and equipment to be erected by petitioner will pass to Cape Pond at the end of the lease. The land was waterfront property on Commercial Street, Gloucester.

The R. F. C. loan of $300,000 to Fort Wharf was approved January 7, 1946. This loan was secured by a first mortgage on the buildings and equipment, an assignment of lease from Cape Pond to Fort Wharf, and by a pledge of all the outstanding stock of Fort Wharf. Thereafter, on May 6, 1946, Fort Wharf assigned to the R. F. C. all moneys due or to become due to it arising out of the contract to furnish ice to Cape Pond as described above. Cape Pond further secured the loan by executing a mortgage on the underlying fee in the land to the R. F. C.

Fort Wharf was required to show that it had expended $250,000 on the proposed plant before the R. F. C. would advance funds. In April 1947 the following buildings and equipment had been built and installed at a total cost of $565,221.90. The cost of each item, the useful life, and the depreciation allowed by respondent are as follows:

Petitioner claimed amortization of its total cost at 10 per cent per year beginning with the taxable year April 1, 1947, to March 31, 1948, of $56,522.19 as opposed to the depreciation of $26,895.45, as allowed by the Commissioner.

Sales began in May of 1947. During the taxable years involved, petitioner sold its ice exclusively to Cape Pond. For the taxable year ended March 31, 1948, the petitioner filed a return showing a net operating loss of $7,387.68. Although it had a small net profit for the taxable years ended March 31, 1949, and March 31, 1950, it paid no taxes due to the net operating loss carryover.

The real estate taxes on the leased premises were assessed by the City of Gloucester against Cape Pond as owner of the fee and were paid by Cape Pond in the approximate amount of $10,000 per year.

In 1948, in accordance with the terms of their contract, Cape Pond and Fort Wharf reduced the price of ice from $3.25 to $3 per ton. The petitioner and Cape Pond used the same offices and petitioner charged Cape Pond $50 per month for rent of these offices.

We find as an ultimate fact that petitioner was a bona fide operating company and not a sham. The lease is for a period of 10 years and is not a tenancy at will.

OPINION.

VAN FOSSAN, Judge: The issue presented is whether petitioner is entitled to amortize the cost of buildings and machinery over the 10year period of its lease, or whether it is entitled only to depreciation over the useful life of its assets. Statutory authority for these deductions is contained in section 23 (a) (1) (A) and (1) (1), Internal Revenue Code of 1939.2

Ordinarily a taxpayer who makes improvements of a capital nature on property that is used in his trade or business is allowed a deduction for depreciation based on the useful life of the improvements. As an exception to this rule, if a taxpayer makes improvements on property of a capital nature in a situation where he will lose the ownership or control of that property before the usefulness of the assets is exhausted, he will be allowed to amortize the cost of the improvements over the period during which he has the ownership or control of the property. Such a situation arises when a lessee for a term of years makes capital improvements to the leasehold, having a longer economic life than the term of the lease, which will pass to the lessor at the end of the lease period. Hess Brothers, 7 B. T. A. 729. See also Jos. N. Neel Co., 22 T. C. 1083; Regs. 111, sec. 29.23 (a)-10. This exception to the general rule is justified because otherwise the taxpayer would either be unable to recover his basis or would be forced to take disproportionate loss at the time when he loses the improvements.

A lessee is not always entitled to amortize the cost of such capital improvements. For example, when the lease is for an indefinite period of time and there is no way to determine the proper period for amortization purposes, depreciation over the useful life is required. B. Kirk Rankin, 17 B. T. A. 1301; Elmira Arms Co., 7 B. T. A. 703.

Respondent does not challenge this interpretation of the law but he contends that the application of the exception to the general rule is not justified in this case. He points to the interlocking directorates, the fact that the corporate officers of all interested corporations are the same, and that three men and their wives have substantial, direct or indirect, stock interests in all the corporations here involved.

In effect, he challenges the bona fides of the companies and their shareholders in the premises. However, the record in this case con

SEC. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be allowed as deductions :

(a) EXPENSES.—

(1) TRADE OR BUSINESS EXPENSES.—

(A) In General.-All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business,

(1) DEPRECIATION.-A reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)

(1) of property used in the trade or business, or

vinces us to the contrary. The petitioner company was not a mere sham, it was an operating company actively engaged in a legitimate business. Likewise, the other companies. They were all independent entities, each having an independent status in operation and each being engaged in a different phase of the fish business. Respondent cites neither statute nor case in support of his position, and we have been unable to find such by independent research.

The contract of lease fixed a term of 10 years. There was no provision for a renewal or extension. At the end of 10 years the improvements on the property were to go to the lessor. To avoid serious loss in the final year, petitioner asks amortization over the 10-year term of the lease. Our decision in Hess Brothers, supra, is squarely in point, even to the length of the term. See also John Junker Spencer, 19 T. C. 727. In the factual situation before us the claimed deduction for amortization is reasonable, and it is accordingly allowed.

Decision will be entered under Rule 50.

