*141 Decisions will be entered under Rule 50.
Since 1941 annual retail liquor vendors' licenses have been issued by the city of Jacksonville, Florida, to a limited number of licensees and have been renewed to the holders thereof. In April 1944 petitioners expended $ 8,000 in acquiring from a licensee his license for the year ended September 30, 1944, for which the fee to the city was $ 750, and they have operated a liquor store under that license and renewals thereof ever since. Held, the sum of $ 7,250 was a capital expenditure for an asset having an indeterminate useful life beyond the taxable year and was not deductible in 1944.
*1205 Respondent determined deficiencies in the income taxes of petitioners Nachman and Tobias for the year 1945 in the respective amounts of $ 2,298.49 and $ 2,277.59. In these proceedings, consolidated for hearing and opinion, the petitioners allege error on the part of respondent in so far as the deficiencies result from his determination disallowing a deduction claimed by a partnership composed of petitioners on account of a payment of $ 8,000 made by the partnership during the taxable year incident to the acquisition of a license from the city of Jacksonville, Florida, to sell liquor in that city.
FINDINGS OF FACT.
The parties have filed herein a partial stipulation of facts, which is incorporated herein by reference.
Petitioners were residents of Jacksonville, Florida, during the taxable year, and filed their income tax returns with the collector of internal revenue for the district of Florida. On or about April 25, 1944, they organized a partnership for the purpose of operating a retail liquor store in Jacksonville. Each of them was *143 to receive a salary and share equally in the partnership profits.
Before petitioners could carry on a business of selling liquor in Jacksonville, it was necessary that they receive from the city a retail liquor vendor's license. A city ordinance, enacted on September 30, 1941, provided that no retail liquor vendors' licenses should be issued by the city in excess of one license for each 2,277 persons in the city according to the last Federal census. Prior to the enactment of this ordinance, such licenses were issued to all applicants of good character. The effect of this ordinance was to restrict the number of licenses issued in the years here in question to approximately 76. It was also provided by city ordinance that in issuing such licenses for the year October 1, 1941, to October 1, 1942, preference should be given to persons holding such licenses for the year 1940 to 1941. No such preference was required by ordinance with reference to subsequent years, but during such subsequent years, the municipal license inspector of Jacksonville, acting within his discretion, gave such preference to previous holders of liquor store licenses. Because of this known practice and the limited*144 number of liquor licenses available for issuance by the city of Jacksonville, persons wishing to engage in the business of operating a liquor store were willing to pay a premium in order to acquire such a license from a licensee. In at least one instance a payment of $ 20,000 has been made for this purpose.
Shortly prior to April 25, 1944, petitioners made inquiries of the municipal inspector at Jacksonville as to the availability of a liquor license and were advised that the full number of such licenses permitted by ordinance had already been issued. However, the inspector *1206 informed them that one Bryan, who held a license issued for the license year October 1, 1942, to September 30, 1943, and had been engaged in litigation over his license with the city, might be willing to enter into arrangements with petitioners by means of which they might be able to obtain such a license. This would be pursuant to a practice of the municipal license authorities permitting assignment of licenses, providing a transfer was evidenced by a bill of sale or other written instrument. It was suggested that Bryan pay up all his back license fees owing to the city and send a letter addressed*145 to the municipal inspector, advising him that Bryan had sold his liquor business to petitioners, and request that the municipal license to which Bryan was entitled be issued direct to petitioners. Bryan agreed to send such a letter and to pay up all of the back license fees owing to the city, as well as the fee for the license covering the year October 1, 1943, to September 30, 1944 (the amount of which license fee was $ 750), in return for a payment to Bryan by petitioners of $ 8,000. The petitioners, on April 25, 1944, made a payment in this amount to Bryan, who, in turn, paid the license fee to the city as agreed and signed and delivered a letter to the municipal inspector, requesting the issuance of the municipal license to which he was entitled to petitioners, and thereupon such a license was issued by the city of Jacksonville to petitioners covering all the period October 1, 1943, to September 30, 1944. Bryan made no transfer to petitioners of any inventory, furniture, fixtures, leasehold, or accounts receivable. Petitioners acquired nothing in return for the $ 8,000 which they paid to Bryan except a liquor license for the year October 1, 1943, to September 30, 1944, together*146 with the reasonably anticipated privilege of having a similar license issued to them for subsequent years because of the known practice of the municipal inspector of issuing such licenses to those who had held them in prior years. Petitioners have obtained a similar license in each subsequent year.
