Opinion
No. 25, Docket 21376.
Argued November 2, 1949.
Decided November 22, 1949.
In 1921 the two plaintiffs and a third person, each of whom owned a one-third undivided interest in certain land and buildings, leased them to certain lessees for a term of twenty-one years with a renewal option for a similar period. Under the lease, the lessees obligated themselves to remove the buildings and to erect a new building, towards the cost of which the lessors agreed to contribute $75,000. The lessees accordingly demolished the old buildings and, in 1921, erected a new building on the leased premises at a cost of $150,000, towards which, as agreed, the lessors contributed $75,000, each of the lessors paying $25,000 of this amount. Under the terms of the lease the new building when erected became, subject to the lease, the property of the landlord. This new building was a concrete garage; it was not removable from the premises without destroying its value, except as scrap.
On April 1, 1934, the lease was forfeited, the lessees surrendered the premises, and the lessors took possession of the land and building. At that time, the new building had a fair market value of $75,000 (which happened to be one-half of its original cost). The two plaintiffs each included as income, in her income tax return for 1934, the sum of $12,500, this sum representing one-third of $37,500, the then fair market value of the lessees' surrendered interest. Each plaintiff paid a tax accordingly.
Subsequently, each of the plaintiffs filed a claim for refund which the Commissioner disallowed. The plaintiffs then brought the present suits for refunds. The suits, consolidated for trial, were tried, on stipulations setting forth the foregoing facts, before a judge without a jury. There the taxpayers made the following alternative arguments: (1) No taxable gain resulted from the termination and surrender of the lease. (2) If a taxable gain of $37,500 did result to the three lessors in 1934 from their acquisition, through surrender, at that time, of the one-half of the building for which the lessees had paid in 1921, then there must be deducted from this sum a loss to the three lessors. This loss consisted of the difference between (a) the amount paid in 1921 by those lessors for the other one-half of the building, adjusted for depreciation, from 1921 to 1934, and (b) the fair market value of that one-half in 1934. This deduction reduced the taxable gain of each plaintiff resulting from the termination to $6500. The trial judge, rejecting those arguments, entered judgments dismissing the complaints on the merits.
Taxpayers' contention as to this deduction may be stated in one of two ways:
(A) The three lessors in 1921 invested $75,000 for their one-half. Subtracting depreciation (from 1921 to 1934) of $19,500, the adjusted cost of the lessors as of 1934 was $55,500. The fair market value in 1934 of this one-half was $37,500. The loss on this investment was therefore $18,000. Deducting this loss from the gain ($37,500) to the lessors on the receipt of the other one-half, leaves a taxable gain of $19,500. Each of the taxpayers received one-third of this gain, or $6,500.
(B) The fair market value in 1934 of the entire building was $75,000. From this figure must be deducted the adjusted cost of the three lessors' one-half, computed as above, or $55,500. The taxable gain of the three lessors was therefore $75,000 minus $55,500 or $19,500. Each taxpayer received one-third of this gain, or $6,500.
Benjamin H. Trask, New York City, for appellants.
John F.X. McGohey, United States Attorney for the Southern District of New York, New York City (Henry L. Glenn, Assistant United States Attorney, New York City, of counsel), for appellee.
Before L. HAND, Chief Judge, and SWAN and FRANK, Circuit Judges.
Helvering v. Bruun, 309 U.S. 461, 60 S.Ct. 631, 84 L.Ed. 864, disposes of taxpayers' first contention. Pursuant to the ruling in that case, the three lessors, on the termination of the lease, received a taxable gain equal to the fair market value of that half of the building for which the lessees had paid.
The taxpayers argue that the Bruun decision rested on a stipulation which did not show whether or not the building, when the lease terminated, had a value, if removed from the land, other than scrap value. Accordingly, taxpayers argue that the Bruun case left intact our previous decision in Hewitt Realty Co. v. Commissioner, 2 Cir., 76 F.2d 880, 98 A.L.R. 1201 where, without doubt, the building had nothing but scrap value if severed from the land. But the Court in the Bruun case said that it would reach the same conclusion even assuming that the stipulation meant that the land was enhanced in value by the value of the building at the date of termination. We think it plain that Bruun over-ruled Hewitt Realty. See the explanation of the Bruun case in Helvering v. Griffiths, 318 U.S. 371, at pages 393 and 411, 63 S.Ct. 636, 87 L.Ed. 843.
Congress, in 1942, by adding 26 U.S.C.A. § 22(b) (11), effective January 1, 1942, wiped out the Bruun doctrine, 56 Stat. 802, 812, § 115(a). But that statutory change is inapplicable to this case.
We cannot agree with taxpayers' second contention. The half of the building for which the three lessors paid $75,000 in 1921 was then their own improvement and continued to be so in 1934 when the lease terminated. Until they dispose of the land and building, they will realize no taxable gain or loss with respect to that investment.
Affirmed.