Opinion
Docket No. 26623.
1951-06-29
MARGARET PENN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Chas. Claflin Allen, Esq., for the petitioner. Frank Cavanaugh, Esq., for the respondent.
Chas. Claflin Allen, Esq., for the petitioner. Frank Cavanaugh, Esq., for the respondent.
Petitioner, life tenant of real estate bearing a building largely unproductive, razed it and erected at her own expense an income-producing building. At the time she had a life expectancy of 7 years but the property had a useful life of 50 years. Held, the Commissioner did not err in allowing depreciation deduction on a basis of estimated useful life of the building and disallowing it on basis of petitioner's life expectancy. Caroline T. Kissell, 15 T.A. 705, distinguished.
This case involves income tax for the calendar years 1943 and 1944. Deficiencies were determined in the respective amounts of $563.71 and $782.25. The only question presented is the amount of depreciation to be allowed upon a building, i.e., whether it is to be based upon the estimated useful life of the building or the life expectancy of the petitioner, life tenant as to the building. The parties agree upon the useful life of the building and the life expectancy.
FINDINGS OF FACT.
The stipulated facts are so found.
The Federal income tax returns of petitioner for the taxable years were filed with the collector for the first collection district at St. Louis, Missouri.
On July 9, 1907, petitioner's husband received in a partition of his deceased father's estate the real property on which the disputed improvements were later made. The property was located on a corner in the downtown section of Belleville, Illinois.
On the 25th of June 1913 petitioner and her husband, William C. Penn, entered into an indenture in which this same real property was conveyed as a gift in trust to their daughter, Gladys Lucille Penn, reserving to themselves and to the survivor a life estate in that real estate. The deed also provided:
* * * that during the continuance of said life estate as above defined, the said real estate shall be kept, leased and rented to tenants * * * for the best rents obtainable therefor; and that out of the money obtained for said rents the building situated on said real estate shall be kept in good repair and condition * * * and that the said William C. Penn shall have the control and management of said real estate as long as he shall live; and upon his death; the said Margaret A. Penn, if she shall survive him, shall have the control and management of said real estate as long as she shall live.
This conveyance is made by the grantors for the purpose of assuring to their said daughter Gladys Lucille Penn a fixed income, after the death of these grantors, during the remainder of her natural life.
There was located on the real estate above mentioned a three-story brick building. In 1938 (and after the death of William C. Penn) the building on the real estate was some sixty years old; the second and third floors had become entirely vacant and the first floor practically so. The only tenant remaining was a small cigar store on the first floor. The rental from that cigar store was the only income being realized from the building. The building had become completely obsolete and out of date and untenantable. In 1938 petitioner was active, vigorous mentally and physically, and then and for many years theretofore had attended to her own business herself.
In 1938 petitioner tore down the old three-story brick building and at her own expense erected a new one-story cement building at a cost to her of $17,628.45. The purpose of the erection of the new building was ‘to get something out of her life estate‘ in the realty. The useful life of the new building is 50 years beginning with 1938.
In 1938 petitioner was 73 years old and had a life expectancy of 7.26 years.
From 1938 to 1943 petitioner received $4,000 or $5,000 a year rental on the new building. From 1943 to 1950, inclusive, her rents from this building were as follows: 1943, $5,680; 1944, $6,900; 1945, $6,975; 1946, $7,525; 1947, $9,895; 1948, $10,950; 1949, $11,010; 1950, $9,669.
Petitioner's total expenses on the property each year were well under $1,000.
In 1938 petitioner was a woman of moderate means. She had two other pieces of realty and from both of these received around $5,000 gross a year.
For purposes of depreciation, the new building was completed in 1938.
Petitioner sued the contractor who had erected the new building for her in 1943 or 1944; the claim against that contractor was later assigned to her daughter, the remainderman.
This case was settled about three years ago for $3,000, and at that time the $3,000 was put in the form of a cashier's check payable to the next succeeding life tenant, to be used with such other money as might be necessary to fix the defective outer wall by replacing it with brick or some other substance.
Petitioner was born in June 1865; she is presently confined to her bed and wheelchair. She was not able to testify.
OPINION.
DISNEY, Judge
The petitioner's contention is that having expended her own money in the erection of the building involved she as life tenant of the property is entitled to a deduction in the nature of depreciation based upon her 7-year life expectancy instead of the 50-year useful life of the building, as determined by the Commissioner.
Section 23(l), Internal Revenue Code, provides that deduction for depreciation ‘shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant.‘
The Revenue Act of 1921, section 214(a)(8), provided for deduction of a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. Caroline T. Kissel, 15 B.T.A. 705, is based upon that statute. Therein it was found that the petitioner in 1921 acquired a life estate in land, and because the buildings were old and unproductive of satisfactory revenue, petitioner tore them down and put up a four-story building, costing about $113,000, which was rented when petitioner had a life expectancy of 11 years. She claimed depreciation on that basis but the Commissioner allowed it on a 50-year basis, that being the useful life of the building. Her contention was sustained. The petitioner relies primarily upon the Kissel case.
