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REPAIRS OF EXTRAORDINARY NATURE
In spite of the opinion quoted from the case of Hirsch v. Weiner, there is much force in the argument that the cost of repairs of an extraordinary nature, not usually required in the general current upkeep of property, should properly be apportioned and spread over a number of years representing the estimated life of such repairs. This seems to be the rule adopted as proper in the case of Maitland v. Kerrigan.88
The evidence, however, should clearly show that the repair is an extraordinary one, which will last a number of years. For instance, if property has, through neglect, been permitted to run down or fall into decay, it would seem unfair to charge up the entire expense of restoration and repair against a single year's income.89 But unless the evidence shows that the repair is of this character, the rule laid down in the case of Hirsch v. Weiner should undoubtedly be followed.
It has been held that it is improper to permit testimony by the landlord as to repairs to be made in the future, which may never materialize.90
EXPENSES INCURRED THROUGH MISMANAGEMENT
The evidence may show that certain expenses were incurred through mismanagement or extravagance or that prices paid for repairs or upkeep were excessive. If these be the facts, the landlord's lack of judgment or improvidence ought not to be visited upon the tenants.91
88 187 N. Y. Supp. 495 (App. Term, 1st Dept.).
91 Memorandum filed by Spiegelberg, J., in the matter of adjustment of rental values of apartments in premises 935 & 945 E. 163d Street, Mun. Ct., Manhattan, 1st Dist., May 31, 1921 (not reported).
Legal services, reasonable in amount and properly incurred, should be considered as a proper expense chargeable against the gross income.o2
VACANCIES AND BAD DEBTS
The items of loss through vacancies in apartments and through failure of tenants to pay, or bad debts, present some difficulty. If the gross income is taken as of a completely filled house with all parts rented to paying tenants, it would seem proper to charge off on the reverse side of the accounts such sums as experience shows or the facts disclose to be contrariwise. This would be a matter of proof. If there is claimed to be a certain average loss extending over a period of years, it would seem proper to take the item into consideration. The evidence, however, must support the claim. If reasonable rent is to be fixed by the return on the value of the property or return on the investment of the owner, it appears proper to make such allowances as these, where the facts adduced at the trial justify them. As stated in the case of Hirsch v. Weiner 93:-“When vacancies are proven allowance should also be made for failure of rent by reason thereof.'
Depreciation is likewise a proper charge to be considered. Mr. Justice Lehman, writing for the Appellate Term in the case of Schwartz v. Deutsch, says:94
92 Schwartz v. Deutsch, 187 N. Y. Supp. 521 (App. Term, 1st Dept.). See also Hirsch v. Weiner (App. Term, 2nd Dept.), 190 N. Y. Supp. 111.
94 187 N Y. Supp. 521 (1st Dept.).
"It is also plain that an apartment house depreciates year by year, and the owner of the premises is reasonably entitled not merely to a fair income return on his investment, but in addition to a return which will keep his capital intact, and the amount of the annual depreciation is therefore a proper charge against the gross income received from real property. There are cases where the allowance for repairs is sufficiently large to include depreciation, but the court must permit the landlord in some manner to provide for this item and cannot arbitrarily rule that it never allows for depreciation.”
On the subject of depreciation, the court in Hirsch o. Weiner 95 has this to say
“We think it is established in this case, as well as in other cases before us, that an annual charge for depreciation on the value of the buildings at the time for which rent is sought should be allowed. The great weight of evidence is that an annual charge of 2 per cent per year for depreciation on the value of the buildings is fair. The federal and state governments allow such depreciation in the calculation of income tax."
This item of depreciation is almost invariably disputed in every contested case. While perhaps the court may take judicial notice of the fact that all property used or occupied for dwelling purposes physically deteriorates, we know of no way in which the court may take judicial notice of the extent of such depreciation. That would seem to be a matter of proof by a witness duly qualified by experience to testify on that subject. In the case of Von Baumbach v. Sargent Land Co.,96 Mr. Justice Day, writing the opinion of the Supreme Court of the United States, said:
96 Supra (2nd Dept.),
“What was here meant by depreciation of property '? We think Congress used the expression in its ordinary and usual sense as understood by business men. It is common knowledge that business concerns usually keep a depreciation account in which is charged off the usual losses for wear and tear, and obsolescence of structures,'
In a very recent case the Circuit Court of the United States held (syllabus)97 :
“On an issue as to the amount a railroad company was entitled to deduct from gross income for depreciation of property, under Corporation Tax Act Aug. 5, 1909, $ 38, subd. 2, the court held to have correctly instructed that the measure of depreciation was the difference in the intrinsic value of the property as a whole at the beginning and end of the year, and that enhanced value of parts through repairs and replacements should be set off against depre ciation of other parts not repaired or replaced.”
The usual charges sought to be deducted for depreciation by landlords are from one to four per cent.
The Federal income tax law, known as the Revenue Act of 1918, contains a section permitting a deduction for exhaustion and wear and tear of property, which is here quoted, together with some decisions in connections therewith, as well as some of the Treasury Department rulings, as they seem to contain much that is pertinent to this subject.
Section 214 of the Revenue Act of 1918 reads as follows:
"That in computing net income there shall be allowed in deductions:
.. (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.”
97 Nashville, C. & St. L. Ry. Co. v. United States, 269 Fed, R. 351.
As used in the Treasury Department rulings, depreciation usually means the gradual reduction in the value of the property due to physical deterioration, exhaustion, wear and tear through use in trade or business. Obsolescence means the gradual reduction in the value of property due to the normal progress of the art in which the property is used, to change in surrounding conditions, such as social or legal, or to the property becoming inadequate to the growing needs of the trade or business. Depreciation is often used to indicate a combination of the two. Obsolescence, a gradual lessening of value, must be distinguished from loss of useful value,” which contemplates an abrupt termination of usefulness.98
A court decision furnishes the following definition:
Depreciation is not to be confused with ordinary repairs. It is intended to cover the estimated lessening in value of the original property, if any, due to wear and tear, decay, or gradual decline from natural causes, inadequacy, obsolescence, etc., which at some time in the future will require the abandonment or replacement of the property, in spite of ordinary current repairs."
The Treasury rulings 100 are as follows:- The necessity for a depreciation allowance arises from the fact that certain property used in the business gradually approaches a point where its usefulness is exhausted. 101
Property kept in repair may, nevertheless, be the subject of a depreciation allowance.
The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life,
98 Federal Income Tax Service, p. 93. 99 San Francisco & P.S. S. Co. v. Scott, 253 Fed. R. 854, Bean, J. 100 Regulations 45 and footnotes, as reported in Federal Income Tax Service. 101 Federal Income Tax Service, Art. 162, page 93,