Opinion
No. M-103.
November 9, 1936.
Proceeding by Joseph Huber against the United States.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a Commissioner, makes the following special findings of fact:
1. Emilie Huber, the mother of plaintiff, died August 28, 1914, leaving a will in which plaintiff was named executor. Her will contained, among other things, the following provisions: "I give and devise to my son, Joseph Huber, any and all real property or interest therein I may own at the time of my death to have and to hold the same for his own use and benefit for the term of his natural life and to receive the rent, income, and profit thereof to his own use and benefit, and upon his death I give and devise the said real property to my four children, Max Huber, Charles Huber, Emilie Obernier, and Francisca Seidenberg, share and share alike. * * *"
2. The real property devised to the plaintiff for life by his mother consisted of about 40 buildings, of which the lower floors were used for stores and the floors above for living quarters.
3. Charles Huber, a brother of plaintiff, died January 14, 1918, leaving a will in which the plaintiff was named residuary devisee of certain properties, including the interest of remainderman of Charles Huber under the will of Emilie Huber.
4. February 27, 1923, plaintiff filed his income tax return for the year 1922, which disclosed a net income of $229,867.31 and a tax liability of $101,515.40. The tax was paid as follows:
March 1, 1923 ........... $20,204.89 September 13, 1923 ...... 26,323.57 December 13, 1923 ....... 24,000.00 December 21, 1923 ....... 5,173.96 April 29, 1924 .......... 25,812.98 ---------- Total .............. 101,515.40
April 23, 1927, an additional assessment was made against the plaintiff by the Commissioner of Internal Revenue for 1922 in amount of $5,011.19, together with interest thereon of $1,121.58, aggregating $6,132.77, which was paid by plaintiff May 4, 1927.
Subsequently a certificate of overassessment was issued to plaintiff for the year 1922 in the sum of $535.74, with interest thereon of $33.38, aggregating $569.12, which amount was refunded to plaintiff and received by him on July 18, 1928.
5. March 15, 1924, plaintiff filed his income tax return for the year 1923, which disclosed a net income of $198,261.17 and a tax liability of $83,630.89. The tax was paid or abated as follows:
March 15, 1924 .......... $20,907.73 (paid) June 6, 1924 ............ 11,815.40 (paid) August 11, 1924 ......... 20,907.72 (abated) September 11, 1924 ...... 15,000.04 (paid) December 16, 1924 ....... 15,000.00 (paid) --------- Total .............. 83,630.89
April 23, 1927, an additional assessment was made against the plaintiff for 1923, in amount of $5,520.67, with interest thereon of $904.37, aggregating $6,425.04, which was paid by plaintiff May 5, 1927.
6. March 14, 1925, plaintiff filed his income-tax return for the year 1924, which disclosed a net income of $191,883.84 and a tax liability of $59,808.66. The tax was paid as follows:
March 17, 1925 .......... $16,118.39 June 10, 1925 ........... 15,690.27 September 11, 1925 ...... 14,000.00 December 10, 1925 ....... 14,000.00 ---------- Total .............. 59,808.66
June 20, 1927, plaintiff filed an amended income tax return for the year 1924, disclosing a net income of $198,408.84 and a tax liability thereon of $62,614.41. The additional tax thus disclosed was duly assessed, together with interest thereon in amount of $272.13, aggregating $3,077.88, which was paid by plaintiff July 8, 1927.
March 9, 1929, an additional assessment was made against plaintiff for 1924, in amount of $64.05, together with interest of $13.84, aggregating $77.89, which amount was satisfied by credit March 29, 1929.
7. For the years 1922, 1923, and 1924, plaintiff, as executor of the estate of Emilie Huber, filed fiduciary returns covering the income of the estate for these years, and he also filed individual returns referred to in findings 4, 5, and 6 herein covering his incomes during those years, but he did not claim in any of these returns any deductions on account of depreciation of any of the real property passing under the will of Emilie Huber, in all of which he had a life interest, and in which he also had an undivided one-fourth interest as remainderman under the will of his brother, Charles Huber. Likewise the Commissioner has made no allowance of a deduction on account of such depreciation.
8. December 6, 1928, the plaintiff filed claims for refund for the years 1922 and 1923 in the respective amounts of $7,65956 and $5,612.32, and on March 9, 1929, filed a claim for refund for the year 1924 in amount of $4,658.48.
In the aforesaid claims the plaintiff contended that in computing his tax liability for the years 1922, 1923, and 1924 he was entitled to a deduction from gross income for depreciation of the property held by him as a legal life tenant, and in which property the plaintiff owned an undivided one-fourth interest in the remainder.
