OPINION.

GRAUPNER: The only evidence offered in this appeal which is at all satisfactory in establishing any of the facts involved is that establishing the March 1, 1913, value of the hotel building. This value we find to be $175,000, and depreciation should be allowed on that basis. As to the rate to be applied in determining the allowable depreciation, the only evidence is that of a contractor who testified, in substance, that the building would have a useful life of from 10 to 20 years from 1917, depending on the repairs made. No evidence was offered to prove either the value of the equipment or its useful life. The depositions of the taxpayer's witnesses contain some general statements to the effect that the erection of new and more modern hotels in Albany has tended to render the taxpayer's hotel obsolete, but as to the extent to which this affects the value of the taxpayer's property we are not informed. No evidence was offered to establish the value of assets for the purpose of determining invested capital.

We believe it advisable to point out that we are wholly uninformed as to the value attributed by the Commissioner to the taxpayer's property and as to the rates of depreciation used in determining the tax liability. The statement attached to the deficiency letter discloses that the deficiency was based on a revenue agent's report. No effort was made to advise us of the values and rates set forth therein, which were the basis of the Commissioner's determination. It is evident, we believe, that we can not find that the Commissioner erred unless we are first informed as to what he did in committing the error of which the taxpayer complains.

APPEAL OF TWELVE EAST THIRTY-FIRST STREET
HOTEL CO.

Docket No. 3645. Submitted October 13, 1925. Decided November 18, 1925.

A reasonable allowance for exhaustion, wear and tear of a certain hotel building for the year 1919 found to be an amount computed at 4 per cent upon the cost of the building.

Edward Thompson, Esq., for the taxpayer.

John W. Fisher, Esq., for the Commissioner.

Before JAMES, LITTLETON, SMITH, and TRUSSELL,

This appeal is from the determination of a deficiency in income and profits taxes for the year 1919 in the amount of $5,239.75. Only so much of the deficiency is in controversy as arises from the disallowance of part of the deduction taken by the taxpayer in its return for the year 1919 as an allowance for the exhaustion, wear and tear of the building owned by it.

FINDINGS OF FACT.

The taxpayer is a New York corporation with its principal office in New York City.

On June 30, 1919, the taxpayer acquired, at a cost of $226,127.80, a certain hotel building situated in New York City. It retained title to the building until May 30, 1920, at which time the building was transferred to the Twelve East Thirty-first Street Realty Co.

The taxpayer, in computing its net income for the year 1919, deducted as an allowance for the exhaustion, wear and tear of the building in question, for the period July 1 to December 31, 1919, an amount computed at the rate of 4 per cent per annum on a valuation of $226,127.80. The Commissioner, upon audit of the taxpayer's return, allowed for the exhaustion, wear and tear of the building an amount computed at the rate of 2 per cent per annum on the valuation claimed and disallowed the remainder of the deduction. Subsequent to the mailing of the deficiency letter herein, the Commissioner, upon consideration of the returns of the taxpayer and the Twelve East Thirty-first Street Realty Co. for the years 1920 and 1921, allowed for each year for the exhaustion, wear and tear of the building in question an amount computed at the rate of 4 per cent per annum on the valuation mentioned.

A reasonable allowance for the exhaustion, wear and tear of the taxpayer's building during the period July 1 to December 31, 1919, is an amount computed at the rate of 4 per cent per annum on a valuation of $226,127.80.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days' notice, in accordance with Rule 50.

APPEAL OF H. FENDRICH, INC.

Docket No. 4254. Submitted September 22, 1925. Decided November 18, 1925.
Taxpayer paid the sum of $5,000 for the use of certain machines
under a lease contract. Held, that such amount may not be
deducted as an ordinary and necessary expense but must be
exhausted pro rata over the life of the contract.

Conrad Wolf, Esq., for the taxpayer.
Willis D. Nance, Esq., for the Commissioner.

Before GRAUPNER, TRAMMELL, and PHILLIPS.

This is an appeal from the determination of a deficiency in income and profits taxes for the nine months' period ended December 31,

1920, in the amount of $3,742.32. The question involved is whether the amount of $5,000, paid in 1920 for the use of certain machines under a lease contract, may be deducted as an expense in that year, or whether the amount was a capital expenditure to be spread over the period of the lease and an aliquot part taken each year as exhaustion.

FINDINGS OF FACT.

The taxpayer is an Indiana corporation with its principal place of business at Evansville. It was organized April 1, 1920, for the purpose of manufacturing cigars. It succeeded a partnership which had conducted the same business.

During the existence of the partnership bands were placed by hand on the cigars which it manufactured. About the time that the corporation was organized a mechanical device for banding cigars was patented and was placed on the market by the International Banding Machine Co., a New York corporation.

On April 20, 1920, the taxpayer, as lessee, entered into an agreement with the International Banding Machine Co., as lessor, for the use of 10 of the banding machines for a period of five years. The material part of the agreement which gives rise to the controversy here reads as follows:

1. The lessor will deliver said machine or machines hereby leased to the lessee f. o. b. in the Borough of Manhattan, New York City, on or before the 15th day of June, 1920. *

2. The lessee agrees to pay the lessor upon the execution of this agreement five hundred ($500) dollars in New York funds for each machine covered hereby, and shall not at any time after the delivery to it f. o. b. as aforesaid, of each respective machine, have or claim repayment of said sum or any part thereof.