During the taxable year the municipal inspector of the city of Jacksonville was J. Ray Permenter, who had first been appointed to that position in 1938. It is his duty to supervise the issuance of all city licenses and exercise his discretion with respect to the issuance thereof. The municipal inspector is appointed by the city commissioners, subject to the approval of the affirmative vote of two-thirds of the city council. The city councilmen and city commissioners are elected to their respective offices for four-year terms. Permenter was appointed municipal inspector in 1938 and again was appointed on January 1, 1942, for a term of four years.
The partnership composed of both petitioners filed a partnership return for the fiscal year April 25, 1944, to March 31, 1945, in which *1207 there was deducted under the caption "licenses and taxes" the $ 8,000 paid by petitioners to *147 Bryan on April 25, 1944. During the period April 24 to September 30, 1944 (the period during which petitioners operated a liquor store pursuant to the license obtained by them on April 25, 1944) the partnership realized net income in the amount of $ 1,092.23 after the deduction of the $ 8,000. The net income of the partnership for the entire fiscal year was $ 39,644.39.
Of the deduction claimed by petitioners on account of the payment of $ 8,000 to Bryan, respondent allowed the sum of $ 312.50, representing "5/12ths of $ 750 annual fee pro-rated to cover period April 25, 1944, to September 30, 1944." As a result of the disallowance by respondent of the balance of the deduction of $ 8,000, together with other adjustments not here in issue, there resulted the deficiences which are here challenged by petitioners.
OPINION.
Whether petitioners can avail themselves of a deduction in the one year before us for the total sum expended by them for the acquisition of an annual retail liquor license, and the reasonably anticipated privilege of periodic renewal thereof, is the single issue presented to us. It is the contention of petitioners that the entire $ 8,000 payment expended for this *148 purpose is an allowable deduction, either as an ordinary and necessary business expense under section 23 (a) of the Internal Revenue Code, 1 or as a loss sustained in a transaction entered into for profit which was not compensated for by insurance or otherwise, under section 23 (e) of the code.
Respondent, however, determined that of the expenditure of $ 8,000, the amount of $ 7,687.50 was a capital expenditure for the acquisition not only of the retail license for the year ended September 30, 1944, but also for the privilege of the renewal of such license during subsequent years. He considered the renewal privilege as a valuable property right because*149 the number of liquor licenses issued by the city of Jacksonville was limited and because the city authorities had followed the practice each year since 1941 of renewing the licenses of the previous holders. Respondent supports his view by relying upon William Zakon, 7 B. T. A. 687; McAvoy Co., 10 B. T. A. 1017; Best Brewery Co., 16 B. T. A. 1354; Elston Co. v. United States (Ct. Cls.), 21 Fed. Supp. 267; and I. T. 3873, 1947-2 C. B. 82, which is predicated on these cases. He concludes that a deduction on account of this expenditure is not to be allowed, for the reason stated in I. T. 3873 as follows:
*1208 The life of the property in a license, which property is created by the custom of annual license renewal, can not be estimated with any degree of certainty. Consequently, a deduction for depreciation or obsolescence may not be allowed, nor may a deduction be allowed as a business expense, since the asset has an economically useful life beyond the taxable year.
In view of the foregoing, it is held that an amount paid as*150 consideration for the transfer of a liquor license constitutes a capital investment which must be carried on the books of the transferee as a capital asset until such time as the license is again transferred or terminated.
Petitioners argue that the cases which are relied upon by respondent and which form the basis of respondent's I. T. 3873 and his position in this proceeding are distinguishable from the instant case and have been in effect overruled by Bonwit Teller & Co. v. Commissioner (CCA-2), 53 Fed. (2d) 381; certiorari denied, 284 U.S. 690">284 U.S. 690. Undoubtedly, there are factual differences between the instant proceeding and those cases cited and relied upon by respondent. In two of the cited cases, the expenditures were made directly and specifically in the purchase of "renewal rights" for liquor licenses; in all of them there was a long established custom of annual renewal of such licenses; and the municipal authorities treated the "renewal rights" as privileges separate from the licenses themselves. However, a realistic appraisal of the facts in the instant case indicates no such difference in fact which can distinguish*151 it in principle from the cases cited. It is obvious that the greater part of the $ 8,000 expended by petitioners was for privilege of renewing the license. While petitioners made a net profit of approximately $ 1,000 during the period April 24 to September 30, 1944, it is not reasonable to think that they made an expenditure of $ 8,000 for the privilege of operating a liquor store for approximately five months. The fact that they expended this sum indicates that they felt the custom and practice of renewing licenses in Jacksonville was sufficiently established to give value to the anticipated privilege of renewal attached by such custom and practice to the annual license; and the fact that others in the community paid sums as high as $ 20,000 in order to acquire an annual liquor license indicates that the custom and practice of renewing such licenses was accepted as established in the community, and was recognized as a valuable right attaching to the annual license. It is our judgment that petitioners paid $ 750 for the annual license under which they operated for five months in 1944, and $ 7,250 for the reasonably anticipated privilege of obtaining similar licenses in subsequent*152 years which attached to such license by reason of the practice of municipal authorities in actually renewing such licenses to the holders thereof. The fact that no part of the $ 8,000 paid by petitioners was specifically designated by them as payment for "renewal rights" and the fact that the municipal authorities did not treat the "renewal rights" as property rights separate from the licenses themselves, *1209 can not, in our opinion, preclude a conclusion that petitioners expended $ 7,250 for what generally may be termed the renewal privileges attaching to the annual license.
