The opinion of the court was delivered by: MARIS
In this suit to recover an income tax alleged to have been erroneously paid the parties filed a stipulation of facts from which I make the following special findings of fact:
On September 25, 1933, the plaintiffs and two other individuals who owned, as tenants in common, a piece of real estate in Easton, Pa., entered into a lease of the premises for the term of five years beginning December 1, 1933. The lease contained a clause that it could be renewed for a further term of twenty-five years provided notice was given before December 1, 1937. There is no evidence that such notice was given, however.
Clauses 5, 6, and 16 of the lease were as follows:
"5. The Lessee, may, at any time during the term of this lease or any renewal thereof, tear down the front portion of the building now upon the premises, from a line approximately one hundred and fifteen feet (115') north of Northampton Street, and erect in place thereof a new building, the cost of which shall be not less than seventy-five thousand dollars ($75,000) exclusive of fixtures. * * *
"6. The Lessee agrees and covenants that it will keep the existing or any new building and premises outside and inside in good and substantial repair, and will deliver the buildings and premises at the termination of the lease in good repair and first class condition, ordinary wear and tear excepted."
"16. On or before (but not after) December 1, 1937, the Lessee may, at its option, by written notice to the Lessors, renew and extend this lease for the further term of twenty-five (25) years beginning December 1, 1938, and ending November 30, 1963, provided, that at the time of giving such notice, this lease shall be in full force and effect. Such renewal or extension shall be upon and subject to all of the terms of this lease."
The demised real estate consisted of a lot of land, 80 feet in front on Northampton street and extending 240 feet in depth. At the time the lease was executed the buildings occupying the lot were old. After the execution of the lease, the lessee demolished part of the structures on the lot and erected in place thereof new buildings at a cost of $103,833.45.
The erection of the new buildings increased the value of the demised premises. The plaintiffs' aliquot part for the year 1934 of the depreciated value of these new buildings at the expiration of the lease was $907.06. This amount was included by the plaintiffs in their income tax return for the year 1934 and income tax in the sum of $36.29 was paid thereon, $8.54 thereof on September 12, 1935, and $27.75 thereof on December 11, 1935. On May 5, 1936, plaintiffs filed a claim for the refund of the tax so paid in the sum of $36.29, which claim was rejected by the Commissioner of Internal Revenue on December 23, 1936.
Other facts which may be material are set forth in the stipulation of facts, which is incorporated herein by reference.
This case presents the narrow question whether the value of new buildings erected by a tenant are taxable as income to the landlord when it appears that they were built pursuant to authorization contained in the lease and that title to them was not retained by the tenant but vested at once in the landlord.
Section 22(a) of the Revenue Act of 1934, 26 U.S.C.A. § 22(a), provides that: "'Gross income' includes gains, profits, and income derived from * * * dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever." Article 22(a) -- 13 of Regulations 86 adopted under the Revenue Act provides in part as follows:
"Improvements by lessees. -- If buildings are erected or improvements made by a lessee and such buildings or improvements immediately become the property of the lessor, as, for instance, if they are not subject to removal by the lessee, the lessor may at his ...