FRANK T. FEAGANS AND ESTHER FEAGANS, HUSBAND AND WIFE, ET AL.,1 PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 35847, 36074, 36075. Filed November 9, 1954.

The corporate petitioner paid $19,500 in 1948 to one of the individual petitioners, a former president, in settlement of his claims against the corporation.

Held: 1. The individual petitioner had no proprietary interest in the corporation and made no sale of a capital asset to the latter and the amount received in settlement of his claims constituted ordinary income.

2. The attorney's fees incurred by the individual petitioner in negotiating the settlement constituted expenses for the collection of income.

3. Corporate petitioner entitled to deduct settlement payment and related attorney's fees as ordinary and necessary business expenses.

Ben L. Shifrin, Esq., for the petitioners in Docket No. 35847. Paul M. Gerwitz, Jr., Esq., for the petitioners in Docket Nos. 36074, 36075.

Ray H. Garrison, Esq., for the respondent.

In these consolidated proceedings, deficiencies in income tax for the year 1948 are claimed as follows:

1 The proceedings of the following petitioners are consolidated herewith: Lafayette A. Dirksmeyer, Docket No. 36074, and Feagans Paint Company, Docket No. 36075.

The primary question raised concerns a payment of $19,500 by Feagans Paint Company to Frank T. Feagans. We are asked to determine whether this payment was made to purchase Frank Feagans' stock in the paint company, or in recognition of his right to share in the accumulated profits of the company, or to settle a lawsuit over control of the company. Our determination will have tax consequences for each of the three petitioners.

FINDINGS OF FACT.

Frank T. Feagans, the petitioner in Docket No. 35847, resides in Overland, Missouri. His wife, Esther, who is also a petitioner in Docket No. 35847, is deceased. They filed their joint income tax return for the taxable year 1948 with the collector of internal revenue for the first district of Missouri.

Lafayette A. Dirksmeyer, who is the petitioner in Docket No. 36074, resides in St. Louis, Missouri. He also filed his income tax return for the taxable year 1948 with the collector of internal revenue for the first district of Missouri.

Feagans Paint Company, petitioner in Docket No. 36075, is a corporation organized under the laws of Missouri, with its principal office in St. Louis, Missouri. It is engaged in the wholesale and retail paint business. For the taxable year involved in this proceeding, it maintained its books and filed its return on the accrual basis. Its return for the taxable year involved also was filed with the collector of internal revenue for the first district of Missouri.

On May 31, 1944, Dirksmeyer purchased the Whittemore Paint Company, St. Louis, Missouri, for $3,020.70. The purchase included the fixtures, inventory, and goodwill.

The business acquired from Whittemore Paint Company was named the Feagans Paint Company because Dirksmeyer, who owned and operated another paint business in St. Louis under the name Dirksmeyer Hardware and Paint Company, preferred for business reasons that suppliers, competitors, and the local jobbers' association not know that he owned two paint businesses in St. Louis. It was operated as an individual proprietorship until September 7, 1944, when its successor, Feagans Paint Company, a corporation, commenced business at the same address.

Dirksmeyer was assisted in the operation of the business by Frank T. Feagans and Bernard F. Luer. Luer had been associated with

Whittemore prior to Dirksmeyer's purchase of the company and Feagans had been in the paint business for many years as a salesman and had a considerable clientele. Although Feagans and Luer were employed by Dirksmeyer, there was an informal understanding among them that they would share in the profits if the business were successful.

The Feagans Paint Company was incorporated on August 31, 1944, under the laws of Missouri, to take over the business of the proprietorship. The corporation had authorized capital stock of 1,000 shares of $10 par value each. The certificate of authority to commence business was issued on September 7, 1944.

The capital paid in at the organization of Feagans Paint Company amounted to $10,000, and was contributed entirely by Dirksmeyer. It consisted of the Whittemore Paint Company assets which had been acquired by Dirksmeyer and additional cash and merchandise. Neither Feagans nor Luer paid in any capital or promised to pay in any capital.

The authorized capital stock of 1,000 shares of $10 par value in Feagans Paint Company was originally issued as follows:

The stock certificates of Feagans Paint Company were prepared and issued by Gerald L. Seegers, an attorney. The certificates were dated September 1, 1944, but, due to a delay in getting the parties together, were not actually issued until September 12, 1944.

Stock certificates Nos. 1 and 3 were qualifying shares. Certificate No. 2 was issued showing Feagans as owner of the majority of the stock because Dirksmeyer wanted to conceal the extent of his participation from his competitors and also from his wife who was in the process of suing him for a divorce.

Feagans transferred to Dirksmeyer all rights of ownership in certificate No. 2 immediately after the issuance thereof on September 12, 1944. The certificate was endorsed as follows:

For Value Received, I hereby sell, assign and transfer unto L. A. Dirksmeyer Nine hundred ninety seven-Shares of the Capital Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint L. A. Dirksmeyer to transfer the said Stock on the books of the within named Corporation with full power of substitution in the premises.

Dated Sept. 12, 1944

In presence of

G. L. Seegers. (Signed)

Frank T. Feagans. (Signed)