*72 Decision will be entered for the respondent.
Petitioner paid and accrued about $ 26,000 in 1963 in order to accelerate the termination of a lease (which was to expire in 1970) so that petitioner could demolish an existing building and put the property to a more profitable use. The lease was successfully terminated at the end of 1963 and demolition commenced on Jan. 3, 1964. Held: Petitioner is not entitled to deduct the $ 26,000 in 1963 as a business expense under sec. 162 of the Internal Revenue Code of 1954. The expenditure was for a capital asset (the unexpired term of the lease) which had a definite life beginning after the year before us.
*850 Respondent has determined a deficiency *73 in petitioner's Federal income tax for the year 1963 in the amount of $ 13,497.04.
The only issue for decision is whether petitioner is entitled to a deduction under section 162 of the Internal Revenue Code of 19541 for expenditures incurred in relocating a tenant from an office building. Several other adjustments that were made by respondent in his statutory notice of deficiency have not been contested.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations and exhibits attached thereto are incorporated herein by this reference.
Peerless Weighing & Vending Machine Corp. (hereinafter sometimes referred to as Peerless or petitioner) is a Delaware corporation with its principal place of business at Long Island, N.Y. It filed its corporate income tax return for the taxable year 1963 with the district director of internal revenue, Brooklyn district.
*851 Petitioner owns and*74 operates parking lots, garages and industrial properties in Long Island, N.Y., and in Chicago, Ill. For the years 1961, 1962 and, 1963, Peerless' principal business activity and source of income was from the operation of its garages and parking lots.
On March 30, 1962, Peerless purchased property, on which stood a 6-story building at 231-235 South Wabash Avenue, Chicago, Ill. (sometimes hereinafter referred to as 231), at a cost of $ 404,050. The cost was allocated as follows:
| Land | $ 328,467 |
| Building | 75,583 |
| Total | 404,050 |
At the time of purchase, the building at 231 had five tenants, each occupying an entire floor. The lessees, the expiration date of their lease, and their annual rents were as follows:
| Lease | ||
| expiration | ||
| Lessees | date | Rent |
| Marks Bros. Jewelers, Inc | 12/31/63 | $ 5,400 |
| Bain's Inc | 6/30/65 | 9,000 |
| Home Arts Guild Corp | 4/30/70 | 9,000 |
| Boulevard Art Publishers, Inc | 4/30/62 | 8,400 |
| Harding Hotel Co | 4/30/62 | 20,000 |
Boulevard Art Publishers, Inc., had vacated the building by January 1962, though it continued paying rent until April 30, 1962, at which time it allowed its lease to expire without renewal. The leases of Harding Hotel Co. and*75 Marks Bros. Jewelers, Inc., were not renewed upon their expiration. Bain's Inc. vacated the building and stopped paying rent by December 17, 1962, after having been declared bankrupt. Home Arts Guild Corp. (hereinafter sometimes referred to as Home Arts) was to be the building's only tenant as of January 1, 1964.
On August 30, 1963, Peerless entered into an agreement with Home Arts for termination of its lease. Pursuant to said agreement Peerless promised to remodel the second floor of a building at West Randolph Street, Chicago, Ill., to which Home Arts was relocating. Peerless, under clause 5 of the agreement, also agreed to pay Home Arts $ 500 per month to apply toward the rent for the premises at West Randolph Street "beginning with the month of March, 1964, and ending with the month of April, 1965."
The remodeling of Home Arts' new premises began in September 1963, and on December 27, 1963, Home Arts vacated 231. Pursuant to the agreement of August 30, 1963, Peerless expended $ 25,955.85, of which $ 20,455.85 was spent in remodeling, and $ 5,500 in payments to Home Arts under clause 5 of the agreement. The entire amount was either paid or accrued on the books and records*76 of Peerless during the year 1963.
*852 Peerless began demolition of the building at 231 on January 3, 1964, as the first step in the property's conversion to a parking lot. Demolition was completed on July 10, 1964, and as of October 21, 1964, the conversion to a parking lot was complete. In total the building was operated for rental purposes for 21 months.
