OPINION.
Smith:
This appeal raises a question of law only. There is no dispute as to the facts. In 1921 the taxpayer desired to rent the premises at 126-A Tremont Street, Boston, Massachusetts, upon which the Carmen Specialty Shoe Shops, Inc., had a lease for a term of nine years beginning March 1, 1916. On November 12, 1921, the taxpayer and the Carmen Specialty Shoe Shops, Inc., entered into an agreement whereby the last named corporation agreed to " demise and lease " the premises to the taxpayer for a term of three years and two months from January 1,1922. Under the agreement the taxpayer obligated itself from and after January 1, 1922, to " pay the rent which may thereafter become due, according to the terms of said lease, and perform all the covenants and stipulations in said lease from said Trustees to the said Nathan Carmen contained, which are to be performed on the part of the lessee." It also agreed to pay to the Carmen Specialty Shoe Shops, Inc., the sum of $18,000. Of this amount $1,000 was paid on November .12, 1921, and the remaining $17,000 was to be paid upon the giving of possession of the premises to the taxpayer but not prior to January 1, 1922, in manner following:
Ninety-five hundred (9,500) dollars in cash, the remainder of seventy-five hundred (7,500) dollars by thirty-eight promissory notes
The taxpayer paid the $9,500 which it was obligated to pay not later than January 1, 1922, on December 29, 1921.
The taxpayer kept its books of account in 1921 upon a strictly cash receipts and disbursements basis, and its income and profits tax return for that year was prepared and filed upon the same basis. In that return it deducted from gross income the $10,500 which it had paid to the Carmen Specialty Shoe Shops, Inc., and claims that it is entitled to make that deduction under the provisions of section 234(a) (1) of the Revenue Act of 1921, which permits a corporate taxpayer to deduct from gross income " all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including rentals or other payments required to be made as* a condition to the continued use or possession of property to which the corporation has not taken or is not talcing title, or in which it has no equity."
The incidence of the income tax is upon the " net income " of the taxpayer. The net income is determined by deducting from gross income, which includes "gains, profits, and income," derived from various sources, certain specified items. The object of Congress in particularizing the deductions was to make certain to taxpayers their rights to claim deductions. The tax is an annual tax. The theory of the law is that' the true gains of each year shall be subjected to the tax. Where, therefore, a taxpayer claims that it is entitled to deduct from gross income an amount which is not clearly an expense item properly chargeable against the gross income of the particular year, it is incumbent upon the taxpayer to show that it is at least within the letter of the provision of the law permitting the deduction.
The taxpayer claims the right to make the deduction of $10,500, under section 234(a)(1), upon the ground that the payment was made " as a condition to the continued use or possession of property." The essence of its contention is that any amount which a taxpayer may pay for a, right to the possession of property even in a future year is deductible from gross income. In making this contention it of necessity makes the contention that the word possession is coordinate with the word use, and that the word continued does not modify the word possession.
We do not think that this construction of the statute is the correct one. In our opinion the word continued modifies the word possession as well as the word use. The taxpayer can not logically claim that the $10,500 in question was paid as a condition to the continued possession of property, inasmuch as it had no possession of the premises at 126-A Tremont Street during the year 1921.
In our opinion the $10,500 paid in 1921 is not a deductible item, unless it may be regarded as an ordinary and necessary expense, of the taxable year in carrying on the taxpayer's trade or business. We think that the evidence conclusively proves that the item was not such an expense. The taxpayer did not get any profit from the payment of the $10,500 during the year 1921. The profits from the payment were to flow to it through the unexpired term of the lease, namely, from January 1, 1922, to February 28, 1925, inclusive.
In our opinion the payment of $10,500 was a capital item. It •represented an investment of the taxpayer in a lease. The taxpayer during the term of the lease was entitled to deduct from its gross income for each of the years 1922 to 1925, inclusive, a proportionate part of its investment of $10,500 under the provisions of the Revenue Acts of 1921 and 1924, which permit a taxpayer to deduct from gross income a reasonable amount for the exhaustion of property used in its trade or business.