*940 1. Cost of depreciable assets acquired for stock determined.
2. Commissioner fails to show that rate of depreciation is less than 5 percent.
3. Deductions for retirement losses allowed.
*1070 The Commissioner determined deficiencies in the income tax of the petitioner as follows: 1929, $87,798.08; four months ending April 30, 1930, $28,186.97. The issues are:
(1) Whether the cost of the depreciable assets acquired by the petitioner on January 1, 1915, was $18,799,415, or the lower amount determined by the Commissioner;
(2) Whether the rate to be applied in computing a deduction under section 23(k) of the Revenue Act of 1928 for all of the petitioner's depreciable assets is 5 percent, as determined by the Commissioner, or the lower rates which he now contends are proper;
(3) Whether the Commissioner erred in disallowing deductions for retirement losses on the petitioner's assets.
The Commissioner has raised the second issue and*941 has the burden of proof on it.
FINDINGS OF FACT.
The petitioner is a corporation which was organized under the laws of Ohio in November 1914, to take over the pipe line of the Ohio Oil Co., hereinafter called Ohio. The petitioner filed its income tax returns for the two periods here involved with the collector of internal revenue at Toledo, Ohio.
All of the capital stock of the petitioner, consisting of 200,000 shares of common stock, each share having a par value of $100, was subscribed for by Ohio. Ohio transferred to the petitioner, in exchange for all of the common stock of the petitioner, the pipe line properties of Ohio and cash in the amount of $200,000 on January 1, 1915. The assets thus acquired by the petitioner were free and clear of mortgages and other liens. The petitioner did not assume any liabilities of Ohio. The pipe line property was transferred to the petitioner on January 1, 1915, without any interruption in its operation. The petitioner thereafter has operated that line, together with additions thereto and other lines, in the transportation of crude oil as a common carrier in interstate *1071 commerce. Ohio distributed the stock of the petitioner*942 to the Ohio stockholders of record on January 2, 1915.
Trading in the stock on a when-issued basis began in an over-the-counter market on December 11, 1914. The first sale was of 26 shares at $125 per share. The stock sold during December at prices ranging from $120 to $160 per share. One share was sold at $128 on January 2, 1915, the day after the purchase of the pipe line. A total of 1,717 shares was sold between December 11, 1914, and January 17, 1915, for an average price of $138.21 per share. The largest number of shares sold on any one day was 303.
The principal assets comprising the pipe line properties purchased by the petitioner were trunk lines, gathering lines, pumping stations, land, rights of way, and oil tanks. The main trunk line extended from Wood River Station, Illinois, to Negley Station, Ohio, near the Pennsylvania border. It was composed of single steel pipe in some sections of the line and as many as four parallel steel pipes in other sections, depending upon the capacity requirements of the system. The trunk line was constructed of different pipe sizes, also depending upon capacity requirements. Most of the pipe was either 8 inches or 12 inches*943 in diameter. The main trunk line was joined at Martinsville Station by a trunk line from Bridgeport Station, a point in Illinois south of the main line and located in the Illinois-Indiana oil fields, the principal producing area served by the pipe line system. Pumping stations were located at intermediate points along the line, depending upon the topography of the country. They provided the necessary power to relay the oil from one to the other until the final destination was reached. The gathering lines served as connecting links between the oil wells and the trunk line. Gathering lines were of small size pipe and, like the trunk line, were usually laid under ground. Pumping stations were also maintained along the gathering lines, at the lease tanks, in order to move the oil from the tanks to the trunk lines. A communications system, consisting of telegraph and telephone lines, was also a part of the pipe line system and was included in the purchase, as was a quantity of loose pipe, certain machine tools and machinery, office furniture and equipment, and certain highway equipment necessary for maintenance and construction work along the pipe line.
The pipe line system, at*944 the time of its purchase, served two oil producing areas - the Illinois-Indiana oil fields, located in southern Illinois and Indiana, and the Wooster oil fields, located in Holmes and Wayne Counties in eastern Ohio. The oil produced in these areas was transported through the pipe line to Negley, Ohio, where it was received by other carriers for transportation to refineries along the eastern seaboard. That part of the pipe line extending from Martinsville, Illinois, to Wood River, Illinois, received deliveries *1072 from other pipe lines west of the Mississippi River. Oil so delivered at Wood River was shipped by the Prairie Oil & Gas Co. The petitioner did not have contracts with any other oil or pipe line companies for the transportation of oil over its system on January 1, 1915.
Construction of the pipe line purchased by the petitioner had been commenced in 1906 by Ohio. The line was not completed until 1909. Oil was transported over the line beginning in 1907, when deliveries for revenue were first made.
The cost of the depreciable assets on the books of Ohio on December 31, 1914, was $14,264,962.84. Ohio accrued against those assets depreciation in an aggregate*945 amount of $5,467,075.52 up to and including that date, leaving a depreciated cost on its books of $8,797,887.32. Depreciation was computed by Ohio at an annual rate of 5 percent, upon the theory that the pipe line had an economic life of 20 years. The actual physical deterioration sustained by the laid pipe, the principal asset, was at the rate of approximately 1 percent annually from the time of its construction to December 31, 1914. The above cost to Ohio did not include expenditures for salaries of the officers and clerks who performed administrative functions in the construction of the pipe line, nor for taxes, insurance, legal services, traveling, telephone, and interest on moneys borrowed during the period of construction. The record does not disclose the amount of those expenditures. Improvements were made to the system during the period of Ohio's operation of the pipe line and were charged to maintenance expense instead of to pipe line investment. The improvements were for the replacement of defective pipe and equipment and for additional construction work at river crossings and other points where the original construction had been of a temporary nature. The work of*946 improving the pipe line continued almost to the time of the purchase by the petitioner. The cost of those improvements, properly chargeable to capital account, was about $750,000.
