Swygert, Chief Judge, Kerner, Circuit Judge, and Gordon, District Judge.*fn1
MYRON L. GORDON, District Judge.
This is an appeal from a decision of the United States Tax Court which upheld a determination by the Commissioner of Internal Revenue that the appellant is liable for a deficiency of over $60,000 for the two taxable years ended June 30, 1964, and June 30, 1965. The opinion of the Tax Court is reported in 54 T.C. 385 (1970).
The appellant is a corporation which manufactures agricultural equipment at a factory in Gibson City, Illinois. In the early 1960's, the corporation began to make implements of a type which were to be pulled by a tractor. Because of its plan to test such equipment before offering it for sale, the appellant began to look for large expanses of land.
The company determined that farm land near Gibson City would be desirable; initial testing on leased land in Arizona had proved unsatisfactory because of cost and inconvenience. In the fall of 1962, Elmo Meiners, the appellant's president, learned that farm land was available near Wayne City, Illinois, about 200 miles south of Gibson City. Mr. Meiners communicated with Charles Nation, of Nation Realty and Insurance Co. of Fairfield, Illinois, who stated that Ben Nation, his brother, wished to sell his "Blairsville Farm."
Testimony before the Tax Court disclosed that the Blairsville Farm, which contains 1,490 acres, had been listed for sale with Nation Realty in late 1961 or early 1962 at an asking price of $335,250, or $225 per acre. The Tax Court found that Ben Nation and Mr. Meiners orally agreed to a sale of the farm for $358,000, and to a sale of certain farm equipment for $37,000. However, in January, 1963, the appellant drafted a "Lease Agreement for Agricultural & Experimental Work" and an "Option to Purchase." The lease provided for an annual rental of $34 per acre, or $50,660, for a five-year period, at the end of which the option to purchase could be exercised for $342,700 "less all monies received by the Sellers on [the] * * * lease." After the documents were examined by Ben Nation, the company had an attorney prepare the final draft of the document called "Lease" which forms the subject of the present action.
Under the instrument, as executed, the appellant became obligated to pay Ben Nation and his wife an annual sum of $50,660. While the appellant was allowed to make alterations and improvements, the Nations were under no obligation to make repairs. The lease also provided that the appellant was to procure fire insurance in an amount not less than 80% of the insurable value of the buildings and improvements on the property, with the policies to be made payable to "Lessors and/or Lessee and/or any Mortgagee and/or assignee designated by Lessors." Finally, the lease provided that, upon its execution, the appellant would purchase certain farm equipment for an additional $37,000.
An "option to purchase" was contained in paragraph 16 of the "lease" and stated, in part:
"Lessors hereby give the Lessee the right and option to purchase the leased premises and all buildings and improvements thereon including any alterations, buildings and improvements to the leased premises made by the Lessee pursuant to paragraph Seventh hereof at the termination of this lease or at the termination of any extension or renewal of this lease for the sum of One Hundred Seventy-Three Thousand Seven Hundred Seven Dollars and Forty Cents ($173,707.40)."
In December, 1967, the appellant notified Ben Nation that it desired to exercise the option to purchase the Blairsville Farm. On February 7, 1968, Ben Nation and his wife executed a warranty deed to the farm to the appellant. The appellant then paid the Nations $1,267.94 which, as the Tax Court found, "represented the net amount payable after accounting for the assumption of [a] remaining outstanding mortgage indebtedness of $172,000 in addition to certain interest and taxes."
For the taxable years ended June 30, 1964, and June 30, 1965, the appellant deducted rental payments of $50,660 and $53,159.92, respectively. The appellee disallowed these deductions, stating that "Such payments did not constitute rental payments but partial payments on the purchase price of the land since by virtue of the payments you acquired, or will acquire, title to or an equity in, the property."
Two issues are presented for this court's determination. The first is whether the payments made by the appellant to the Nations under the purported lease were properly deducted as rental payments under § 162(a)(3) of the Internal Revenue Code of 1954 or were, instead, payments made to acquire an equity in the Blairsville Farm. The second issue concerns the propriety of the holding of the Tax Court that the appellant failed to prove that the Commissioner's determination of the useful lives of certain "leasehold" improvements was erroneous.
Section 162(a)(3) of the Internal Revenue Code of 1954 [26 U.S.C. § 162 (a)(3)] provides:
"(a) In general. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying ...