated his profession as attorney at law. The petitioner kept his books upon the cash receipts and disbursements basis.
The petitioner was, during the year 1925, attorney for the executor of the estate of Helen C. Pacelli, an estate being administered through the probate court of Franklin County, Ohio. On November 6, 1925, the executor of the estate gave the petitioner a check for $15,000 for his services, but explained to petitioner that certain tax matters had not been settled and that petitioner might have to pay back to the estate an indeterminate part of this amount. Petitioner informed the executor that he could not use the check under*2347 those conditions, so he held it, and on January 2, 1926, the executor telephoned petitioner asking him why the check had not been cashed and informing him that there was no possibility of petitioner's having to refund any part of the $15,000, whereupon petitioner cashed the check. The information return filed by the executor of the estate of Pacelli showed that the payment of $15,000 was made in the year *721 1925. Petitioner reported this fee as income in the year 1926. The respondent included this amount in petitioner's income for the year 1925.
The city of Columbus, Ohio, is a self-governing city and its inhabitants created their own charter. It has a city attorney, which office is elective, and in 1923, 1924, and 1925 the salary of the city attorney was about $4,500 per annum. The city attorney in 1925 was Charles A. Leach. At that time there were two private companies furnishing gas to the city and questions of extension of service and rates arose. Litigation resulted between the city and the companies in the local court of common pleas, in the State courts, and in the Federal court. The cases in the Federal court went through a long hearing before a master and*2348 are now before the United States Circuit Court of Appeals. It was found necessary for the city of Columbus to have additional legal counsel in this litigation and its council, by an ordinance which was necessary, authorized its city attorney to enter into a contract with petitioner which provides, in part, as follows:
That pursuant to Ordinance No. 36,555 passed July 27th, 1925, said James M. Butler as party of the second part, agrees to perform services as an attorney at law and as special counsel under the direction of the City Attorney to assist in the conduct of the city's pending litigation involving gas rates and service in the City of Columbus, Ohio.
IN CONSIDERATION WHEREOF, the said party of the first part hereby promises and agrees to pay to said party of the second part the sum of $100.00 per day for office work based upon a total of eight hours of actual work for each days work in connection with said litigation, and $150.00 per day for work out of office by the said James M. Butler, whether in court or elsewhere, based upon an ordinary court day; provided, however, that work performed in the office work the City Attorney by said James M. Butler shall be construed*2349 to be office work and paid for at the rate of $100.00 per day. Said compensation shall be paid monthly upon voucher approved by the City Attorney from Department No. 6, City Attorney 010 C-44 Fund.
The petitioner entered upon his duties under the above contract in 1925 and during that year such duties were almost continuous. His duties have continued until the present time under the same contract and have been limited to the gas service and rates litigation of the city of Columbus, Ohio. He has not engaged in any general litigation for the city.
The petitioner, himself, had been city solicitor of Columbus, Ohio, at one time and he knew the duties of his position as special attorney. He and Leach were very close friends and, although petitioner recognized Leach's official authority, he was permitted to follow his own ideas as to his duties. A Mr. Laylil was also engaged in a capacity similar to that of petitioner and he worked under the direction of Leach.
The petitioner never gave interviews to newspaper reporters. Leach always did that. The petitioner examined no witnesses except *722 when directed by Leach. No major questions arose between Leach and petitioner*2350 as to the formulation of briefs, although Leach had the final word in such matters.
The matter of cross-examining witnesses was left to a large extent to the discretion of the petitioner, but if a question of method, policy or propriety arose petitioner would consult Leach.
In performing his duties the petitioner was not confined to any particular hours except when in court. Approximately 90 to 95 per cent of the work, however, was performed in the court room.
In the preparation of briefs the petitioner was assisted to some extent by Claude J. Bartlett, who was employed by petitioner at that time in his own private law practice. Petitioner also used his own stenographer in the preparation of briefs and other legal papers in this gas litigation. However, the work which petitioner's private office force performed was not of great consequence. When the work was pressing Leach furnished petitioner a special stenographer.
Petitioner is the only attorney who sat through the litigation in the gas cases who is now available to present the argument on behalf of the city of Columbus to the Circuit Court of Appeals. In 1925 petitioner received from the city of Columbus, as compensation*2351 for his services, the amount of $8,325. In 1926 he received as compensation $16,287.50.
