*2367 Petitioner capitalized its payments of special assessment taxes imposed by the city of Des Moines to meet the cost of certain improvements on city property adjacent to its real estate holdings. Held that there is no basis in law for the recovery of such additional cost by ratable annual deduction measured by the depreciation annually sustained by the public improvements in question.
*612 The respondent asserted deficiencies in income taxes against the petitioner for the years 1924, 1925, and 1926, in the respective amounts of $913.88, $1,351.74, and $1,685.68, only parts of which are in dispute. For its causes of action the petitioner alleges that the respondent committed error in refusing to allow annual deductions from its gross income of amounts representing depreciation of pavements, sidewalks, and gutters constructed by the city, the cost of which was specially assessed as a tax against its real estate and paid by it.
FINDINGS OF FACT.
The petitioner is an Iowa corporation engaged in the ownership, development and rental of real estate in*2368 the city of Des Moines. Prior to the years involved the city of Des Moines, in conformity with its charter powers and in accordance with the laws of the State of Iowa pertaining thereto, through appropriate municipal legislation, authorized and constructed certain public improvements, consisting of the paving and resurfacing of certain streets, and laying of sidewalks and gutters in said city, part of which cost, through special tax assessments, it charged against real estate of the petitioner.
The average life of street paving in the district in which the petitioner's property is located is 10 years, and the average life of sewers, curbing and sidewalks in the same district is 20 years.
in January, 1924, the petitioner paid to the city of Des Moines the sum of $1,884.47 pursuant to a special assessment on account of the resurfacing of Cherry Street from Sixty to Eleventh Streets in the city of Des Moines.
During years prior to and including these involved, the petitioner paid to the city of Des Moines on account of special tax assessments and cost of the improvements as hereinabove described, various amounts which it took into its books in two separate capital accounts. *2369 In one account, designated "Paving Account," it entered all tax payments *613 made on account of street paving. In the other, entitled "Curb, sidewalk and sewer account," it entered all tax payments made on account of expenditures by the city for such improvements. These items the petitioner treated as costs of improvements made upon real property used by it in its business, and subject to depreciation at a rate determinable by the useful life of such improvements. Accordingly, the petitioner determined that it was entitled to have returned to it through claimed deductions from its income-tax returns the whole of all amounts expended on account of street paving in 10 years, or at the rate of 10 per cent thereof in each year; and the sum set up in the second specified account returned through like deductions in 20 years, or at the rate of 5 per cent each year. Upon these accounts, in accordance with such ratios, the petitioner in making its income and profits-tax returns for the years 1924, 1925, and 1926 took deductions from its gross income in the respective amounts of $7,202.25, $7,245.70, and $6,812.88. These deductions were disallowed by the respondent and the several*2370 amounts thereof were added to the petitioner's income for such respective years. Part of the deficiencies here involved result from such disallowances.
OPINION.
LANSDON: The petitioner capitalized the amounts which it paid from time to time to the city of Des Moines in response to special assessments for the construction and upkeep of pavements, sidewalks, gutters and sewers abutting on or adjacent to many parcels of real estate which it owns and rents for income. It here contends for the right to deduct ratable parts of such capitalized costs from its gross income for each of the taxable years under the provision of section 214(a)(8) of the Revenue Acts of 1924 and 1926, and avers that such deductions should be computed on the basis of the useful life of the improvements in question and the cost thereof. The amounts of the special assessments representing the cost of the improvements and the useful life of the various types thereof are stipulated and so require no discussion here except to say that if the petitioner is right in its contention, the exact amounts claimed are deductible from the gross income in the respective years under consideration.
