This case comes up upon petition for review of a decision of the Board of Tax Appeаls finding deficiencies in the petitioner’s income taxes for the years 1926 and 1927.
On November 2, 1925, petitioner leased •certain coal properties from the Shenango Eumaee Company for a term of one year ■ at a rental consisting of $40,000 in quarterly payments of $10,000, a royalty upon the coal mined of 25 cents рer ton, with a minimum royalty of $50,000, and payment of the taxes on the property. All payments made under the leаse were deducted as expenses on the petitioner’s income tax return for 1926, and were apрroved and allowed by the Commissioner. On November 14, 1926, the petitioner entered into a new lease for thе same properties to run from November 1, 1926, until all of the Pittsburgh vein of coal had been mined and removed. Thе new lease provided for payment of rental of $50,000 upon the execution and delivery of the lease, and $51,250 on May 1, 1927, for the payment of a royalty of 13 cents per ton, with a minimum royalty of $26,000 per annum, for pаyment by the lessee of all taxes, and for payment to the lessor of one-half of the net profits of оperation. The payments were made in accordance with the lease for each of the years 1926 and 1927.
In its income tax returns, the petitioner deducted the sum of $50,000 as an expense of carrying on thе business during the year 1926, and deducted $51,250 as a similar expense for the year 1927. The Commissioner disallowed eaсh of the deductions as an expense of the taxpayer’s business for the years 1926 and 1927, and apportioned the entire sum throughout the life of the lease, ascertained by taking the petitioner’s estimate of the total tonnage of coal in the ground and dividing that by the average tonnage of coal taken out per year. He gave as his reason therefor that those amounts represented a bonus “paid in connection with the attaining of the lease and Should be capitalized and the cost recovered оver the life of the asset.”
The Board of Tax Appeals held that, whether the sums paid in each of the yеars 1926 and 1927 were considered a bonus or advance payment of rental, the payments should not be dеducted in their entirety in those taxable years, but should be spread over the years during which the lease would continue.
The pertinent section of the Revenue Act of 1926 is’as follows:
“See. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230, there shall be allowed as deductions:
“(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on аny trade or business, including a reasonable allowance for salaries or other compensatiоn for personal services *470 actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity. * * *
“(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence;
“(8) In the case of mines, oil and gas wells, other natural deposits, and timber, a rеasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each ease; such reasonable allowance in аll cases to be made under rules and regulations to be prescribed by the commissioner with the approval of the Secretary. In the ease of leases the deductions allowed by this paragraph shall bе equitably apportioned between the lessor and lessee.” 26 USCA § 986 (a) (1), (7), 'and (8).
The pertinent part of the Trеasury Department Regulation, prescribed in accordance with the authority granted by that act, is as follows: “Art. 110. Rentals. — Where a leasehold is acquired for business purposes for a specified sum, the purchаser may take as a deduction in his return an aliquot part of such sum each year, based on the number of years the lease has to run.”
We perceive no ground for differing from the conclusions and rulings of the Commissioner and the Board of Tax Appeals. It is clear that the payments of $50,000 in 1926 and $51,250 in 1927 did not constitute rental paymеnts for these respective years, but together represented the payment of a bonus or rental in advance for the entire term of the lease, the length of which was determinable by the quantity of coal in thе ground divided by the annual average output. The lease was to run until exhaustion of the coal. It is clearly evident, therefore, that those sums, together with the other payments specified in the lease, constituted thе consideration for a lease during the entire period, and that, under the law and the regulations, those sums must bе apportioned as an expense over the whole term of the lease, and are not deductible as a business expense of the years in which they were paid. Duffy v. Central R. Co.,
The petition is' dismissed, and the order and decision of the Board of Tax Appeals affirmed.