The respondent included in the gross income of petitioner for the year 1925 an amount of $7,863 representing compensation paid petitioner by the city of Columbus, Ohio.
In 1923 the petitioner purchased, in fee, real estate in the city of Columbus, Ohio, known as 45 South Grant Avenue, at a total cost of $14,500. Petitioner paid $4,600 in cash and assumed a first mortgage of $5,000 and a second mortgage of $4,900. Petitioner subsequently paid off in full the second mortgage, and paid $124.37 of the first mortgage.
On October 1, 1923, the petitioner entered into an agreement with Otto W. Lintner and William E. MacDonald whereby petitioner leased the property to those parties for a period of 99 years, renewable forever, in terms of 99 years, at a rental of $1,000 per year, payable quarterly each year in advance. The lease contained an option to purchase the petitioner's interest in the property for $20,000 after June 1, 1953, and provided that as further rental and as consideration for the lease the lessees should assume the $4,875.63 unpaid balance of the first mortgage. The lessees, *2352 at the time the agreement was made, paid petitioner $1,000 in cash. The petitioner having theretofore paid $124.37 on the first mortgage, the lessees reimbursed petitioner to that extent at the time the agreement was consummated.
*723 The lessees were men of high character and were reliable. They were not wealthy however.
The lease was subsequently terminated by forfeiture in 1929 as the lessees failed to carry out their obligation. The lessees paid the following sums accruing under the mortgage which they assumed:
| 1923 | 1927 | 1925 | |
| Principal | $289.13 | $276.55 | $402.54 |
| Interest | 343.89 | 306.45 | 286.46 |
| 633.02 | 583.00 | 689.00 |
The above payments were not paid to petitioner, but were paid to a building and loan company.
The respondent increased the petitioner's 1923 income by the amount of $6,000, by including therein the total of $1,124.37 cash received by petitioner from the lessees and the balance of $4,875.63 of the first mortgage, which they assumed.
When the above mentioned lease was executed a real estate broker's commission of $980 was paid by petitioner to the Freeman-Neff Realty Co. or their representative, Walker. In his return*2353 for the year 1923 the petitioner claimed as a deduction an amount of $1,009.44 as expenses incident to the transactions in regard to the property at 45 South Grant Avenue, and also claimed a deduction of $935.92 in regard to some property at 33 South Front Street, making a total of $1,945.36. In the deficiency letter dated November 10, 1924, the respondent disallowed the claimed deduction of $1,945.36, holding it to be a capital expenditure. He did allow as a deduction from income of the year 1923, an amount of $19.65 representing commissions of $1,945.36 prorated over a period of 99 years.
On May 15, 1922, Thomas J. Dundon and Ella Dundon executed in favor of Peter A. Fitzpatrick a lease for 99 years from May 1, 1922, renewable forever in terms of 99 years, covering property in Columbus, Ohio, described as "Lot 12 of Heffner and Hayden's addition." The lease provided that the annual rental from May 1, 1922, to April 30, 1932, should be $1,175 and that the annual rental for the remainder of the term of the lease or any renewals thereof should be $1,500. These rents were to be paid quarterly each year in advance. The lease also granted the lessee, or his heirs or assigns, the*2354 option of purchasing the premises at any time between May 1, 1922, and April 30, 1932, for the sum of $23,500 in addition to the cash payment of $1,500 made at the time the lease was executed, or for the sum of $30,000 at any time after April 30, 1932, in addition to the cash payment of $1,500.
*724 By an instrument in writing, executed February 5, 1925, Peter A. Fitzpatrick transferred to the petitioner all his interest in the above lease.
The contract whereby petitioner agreed to purchase this lease was dated December 21, 1924, and petitioner therein agreed to pay Fitzpatrick $7,500 in cash.
On May 15, 1922, Thomas J. Dundon and Ella Dundon executed, in favor of Peter A. Fitzpatrick, a lease for 99 years from May 1, 1922, renewable forever, in terms of 99 years, covering property in Columbus, Ohio, described as "Lots 1, 2 and 3 in Heffner and Hayden's Addition," and also a strip of ground lying on the north side of said lots. The lease provided that the annual rental from May 1, 1922, to April 30, 1932, should be $3,750; that the annual rental from May 1, 1932, to April 30, 1942, should be $4,000; and that the annual rental for the remainder of the lease or any renewal*2355 thereof should be $4,250. These rents were to be paid quarterly each year, in advance. The lease also granted the lessee, or his heirs or assigns, the option of purchasing the premises at any time between January 1, 1930, and December 31, 1939, for the sum of $70,000 in addition to the cash payment of $5,000 made at the time the lease was executed, or for $80,000 in addition to the $5,000 cash payment, at any time after December 31, 1939.