Under this interpretation of the facts of the instant case, we are unable to distinguish it in principle from the cases relied upon by respondent.
There remains the question of whether these cases have been, in effect, overruled by Bonwit Teller & Co. v. Commissioner, supra. Although the three Board of Tax Appeals cases to which we have referred were decided prior to Bonwit Teller, the Elston case was decided six years thereafter. As to the latter opinion, petitioners urge that apparently no consideration was given to the rule of the Bonwit Teller case, *153 and, therefore, it does not represent persuasive authority.
In Bonwit Teller & Co. v. Commissioner, supra, one of the questions presented was the period during which the value of a leasehold for a term of years should be depreciated, where the lessee had an option to renew the lease at a rental to be determined by an appraisal of the property at the time of renewal. The leasehold had 19 years to run and contained an option to renew for 21 more years. It was there held, under the facts presented, that the period over which the exhaustion of the leasehold was to be spread was the original term of the lease, without regard to the possibility of renewal. It should be observed that in that case the renewal privilege had not been exercised, and the court was not presented with the question of the probability of renewal. Moreover, the Bonwit Teller case does not lay down an inflexible rule that the period of exhaustion is the term of the original lease, irrespective of the circumstances attendant to the renewal option; but rather it stands for a rule which must be molded to the facts and circumstances present in each case. Cf. 379 Madison Avenue, Inc. v. Commissioner (CCA-2), 60 Fed. (2d) 68;*154 4 Mertens, Law of Federal Income Taxation, sec. 23.93.
In our consideration of the scope of the Bonwit Teller case, we observed in 353 Lexington Avenue Corporation, 27 B. T. A. 762, at page 764:
Respondent points out that a situation might arise where the original term of a lease was a comparatively short period, say a year or two, with an option to renew for 21 years, and in such case a write-off over the original term would not be justified. Under such circumstances it seems to us very doubtful whether an exhaustion allowance confined to the original term would meet the statutory requirement of reasonableness. However, that is a question to be decided when the occasion arises.
And we stated in Leonard Refineries, Inc., 11 T. C. 1000, at page 1010, that:
Where it appears certain that an option to purchase leased premises will be exercised, over what period should assets on those premises be depreciated? *1210 Decisions pertinent to this question deal with a comparable situation where there is a reasonable certainty that a renewal provision in a lease will be exercised. Under those circumstances the courts *155 have held the proper period for taking depreciation is the remaining life of the original term plus the renewal period. Pittsburgh Union Stock Yards Co. v. Commissioner, 46 Fed. (2d) 646; 1620 Broadway Corporation, 36 B. T. A. 149, 152; Standard Tube Co., 6 T.C. 950">6 T. C. 950. By analogy, where it is apparently certain that the option to purchase leased land will be exercised, depreciation rates for assets located on such land should be based on their estimated physical lives. * * *
Some of the uncertainty and confusion which the decided cases presented before 1939 have now been allayed by the incorporation of T. D. 4957, 1939-2 C. B. 87, in respondent's regulations. Regulations 111, sec. 29.23 (a)-10. It is there generally provided that where the facts show that the lease has been renewed, or that there is reasonable certainty that the lease will be renewed, the period should encompass not only the original term of the lease, but the renewal period. We recognized the correctness of this section of the regulations in Standard Tube Co., 6 T.C. 950">6 T. C. 950, 955.*156
Petitioners also seek to derive strength for their contentions on this point from the cases involving baseball players' contracts, which are generally contracts for the period of one year, containing renewal options running in favor of the club. Pittsburgh Athletic Co., 27 B. T. A. 1074; affd. (CCA-3), 72 Fed. (2d) 883, is an example. In that case, relying upon Bonwit Teller & Co. v. Commissioner, supra, we overruled earlier authorities in which we held that the renewal clause in the contracts gave them a life of more than one year. However, that line of cases, as well as the Bonwit Teller line, does not control the instant case, because of the significant factual dissimilarities. In this connection, the language in Helvering v. Kansas City American Association Baseball Co. (CCA-8), 75 Fed. (2d) 600, 604, is persuasive:
* * * *
The petitioner contends that there is a distinction in the lease in the Bonwit Teller Case and the contracts here involved, in this, that in the case of the lease there could be no certainty at the time of its execution that*157 the renewal privilege would be exercised at the end of a period of nineteen years; while in the case of ball players' contracts covering a term of one year renewal was so reasonably certain that the contracts, instead of being for one year, were, in effect, for the useful playing life of the player. However, this contention, as to the value and character of the renewal provisions of the contracts, is answered in the case of the Commissioner v. Pittsburgh Athletic Company (C. C. A.) 72 F. (2d) 883, 884, wherein the court said: "An examination of the standard option clause contained in each contract reveals that the right given the respondent by the option is not absolute but qualified. Its right is dependent upon the player's continuance in professional baseball, which may be terminated because of his objection to an assignment to another club, or to the wages offered in a new agreement, or for many other reasons. Whatever the reason, if the player should cease to engage in professional baseball, the option for renewal of his contract would become valueless."
