Opinion
Docket No. 12511.
1947-08-14
LONGVIEW HILTON HOTEL COMPANY, BY S. A. ELLISON, JAMES B. HERNDON, JR., AND JOHN M. BROWN AS TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Wright Matthews, Esq., for the petitioner. Allen T. Akin, Esq., for the respondent.
Petitioner in 1941 obtained a loan, secured by mortgage on its hotel property. For services in securing the loan it paid fees to brokers. Pursuant to the requirement of the revenue agent, it amortized these fees over the life of the loan and in its returns for the fiscal years 1941, 1942, and 1943 took pro rate deductions. At the close of its fiscal year 1944 petitioner was dissolved and its assets were distributed in kind to its then stockholders, who assumed the liability for the unpaid portion of the original loan. Held, petitioner is entitled to deduct the remaining unamortized portion of the brokerage fees in the year of its dissolution. Wright Matthews, Esq., for the petitioner. Allen T. Akin, Esq., for the respondent.
Petitioner here seeks redetermination of income and excess profits tax deficiencies for its fiscal year ended May 31, 1944, in the respective amounts of $4,964.28 and $2,771.55. The question for decision is whether petitioner is entitled to deduct in the taxable year the remaining unamortized portion of certain broker's fees and commissions for services in procuring a loan in 1941.
The facts have been stipulated.
FINDINGS OF FACT
Petitioner Longview Hilton Hotel Co. was incorporated under the laws of Texas in 1936. Its returns for the period involved were filed with the collector of internal revenue for the second district of Texas. Petitioner kept its books and made its returns on an accrual method and on the basis of a fiscal year ending May 31.
Petitioner was engaged in the business owning and operating for profit a hotel property known as the Hilton Hotel, located in the city of Longview, Texas. On January 1, 1941, petitioner borrowed $167,000 from the Great Southern Life Insurance Co. of Houston, Texas, evidenced by a first mortgage real estate note providing for installment payments over a period of 10 years, with any unpaid balance of principal and accrued interest to be paid January 1, 1951. The loan was secured by a deed of trust to petitioner's hotel property.
On January 1, 1942, petitioner executed an extension agreement with the insurance company, which changed to an unsubstantial degree the amounts of the installment payments, but which provided, however, that the entire amount of the loan was to be paid over a 10-year period ending January 1, 1951.
A part of the proceeds of the loan was used by petitioner to retire certain existing indebtedness and the rest used as additional working capital in the operation of the hotel business.
In order to obtain the loan, it was necessary for petitioner to engage the services of two independent agents and brokers. As a brokerage fee and commission, the petitioner agreed to pay them $18,000 and $12,000, respectively. The brokers were independent agents and were not representatives of the insurance company. Petitioner paid the fees in the calendar years 1941 and 1942.
The revenue agent auditing petitioner's return for the year ended May 31, 1941, held that the brokerage fee should be amortized over the 10-year period of the loan. Pursuant to the ruling, petitioner set up on its books the amount of $30,000 as a deferred financing commission. In its tax return for the year ended May 31, 1941, petitioner deducted $1,250, and in its returns for each of the taxable years ended May 31, 1942 and 1943, it deducted $3,000 in this connection.
On May 31, 1944, the unpaid principal balance on petitioner's mortgage note was $134,125. On that date petitioner completely liquidated and dissolved under the laws of Texas and transferred all of its assets in kind to its eight shareholders, who assumed and agreed to pay its indebtedness to the insurance company and thereafter operated the hotel property in partnership.
In its final return for the year ended May 31, 1944, petitioner reported no gain or loss on the transfer of its assets to its stockholders in exchange for their stock, and the respondent has asserted no tax on any gain or loss in that connection. The unamortized portion of the brokerage fee on May 31, 1944, was $22,750, all of which petitioner wrote off on its books and deducted in its final return. Of that amount, the respondent disallowed $19,750 and allowed only $3,000.
OPINION
ARUNDELL, Judge:
Both parties are agreed that it was proper for petitioner to amortize the brokerage fees and commissions paid for services in securing the mortgage loan of $167,000. This practice appears to be in accord with a long established rule. It was early held that bond discount was in the nature of interest expense accruing ratably during the term for the use of borrowed money and should therefore be amortized and deducted proportionately over the life of the bonds. Chicago, Rock Island & Pacific Railway Co., 13 B.T.A. 988, 1031; United States Playing Card Co., 15 B.T.A. 975. And it was also held that commissions and expenses incurred in issuing bonds or obtaining loans were sufficiently analogous to discount to be amortized in like manner. Chicago, Rock Island & Pacific Railway Co., supra, at 1035; S. M. 3‘91, IV-1 C.B. 145.
The sole issue here is whether in the year of its dissolution— the taxable year before us— petitioner is entitled to deduct the remaining unamortized portion of its brokerage. In support of the position that it is, petitioner relies upon S. & L. Building Corporation, 19 B.T.A. 788. That case held that a taxpayer who paid fees and commissions in obtaining a mortgage loan was entitled to deduct the unamortized part of such fees and commissions in the year it sold the mortgaged property and the purchaser assumed the mortgage. It was said that the fees and commissions represented cost of the use of borrowed money and not part of the cost of the mortgaged property. Metropolitan Properties Corporation, 24 B.T.A. 220, is a decision to the same effect with respect to deduction or unamortized bond discount in the year of sale of the mortgaged property, subject to the mortgage.
We think the present case comes within the rationale of the S. & S. Building Corporation case. No valid distinction is to be taken merely because the mortgaged property was sold in that case and in this case it was distributed to the stockholders in liquidation. In either case the effect is the same; that is to say, the taxpayer, ‘having shifted the burden of his mortgage to other shoulders, stands in the same situation as if he had paid it off and therefore should be allowed to deduct the remaining portion of his unamortized mortgage fees.‘ In many respects it is like the purchase and retirement before maturity of bonds issued at a discount, in which event the unamortized discount is deductible as an expense of the taxable year. Regulations 111, sec. 29.22(a)-17(3).
Plaza Investment Co., 5 T.C. 1295, cited by the respondent, is not contrary to our conclusion herein. The item involved in that case was the unamortized portion of fees paid to brokers for securing a long term lease of certain of the taxpayer's real estate. Such as expenditure to acquire an income-producing asset became a part of the cost basis of the asset itself. The essential distinction between that type of expenditure and the one involved here and in the S. & L. Building Corporation case was pointed out in the following language:
* * * Petitioner contends the situation here is similar to that existing in the case of S. & L. Building Corporation, 19 B.T.A. 788. We there held that the taxpayer was entitled to deduct the unamortized balance of an expenditure make to procure a mortgage on certain of its real estate which was sold and the mortgage assumed by the purchaser of the property. We do not think the facts are analogous to those here involved. Clearly, the taxpayer, in paying a fee to secure a mortgage, acquired no capital asset. No value was added to the property. The payment was not an expenditure to acquire an income-producing asset, but an expense in connection with the creation of a liability.
Here the real question is not whether petitioner sustained a loss upon the distribution of its assets to its stockholders, because the brokerage fees did not form a part of its cost basis on any of the property distributed. S. & L. Building Corporation, supra; East Ninth Euclid Co., 26 B.T.A. 32. They were a separate and distinct item representing cost of the use of money borrowed rather than cost of property. The only significance of the dissolution and liquidation is that it marked the close of the period during which petitioner had the use of the borrowed money.
We hold that petitioner was entitled to deduct the unamortized portion of the brokerage fees in the taxable year.
Decision will be entered for the petitioner.