*2371 A levy against private property for paying the cost of public improvements abutting on or adjacent thereto or for replacements or repairs thereof is a special tax which tends to increase the value of the property assessed. . Such a tax is excluded from allowable deductions from gross income for Federal tax purposes by the express provision of section 234(a)(3)(C) of the Revenue Act of 1924. Nothing in the statute, *614 however, precludes a taxpayer from charging amounts so paid into its capital accounts and in so doing the petitioner conformed to sound and generally accepted accounting principles and practice. The bookkeeping methods employed by taxpayers for their own purposes, except as they may be records of taxable transactions, are of no concern to this Board and, standing alone, entries on books of account are not determinative of tax liability. . Our problem here is not to determine whether the expenditures in question are properly chargeable into capital accounts, but to decide whether amounts so charged; in the circumstances set forth in our findings of fact, represent*2372 depreciable assets or amortizable capital investments which the petitioner is entitled to recover free from tax under the statutory provision cited above.
To establish a claim for annual ratable deductions for the depreciation of wasting assets under the statutory provisions relied on, the petitioner must prove cost or value at March 1, 1913, if acquired prior thereto, the useful life thereof, and use in its trade or business in the taxable year. As a corollary to the first condition, we think it clear that ownership must be established, since the only purpose for which such deductions are authorized is the untaxed recovery of capital investments in wasting assets used for income purposes. . The improvements in question are not the property of the petitioner nor located on its property, but are attached to land which is owned in fee by the city of Des Moines. ; . In our opinion the statutory provision upon which the petitioner relies contemplates the tax-free return only of the cost of assets in which the taxpayer claiming thereunder*2373 has a capital investment and which in some way contribute to the gross income from which deductions for depreciation are allowable and that in such use or by the passage of time or operation of law are exhausted. Certainly the petitioner makes no direct income-earning use of the improvements here in question. The exhaustion, which calls for repairs and replacements, does not result alone from use by the petitioner, which with all its tenants is only a small part of the public assessed for, benefited by and using the improvements in question. We are of the opinion, therefore, that the deductions claimed are not within the provisions of section 214(a)(8) of the Revenue Acts of 1924 and 1926.
The petitioner argues that the principle for which it contends has been recognized in several prior decisions of the Board. We have made a careful study of the decisions cited and in our opinion none of them control the issue here. In , we held that the cost of tunnels constructed by the petitioner *615 under city property connecting its stores on opposite sides of a street were capital expenditures recoverable tax free as ratable annual*2374 deductions from gross income. The improvement there in question was not a public necessity, was not constructed by the municipality, paid for by special assessments or used as a public thoroughfare. Our decisions there established no rule applicable to the situation in this proceeding. In , we held that a private roadway located on the property of the taxpayer which was constructed, owned and controlled by it was a part of its business plant and that "the original cost must be regarded as a capital expenditure not deductible from income" but made no decision relating to the depreciation or amortization of the cost thereof. In , we permitted the petitioner to amortize the cost of liming his farm over a period which it was proved measured the useful life of the annual application of line to the soil. This was periodical expenditure for an income-producing element useful during a period of more than one year.
In , the taxpayer sought the right to amortize special assessment payments. In its opinion the Board said:
*2375 The item of $129,600 represents and was assessed as a benefit to petitioner's real property and its payment is an addition to the cost of such real property. The amount of this payment should be capitalized and allocated to the several parcels and descriptions of petitioner's real property in the proportion that the values of such parcels and descriptions contribute to the total valuation upon which the benefit assessment was levied.
This is not inconsistent with our conclusion above, since the amounts in question, if properly capitalizable, can be recovered tax free whenever the property is sold.
Some accounting authorities suggest that expenditures of the nature under review should be recovered tax free by annual deductions from gross income. The Commissioner, in several pronouncements in effect, has approved such procedure. All agree that such payments should be capitalized, but so far no workable rule for the ratable annual recovery thereof tax free has been devised and enacted into law.
It is stipulated that in 1924 the petitioner paid a special assessment imposed by the city of Des Moines for the repair of certain pavements adjacent to its properties. Such payment*2376 is not deductible from petitioner's gross income in the year of payment as an ordinary and necessary expense. .
The petitioner argues that a letter from a former Commissioner authorized the deductions here in question and contends that such *616 letter is a continuing promise which is at least morally binding on the Government. This question has been decided adversely to the theory of the petitioner. .
Reviewed by the Board.
Decision will be entered for the respondent.
MURDOCK and MATTHEWS concur in the result only.