These provisions were followed by others relating to the ownership of the leased machines, their use and maintenance, and the following:

6. The leased machinery shall be used only in the banding of cigars, and the lessee shall pay the lessor throughout the full term of this agreement, the sum of $150.00 per quarter-yearly per machine in advance for the use of said leased machinery, commencing on the date when the said leased machinery is delivered to the lessee.

7. The term of this agreement shall be five years from the date or dates of deliveries

The initial payment of $500 per machine, a total of $5,000, was paid by the taxpayer at the time the agreement was executed, and the machines were delivered to it substantially in accordance with the agreement.

The taxpayer charged the initial payment of $5,000 to expense and claimed the full amount as a deduction from gross income in the

return filed for 1920. The Commissioner allowed a deduction of only $666.67, on the theory that the payment should be prorated over the life of the agreement, which resulted in the deficiency here involved.

DECISION.

The determination of the Commissioner is approved.

OPINION.

GRAUPNER: In its petition the taxpayer contends that the sum of $5,000 was paid for the privilege of securing the lease. At the hearing it claimed that the $5,000 was paid for the purpose of expediting the manufacture of the machines by a company which was then starting in business, and to secure prompt delivery. Taxpayer also asks that we hold the agreement to be divisible.

It appears to us immaterial whether or not the agreement was divisible. The cases cited by the taxpayer involve contracts a part of which were valid and a part invalid. We are not concerned with the validity of any part of the contract executed by the taxpayer, particularly as it appears that the requirements of the contract have been fulfilled by both parties. In asking us to find that the payment of $5,000 was made for a purpose other than to secure a license to use the patented machines, the taxpayer is asking that we read into the agreement something that will vary its plainly expressed terms and to construe the meaning of the agreement in a manner radically different from the meaning which would naturally be arrived at by placing upon the terms thereof their ordinary and accepted meaning. There appears to us to be no ground for such a construction, as the instrument on its face is complete and we can find in it no ambiguity which needs an interpretation other than that to be gained by the clear import of its terms.

APPEAL OF HENRY STODDARD.

Docket No. 3198. Submitted September 25, 1925. Decided November 20, 1925.
William B. Dana, Esq., for the taxpayer.
Ward Loveless, Esq., for the Commissioner.

Before GRAUPNER, TRAMMELL and PHILLIPS.

This is an appeal from the determination of a deficiency of $3,930.48 in income tax for the calendar years 1919, 1920, and 1921. The question involved is whether the taxpayer is entitled to deduct a claimed loss on the sale of securities which were held by trustees under an instrument given by the taxpayer.

104881-27-9

FINDINGS OF FACT.

The taxpayer is an individual and a resident of Connecticut. For a number of years it has been the custom of the taxpayer and his wife, both of whom are of advanced age, to spend the winter of each year in the South.

On December 21, 1916, the taxpayer executed and Clifford I. Stoddard and the Union & New Haven Trust Co. accepted the trust created by the following instrument:

I, Henry Stoddard, of the Town of Woodbridge, State of Connecticut, do hereby give, grant, sell, assign, transfer and convey unto my son, Clifford I. Stoddard, of said Woodbridge, as trustee, and unto the Union & New Haven Trust Company, a corporation organized under the laws of the State of Connecticut and located in said New Haven, as co-trustee, with my son Clifford, the several items of property noted in the schedule or schedules of property hereto annexed, marked "Exhibit A," and made part hereof. The said trustees are to take, hold and dispose of said property upon the trust and subject to the conditions stated in this instrument. Said trustees shall have power to invest or reinvest any part of the principal of the trust fund, to change investments, and for that purpose to sell, convey, pledge and mortgage said trust fund at discretion to hold the same during my life, collect the income and to pay over to my wife, Amelia E. Stoddard, annually three thousand dollars ($3,000), to be paid in equal quarterly installments, on or about the 16th days of January, April, July and October in each year, and at such times to pay over the balance of said net income to me during the full term of my life. At my death, the said trustees are to pay over and deliver to the trustees named in my will all the trust fund, principal, and income, to be held by such trustees named in my will upon the trusts and as a part of the trust fund created, established and provided for in my will.

I hereby reserve the right to withdraw from said trust fund any and each item of property, and add thereto at my discretion, and I also reserve the right to terminate this trust, either in whole or in part, at my discretion, and in case of the exercise of such reserved right of withdrawal of any item of property, or of terminating this trust, in whole or in part, then and in such event, the trust shall terminate and the property shall be thereupon returned to me.

Subsequent to the execution of this instrument the following securities, which are referred to in the instrument as being listed in "Exhibit A," were delivered to the Union & New Haven Trust Co. and placed in a safe-deposit box:

500 shares, Brooklyn Rapid Transit Co.

100 shares, Scranton Electric Co., preferred.

100 shares, Mackay Co., preferred.

400 shares, Interborough Consolidated Corporation, preferred.

300 shares, American Telephone & Telegraph Co.

300 shares, The General Electric Co.

161 shares, The Associated Drygoods Corporation, first preferred. 80 shares, The Associated Drygoods Corporation, second preferred.