By an instrument in writing executed February 5, 1925, Peter A. Fitzpatrick transferred to the petitioner all his interest in the above lease.
The contract whereby petitioner agreed to purchase this lease was dated January 4, 1925, and petitioner therein agreed to pay Fitzpatrick $30,000 in cash.
All of the property covered by the two leases to the petitioner is known generally as the Spring and Water Street property. Under the contracts the purchase price of these leases to the petitioner was $37,500, but by the time the petitioner gained possession of the properties he also had to pay Fitzpatrick some accrued rents, bringing the total cost to the petitioner to $38,516.25.
A real estate broker named Marcus Burnstine sought out the*2356 petitioner and informed him that he had clients who would be interested in the above described properties. He informed petitioner that if a deal were negotiated there would be no commission due him from the petitioner. It later developed that Burnstine was acting on behalf of S. M. Levy and A. J. Kobacker. The petitioner never authorized Burnstine to represent him.
On October 22, 1925, Levy and Kobacker entered into a written agreement with petitioner wherein they agreed, among other things, to pay Burnstine's commission of $6,000, and Burnstine endorsed *725 upon this agreement a release to petitioner concerning this commission.
This same agreement provided that petitioner would convey by a 99-year lease, renewable forever, all of this Spring and Water Street property to Levy and Kobacker, or, at their option, to an Ohio corporation to be organized by them.
Levy and Kobacker organized the Civic Center Realty Co. Pursuant to the agreement of October 22, 1925, there was executed, on November 9, 1925, to the Civic Center Realty Co., a 99-year lease of this Spring and Water Street property from November 1, 1925, renewable forever thereafter in subsequent terms of 99*2357 years. The petitioner at this time was busy in the gas litigation of the city of Columbus, and did not prepare the lease, although he did, of course, take part in the negotiations leading to its execution. The lease provided, in part: that one of the considerations for the execution of the lease was the assumption, by the lessee, of the broker's fee; that the annual rental from November 1, 1925, to October 31, 1928, should be $8,793.75; from November 1, 1928, to October 31, 1931, $10,434.37; from November 1, 1931, to April 30, 1932, $12,075.00; from May 1, 1932, to April 30, 1942, $12,650.00; and thereafter $12,900; that the lessees would, prior to November 1, 1930, erect certain buildings; that the lessees must keep all buildings in good repair; that the lessees should have the option to purchase the leasehold estates at any time after November, 1953, for $258,000 in cash, and that out of such payment the petitioner should purchase the property from the lessor under the two prior 99-year leases; and that any breach of the conditions imposed upon the lessees should be ground for forfeiture of the lease.
At the time the above lease was executed to the Civic Center Realty Co. that*2358 company, or Levy and Kobacker, paid petitioner $15,000 in cash and notes. The amount of $5,000 was paid in cash and two promissory notes of $5,000 each were executed, payable in 60 and 90 days respectively. These notes bore interest and petitioner took them to a bank and discounted them without any loss to him.
Marcus Burnstine was present at the time the contract was entered into between the petitioner and Levy and Kobacker for the execution of the lease. Burnstine wanted the contract to show that he was to receive a commission. Petitioner informed him that since he (petitioner) was not to pay the commission, he wanted Burnstine to sign a certificate on the contract releasing petitioner from all obligations in the matter of payment of the commission. Burnstine did sign such a certificate. Kobacker and Levy paid Burnstine the commission of $6,000 in the form of a note executed on November 9, 1925, payable 4 months after date. This note was paid in full. The payment of *726 this broker's fee was not consideration to the petitioner for the execution of the the lease.
The above lease executed by the petitioner to the Civic Center Realty Co. was subsequently terminated*2359 by forfeiture in 1929, as the lessee failed to carry out its obligations.
The respondent included in the income of the petitioner for 1925 the amount of $21,000 representing $15,000 cash and notes received by petitioner from the Civic Center Realty Co. and $6,000 representing the commission paid to Marcus Burnstine.
OPINION.
