*1 CITY NAT. v. HELVER BANK BLDG. CO. ING, of Internal Commissioner Revenue.

No. 6914. Appeals for the

United States Court District of Columbia. Milne, C, Washington, Argued T. D. Baxter Dee. 1937. Omaha, Neb., Gaines, and F. S. April Decided tioner. Gen., Morris, Atty. W. Asst. James Shafroth, Key, Ellis N. Sewall Morrison Slack, Smith, Washing- Ralph E. all ton, C., respondent. D. GRONER, Justice, and Before Chief MILLER, STEPHENS and Associate Jus- tices.

GRONER, C. J. petition assessed deficien- This involves years, 1929-31. in income taxes for the cies corporation with Petitioner a Delaware Omaha, principal Neb. It took office of- on a certain- owned fice in Omaha claimed to be disallowed the it. The Commissioner deficiencies amount- ductions ing assessed approximately aggregate Board, with years. The $5,000 for dissents, sustained four followed. and this review found statement the facts A short Lee, Rufus an investment E. follows: Otis; Omaha, in association with banker of Cleveland, investment bankers & Ohio, in 1925an obtained cor capital stock of Nebraska the entire corporation- $940,000. That poration for 16-story building in Omaha office owned a $560,000. Lee and subject Na petitioner, City organized Otis & Co. subscribing Company, Building Bank tional capital stock of its equally whole assigned per share), shares at (2,000 $1 thereupon option to option.. exercised subsequent material All events place on case took consideration simultaneously. shall We June First, the logical order. them in their count land conveyed the Nebraska bargain and sale deed conveyed in fee Petitioner petitioner. Cleveland, Company of Trust Union Company executed a Trust Ohio. petitioner at an annual building to years, a term of 99 rental forever, with an exclusive renewable *2 Company option also purchase. adopted Trust He insists that the method was reciting that required a sale loan, executed of trust but a though a declaration he was n 1,000 give been issued had technically land trust certificates a deed to the each, by $1,000 with it at the face value of Regarding aspect in describ- the case fixed and with no interest of above, apparent 5% ed it is this is not a case redemption date, declaring that corporation property where a owned trust property in Company, Trust held the Instead, sold get order to rid of it. for certificates. Petition- the owners of the corporation it is a case where a sold $930,000 the sale of er received erty purchase order to for discount (face value less certificates safely petitioner, setting assume out to Then selling). for commissions buy dollars, property half for a million and a is- leasehold and executed on its simultaneously would have sold per cent. $600,000 sued face value of 6% inadequate price the fee for the obtained sold, 15-year bonds. These it sinking fund through the sale of the trust certificates. $540,000. As the result receiving therefor question, then, decision is whether for transactions, petitioner had of these entitled to on proceeds sale of the certificates building. $1,470,000. The bonds, amounting to The answer in the correct must be found stock, plus plus the Nebraska (k) Rev- construction of of the section corporation, mortgage debt enue Act of 45 Stat. 26 U.S.C.A. $1,525,000 $25,000,totaled a commission which The note, 23(i) and which authorizes: § discharge. obligated to was “A exhaus- reasonable allowance had, plus $1,470,000 a contri- which it tion, property wear tear of used $55,000, bution provided Co. of from Lee and Otis & business, including trade or reasonable debt, discharge the entire funds to allowance for obsolescence.” peti- the situation and tioner end position renewable for- the Commissioner had a purchase, Trust option ever is that between with an takes tioner and gage the transaction Company Company a mort- lessor and record owner was not Trust title, legal leaving of the and the certificates and but an absolute sundry estate, leasehold bonds were owned with leasehold and also but a The rental the lease was have investors. $55,000 net, that investment in can claim to in- exactly got the amount certificates, and terest on the lease Petition- back whole its investment. any option repurchase hand, says question er, contained on the other $1,050,- payment of rentpaying legal date title? —but is not: Who holds equal par premium for instead: Whose preciated? which is is it $50 000— each Petitioner, outstanding question certificate. be- there is insists $55,000, sides having pay rent of had that the deed to the trust pay taxes, assessments, repairs, upkeep, to insurance, security executed loan and as for a commissions, the trustee’s that the intention of the should con- trol, by casualty, pay deed, case had to for though loss and that absolute form, restoration. mortgage. be construed as a position respect peti- To sustain its in this Lee, president record shows that upón Davis, tioner relies petitioner, previously had not dealt as in which case the Su- an investment