Peerless' income from the property at 231 from the time of purchase through December 31, 1967, was as follows:
| Year | Gross income | Source |
| 1962 | $ 17,288 | Rent. |
| 1963 | 14,400 | Do. |
| (Jan. 1, 1964, through Oct. 20, 1964) | 0 | Do. |
| 1964 | ||
| (Oct. 21, 1964, through Dec. 31, 1964) | 15,208 | Parking. |
| 1965 | 57,206 | Do. |
| 1966 | 70,077 | Do. |
| 1967 | 86,812 | Do. |
In its return for the taxable year ending December 31, 1963, Peerless claimed a deduction of $ 25,955.85 (the total of the payments to, and for the benefit of Home Arts) 2 as an ordinary and necessary expense of its business. Respondent determined that the cost was a capital expenditure.
*77 OPINION
The only issue for decision herein is whether the expenditures incurred in canceling the lease of Home Arts is an ordinary and necessary expense for the year 1963 under section 162 3 of the Internal Revenue Code.
As a general rule, amounts paid by a lessor to a lessee for the cancellation of a lease prior to its expiration date have been held to be capital expenditures, amortizable over the unexpired term of the canceled lease. Henry B. Miller, 10 B.T.A. 383 (1928); Harriet B. Borland, 27 B.T.A. 538 (1933); Laurene Walker Berger, 7 T.C. 1339">7 T.C. 1339 (1946); Bernard A. Rosenblatt, 8 T.C. 1245 (1947); Trustee Corporation, 482">42 T.C. 482 (1964); and*78 cf. Clara Hellman Heller Trust No. 7610, 7 T.C. 556">7 T.C. 556 (1946), reversed sub nom. Wells Fargo B. & U. Trust Co. v. Commissioner, 163 F. 2d 521 (C.A. 9, 1947), cited by us with approval in Trustee Corporation, supra.
We believe that the Miller case and the others cited above are determinative of the issue involved herein. While they do not deal with a situation where the lessor procures a cancellation of a lease *853 to obtain possession in order to demolish the buildings located on the property and subsequently engage in nonrental activities, the rationale of these cases, insofar as it relates to whether such expenditures are capital expenditures, is equally applicable to such a situation.
In Henry B. Miller, supra, the lessor obtained the cancellation of a lease which had 6 years to run and subsequently leased the premises to another. He sought a deduction as an ordinary and necessary expense of the amounts paid for cancellation. In finding for the respondent, the Board stated (10 B.T.A. at 384):
It seems unnecessary to cite authorities for the *79 principle that a lessee under and by virtue of the terms of his lease acquires an interest in real estate. Likewise it seems unnecessary to cite authorities for the principle that amounts expended in the acquisition of real estate, and consequently an interest therein as well, are capital expenditures and that such amounts, in the computation of net income may not be deducted as ordinary and necessary business expenses of the year.
The more difficult problem is that which involves the return, to the person who thus acquires a leasehold interest, of the amount of his capital expenditure. It may be well argued that, since the law presumes a merger where the lessor acquires the interest of his lessee, the cost to the lessor is deductible in the year of the expenditure, since by reason of the merger the asset which he thus acquired is entirely wiped out. It seems to us however that the contrary view is the better. Prior to the acquisition of the outstanding leasehold by the lessor, his rights to the use and possession of the premises so leased were limited by the lease. As the result of the expenditure he acquired for himself the six-year leasehold right theretofore vested in the *80 lessee and by so doing he, for a sufficient interval of time, became his own lessee. True, the law presumes a merger of the two interests, but before that can occur the lessee's interest must vest in the lessor. The amount thus expended is a capital expenditure made in order to obtain possession of premises for a period prior to the time the petitioner would have come into possession under the terms of the lease and affords to him no benefits beyond the period for which the payment is made. The amount so expended was paid for the right to enjoy the possession of the premises for the unexpired term of the lease -- that is to say, it is an amount expended in the acquisition of a capital asset having a life of a definite number of the years. * * *
In the instant case, petitioner obtained cancellation of a lease in order to regain possession of his property. The particular factual situation surrounding such cancellation in no way indicates that the expenditures should be treated any differently than in the above-cited cases, insofar as a denial of the deduction for ordinary and necessary expenses is concerned. The benefit of the expenditure -- namely possession of the property -- *81 did not accrue in 1963, but rather in years subsequent thereto when the possession and demolition of the building made it possible to engage in the parking-lot business at 231.
Accordingly, we hold that the expenditures incurred by petitioner in canceling the lease of Home Arts cannot be deducted as an ordinary and necessary expense in the year 1963.
Decision will be entered for the respondent.
Footnotes
1. All statutory references herein are to the Internal Revenue Code of 1954, unless otherwise indicated.↩
2. Costs of demolition of 231 are not in issue herein.↩
3. SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *↩