The respondent points out that the statute prescribes deduction of a reasonable allowance for exhaustion, wear and tear of property, that the statute is specific in providing that a life tenant shall be allowed deduction for depreciation in the same manner as an absolute owner, and that an absolute owner is allowed such deduction based on the useful life of the property.
The petitioner, however, argues in substance that the provision allowing deduction for depreciation to a life tenant as if absolute owner arose in the Revenue Act of 1928 which amended previous law, that the Revenue Act of 1926 had provided that in case of ‘improved real estate‘ held by a life tenant the depreciation deduction should be equitably apportioned between life tenant and remainderman, and that the 1928 Act, in providing for deduction for depreciation by a life tenant as if absolute owner also referred to ‘improved real estate.‘ This, petitioner contends, means property imprOved when received by the life tenant, so that the present statute, based on the 1928 Act, makes no provision for the situation in the instant case— where the improvement involved was not received by the life tenant with the property, but was erected by her at her own expense. Therefore, she argues in effect, the Kissel case, based on the 1921 Act prior to the Acts of 1926 and 1928, here controls. Reference to the earlier acts in Grant v. Rose, 32 F.2d 812, is cited, and petitioner quotes H. Edward Wolff, 7 T.C. 717, where, in a case involving annuity payments for a purchased life estate, we said in effect that if the petitioner has purchased a life estate for a lump sum, the sum would have been exhaustible over the life expectancy of the life tenant.
We can not agree with the petitioner's contention. The Kissel case, in our view, does not apply, since the present provision as to deduction by a life tenant as if absolute owner originated in 1928; and we find no support for petitioner in the fact that the provisions in the Revenue Act of 1926 refer to ‘improved‘ real estate. Real estate without improvements is not subject to depreciation, the use of the word ‘improved‘ merely so recognizes, and the use of the expression, in our opinion, can not reasonably be the basis for petitioner's argument that only real estate received by a life tenant already improved is covered by the statute. The language of the statute is plain and general: Property held for life with remainder to another, shall be the subject of depreciation deduction as if life tenant were absolute owner, which means on a basis of useful life. If there is inequity in such a provision, when applied to the present case, it is for Congress, not us, to remedy. Congressional intent in the present statute, however, we find clearly indicated in the Committee Report (1939-1 C.B.(PART 2) 423), as to the Revenue Act of 1928, stating that:
In the case of life tenant and remainderman the bill provides that the deduction for depreciation shall be computed as if the life tenant were the absolute owner of the property— that is, in accordance with the estimated useful life of the property— and shall be allowed to the life tenant each year that he holds the property. * * *
It is to be noted that the reference in the Senate Report on the Revenue Act of 1928 to the situation of life tenant and remainderman is general, not limited to improved real estate, well indicating that the instant situation was not overlooked and that ‘improved‘ was used in the statute in 1926 only because only such improved real estate involved depreciation. Petitioner's argument as to the expression ‘improved real estate‘ is indeed met by the fact that though that expression appears in the Revenue Act of 1926 it is changed to ‘property‘ in the Revenue Act of 1928 and has since so appeared.
The Kissel case, involving a statute containing no provision on the subject of depreciation allowance to a life tenant, can not control in the face of the particular provision later provided, and effective in the years here involved. Cases such as H. Edward Wolff, supra, clearly have no application, nor does a situation involving an ordinary purchased life interest. Elmer J. Keitel, 15 B.T.A. 903. In such a case the purchased life interest is the capital asset, not the physical property.
The petitioner, as above seen, contended on brief that the Revenue Act of 1928, as well as that of 1926, referred to ‘improved real estate‘; and the petitioner actually quotes section 23(k) of the Revenue Act of 1928 as reading: ‘In the case of improved real estate held by one person for life * * * .‘ This is, of course, a misquotation. The Revenue Act of 1928, section 23(k), in fact reads, instead of the language just quoted from petitioner's brief, as follows: ‘In the case of property held by one person for life * * * .‘
Section 124(i), Internal Revenue Code, as added by section 155 (f) of the Revenue Act of 1942, adds the language of section 23(l) to the law of amortization of emergency facilities. Since it appears obvious that the object of section 124 was to encourage construction of war emergency facilities, the addition of such language refutes petitioner's theory that section 23 (l) was not intended to apply to new improvements made by a life tenant.
Moreover, even under the Kissel case, the petitioner could not here prevail, for we there said:
This case does not present the situation of a life tenant with a very limited life expectancy erecting improvements for the benefit of remaindermen which might savor of a gift to the latter. * * *
Here, as shown in the facts, the original conveyance was made by petitioner and her husband ‘for the purpose of assuring to their said daughter * * * a fixed income, after the death of these grantors * * * .‘ This, with the erection of a 50-year-life building by one having an expectancy of 7 years, indicates, we think, that the building was not erected by petitioner merely for her own benefit, but for benefit of herself and daughter; and the rule expressed by the statute logically applies.
We conclude and hold that the Commissioner did not err in allowing depreciation on a basis of useful life of the building.
Reviewed by the Court.
Decision will be entered for the respondent.