*2597 The purchaser and assignee of a 99-year lease of real property, renewable forever, is not entitled to a deduction from gross income for depreciation of buildings, machinery and equipment used in his business, which were erected upon the demised premises by the original and prior lessees at their own cost and expense, in accordance with covenants in the original lease, even though the purchaser and assignee assumes all of the covenants and conditions imposed upon the original and prior lessees under which such original and prior lessees were required to maintain and keep such improvements or others of at least the stipulated value upon the premises at all times during the term demised. Weiss v. Wiener,279 U.S. 333">279 U.S. 333, decided by the Supreme Court April 22, 1929, followed.
*375 This is a proceeding for the redetermination of a deficiency in income taxes for the calendar years 1921, 1922, and 1923, amounting in the aggregate to $8,809.24.
Petitioner alleges that the Commissioner erred in disallowing a deduction for the years in*2598 question for depreciation on a building, machinery and equipment, erected upon leased premises by the original lessees under a perpetual lease, which was assigned to petitioner, based upon the value and unexpired useful life of the property. It is alleged, further, that the Commissioner erred in determining the extent of petitioner's interest in the perpetual lease and the amount of the depreciation allowable, if any, to petitioner.
FINDINGS OF FACT.
On April 13, 1881, the trustee of the estate of James Bradford, deceased, leased an unimproved lot situated in the City of Cincinnati, Ohio, to Thomas J. and John J. Emery for a term of 99 years, renewable forever thereafter, in consideration of the payment of an annual rental of $10,200 and the performance of the covenants and conditions therein contained by the lessees to be performed. The lessees, for themselves, their representatives and assigns, covenanted and agreed to pay the stipulated annual rental in equal quarterly installments to the persons designated and in the manner provided; to pay and discharge all taxes assessed upon the demised property; to erect within three years after the date of the lease a suitable and*2599 substantial building, or buildings, of the value of at least $75,000; to maintain and keep upon the premises at all times during the term demised and all renewals thereof, a building, or buildings, of the same character and value as stipulated; to repair the building to be erected and maintained on the premises so that no waste should be suffered; to keep the said building safely insured against loss by fire, the proceeds of the policy in the event of loss to be used exclusively in rebuilding or repairs.
To secure payment of the rent and performance of the other covenants by the lessees on their part to be paid and performed, the lessor reserved a right of entry upon default and a lien upon the term demised and the improvements placed upon the premises. The lessor, on behalf of all persons entitled, or to become entitled under the will of James Bradford, to the reversion of the demised premises, covenanted and agreed for them, their heirs and assigns that the lessees, their representatives and assigns should have peaceable and quiet possession and enjoyment of the premises and all appurtenances *376 thereto for the full term demised and that at any time within one year next*2600 before the expiration of the term they would, upon request of the lessees, their representatives or assigns, grant and execute a renewal of the lease for a like term, rent, covenants and conditions and renewable in like manner forever. Pursuant to the terms of the lease Thomas J. and John J. Emery constructed and equipped a building on the premises and otherwise complied with its provisions.
By "Agreement of Lease" dated February 23, 1921, representatives of the estates of Thomas J. and John J. Emery, both deceased, in consideration of $100,000, receipt of which was acknowledged, and the payment and performance of the rents, installments and covenants therein stipulated to be paid and performed, sold the said perpetual lease, subject to all the terms and conditions therein, to Lloyd Baker, his executors, administrators and assigns, the conveyance being in the form of a lease of the lot and improvements for a term of 15 years, beginning March 1, 1921, with the privilege to purchase all interests of the Emerys in and to the perpetual lease. Baker, for himself, his heirs, administrators and assigns covenanted and agreed to comply with and perform all of the terms, conditions and*2601 covenants of the perpetual lease.
