*1393 1. In the absence of evidence showing that the petitioner was the owner of a certain levee which was damaged by a flood, held that the petitioner is not entitled to any deduction on account of the damage done to the levee.
2. During 1927 certain farm land owned by the petitioner was damaged as a result of flood waters washing sand upon it and the buildings on such farm land were destroyed. Held that since the deductions provided for in sections 242 to 245 inclusive of the Revenue Act of 1926 do not include any provision for losses, the petitioner may not deduct any amount representing the loss sustained by it on account of the damage to its land and the destruction of its buildings. Midland National Life Insurance Co.,18 B.T.A. 1240">18 B.T.A. 1240, followed.
3. The requirement of section 245(b) of the Revenue Act of 1926 that no deduction shall be made of taxes, expenses and depreciation in respect of real estate owned and occupied in whole or in part by a life insurance company unless the rental value of such real estate be included in gross income in computing taxable net income held invalid. Independence Life Insurance Co. of America,17 B.T.A. 757">17 B.T.A. 757,*1394 followed.
*1335 This proceeding is for the redetermination of a deficiency in income tax of $17,476.76 for 1927. The matters put in controversy by the petition as amended are the correctness of the respondent's action (1) in disallowing deductions totaling $137,000 taken by the *1336 petitioner as representing damages or loss sustained on certain farm land and the levee and buildings thereon as a result of floods; (2) in determining the book value of the home office building and property of the petitioner; and (3) in determining the amount to be included in the petitioner's taxable income for rents.
FINDINGS OF FACT.
The petitioner is a North Carolina corporation, engaged in and conducting the business of a life insurance company and having its principal office at Greensboro. Some time prior to 1926 it loaned $175,000 to one McWilliams, receiving as security for the payment thereof a deed of trust on 6,285 acres of farm land located in the Mississippi Delta in the vicinity of Sherard, Mississippi, and hereinafter*1395 referred to as the McWilliams Plantation. Upon default in payment of interest and principal the petitioner, during 1926, acquired the property through foreclosure proceedings. The status of the loan account with respect to the property immediately preceding the foreclosure proceeding was as follows:
| Original loan | $175,000.00 |
| Less payments of principal | 22,250.00 |
| Balance | 152,750.00 |
| Add: | |
| Refund to mortgagor | 950.00 |
| Taxes advanced in 1925 | 5,213.13 |
| Interest due and unpaid | 34,975.90 |
| Total | 193,889.03 |
About 2,400 acres of the McWilliams Plantation were protected by a levee from overflow of the Mississippi River. Of the land thus protected 1,500 acres were cleared and in a high state of cultivation. There were also about 150 acres not protected by the levee that were cleared and in a high state of cultivation. The character of the soil was good and the buildings on the property were in excellent condition when acquired by the petitioner. Subsequent to acquisition of the plantation the petitioner expended $7,500 building new houses and repairing the ones that were on the property. There were between 50 and 60 tenant houses on the property. In addition there*1396 were a manager's house, assistant manager's house, barns, a cotton seed house and other small buildings used in connection with the operation of the plantation.
The levee protecting a portion of the McWilliams Plantation was on the property when acquired by the petitioner and was in good condition. It was maintained by the Yazoo & Mississippi Levee District, except for a portion referred to as the South Levee, which *1337 was abandoned by that levee district and thereafter maintained by the Ward Lake Levee District, an organization of interested property owners. The petitioner paid taxes for the support and maintenance of the Ward Lake Levee District.
During 1927 the Mississippi River overflowed, causing breaks in the South Levee and the flood waters backed up on the McWilliams Plantation. Little damage was done by the water backing up on the property, because there was no flow of water over it. Later during the flood period a break occurred at a certain point in the upper levee, permitting the flood water to flow over the petitioner's land and over the top of the South Levee. The flow of water over the McWilliams Plantation deposited sand upon about 650 acres of*1397 it to such a depth that crops could not thereafter be grown profitably on that portion. The flow of water over the property swept the buildings away from their original positions and wrecked them. The flow of water over the South Levee cut many holes in it, leaving it practically worthless as a protection to the property.
Prior to the flood he value of the buildings on the McWilliams Plantation that were wrecked was $35,000. The 650 acres of land upon which sand was deposited had a value of $70 per acre before the flood and a value of $5 an acre afterwards.
With respect to the injury done by the flood to the McWilliams Plantation, the petitioner took deductions in its income-tax return for 1927 as follows:
| Loss on frame buildings, McWilliams, Mississippi, destroyed by flood | $34,500 |
| Levee destroyed by flood | 37,500 |
| 650 acres of land ruined by flood | 65,000 |
| Total | 137,000 |
In determining the deficiency here involved the respondent disallowed the deductions thus taken by the petitioner.
The value of real estate owned and occupied in part by the petitioner, and hereinafter referred to as the home office building, as carried in the petitioner's books at*1398 December 31, 1927, was $3,069,498.47. This was the value used by the respondent in determining the deficiency.
On its income-tax returns the petitioner took deductions for depreciation on its home office building as follows:
| 1924 | $30,306 |
| 1925 | 30,306 |
| 1926 | 34,434 |
| 1927 | 34,434 |
A reserve for depreciation account is not maintained on the books of the petitioner. The only record of depreciation made by the *1338 petitioner is in the schedule of depreciation filed with its Federal income-tax returns and in the sworn statements filed by it with the insurance officials of the various states in which it does business. The amounts taken by the petitioner for depreciation on its income-tax returns for the years 1924 through 1927 were not deducted in determining the value at which the home office building was carried on the books of the petitioner.