in land banker certifi- trust preme Court said that a court of cates, associate, and that he and his &Otis in form as treat a deed absolute particular adopted that method because security when as executed was demand the state of Ohio money. for a loan words, that form of that he than In securities. other & new. F. selected trust R. & Co. Lazarus B.T.A. financing bonds as the method of respects facts were in all essential because of the here, There, greater the owner of identical. demand for the former in- as an the same building desiring refinance con- expected where it was vestment Ohio fee veyed it to and at same he would a trustee sell them. Lee testified not have years lease for 99 took a deed of Company to the Trust time newable, There, sold etc., purchase. with to that he one else the reason claimed already his associate there, here, $1,500,000 building and Commis- buy pay agreed to for it. sioner disallowed the But in that tive of it rights claim. holders, of the certificate case important ques- Board said “The would seem to us to follow that the case not, tion is in whom the fee or when it vests holds that the deed from vested, but who made the investment outright conveyance was an *3 capital which is to be recovered over a in fee of the land mortgage. and not a period property.” of the exhaustion of For if the transaction awas loan Senior rule, Based on this the Board held that would have bond, had mortgage which although the deed was in form absolute would have been a chose in action and not it should in the circumstances be treated an Unless, interest in therefore, land. there found, mortgage since, as as the Board it are other and additional facts dis- security was executed tinguish as a loan. case from Senior v. Braden, supra, Again we should have to affirm Neighbors Company H. F. v. the Board’s decision Board, authority Commissioner under on (unpublished) that case. says But facts, there are same state of adhered such additional opinion says to its facts. Case, that Lazarus Senior question Case the appeal wholly turned (Commis- the Sixth Circuit legal sioner effect of of Internal the deed under Neigh- Revenue v. H. F. which the that the issued, trust Realty Co., bors certificates were 173) F.2d the Board’s Supreme Court, more, with decision was affirmed. precisely written; construed it as it was In however, the instant the Board just since it ordinary convey- statute, took a different view of the 34 B.T. general title, ance land with covenants of A., 93, 96, and, contrary to its former any other impossible. conclusion was But opinion, petiitoner, held that con having here, petitioner says, the Commissioner and veyed fee-simple title to company, them, the Board had before in addition to lessee, that, was thereafter certificates, the deed and undeniable evi- petitioner, by refinancing arrangement its dence of the true motive and intent of bonds, through the sale of parties in making conveyance and in repaid had capital outlay, been it had taking evidence, back the lease. And this no and there petitioner insists, shows that there depreciation. fore was not entitled to This ' never an intent to sell the but was, change viewpoint doubtless, induced rather a to establish a trust for the by Supreme the decision of the Court payment security of of interest and for the Braden, Senior v. U.S. view, debt. In this insists 800, if, 100 A.L.R. 794. And is, it and should under the rule in the thought, as Board that case is de Peugh be, Case be said to the owner cisive of the go issue we need no building. Applying the rule in Braden, farther. The in Senior v. Peugh Davis, supra, the Sixth Circuit supra, was whether one of the identical in Commissioner Neighbors, supra, held we “certificates” are concerned here with by treating conveyance in fee species anwas interest in land or was a trust, as a they thought should be personal property intangible or chose done, consequent ownership subject intangibles action to the Ohio tax. erty entitled the owner to the allowable The case arose reason of the action depreciation; duction for great but with county, the tax officer of Hamilton opinion deference to that follow it. we are unable to Ohio, in assessing the certificate—in the Senior, owner, hands of taxation —for intangibles In under the Ohio the view we take of law. To there facts prevent be Senior instituted can doubt that suit in the court, alleging 1, 1925, state represented transactions precisely the certificate which occurred June an interest in land and carried out their intentions and acquire tax was unconstitutional easily because the state that the motive was to more power was without to tax land marketable securities which or interests could be con- beyond in land situated its borders or verted into cash to furnish the within building. its borders otherwise rule these circum- uniform according Supreme stances, apply equitable value. The Court doctrine in Davis, supra, reached the conclusion that the certificate and