The agreement provided that the lessee should pay an annual rent of $55,800 in equal quarterly installments; should pay all taxes and assessments levied directly against the leasehold and its improvements, and should keep the property insured under policies providing that the proceeds thereof should be used to either restore the old or erect a new building on the premises. The lessee, his heirs and assigns were granted the right, all covenants and conditions of the agreement having been complied with, to purchase the premises on any rent day after March 1, 1924, upon giving four months previous notice to the assignors, by payment of $930,000 in addition to the $100,000 already paid, less any sums paid on account thereof during the term of the lease. The lessee had the privilege of paying, after 30 days notice, $50,000 on each of certain rent days to be applied upon said purchase price, the rent to be proportionately reduced upon each and every such payment. It was provided that if the lessee had not previously exercised the privilege of purchase in the year 1924, as therein provided, he should pay on March 1, 1924, and each March 1 thereafter*2602 during the term, $50,000 to be applied to the purchase price, with a proportionate reduction in the rental, and should pay at the end of the term any unpaid balance of the purchase price. The lessors, for themselves, their heirs, successors and assigns covenanted to convey the leasehold to the lessee, his heirs and assigns, upon the completion of the purchase price.
It was further provided that the lessee, his executors, administrators, heirs and assigns should have the privilege, upon certain conditions, *377 to demolish the building then on the premises and to construct in place and stead thereof another suitable building to cost not less than $750,000; that he should not assign the lease nor any part thereof without the written consent of the lessors; and that he would deliver up the premises at the end of the term in as good order and condition as they then were or should be put by the lessee, reasonable use and ordinary wear and tear thereof excepted. It was agreed that the lease should not become void or voidable by reason of loss or destruction, or partial destruction, by fire or other unavoidable casualty. The lessors reserved the right ot reentry and a lien upon*2603 the premises as security for payment of the rent and the performance of the covenants and conditions by the lessee to be paid and performed. The lessors, for themselves, their heirs, successors and assigns covenanted that the lessee, his executors and administrators should have quiet and peaceable enjoyment of the premises during the term demised.
With the written consent of the lessors, Baker, on February 28, 1921, for valuable considerations, sold, assigned and transferred the "Agreement of Lease" and his interest in the same and in the premises therein described to William N. Andrews and J. M. Richardson. As further consideration for the assignment it was verbally understood and agreed between the parties that Baker should have an undivided one-third interest as lessee in and to the purchase of the perpetual lease, such interest to be held in trust by Andrews and Richardson. On October 4, 1922, in consideration of $100,000 in cash and notes, and other valuable considerations, Richardson assigned all his right, title and interest in and to the "Agreement of Lease" and the premises therein described and the said perpetual lease to Andrews, his heirs, executors, administrators*2604 and assigns. Andrews, for himself, his heirs, executors, administrators and assigns covenanted with Richardson to henceforth pay the rent and perform all covenants and conditions to be paid and performed by the lessee, and to forever indemnify and save harmless said Richardson from all liability, loss and damage. By instrument in writing dated November 21, 1922, and designated "Declaration of Trust and Agreement," Andrews, for himself, his executors, administrators and assigns, acknowledged to Baker, his executors, administrators and assigns, that Baker had an undivided one-third interest in the title and estate in the perpetual lease held by Andrews as the sole lessee and that such interest was held by Andrews in trust for the use and benefit of Baker.
William N. Andrews owned from February 28, 1921, to October 4, 1922, an undivided one-third interest, and thereafter an undivided two-thirds interest, in and to the said perpetual lease.
*378 At the date of the "Agreement of Lease," and the assignment thereof by Baker, the unexpired useful life of the building upon the demised premises was 15 years and the remaining useful life of the machinery and equipment was 10 years. *2605 The value of the building was $337,462.23 and of the machinery and equipment, $31,028.69. The proper rates of depreciation are 6 2/3 per cent per annum upon the building and 10 per cent per annum upon the machinery and equipment.
OPINION.
VAN FOSSAN: The primary question for determination is whether or not the purchaser and assignee of a perpetual lease of real property may deduct from income depreciation upon the building, machinery and equipment erected on the premises by the original lessees, pursuant to covenants so providing and requiring that the building, or others of equal or greater value, be maintained and kept upon the premises at all times, where the purchaser and assignee assumes all the obligations and covenants of the perpetual lease imposed upon the lessees, and the building and improvements are used by him in earning the income to be taxed. Substantially the same question was before the Supreme Court in the case of , decided April 22, 1929, in which the court held that depreciation was not allowable under such circumstances. See also *2606 ; ; ; and .
Judgment will be entered for the respondent.