During 1927 the petitioner received $226,262.73 as rent from tenants who occupied a portion of the home office building. In determining the deficiency here involved the respondent determined the amount to be reported as rent from the home office building to be $237,859.71.
During 1927 the petitioner incurred*1399 expenses in the amount of $80,645.77 in the operation of its home office building. This amount was deducted by the petitioner in its return and was allowed by the respondent in determining the deficiency.
OPINION.
TRAMMELL: In its return the petitioner deducted the amount of $137,000 on account of injury or damages done to the McWilliams Plantation by the flood waters. It now contends that the loss sustained by it as a result of the flood was $114,250. The items and amounts upon which the petition bases its contention are as follows:
| Loss from destruction of levee | $37,500 |
| Loss from destruction of buildings | 35,000 |
| Loss from damage to land - 650 acres at $65 per acre | 42,250 |
| 114,750 |
At this point it is to be noted that the total of the items on which the petitioner bases its contention is $114,750 and not $114,250, the amount used in various places throughout the petitioner's brief as the amount of the deduction now contended for. The discrepancy between the amounts apparently is due to an error in addition on the part of the petitioner.
With respect to the amount of $37,500 claimed to represent a loss from the destruction of a levee, the facts show*1400 that there was a levee on the McWilliams Plantation when acquired by the petitioner and that a portion of the levee was maintained by the Yazoo & Mississippi Levee District and the other portion was maintained by the Ward Lake Levee District. The evidence fails to show whether the petitioner was the owner of the levee or whether it was the property of the levee districts. If the levee was the property of the levee districts, clearly the petitioner could not claim as a deduction a loss *1339 resulting from its destruction. Being unable to determine from the record who the owner of the levee was, the petitioner's contention with respect to this item must be denied.
There remains for determination the question of whether the petitioner is entitled to a deduction for loss from the destruction of the buildings and the damage to the 650 acres of land. The petitioner contends that, having established that the buildings destroyed had a value of $35,000 at the time destroyed and that the 650 acres of land had a value of $65 per acre less after being flooded than before, it is entitled to deduct as a loss the amounts of $35,000 and $42,500. He respondent contends that since the*1401 petitioner is a life insurance company taxable under the provisions of sections 242 to 245, in clusive, of the Revenue Act of 1926, and since those sections of the act contain no provision with respect to the allowance of a loss sustained on property owned by such a company, the petitioner is not entitled to the loss here involved. The respondent also relies on our decision in .
In , the petitioner, a life insurance company, during 1924 sustained losses resulting from the failure and insolvency of several banks in which it had cash deposits represented by certificates of deposit. We there held that in computing its net income the petitioner was not entitled to deduct such losses since the provisions of sections 242 to 245, inclusive, of the Revenue Act of 1924, under which the petitioner's income-tax liability was to be computed, did not include any provision for the deduction of bad debts or losses.
Sections 242 to 245, inclusive, of the Revenue Act of 1926, which are applicable to the taxable year here involved, are substantially the same as those*1402 sections of the Revenue Act of 1924. Those sections, like the same sections in the 1924 Act, do not contain any provision for the deduction of losses. This being true, we think our decision in , is applicable and controlling here. The petitioner's contention is therefore denied.
In its brief the petitioner concedes that its contention for the allowance of the loss here involved is contrary to our decision in , but urges that to disallow the loss would result in levying a tax on an income which does not exist and that such tax is unconstitutional. We are not convinced, however, that Congress did not have the power in levying taxes to make the classification which it did and to treat insurance companies differently from other corporations. See . Certain income was omitted from the *1340 tax as well as certain deduction allowable to other corporations in computing net income.
The petitioner further contends that the amount determined by the respondent as rentals to be reported by it from the home*1403 office building should be reduced by $11,596.98, and in support of this contention relies on our decision in .
During the taxable year the petitioner received rents amounting to $226,262.73 from tenants who occupied a portion of the home office building. For the purpose of allowing as deductions depreciation and other expenses incurred in operating the building the respondent, pursuant to the provisions of section 245(b) of the Revenue Act of 1926, determined that the amount to be included in the petitioner's income as rentals from the home office building was $237,859.71, or $11,596.98 in excess of the amount of rents actually received by the petitioner. Such excess amount was the rental value of the space occupied by the petitioner as computed by the respondent under the provisions of section 245(b).
Among the deductions provided in section 245(a) of the Revenue Act of 1926 are the following:
(6) Taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase*1404 the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. * * *
(7) A reasonable allowance for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence.
Paragraph (b) of section 245 provides:
No deduction shall be made under paragraphs (6) and (7) of subdivision (a) on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied.
In , we considered the validity of section 245(b) of the Revenue Acts of 1921 and 1924, which is identical with section 245(b) of the 1926 Act quoted above. In that case we held*1405 invalid the requirement that no deduction shall be made of taxes, expenses and depreciation in respect of real estate occupied by the owner unless the rental value of such real estate be included in gross income in computing taxable net income. For the same reasons set forth in our opinion in that case, *1341 we think the identical requirement contained in section 245(b) of the Revenue Act of 1926 is also invalid. The contention of the petitioner is accordingly sustained. See ; petition for review dismissed by Circuit Court of Appeals, Seventh Circuit, January 12, 1932.
The pleadings raise certain issues with respect to the respondent's determination of the book value of the petitioner's home office building for the purpose of computing under the provisions of section 245(b) the rental value to be included in gross income of the space occupied by the petitioner. In view of our holding above with respect to the requirements of this section, these issues become moot questions and it is not necessary for us to decide them.
Judgment will be entered under Rule 50.