MCMAHON: At the hearing of this proceeding the petitioner specifically waived his assignments of error as to the year 1924. Judgment will therefore be entered for the respondent as to that year. Petitioner likewise specifically waived his assignment of error relating to depreciation as to the year 1923 on property at 51-53 North Front Street. The petitioner failed to adduce proof as to the first assignment of error as to 1923 and the third assignment of error as to the year 1925. No mention of those assignments of error was made in petitioner's brief and we assume that petitioner has abandoned these contentions. The questions raised in such waived and abandoned assignments of error will be resolved in favor fo the respondent.
In 1923 petitioner purchased in fee real estate known as 45 South Grant Avenue, Columbus, Ohio, at a total cost of $14,500. *2360 He paid $4,600 in cash and assumed a first mortgage of $5,000 and a second mortgage of $4,900. Petitioner paid off the second mortgage in full and also paid off $124.37 of the first mortgage. On October 1, 1923, the petitioner entered into an agreement with O. W. Lintner and W. E. MacDonald, Agreeing to lease the property to those parties for 99 years, the lease to be renewable forever in subsequent terms of 99 years at a rental of $1,000 per year. The lease contained an option to purchase the property at any time after June 1, 1953, for $20,000. By the terms of the lease the lessees were to assume the unpaid balance of $4,875.63 on the first mortgage. At the time the lease was executed the lessees paid petitioner $1,000 in cash and also reimbursed petitioner for his payment on the first mortgage in the amount of $124.37.
The respondent increased petitioner's reported gross income for the year 1923 by the amount of $6,000, representing the $1,124.37 cash paid to petitioner, and the unpaid balance of $4,875.63 on the first mortgage which the lessees agreed to pay.
The petitioner contends that the cash payment of $1,124.37 was not income to petitioner, that it was a return, *2361 in part, of the petitioner's *727 capital investment in the property, and that no income was derived by petitioner until he received the full amount of his original capital investment, or until the lease was forfeited in 1929. The petitioner also contends that the assumption of the mortgage by the lessees did not operate to increase petitioner's income, since this did not relieve the petitioner from liability on the mortgage. It is the view of the petitioner that even the payments later made by the lessees upon the mortgage are not income to petitioner, but simply operate to reduce the petitioner's capital investment.
The respondent contends that the lease for 99 years, renewable forever, is to be considered as any other lease and that the sums received by the petitioner are rental for the use of the capital asset of the petitioner and are properly includable in petitioner's gross income for 1923. Respondent contends that, even if the assumption of the mortgage by the lessees did not give rise to income to the petitioner, the sums actual paid by the lessees thereunder are income to the petitioner at the time paid. These payments, including principal and interest, amounted*2362 to $633.02 in 1923, $583 in 1924, and $689 in 1925.
Ralston Steel Car Co. v. Ralston,112 Ohio State 306; 147 N.E. 513">147 N.E. 513, is cited by petitioner in support of his position that the execution of an Ohio 99-year lease on property, renewable forever, is the equivalent of the transfer of the property in fee simple. In that case the Supreme Court of Ohio had before it the question of whether the lessee under a 99-year lease, renewable forever, similar to those involved in this proceeding, was possessed of a freehold estate in real property such as is subject to the laws of descent as an estate in fee.
The court, in its opinion, stated:
* * * It is provided by section 8597, General Code:
"Permanent leasehold estates, renewable forever, shall be subject to the same law of descent as estates in fee are subject to by provisions of this chapter."
This statute in in pari materia and leaves no doubt that a permanent leasehold is an estate of inheritance. * * *
* * *
* * * It is therefore not easy to see how the tenure under such an instrument differs from the tenure of a similar instrument which extends merely to the grantee, his heirs and*2363 assigns forever. The one is neither more nor less permanent than the other. The mention of successive terms of 99 years each, renewable forever, such renewals to become effective without any affirmative action on the part of the grantee, does not limit the perpetuity of the tenure, provided the conditions as to payment of rent and other covenants are faithfully observed. Some permanent leases are drawn in one form and some in the other. Any effort to show that a permanent lease to the grantee, his heirs and assigns forever, is a more permanent tenure than an instrument which mentions successive terms of 99 years, forever, must be upon refinements of reasoning which do not tend to promote substantial justice.
*728 If the foregoing reasoning is sound, the case of Stephenson v. Haines,16 Ohio St. 478">16 Ohio St. 478, becomes a valuable aid in determining the issues of this controversy. That case involved a permanent leasehold * * *.
