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ing of the court's opinion discloses that the renewal privilege was taken into consideration and it was held that the result would be the same whether or not the option entered into the value of the lease. The court said:

Such an option might readily enhance the value of the lease, but it could hardly be supposed to change the period during which the lease would become exhausted.

We should not lose sight of the fact that in both cases rentals were to be adjusted upon exercise of the option to renew, and it is far from certain that a rental based on land values a score of years in the future would make a renewal attractive to the lessee. In our opinion the Bonwit Teller case is controlling here and deductions for exhaustion of the lease should be confined to its original term.

Respondent points out that a situation might arise where the original term of a lease was a comparatively short period, say a year or two, with an option to renew for 21 years, and in such case a write-off over the original term would not be justified. Under such circum

stances it seems to us very doubtful whether an exhaustion allowance confined to the original term would meet the statutory requirement of reasonableness. However, that is a question to be decided when the occasion arises.

As to the building erected by the lessee, we are of the opinion that the respondent's allowance must be sustained. The respondent has found that the building had a useful life of 33% years and upon that finding has computed depreciation at the rate of 3 per cent a year. Petitioner did not dispute this and has offered no evidence to show that the respondent's determination in this respect is erroneous. Under these circumstances we are compelled to accept the determination as correct. There is no requirement in the statute that the cost of a leasehold and the cost of improvements placed by the lessee on the leased premises shall be exhaustible over the same period, even though it might simplify accounting if the useful life of the lease and the improvements were coextensive. Cf. Eimer & Amend, 2 B. T. A. 603. In the instant case the adjusted rental provided for, should the option of renewal be exercised and the lease extended, is by the terms of the lease to be based solely on a percentage of the value of the land without reference to the improvements. We believe that here the land and the improvements must be regarded as separate pieces of property and deductions allowed accordingly. If it so happens that the lessee does not renew the lease and finds that a portion of its capital investment is not fully exhausted through deductions allowed for depreciation, it will undoubtedly be entitled to a loss deduction to make up the difference.

According to the deficiency notice the net loss claimed in 1928 and disallowed by respondent as a deduction for 1929 arises from adjustments in claimed deductions for exhaustion and depreciation similar to those for 1929. The same deductions should be allowed for 1928 as we hold herein are allowable for 1929. We are unable to tell at this time what the effect will be on the alleged net loss and this may be settled under the recomputation that will need to be made.

Reviewed by the Board.

Decision will be entered under Rule 50.

JEROME R. GEORGE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 45240. Promulgated February 20, 1933.

BONUSES AND COMMISSIONS-TAXABLE IN YEAR WHEN ACCRUED, WHERE PETITIONER KEPT HIS BOOKS ON THE ACCRUAL BASIS. Where petitioner was employed on a salary plus a percentage of the profits as bonus and commissions and kept his accounts on an accrual basis and for a good many years rendered his income, including such bonuses and commissions, for taxation on an accrual basis, it was error for him to change his method of reporting income for taxation to the cash receipts and disbursements basis without first obtaining permission from the Commissioner of Internal Revenue to make such change.

Howe P. Cochran, Esq., for the petitioner.

R. W. Wilson, Esq., and S. B. Anderson, Esq., for the respondent.

OPINION.

BLACK: The respondent determined a deficiency of $50,686.78 against the petitioner for the year 1924. Petitioner alleges that the determination of the Commissioner is based upon the following

errors:

(a) Use of an incorrect net income.

(b) Failure to allow as a deduction in computing the net income for 1924 the net loss sustained by the taxpayer during the year 1923.

(c) Erred in adding to income for 1924 the sum of $151,038.98.

No evidence was offered as to any net loss for 1923 and petitioner says nothing about it in his brief and, under these circumstances, that particular assignment of error will be considered as abandoned. Petitioner is a mechanical engineer and resides in Marion, Massachusetts. During the taxable year and for a number of years previous thereto he was employed by the Morgan Construction Com

pany, of Worcester, Massachusetts. This company was engaged in the construction of complete rolling mill units throughout the world. It was the leader in that field of construction.

Petitioner held only one share of stock in the company, which was for qualification purposes, but he was a valued employee as chief engineer and served as vice president and director for several years. He received for his services a salary of $25,000 yearly and in addition thereto commissions and bonuses measured by the profits of the company, which additional compensation averaged between $100,000 and $200,000 per year for a good many years.

These bonuses and commissions were voted to him by the stockholders of the company in the early part of the year in which they were to be earned, to be paid from the profits of the current year. The meeting authorizing the payment for 1923 was held February 27, 1923, and that for 1924 on February 19, 1924.

The minutes of the 1923 meeting were as follows:

Voted: To pay as additional compensation to Jerome R. George for the year 1923 an amount equal to 12% of the net profits of the company for the year 1923, after providing for accrued dividends on preferred stock for the year 1923, and before providing for Federal Income Taxes for the year 1923. Voted: To pay as additional compensation to Jerome R. George, E. H. Carroll, Paul B. Morgan, J. W. Sheperdson, C. C. Smith, W. A. Winn, and R. L Mason, an amount equal to 50% of the net profits of the company for the year 1923, after deducting Mr. George's additional compensation as covered by next previous vote, dividends accrued during the year on outstanding preferred stock, the sum of $20,000 Federal Income Taxes for the year 1923 and that the proportion to be paid to each be determined by the Board of Directors.