call the transfer action, was not dence of the holder’s equitable chose but was an evi of the fee or a deed of trust ownership be extend rule the would into a field proper application. fee the land. Accepting has no the where it decision, do, course trust determina- certificates issued n were They again by through deduc- recovered nor notes. neither bonds tions for maturity, on the and there stated no obligation original others. remainder either on the any receipt or at was of a time recovered them redeem orig- part on its face valuable Each certificate states all. the inal fraction of entitled to a investment again holder is by through interest should ownership and recovered beneficial reason Nor deductions for of on the in the real estate. * * * is en- as a loan. describe others. repay. implies obligation benefit of “loan” titled to and has received proper word true, Petitioner, the exhaustion has certificates, discharge to de- leasehold. It also be entitled deem *4 to only option. If elects never on its it ductions for of discount is exercise the amortization will con- holders the lease- option, the secured the bonds owner- allowed perpetuity their It has claimed and been tinue hold.1 has property. pays Petitioner ship leased rent which under the the it ” * * * anything the anytime to owed the never at lease. obligation Its of certificates. the holders under the contract And the Board continued: company with the “If a building replace new is ever to the rent, payment of and by the was satisfied present building during of the term probably the as inter- distributed this lease, pay petitioner will have to rights beneficial holders of the est to the repre- for its erection. That will cost find we can property. In this view in no leasehold, sent additional the cost to treat proper on which ground belong petition- will not to the as debt. the certificates a sale as a loan or cost, er. paid, That additional if will be anything Nor is there to show through recoverable charges. annual * * * has tioner erty. investment a not true, paid out, mil- it is a Petitioner anticipate such future of additional costs its * * * dollars, part this lion and a half but present A leasehold. deduction got by and the mortgaging it anticipation of future additional sale certificates. rest came of trust from a would not be ‘reasonable’ deduction. gave obligated it lease- decides to forfeit lease building, and and the Com- hold not the out, present building when the wears missioner it, allowed amortization as has be no loss will more than the unexhausted certi- and the received It lose cost of leasehold. can not petitioner does and cannot ficates not owe original building, entire it of cost to be- compelled repay. most, building in cause it sold the if and original all of its cost was restored to Act of deduc- Revenue 1928allows it If it were at that time. allowed annual property, tion for exhaustion but $22,500, deductions of and then were to de- is, claimant, his can the whatever test present building fault when the lease owner, relationship to the les- —as out, wears it would have received a sub- lessor, cap- see, depreciating etc.—show a income stantial amount of tax free. Con- ? The ital investment gress did so intend.” permit person is preciation allowance money is invested recover whose Here, reasoning think this sound. We equal amount deductions seen, consistently annual original have has Board, outlay. speaking to ordinary neces- part deducted as a and case, present aspect said: paid by opera- sary expenses all sums it interest, insurance, upkeep, repairs, tion, “The sold $55,000 paid annually taxes, also the Cleveland, Ohio, by Trust Co. Union warranty deed, It not shown is rent $930,- and received therefor anything paid out for betterments to have valuable leasehold. The in cash and a premises. leased and additions received ob- $930,000in cash it operation control its actual viously much of its return so respects position is in property and, all property, if it be But even considered portion tenant. its of a it thus recovered since capital owner, apparent got investment, it is back amount should as same position clearly to claim it. is still in so if it We think is enti- deduction tled allowed cent, per annually at 1 put When, all time, for the whole term the course of out. (99 years), stipulation' replace whereas is called worn-out years. the life of premises or to parts unusable This, exist, thereto, says, is unfair and insists add but different situation the amortization should be at the rate that is not the case. cent, per annually years of 3 What we find here more like Weiss v. annually years. than 1 for 99 Wiener, 279 U.S. 49 S.Ct. 73 L.Ed. Duffy v. New Central Railroad Co. of Jer- Cir., Cogar Commissioner, like sey, 44 F.2d 564. In the Case the Wiener authority position. cited as for this That taxpayer long taking was in the business of a case in which the railroad leases of subletting. He held operated certain under a railroad