* * * In discussing this instrument, Welch, J., at page 486, observed:
"* * * In other words, the transaction was equivalent to a sale and conveyance, with a mortgage to secure the payment of the purchase money."
*2364 In Weiss v. Wiener,279 U.S. 333">279 U.S. 333, the Supreme Court had under consideration a question involving the right of a lessee under Ohio 99-year leases, renewable forever, to deductions for depreciation on buildings erected on the land before the execution of the leases. The court, in denying lessee's right to such deductions, stated:
It does not matter that in Ohio, where the properties lie, these long leases are treated as in many respects like conveyances of the fee. The Act of Congress has its own criteria, irrespective of local law, that look to certain rather severe tests of liability and exemption and that do not allow the deductions demanded whatever the lessees may be called. We understand this to be the view taken by the Department for a long time and we are of opinion that it should not be disturbed. (Italics supplied.)
See Rosenberger v. McCaughan, 25 Fed.(2d) 699, in which certiorari was denied, 278 U.S. 604">278 U.S. 604.
It seems clear to us that the opinion of the United States Supreme Court is that a lessee under a 99-year lease, renewable forever, does not, by virtue of the execution of the lease, acquire any ownership*2365 of the property which is the subject of the lease, despite the fact that such leases are treated locally as in many respects like conveyances of the fee. In the instant proceeding the lease, which by its terms provides for the exercise of an option to purchase the property and does not bind the lessee to renew at the end of the term, negatives the theory of a conveyance of the fee at the time the lease was executed.
It is therefore our opinion that the instrument in question is no more than a lease and that the question as to whether amounts paid by the lessee under its terms and in consideration of its execution constitute income to the lessor is governed by the law applicable to other leases.
In Edward E. Haverstick,13 B.T.A. 837">13 B.T.A. 837, we held that amounts paid to a lessor under a lease containing an option to purchase were income to the lessor. In O'Day Investment Co.,13 B.T.A. 1230">13 B.T.A. 1230, we held that bonus money and rents paid under a 15-year renewable lease were income in the years in which they were paid.
The petitioner in the instant proceeding operated under the cash receipts and disbursements basis, and the amount of $1,124.37 which he*2366 received at the time this lease was executed was income to him at the time received. However, the assumption, by the lessees, of an *729 obligation to pay the remainder of $4,875.63 can not be considered income to the petitioner at the time of assumption. The petitioner was still liable under the mortgage and his liability was reduced only as payments were made on the principal of the mortgage by the lessees. But as such payments were made they did reduce petitioner's liability to the same extent and were income to petitioner when paid. In 1923 the lessees paid a total of $289.13 as principal accruing under the mortgage, and this will be included in petitioner's income for that year.
The lessees also paid upon this same mortgage $583 in 1924 and $689 in 1925. The respondent, in his brief, urges that these amounts should be included in income for those years. While it is true that we have before us the years 1924 and 1925, none of the petitioner's allegations of error with regard to the respondent's determinations of the deficiencies for those years go to the question of the income derived from this particular transaction, and the respondent has not affirmatively pleaded*2367 in this respect. In this situation we are precluded from including these amounts in petitioner's income for those two years. Sec. 274(e), Revenue Act of 1926. See D. N. & E. Walter & Co. et al.,10 B.T.A. 620">10 B.T.A. 620; H. D. & J. K. Croswell, Inc.,6 B.T.A. 1315">6 B.T.A. 1315; and E. O. Fippin,2 B.T.A. 350">2 B.T.A. 350.
The petitioner as lessor paid a real estate broker's commission of $980 for the securing of the above discussed lease.
The petitioner, in his return for 1923, claimed as a deduction an amount of $1,945.36 as expenses incident to two real estate transactions in 1923. Of this amount, $1,009.44 was claimed as expense incident to the leasing of the property at 45 South Grant Avenue This amount includes the real estate broker's commission of $980 paid by petitioner for securing the lease which we have discussed above. The respondent disallowed the claimed deduction of $1,945.36, holding that it constituted a capital expenditure, but allowed a deduction in the amount of $19.65 representing commissions of $1,945.36 prorated over a period of 99 years. Petitioner contends that the brokerage fee $980of was an ordinary and necessary expense of his business*2368 of dealing in real estate and is, therefore, deductible from income of 1923.
