*725OPINION.
Smith: The taxpayer had a one-half interest in a leasehold which was acquired in 1902, the lease expiring April 30, 1922. The leasehold had a large cash value at March 1, 1913. The taxpayer is entitled to deduct from gross income for each of the years 1919 and 1920 an amount representing the annual exhaustion of the leasehold. Appeal of Grosvenor Atterbury, 1 B. T. A. 169.
In his income-tax returns for the years 1919 and 1920, the taxpayer claimed that the fair market value of the leasehold on March 1, 1913, was $652,641.32; that this value should be spread ratably over the 9 years and 2 months that the lease had to run from March 1, 1913, to the date of expiration, April 30, 1922; that the exhaustion deduction allocable to each of the years 1919 and 1920 was $70,555.82; and that the taxpayer, having a one-half interest in the leasehold, was entitled to a deduction for exhaustion of $35,277.91 for each year.
In support of this appeal the taxpayer has placed in evidence appraisals of the leasehold by two real estate experts of New York City. One expert has given the leasehold a value on March 1, 1913, of $800,496, based on the fair market value of the land and buildings, and of $739,203, based on the fair rental value of the property as follows:
Fair market value of land-$3, 000, 000
Fair market value of building_ 225, 000
Allowing 5 per cent interest on land and 6 per cent interest on the building and applying the Inwood formula, the estimated value of the leasehold is_ 800,496
Fair annual rental from entire building- 258, 750
Less-40 per cent for operating, taxes, insurance, etc- 103,500
Less $55,000 annual rental of lease_ 55,000
Net annual income from property_ 100,250
Value of leasehold on March 1, 1913_ 739,203
*726The appraised value of the leasehold was placed by the other expert at $793,000 as of March 1, 1913. Both appraisals were made in 1925.
In the light of the actual earnings, we thinii that the appraisals made by the expert appraisers of the value of the leasehold in question as of March 1, 1913, are much too high. In the determination of the value of the leasehold at March 1, 1913, one of the appraisers has stated that the fair annual rental from the entire building as of March 1, 1913, was $258,750. This was greatly in excess of the rentals collected for the fiscal year ended January 31, 1913, or for any year prior to that ended January 31, 1920. There was a gradual increase in the total rentals collected, a portion of which increase was reflected in the profit- from the leasehold, but we do not think that it was possible in 1913 to foresee the greatly increased rentals of the years subsequent to 1919. The lessees’ profits were subject to the hazards of business. Even though the rentals might increase in amount, the proportionate part of such increase which would be reflected in profits was uncertain. It is noted that from February 1, 1910, tó January 31, 1916, the average annual profit from the lease was $49,611.06. In our opinion, it was impossible for the lessees to foresee on March 1, 1913, a greater profit per year from the operation of the property for the period March 1, 1913, to April 30, 1922, than $49,611.06. We are of the opinion that, in the determination of the cash value of the leasehold, it should be considered that it would earn only $49,611.06 per year for nine years and two months. The then cash value of such a leasehold is $262,025.82, which we have found as a fact to be the cash value of the leasehold on March 1, 1913. The amount of the exhaustion allocable to each year is $28,-584.63, one-half of which, or $14,192.31, is a legal deduction from the annual gross income of the taxpayer in his income-tax returns.