facilities years 13 leases for 99 forever. renewable 999-year lease required it maintain right He claimed the annual make an keep good order deduction from his income tax for estimat repair, pier property held certain ed buildings. He required lease which make it to allowed repairs, to deduct estimated large expenditures. sought to deduct as this, obsolescence. In payments” “rentals or large other sums of keep buildings lessee had undertaken to money spent additions, betterments, *5 and present condition, rent, pay in their to replacements under the leases. The Su- and in the event of destruction to restore preme against Court held lessee rail- buildings upon forfeit the lease road, additions, etc., but said of the argued growing default. And it was that that, it had made since some of them would necessity out of the the lessee undoubtedly be consumed within a fraction keep the buildings in this case —as 999-year lease, the term of the an allow- required by is the lease to do—in like con depreciation, ance could be taken for annual repair leased; dition and as when and in the case of others which would there it was insisted that amount needed probably 30-year outlast the term of the for this be An allowed. might properly lease deductions in be taken contention, swering Supreme Court proportionate form annual allow- permit said that in order to an allowance ances for exhaustion. But we think there for obsolescence the amount claimed must nothing is in the decision which fits the pocket be shown to be out of and cost—actual situation are now discussing. present and not loss more or less loss petitioner Here obtained a lease of land sure to occur the future. In other words, building years. paid for 99 cash that here is claimed $595,000 agreed leasehold capital never allowable unless pay money the rental gone as it became due claimant has into the year year. from Obviously the value of gone property, Where er the claimant be owner or duction is into the wheth depreciate year the leasehold will lessee, de year termination, until allowable, but in case there either is accordingly. entitled to allowance present But must be a loss of invested in effect what See, also, asks is apply. make the to connection our statute in this expenditure whole of its be opinion the leasehold Railway in Belt Co. applied against and, building, Commissioner, 137, since App.D.C. 59 36 F. building theoretically years, has a life of 2d 541. 33 allowance be Second. Petitioner asks al period; confined in is that, if ternative we should hold it regulations statute depreciation, entitled deduct then in permit would purchased this to be done. Petitioner $5,950 event the amortization allowances of computed the leasehold of the entire annually by erty, building, land and for the sum of representing 1 of the cost of- the $595,000 obligated itself to maintain permit so be increased as to premises during on the the- entire on the basis of the life 33-year amortization period obliga- of the lease. building rather necessity expendi- involves the tion period posi of the lease. To sustain this money ture construction of a new petitioner argues years, tion that it has an invest at the end 33 leasehold; expended ment will be so recognized Commissioner has this invest returnable to over the life of the ment, but has fixed the rate of amortization new structure in accordance with the laws

221 regard will But substance regulations prevailing. then form, seen, give has no rather than effect to already as we have building, parties. actual contract of the in tax issues between the Government and The courts capital investment in the al- and, of the lease if amortization years, the the citizen at real character should look lowed on basis of 33 involved, its of run one-third of the transactions time the lease has course thereof, recovered at the form if no will come to will have harm persons doing. have third No harm can and will still so entire investment therein years. pres- remaining 66 come to the the leasehold for the certificate holders the -fact overlooks ent case if for no other reason than Petitioner’s contention keep build- since holders under its lease it must the certificate are not that ing, throughout years, good to this decision herein cannot be the 99 suit the that, them; condition, obliga- judicata if the res and it cannot be tenantable so met, building will claimed relied tions of the lease are' that the Government theoretically, actually, though it form the transaction. detriment of 33 completely depreciated end To the effect that the courts will look assume that the years; we must form to ascertain the to substance be observed and whole contract will broken, essential transaction in tax nature of a petitioner’s cases, relation well see: cases as Eisner v. assumption. Macomber, 1920, 189, be determined on that 252 U.S. 545, Savannah, 531, 1570; 521, 189, Wells 181 U.S. A.L.R. S.Ct. L.Ed. opinion Phellis, 1921, our S.Ct. L.Ed. United States v. 257 U.S. point. prevail 180; Stearn, on this cannot S.Ct. Weiss L.Ed. Affirmed. 