Malta Temple Ass'n v. Commissioner

MALTA TEMPLE ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Malta Temple Ass'n v. Commissioner
Docket No. 29476.
United States Board of Tax Appeals
16 B.T.A. 409; 1929 BTA LEXIS 2593;
May 8, 1929, Promulgated

*2593 Corporate organization expenses may not be included in the basis for determining profit or loss upon the sale of property acquired subsequent to incorporation, but constitute a capital expenditure deductible under the loss provisions of the statute upon dissolution of the corporation and abandonment of its corporate franchise.

C. H. Henderson, for the petitioner.
A. H. Murray, Esq., for the respondent.

SMITH

*409 This proceeding involves a deficiency for the period January 1 to June 30, 1925, in the amount of $170.55. In computing the gain realized from the sale in 1925 of certain real estate acquired in 1924, the respondent disallowed as part of the cost of said real estate the organization expenses incurred by the petitioner at the time of its incorporation in 1924.

FINDINGS OF FACT.

The petitioner was incorporated May 9, 1924, under the laws of West Virginia. One of the purposes for which it was created was "the acquiring, operation and leasing of real and personal property in the City of Wheeling, known as Malta Temple." It purchased the building known as Malta Temple on June 2, 1924, for a consideration of $60,000. Said building*2594 was operated by petitioner at a loss over the remaining period of the calendar year 1924 and a part of the calendar year 1925. On May 23, 1925, the petitioner sold the said building for a consideration of $75,000, and on June 20, 1925, it dissolved and surrendered its corporate charter.

The petitioner owned no property during its existence other than the building above described. It had no business other than the operation of said building.

In connection with its incorporation in 1924 the petitioner incurred expenses incident thereto in the amount of $1,087.40.

Petitioner filed income-tax returns for the calendar year 1924 and for the fractional part of the year 1925 during which it was in existence. In the latter return the petitioner, in reporting the gain derived from the sale of the above described building, included as a part of the cost thereof the organization expenses incurred in connection with its incorporation in the year 1924. In his computation the respondent has computed the gain upon the sale of the building in the year 1925 upon a cost basis of $60,000, excluding therefrom the full amount of organization expenses.

*410 OPINION.

*2595 SMITH: We think that petitioner's contention that the organization expenses incurred by it at the time of incorporation constitute capital expenditures is sound. To this effect see ; ; ; , and later cases. In , we held that corporate organization expenses were no part of the cost of a leasehold acquired at the time of incorporation and could not be included in the basis to be used in computing the exhaustion allowance on the leasehold. It is not material that in the instant case the basis sought is for the purpose of computing gain or loss upon the sale of the property rather than for the purpose of determining the allowance for exhaustion. The statutory provision for the ascertainment of gain or loss from the sale of property is contained in section 202(a) of the Revenue Act of 1924, which reads as follows:

Except as hereinafter provided in this section, the gain from the sale or other disposition of property*2596 shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204, and the loss shall be the excess of such basis over the amount realized.

Section 204(a) provides that with certain exceptions not material here the basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property.

Section 202(b) provides that:

In computing the amount of gain or loss under subdivision (a) proper adjustment shall be made for (1) any expenditure property chargeable to capital account, and (2) any item of loss, exhaustion, wear and tear, obsolescence, amortization, or depletion, previously allowed with respect to such property.

We think it obvious that the statute contemplates adjustments only for capital expenditures relating to the specific property. The section must be read:

In computing the amount of gain or loss under subdivision (a) proper adjustment shall be made for * * * any expenditure properly chargeable to capital account * * * with respect to such property. (Italics ours.)

Any other interpretation of the statute would lead to endless*2597 confusion. In reporting income the result of each capital transaction must of necessity be computed independently of other capital transactions. The expenditures incident to incorporation here are in no sense a part of the transaction involving the subsequent purchase of the building. So far as the evidence shows, the petitioner might have enjoyed its corporate franchise without ever having acquired the building and might have continued to do so after disposing of the building. The fact that the petitioner did dissolve and abandon its corporate charter soon after the sale of the building raises the question *411 of whether in so doing it sustained a deductible loss in respect of its capital investment in the organization of the corporation.

We have heretofore held, as above stated, that expenses of incorporation are capital expenditures, see cases supra, and as such are not deductible as ordinary and necessary expenses for the year in which paid. ;; *2598 ; ; ; et alia.

We have held further that such capital expenditures may not be recovered by exhaustion deductions prorated over the life of the corporation. .

Upon dissolution and surrender of its corporate franchise in the year 1925 the petitioner abandoned or lost a corporate asset which had cost it $1,087.40, no part of which had been returned to it through exhaustion deductions or as ordinary and necessary expense deductions. We think that such a loss clearly falls within the provisions of section 234(a)(4) of the Revenue Act of 1924, and is deductible in computing net income of the year when sustained.

Judgment will be entered under Rule 50.