The resolution for 1924 was to the same effect and expressed in the same language.

The Morgan Construction Company kept its books of account and made its returns on the accrual system and took deductions for the compensation including bonuses and commissions agreed to be paid petitioner for the year in which the services were rendered and in which year it was accrued. This was approved by the respondent. Owing to the size and extent of the company's operations, it was sometimes impossible to close its accounts on the last day of the year and compute the additional compensation to which the petitioner was entitled, but it was done as soon as possible in the following year and the books were closed as of the 31st of December preceding. For the year 1923 the books were closed early in 1924, showing a credit to petitioner of $151,038.98 on account of commissions and bonus earned during 1923. For the year 1924 the books were closed early in 1925, showing a credit to petitioner of $130,647.94 on account of commissions and bonus earned during 1924.

From 1913 to 1923, both inclusive, the petitioner reported his entire earnings from the company in the year in which the services were rendered. In some of the earlier years he collected approximately all of it in the year earned. In later years, when the business of the company and his compensation increased, part of the commissions and bonus was not collected until the year following that in which earned, and in such instances interest-bearing notes were given.

In 1924 petitioner found out that other employees of the Morgan Construction Company had been reporting their bonuses and commissions on the cash receipts and disbursements basis and therefore in the year in which they were actually received rather than in the year in which the Morgan Construction Company accrued them on its books. Petitioner, therefore, without getting permission from the Commissioner, changed his method of reporting income for 1924 from the accrual system to the cash receipts and disbursements method. His 1924 return reported no bonus and commissions from the Morgan Construction Company because bonuses and commissions for 1923 (paid in 1924) had been reported for taxation in 1923 on the accrual system and by his change of method, bonus and commissions accrued for 1924 (paid in 1925) were not returned rendered for taxation until 1925.

The Commissioner held that petitioner had no right to change the basis without his consent. On this point, petitioner's counsel, in his opening statement at the hearing, said: "We are perfectly willing to concede that position would be well taken in which Mr. George would this very year owe, instead of some $50,000, some $42,000, a difference of $8,000, and we think the Commissioner was correct on that. But afterwards the Commissioner struck upon a new idea which is the basis of this deficiency, to-wit: that he would take the $150,000 commissions earned in 1923 and reported in 1923 and accrued in 1923, and tax them in 1924, and that makes this difference. Petitioner admits that by preserving the accrual basis his deficiency would be about $41,000 instead of $50,000, and this he is perfectly willing to admit."

Petitioner's son kept his accounts for him in a cash book and ledger in which were recorded the facts connected with his various business transactions. Some items were recorded on the cash receipts and disbursements basis and certain items were accrued, including the bonus and commissions due from the company. The ledger showed, for 1923: "Morgan Construction Company, demand note dated December 31, 1923, for $151,038.98 at 5%; up to July 1, 1924, $75,038.98 paid on principal, $76,000 still due." For 1924

the ledger showed: "Morgan Construction Company bonus and commission 1924, schedule of payments in 1925. Due December 31, 1924, $130,647.94, interest for 73 days at 5% up to March 14, $1,306.48, principal paid on March 14th, $15,000.”

There was no written contract between petitioner and the company, but it was originally agreed that the additional compensation was to be paid during the year when accrued and at the same time dividends were paid stockholders. As the business of the company increased and it had use for its cash, it became the custom of petitioner to allow his additional compensation to remain with the company until the following year and draw it as he needed it, but it was understood that the entire sum was due December 31 of each year and he had the right to draw down his earnings at that time or before. When payments were deferred, interest was collected from December 31 of the year when payments were due.

Petitioner's 1923 tax return showed a tax of only $118.06, which resulted from deductions of losses of $169,768 incurred in other enterprises entirely disconnected with Morgan Construction Company. Upon audit of this return it was approved, except that it was held by the respondent that there had been an overassessment of $88.77, which was refunded with interest of $13.60. After conferences with petitioner's representative relative to taxes for 1924, 1925, and 1926, respondent, on February 18, 1929, ruled that the petitioner's bonus and commissions earned in 1923 should be considered as income for 1923, and that likewise the bonus and commissions earned in 1924 should be considered as income for 1924 and not 1925 as reported. On this basis a deficiency for 1924 of $41,918.62 was determined. By his deficiency notice of May 23, 1929, the respondent reversed his previous finding and determined a deficiency of $50,686.78 for 1924 instead of $41,918.62 previously determined. This was accomplished by holding that the petitioner was on the cash receipts and disbursements basis and including petitioner's bonus and commissions earned in 1923, but collected in 1924, in income for 1924, and including bonus and commissions earned in 1924 in income for 1925, the year in which collected.

As will be seen from the foregoing statement, the principal question involved is whether the bonuses and commissions earned by petitioner are properly taxable in the years in which they were earned and accrued as income on petitioner's books or are taxable in the year when actually collected.

Under the facts as detailed in our findings, we think the bonus and commissions earned in 1923 were properly reported by petitioner on the accrual basis and are taxable in that year and that the action of respondent in transferring those items from 1923 to 1924 and basing the deficiency thereon is error.

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