The petitioner relies upon Robert H. McNeill,16 B.T.A. 479">16 B.T.A. 479, in which we held that the cost, to the lessor, of securing a lease is deductible from the gross income of the lessor in the year in which the expenditure is made. However the principle laid down in Robert H. McNeill, supra, has been overruled in two recent Board decisions. Bonwit Teller & Co.,17 B.T.A. 1019">17 B.T.A. 1019, and Julia Stow Lovejoy,18 B.T.A. 1179">18 B.T.A. 1179.
*730 In the instant proceeding the $980 which petitioner expended to secure the lease was not an ordinary and necessary business expense The expenditure in question resulted in the securing of an asset from which income was to be derived for 99 years. Such an expenditure is, beyond a doubt, of a capital nature and may be allowed as a deduction only as the benefit is realized. The respondent has allowed petitioner a deduction fron income of 1923 calculated in accordance with our decision and upon the basis of a larger expenditure than petitioner has here shown. In this circumstance the holding of the respondent will be*2369 approved.
On May 15, 1922, Thomas J. Dundon and Ella Dundon executed in favor of Peter A. Fitzpatrick two 99-year leases, renewable forever, in terms of 99 years, covering property in Columbus, Ohio, described as "Lots 12, 1, 2 and 3 in Heffner and Hayden's Addition," and also a strip of land lying on the north side of "Lots 1, 2 and 3 of Heffner and Hayden's Addition." Each of these leases contained an option to purchase. All of the property covered by the two leases to the petitioner is known generally as the Spring and Water Street property.
On February 5, 1925, Peter A. Fitzpatrick transferred to the petitioner all his interest in these leases. Under the contracts the purchase price of these leases to the petitioner was $37,500, but petitioner was also required to pay some accrued rents, bringing the total cost to the petitioner of the properties at the time he received them to $38,516.25. On November 9, 1925, the petitioner entered into an agreement with the Civic Center Realty Co. leasing the Spring and Water Street properties to that company. This lease was for 99 years, renewable forever, in terms of 99 years, and contained an option to purchase the property covered*2370 by the lease.
At the time the above lease was executed to the Civic Center Realty Co. petitioner was paid $5,000 in cash and two promissory notes for $5,000 each. These notes bore interest and petitioner discounted them at the bank without any loss to him. The respondent included in the income of the petitioner for 1925 the amount of $15,000. The petitioner contends that the amount of $15,000 was not income but was a return of a capital.
As pointed out hereinbefore, the lessee under a 99-year lease renewable forever, does not receive title to the property covered by the lease. Here, the petitioner became the lessee of the Spring and Water Street property and thereafter subleased the same. Any amount which he received under such sublease was income to him when received. Edward E. Haverstick, supra, and O'Day Investment*731 Co., supra.We see no error in the respondent's determination that the amount of $15,000 received by the petitioner from the Civic Center Realty Co. was income to the petitioner.
The respondent also included in the income of the petitioner for the year 1925 the amount of $6,000, representing the broker's fee paid to*2371 Marcus Burnstine, the broker who negotiated the deal whereby petitioner leased the Spring and Water Street property to the Civic Center Realty Co. It is true that the lease itself recites that one of the considerations for the execution of the lease was to be the payment by the Civic Center Realty Co. of the fee of $6,000 to Marcus Burnstine. Likewise, it is alleged in the petition and admitted in the answer that it was a part of the consideration. However, the petitioner testified that he did not employ Burnstine, but that Burnstine came to him as the representative of Levy and Kobacker and bargained for the lease. All the parties concerned with the lease agreed that the liability for the broker's fee was not upon petitioner and that the payment of such fee by the Civic Center Realty Co. was not a consideration for the execution of the lease. We, therefore, hold that this amount of $6,000 was not income to petitioner in the year 1925.
The petitioner, on November 6, 1925, received a check in the amount of $15,000 from the executor of the estate of Helen C. Pacelli, for services as attorney for the estate. The executor informed petitioner that certain tax matters of the estate*2372 had not been settled and that petitioner might have to pay back a part of this amount. Petitioner held the check until January 2, 1926, at which time the executor finally informed him that there was no possibility of petitioner's having to repay any part of the fee. Petitioner then cashed the check and reported the $15,000 as income in 1926. The respondent held that this amount was income to petitioner in 1925. Respondent contends that the check received by petitioner in 1925 had a value equal to its face value, or that petitioner constructively received $15,000 in money in 1925, and that under either theory the petitioner's reported income for 1925 should be increased by the amount of $15,000. Petitioner contends that since he kept his books upon the cash receipts and disbursements basis, and since the drawer or maker imposed a condition upon the cashing of the check, the amount of such check was not income to him until such amount was actually paid to him in money.