*1211 Obviously, the options add to the value of the contracts; but it cannot be *158 said that they extend the life of the contracts beyond one year, because of the uncertainty of their renewal. The option is qualified; the power of the taxpayer to renew the contracts is not absolute, but is contingent on the inclination and ability of the players to render personal services requiring a high degree of skill and training.
The petitioner has directed the attention of the court to a number of cases involving leases that contained options to renew wherein it has been held that the entire exhaustion allowance should not be allocated to the comparatively short term of the original lease when it clearly appeared that the chief value was in the right to renew for a long term. In other words, where the original term of a lease is of short duration and there is an absolute option to renew for a long term, exhaustion over the original term could not be justified. Under such circumstances, it is doubtful whether an exhaustion allowance confined to the original term would meet the statutory requirement of reasonableness. Such authorities are not applicable here.
* * * *
In the lease cases following Bonwit Teller and in the baseball players' contract cases, we find that, *159 although the option provision may have added some value, the expenditures in the lease cases were primarily for the use of the leased premises during the term of the original lease and, in the baseball cases, for the services rendered during the year of the contract. Here, however, just the converse is true. The expenditure by petitioners was made primarily for the purposes of acquiring the expectation of continued renewal of the liquor license, and not for the purpose of engaging in the liquor business for only a part of the year for which the license was acquired. Moreover, it is simple to allocate that part of the expenditure made for the purpose of engaging in business for a year and that part properly attributable to the option privilege acquired by petitioners. No such allocation can generally be made in the authorities that petitioners seek to rely upon.
In addition, we are confronted with the fact of actual renewal of the license during the year before us, and the vitality of this event can not be minimized. See East Kauai Water Co., Ltd., 11 T. C. 1014; but cf. 1620 Broadway Corporation, 36 B. T. A. 149.
In*160 our judgment, neither the Bonwit Teller case nor the baseball players' contract cases have weakened the validity of the authorities relied upon by respondent.
Petitioners' alternative contention, that the amount of $ 7,250 is deductible as a loss under section 23 (e), is not strenuously pressed upon brief, and is, in our opinion, without merit.
In his determination of deficiency, respondent allowed as deduction on account of the expenditure made for the license only $ 312.50, as representing "5/12ths of $ 750 annual fee pro-rated to cover period April 25, 1944, to September 30, 1944." We are of the opinion that the full amount of $ 750 should have been allowed. Before petitioners could have engaged in business during those five months, it was necessary *1212 that they have a license for the year ended September 30, 1944. Unlike the case of William Zakon, supra, the annual license paid for by petitioners was used by them in their actual operation of a liquor store during a considerable part of the license year. We have interpreted the facts as requiring a conclusion that $ 750 was expended by petitioners for the license under which they did*161 business for the five-month period. It is, therefore, deductible as a current expense. See footnote 1. Respondent's argument on brief implicitly recognizes the propriety of this adjustment.
Decisions will be entered under Rule 50.
Footnotes
1. If the sum could be considered as an expenditure incident to the acquisition of an intangible capital item with an anticipated life of one year or less, then it would be proper to deal with it as a deduction for current expense. W. B. Harbeson Lumber Co., 24 B. T. A. 542; J. E. Mergott Co., 11 T. C. 47↩.