9. The Commissioner rejected the claims for refund for 1922 and 1923 on March 22, 1929, and the claim for refund for 1924 on December 13, 1929.
10. During the years 1922, 1923, and 1924, the plaintiff managed and looked after all repairs of the real properties devised to him by his mother, rented them, and collected the rents. Depreciation was sustained on these properties through their use by plaintiff in his business, and the correct apportionment thereof on account of plaintiff's interest (including that in which plaintiff had a life interest as well as that held by him in fee simple) was $11,125.72 for each of the years 1922 and 1923, and $10,236.38 for 1924.
Conclusion of Law.Upon the foregoing special findings of fact, which are made part of the judgment herein, the court decides, as a conclusion of law, that the plaintiff is entitled to recover.
Entry of judgment will be suspended, however, to await receipt of computations by the parties showing the exact amount due plaintiff in accordance with the opinion herein.
Frank S. Bright, of Washington, D.C. (H. Stanley Hinrichs, of Washington, D.C. on the brief), for plaintiff.
Joseph H. Sheppard, of Washington, D.C. and James W. Morris, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
The plaintiff seeks in this suit to have depreciation allowed on some 40 buildings in which he holds a life interest. These properties were devised to plaintiff for life under his mother's will. He is in possession and enjoyment of them. Prior to taxable years involved one of the remaindermen died leaving his interest in these properties to plaintiff. He therefore held one-fourth interest in fee simple and a life interest in the remaining three-fourths interest. The properties were subject to wear and tear and exhaustion. They were used by plaintiff in his trade or business during the years in question. He managed them, kept them in repair, collected the rents, and returned the revenue received from them as income under the revenue laws.
Plaintiff duly filed individual income tax returns and also returns for his mother's estate of which he was executor. Although no claim for deductions on account of depreciation sustained on these properties was made in these returns, nevertheless, plaintiff later filed timely claims for refund in which he contended he was entitled to deduction from gross income for depreciation sustained not only on the part in which he possessed the fee simple, but also on the part of the property in which he had an estate for life.
There is no dispute that plaintiff is entitled to deductions claimed on the interest he had in fee simple. The defendant concedes this right. There remains only the question as to whether a life tenant is entitled to a deduction for depreciation sustained on properties used by him in his trade or business. The applicable section of the Revenue Acts of 1921 and 1924 is 214(a)(8), 42 Stat. 240, 43 Stat. 270, which provides: "(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence."
We can find nothing in these words of this section to indicate that the property must be held in an absolute estate in order to permit the allowance. The plaintiff had the possession and enjoyment of a freehold estate and that estate was suffering a gradual exhaustion; through such exhaustion the income which was being returned for income tax purposes was gradually diminishing. This slow exhaustion was due to wear and tear and was not caused by a shrinkage in the value of the estate due to efflux of years.
In the case of Rose v. Grant (C.C.A.) 39 F.2d 338, 339, the Circuit Court for the Fifth Circuit in a similar case involving the identical question held: "The Revenue Acts of 1918 and 1921 do not limit the deduction to property held in fee simple, or attempt nice discriminations between inheritances absolute and limited or conditional, but they grant the allowance on `property used in the trade or business.' Therefore, an estate for life, even if it be pur auter vie, if so used, is property within the letter and spirit of the statute and entitles the owner, that is, the holder of the legal title in possession, to the deduction." See, also, H. C. Brown v. Commissioner, 25 B.T.A. 631.
The defendant pleads section 215(b) of the Revenue Acts of 1921 and 1924 ( 42 Stat. 242, 43 Stat. 272) as a further defense. We can see no merit in this contention. The plaintiff is making no claim for depletion of the land or for shrinkage in value due to the expiration of the life estate. There is a marked difference between depreciation and depletion and shrinkage in value due to the lessening of the life estate by age.
The cases relied upon by the defendant are distinguishable on their facts from the case at bar in that each deals with a different character of interest which would make these decisions inapplicable. A leasehold is only a chattel and there is a decided difference between an equitable life tenant and a legal life tenant. We can see no good purpose to be attained in differentiating each case.
The plaintiff is entitled to the allowance for depreciation on the properties in which he has a life interest.
The parties have stipulated that in the event it is held that plaintiff is entitled to deductions for depreciation on his interest as a life tenant, as well as on his fee-simple property, the amount of such deductions (including the correct apportionment of depreciation on account of the life estate, and the total depreciation sustained on the fee interest) is $11,125.72 for 1922, $11,125.72 for 1923, and $10,236.38 for 1924.
Judgment will accordingly be entered in favor of plaintiff by giving effect to those deductions, with entry of judgment suspended pending the submission of a computation by the parties on that basis. It is so ordered.