First Nat'l Bank v. Commissioner

                  United States Board of Tax Appeals

LANSDON: The respondent has determined a deficiency in income tax for the year 1929 in the amount of $ 599.75. The petitioner is a national banking corporation, with its principal office at Mobile, Alabama. The issues are: (1) Insufficient depreciation allowance on an annex to its bank building constructed in 1929; (2) erroneous computation of allowance for depreciation of its mechanical equipment; (3) disallowance by respondent as ordinary expense of an amount alleged to have been expended for necessary repairs on its old bank building; (4) disallowance of deduction representing certain donations; and (5) overstatement of profit realized from the sale of securities in 1929. It introduced no evidence in support of its second contention and at the hearing the respondent admitted error as to the fifth cause of action. Accordingly, the respondent is affirmed in his determination as to the depreciation of petitioner's mechanical equipment in 1929, and is reversed in the matter of profits from the sale of securities in the same year, which reduces the petitioner's profit thereon in the amount of $ 3,976.41. This leaves for our consideration only alleged errors (1), (3), and (4).

The annex to petitioner's bank building was completed late in 1929. It is a steel and concrete eight-story office building which the respondent has determined has a useful life of 50 years, and upon which a depreciation deduction for the last two months of the taxable year, based on a rate of 2 percent per annum has been allowed in the amount of $ 1,866.33. Petitioner contends that the useful life of the building is not in excess of 40 years and asks for depreciation allowance at a rate not less than 2 1/2 percent per annum. This contention is based on section 23(k) of the Revenue Act of 1928. ¹ This Board and the courts have many times held that depreciation, including obsolescence, is a matter of fact to be established by evidence.

In support of its contention for a higher rate of depreciation, petitioner introduced three witnesses. Its vice president testified that the erection of the annex and of a new building just across the street by the Merchant's Bank caused the loss of a number of tenants of its old building and that, in his opinion, the erection of new office buildings in the future would shorten the economic life of the annex. The operating manager of the building in question testified that in his opinion the economic useful life of such buildings erected in 1929, or earlier, is not more than 35 years. He based his opinion on his knowledge of improvements in the construction of office buildings that are constantly being made. He enumerated improved highspeed elevators and heating and air-conditioning systems as being placed in new buildings, which cannot be economically installed in completed structures. To the same effect was the testimony of an architect in no way connected with the petitioner and also that of the architect who designed and supervised the construction of the building here involved. The respondent adduced no evidence on this point.

It is now generally known that the economic usefulness of office buildings is shorter than their physical life. In a similar controversy in Robert H. McCormick, 2 B.T.A. 430, where the respondent disallowed petitioner's claim for a 40-year useful life on office buildings in Chicago, the Board overruled his determination and allowed the computation of depreciation on the basis of 40 years of useful life. In our opinion petitioner's allowance for depreciation, including obsolescence, in the building here involved, should be made on the basis of 40 years of economic useful life. Central Savings Bank, 10 B.T.A. 1408; United Business Corp. of America, 19 B.T.A. 809. Cf. Burnet v. Niagara Falls Brewing Co., 282 U.S. 648.

The first section of the old bank and office building of the petitioner was erected in 1903, the second in 1913. In 1928 a fire in that building disclosed the necessity for somewhat extensive replacements in the electrical wiring system made in 1929 at a cost of $ 4,907.18, which amount the petitioner deducted from its gross income in that year as an ordinary and necessary expense. Such deduction was disallowed by the respondent, who held that the amount claimed was a capital expenditure. The evidence indicates that the expenditure in question was incurred in the installation of a completely new assemblage of electrical equipment. The old wiring and material had been used for 15 years before any necessity for other than ordinary repairs was discovered. In our opinion the replacement of the old wiring and other equipment was not for incidental repairs, but was in the nature of an additional capital expenditure which the petitioner is entitled to recover ratably over the remaining useful life of the building. On this issue the determination of the respondent is affirmed. Parkersburg Iron & Steel Co., 17 B.T.A. 74; affd., 48 Fed.(2d) 163; Lycoming Silk Co., 11 B.T.A. 523.

In the taxable year the petitioner made contributions and donations as follows:

     (Table omitted)

It is our opinion that contributions of this character do not fall within the classification of "ordinary and necessary expenses" as that phrase is used in the revenue laws, unless it is clearly shown that the expenses bear some direct relation to petitioner's business. They rather fall within the charities enumerated in section 23(n) of the Revenue Act of 1928. Congress has provided that such expenditures are, within certain limitations, deductible by individual taxpayers, but not by corporations. Such contributions if made public may have some advertising value, but they can hardly be classed as "ordinary and necessary" expenses of advertising. The respondent is sustained as to this issue.

In Welch v. Helvering, 290 U.S. 111, the Supreme Court, speaking through Mr. Justice Cardozo, said:

Unless we can say from facts within our knowledge that these are ordinary and necessary expenses according to the ways of conduct and forms of speech prevailing in the business world the tax must be confirmed. But nothing told us within this record or within the sphere of our judicial notice permits us to give that extension to what is ordinary and necessary.

While the Welch case did not involve contributions, it did require a definition of the statutory concept of "ordinary and necessary expenses." There is nothing in the record upon which we can base a finding that the contributions in question were such expenditures as are commonly regarded either as ordinary or necessary in the conduct of a business. The testimony is that some of the gifts could not have been denied without provoking resentment on the part of customers of the bank, but there is no evidence that any of the beneficiaries of the petitioner's largess increased their volume of business with the bank by reason thereof or that any would have discontinued their business relations with the petitioner had any or all the contributions been withheld. There is no showing that petitioner was directly benefited by the donations claimed. In this situation the deductions claimed must be denied.

Reviewed by the Board.

Decision will be entered under Rule 50.

GOODRICH concurs in the result.

SMITH dissents on the question of donations.