Millinery Center Building Corp. v. Commissioner, 350 U.S. 456 (1956)

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Syllabus

In April, 1924, petitioner leased land in New York City for 21 years, with an option to renew the lease for two further 21-year periods. In accordance with the terms of the lease, it erected a 22-story loft building at a cost of $3,000,000. The lease, as amended in 1935, provided for an annual rental of $118,840. Title to the building was in petitioner, but, at the eventual termination of the lease, it would vest, without payment, in the lessor at the lessor’s option. During the first 21-year period of the lease, petitioner fully depreciated the entire $3,000,000 cost of the building. In April, 1945, it exercised its option to renew the lease until April, 1966. In May, 1945, it purchased the fee and obtained release from the obligations of the renewed lease at a price of $2,100,000. When purchased by petitioner, the value of the land, as unimproved, was $660,000.

Held:

1. Under § 23(a)(1)(A) of the Internal Revenue Code of 1939, the purchase price paid by petitioner represents the cost of acquiring the complete fee to the land and the building, both capital assets, and no deduction as an ordinary and necessary business expense can be taken. Pp. 457-460.

2. Petitioner is not entitled to amortize, over the remaining term of the extinguished lease, that portion of the excess of the payment of $2,100,000 above the determined land value of $660,000 which is allocable to the acquisition of rights in the building. Pp. 460-461.

3. The judgment of the Court of Appeals in this case is affirmed, leaving to the Tax Court the allocation still to be made. P. 461.

211 F.2d 322 affirmed.