We do not agree with the contention of the petitioner. The petitioner did receive and retain the check and he was not required to refrain from cashing it. In fact, the executor of the estate, who drew the check, *2373 considered the amount as paid in 1925 and reported *732 it as a disbursement in that year. There is no showing that there was not sufficient money of the estate in the bank to cover the amount of the check and we see no reason for reversing the respondent's holding that the amount of $15,000 was income to petitioner in 1925. Harry B. Hurd et al.,12 B.T.A. 368">12 B.T.A. 368; I. M. Cowell et al.,18 B.T.A. 997">18 B.T.A. 997. See Ella C. Loose, Executrix,15 B.T.A. 169">15 B.T.A. 169.
The respondent included in the gross income of the petitioner for the year 1925, an amount of $7,863 representing compensation paid to petitioner by the city of Columbus, Ohio. At the hearing petitioner conceded that this figure was incorrect, that the true amount which he received from this source was $8,325, and that if any amount is includable in his income as compensation from the city of Columbus, the amount should be $8,325. Petitioner contends, however, that such compensation is exempt from the Federal income tax.
Section 213 of the Revenue Act of 1924 provides in part:
SEC. 213. For the purposes of this title, except as otherwise provided in section 233 -
(a) The term*2374 "gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, * * * or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.
Section 1211 of the Revenue Act of 1926 provides:
Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer of employee of any State of political subdivision thereof * * * shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.
We think it clear that petitioner was not an officer of the city of Columbus, Ohio. The income of petitioner was received under a contract with the city. The petitioner as special attorney rendered professional services in the gas litigation in which the city was involved. It is true an ordinance was passed authorizing the employment of the petitioner, but such ordinance clearly did not create an office of special*2375 attorney. It was simply an emergency measure passed for the purpose of allowing the city attorney to employ a specified person for the sole purpose of assisting in the gas litigation. Under the contract petitioner was to be paid for the actual number of days he worked based upon an 8-hour day and he was free to accept other employment. Petitioner was not required to take an oath of office. Nor do we believe petitioner was an employee of the city of Columbus. His position, in our view, was more like *733 that of an independent contractor than of an employee. Under the contract petitioner was not required to do any of the general work of the city attorney's office. His duties were confined to the gas litigation. Furthermore, while petitioner was to some extent under the direction of the city attorney, yet this direction consisted in defining policies and indicating the end desired to be accomplished. The examination of witnesses and the preparation of briefs, in so far as they were entrusted to him, were left to the discretion of petitioner, and petitioner used his private office force to some extent in the work he did for the city. No attempt was made to interfere with*2376 petitioner's handling of any of the details. Petitioner was not limited to particular hours. It appears that petitioner is still acting under the same contract and that he is now in almost complete charge of the gas litigation. He is the only attorney who sat through the gas litigation who is available to present the city's argument to the United States Circuit Court of Appeals. In our view the imposition of the tax in question does not impair "in any substantial manner" the obligation of the petitioner to the city of Columbus or the ability of the city to procure services of this character. We see no reason for disturbing the determination of the respondent whereby he included in petitioner's gross income for 1925 the compensation received by the petitioner from the city of Columbus. We consider that these conclusions are sustained and that this proceeding in so far as it involves that compensation, is ruled by the following cases: Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514; W. J. Howard,10 B.T.A. 62">10 B.T.A. 62; affd. 280 U.S. 14">280 U.S. 14A; *2377 David A. Reed,13 B.T.A. 513">13 B.T.A. 513; 34 Fed.(2d) 263; 281 U.S. 699">281 U.S. 699; Robert J. Cummins,19 B.T.A. 498">19 B.T.A. 498; and Clarence H. Johnston,14 B.T.A. 605">14 B.T.A. 605.
We are satisfied that petitioner has not overcome the presumption which prevails in favor of the correctness of the decision of the respondent on this issue by proving all of the elements that are necessary to establish that the petitioner was either an officer or an employee of the city of Columbus, Ohio, under his agreement, as performed, to render special professional services to the city. We, therefore, hold that the amount of $8,325 received by petitioner in 1925 was taxable income.
Reviewed by the Board.
Judgment will be entered under Rule 50.