*2073 CAPITAL EXPENDITURE - COMMISSION. - The commission paid in 1924 by the petitioners as lessors, for procuring a 99-year lease, held not to constitute a deductible expense in that year, but a capital expenditure deductible ratably over the term of the lease, notwithstanding petitioner was on a cash receipts and disbursements basis.
*738 The petitioners contend that the respondent, in determining a deficiency in income tax in the amount of $5,152.41 for the calendar year 1924, erred in disallowing a deduction of $21,333 paid in that year to real estate brokers as a commission for procuring a long-term lease on property owned by petitioners, and further, that he erred in determining that the said commission should be capitalized and amortized over the life of the lease.
FINDINGS OF FACT.
The stipulation of facts, entered into and submitted by both parties, is as follows:
1. John Tonningsen and Pauline E. Tonningsen, the petitioners herein, husband and wife, and during the taxable year 1924 and now are citizens and residents of the State of*2074 California. During the taxable year herein involved each of said petitioners was over the age of seventy years.
*739 2. The said petitioners prior to and during the taxable year 1924 owned certain real property in the City and County of San Francisco, State of California, which property was held for rental purposes. Petitioners kept their books of account and made return for income tax purposes upon a cash receipts and disbursements basis.
3. On December 31, 1923, the said petitioners as lessors, acting through real estate brokers, as their agents, executed a ninety-nine year lease covering the property in question, by virtue of which the lessees obligated themselves to pay an annual rental of $60,000.00 during the term of the lease. The lease also contained a provision to the effect that the lessees might exercise an option to purchase the property outright, at any time within two years after the death of both of the lessors, for the principal sum of $600,000.00.
4. As a consideration for the negotiation of the aforesaid lease, and the obtaining of tenants thereunder, the petitioners on January 3rd, 1924, paid to the brokers a commission consisting of $10,000.00*2075 cash, and as an additional commission, granted them the right to remove from the demised premises a frame building having a then market value of $11,333.00. Said building was removed from said demised premises by the real estate brokers and its market value is not in controversy. The aggregate amount paid as commission to the real estate brokers in cash or the equivalent thereof was therefore $21,333.00, which amount was paid solely as commissions or brokerage fees for the negotiation and completion of the aforesaid lease.
5. The petitioners filed their income tax returns for the calendar year 1924 and the preceding calendar year, on a cash receipts and disbursements basis. A joint return was filed for the taxable year 1924, as was done in the preceding years.
6. The petitioners, in filing their income tax return for the calendar year 1924 claimed the aforesaid total amount of $21,333.00 paid to real estate brokers as commission as aforesaid, as a deduction from gross income for the said year.
7. The respondent upon audit of the aforesaid return allowed instead a deduction of the amount of $215.48, representing 1/99 of $21,333.00, and disallowed the balance, or $21,117.52.
*2076 8. The respondent contends that the foregoing method of amortizing the total commission paid over the term of the lease and deducting an aliquot part each year represents the proper method of allowance of the item in controversy.
9. The petitioners contend that the total amount of $21,333.00 representing the commission paid in the year 1924 should be allowed as a deduction for the taxable year 1924 in the determination of the taxable net income for such year.
OPINION.
TRUSSELL: We have held that a commission paid to real estate brokers for procuring a lease is not an ordinary and necessary business expense deductible from gross income for the year in which paid, as contended by petitioners, but that such a commission constitutes a capital expenditure, deductible ratably over the term of the lease, although the taxpayer is on the cash receipts and disbursements basis. ; ; ; and the authorities cited herein. Those decisions are controlling in the instant case and accordingly the respondent's action of allowing as a deduction*2077 *740 for 1924 a sum representing one ninety-ninth of the said commission paid, is approved.
The fact that the petitioners are elderly and have a comparatively short life expectancy and that the lease gives the lessee an option to purchase the property at some future date which at present is not determinable, does not in our opinion take the instant case out of the rule laid down in the above cited cases, as contended by petitioners, for such facts do not change the character of the expenditure so far as the taxable year 1924 is concerned.
Judgment will be entered for the respondent.