33 A.L.R. 520. These are cited STEPHENS, (con- Associate Internal F. Revenue v. H. Commissioner Justice *6 curring) 1936, . Neighbors Realty 81 F.2d Cir. Braden, 1935, 295 U.S. 173. Senior v. majority opinion, I read rests L.Ed. 100A.L.R. first, essentially points: upon that the two controlling it did not because not loan; second, sale, was not a a pass upon in the instant case. petitioner had no investment only It the trust certificates were held property. in the against law not taxable Ohio Against points cogent argument these a intangibles for the reason holders as can be made for the as follows. in they represented interest point: As to the first The conclusion that point As second to the —that there was loan is reached because on property— investment papers of stated face there was no first,.becauseif the trans- that falls with the maturity repay duty date and no stated sale, loan, a not then in essence action was a testimony debt. But the of the witnesses a Lee and bought property from was to the effect that the Harris kept that it Nebraska parties intention of the was that trans- bought borrowed made the it with merely action should be means of financ- a none the less that of the ing, that it loan a tioner. fact, sale. that be the then the doctrine a of Davis, 1877, foregoing argu- Convincing L. as seems the 775, applicable. appears petitioner, Ed. Within that doctrine for the to me ment upon majority is deed absolute its face be shown reached a that the result nevertheless correct, mortgage a if but for a reason not to have been that was parties majority opinion. clearly expressed when the deed was intention given. applied ordinarily and Harris While that doctrine It is true the witnesses Lee redemption suits between the intention of the testified that the merely original parties, may also be should be a availed the transaction was that controversy party stranger financing, if with a a loan means sale. But the operate testimony this will to harm others who of the witness that the trust upon was effect have relied the form of the transac- Lee also financing much Cronly’s Administrator, form tion. Walton certificate 1835, Wend., N.Y., 63; time of this trans- Stumpe Kopp, in Ohio at the demand action, while bonds the Ohio because Mo. S.W. 1073. No heavy, was no why quite tax on proper reason exists it should be tax was Ohio, where applied here. The essence of the doctrine land trust certificates most wit- placed. The cannot secure the ad- were the certificates vantage having regarded the transaction testified: specifically Harris ness purpose Ohio for the mak- a more were land trust “The ing the trust certificates tax free under time at that financing popular means of marketable, Ohio law thus more de financing] means because [this ask regarded then that the transaction be existing situa tax veloped out not as a sale but as a loan mort the first under which tion in Ohio under Federal law diminishing by de- literally subject per gage bonds were preciation deductions its income Federal 2.50 amounted sonal tax (cid:127) tax. 2.55, those The result was or 2.60. great undesirable bonds became investments, who types investors many in holding for public their make had to trust, testamentary stance, such aas cases the conscience those where literally required him to conform investor requirement ob the tax letter of buy bonds and retain viously could these mortgage first This tax was them. land trust time and in Ohio at that bonds BARRY v. HALL. tax-exempt. That were certificates principal No. 7049. I made as a distinction Appeals United Court of States layman. I of securities and as a seller District of Columbia. is land certificate regarded both April 11, Decided 1938. being bond issues as sues and ” financing. merely forms of Rehearing May 26, Denied appears that the transaction thus certi- put form that it was and trust marketed in Ohio for issued and ficates definite effect, of purpose, and with the first avoiding Ohio in effect at The Ohio tax statutes bonds. the time of the transaction posed question im- *7 “money pledge loaned estate, although a deed of real given instrument have been or other parties if between thereto security merely.” See Ohio considered Throckmorton, 1926, Ann., Gen.Code §§ 5328; Littell, 36 Ohio Patrick Am.Rep. Thus under the St. the substance rather than the Ohio statutes basis form of necessarily taxation, and seems to follow trust certificate method adopting intent, financing, with the as shown testimony that the certificates should the not be taxable must also law, parties under Ohio to have intended the taken necessary prerequisite under Ohio law to non-taxability of the transaction as making actually mortgage of testimony that was financing only as a means of garded can- negative this. essential- pointed out, relies, ly above court doctrine at the substance look transaction. But he form of the who seeks my equity, equity must do view