The amount of $20,000,000, used as the cost of the properties transferred to the petitioner by Ohio, was determined by the officers of the two companies to represent the fair market value of the properties at the time of the transfer. The petitioner made an inventory of the properties as of January 1, 1915, immediately after acquiring the line, for the purpose of allocating to each asset its proportionate share of the $20,000,000 purchase price. The inventory was compiled in the following manner: The superintendents of the pipe line divisions were instructed to prepare itemized lists of the assets located in the districts under their supervision. These lists were presented to the petitioner's purchasing agent, with instructions to evaluate the individual items shown on the inventory. Values were not to include *1073 costs of installation or construction. The purchasing agent assigned values to the items in accordance with the following procedures for each principal class of assets:
(1) *947 Land and rights of way. - Original cost to Ohio as shown on its books, plus a percentage of that cost. (The reason for so increasing the original cost is not determinable from the record.)
(2) Line pipe laid. - An amount representing the cost of freight, hauling and handling necessary to deliver the pipe at the point of installation, and the cost of painting was added to the January 1, 1915, f.o.b. Pittsburgh price of pipe. Freight was figured at the average of the prevailing rates between Pittsburgh and the various shipping points along the pipe line. Hauling and handling costs were determined from records of Ohio pertaining to such costs. There was also included in the final value an undisclosed amount representing an estimated premium which the petitioner determined buyers of pipe would be compelled to pay at that time for the immediate delivery of sufficient pipe to reconstruct the entire pipe line. No consideration was taken of its physical deterioration during the period prior to January 1, 1915, in determining the value of laid pipe.
(3) Loose pipe for gathering line system. - This value was computed in the same manner as the value of laid pipe, but included*948 an additional element representing warehouse cost to allow for the storage of pipe pending new production in the oil field.
(4) Pipe fittings. - Original cost as shown by entries on books of Ohio, plus freight and handling charges to the point of installation.
(5) Buildings. - Original cost of building materials to Ohio, plus freight and handling charges to point of construction.
(6) Boilers, pumps, tanks, machinery. - The values assigned to this equipment were based on January 1, 1915, prices of similar articles, plus the usual charges for freight and handling to the point of installation. Allowances were made for physical deterioration, and in arriving at those allowances the purchasing agent consulted with the petitioner's engineers and foremen regarding the condition of each item.
The costs of installing or constructing the assets then were computed. The construction costs of assets other than laid pipe were then added to the value of each item as detailed in the inventory and the resulting sum was carried to the various investment accounts for the individual classes of assets. The installation cost of laid pipe was handled in a different manner. Instead*949 of being added to the value of the pipe, it was charged to an investment account designated "Pipe Line Construction", in accordance with the accounting regulations of the Interstate Commerce Commission for pipe line companies. The pipe was charged to the "Line Pipe" account at its value at point of installation as determined by the inventory valuation.
*1074 The principal classes of assets were carried on the petitioner's books at the amounts indicated in the following tabulation, as a result of the allocation of the $20,000,000 purchase price to the individual assets transferred:
| Nondepreciable assets | $1,200,585 | |
| Cash | $200,000 | |
| Land | 131,694 | |
| Rights of way | 656,416 | |
| Materials and supplies | 207,875 | |
| Miscellaneous physical property | 4,600 | |
| Depreciable assets | 18,799,415 | |
| Line pipe - laid | $11,225,431 | |
| Line pipe - loose | 198,147 | |
| Line pipe fittings | 81,892 | |
| Pipe line construction | 4,016,978 | |
| Buildings | 579,818 | |
| Boilers | 62,141 | |
| Engines and pumps | 659,127 | |
| Machine tools, and machinery | 5,716 | |
| Other station equipment | 268,057 | |
| Oil tanks | 1,470,196 | |
| Delivery facilities | 6,382 | |
| Telegraph and telephone lines | 194,459 | |
| Office furniture and equipment | 13,234 | |
| Other property | 17,837 | |
| Total assets | 20,000,000 |
*950 The cost to the petitioner of the above assets acquired from Ohio was not less than $20,000,000. The petitioner did not pay any part of the $20,000,000 for any intangible asset such as "going concern value." The cost of the assets subject to exhaustion, wear and tear, and obsolescence was not less than $18,799,415.
The petitioner made additions to its original lines, and also acquired new lines, between 1915 and 1921.
The persons in charge of the petitioner estimated in 1915 that the economic usefulness of the pipe line purchased from Ohio would be coextensive with the profitable life of the oil fields which it served. They estimated that this life would be 20 years, and they thereafter used an annual rate of depreciation of 5 percent in computing annual deductions for depreciation, exhaustion, wear and tear, and obsolescence, both for bookkeeping purposes and for the purpose of deductions on the income tax returns of the corporation. Depreciation on the books of the petitioner was charged against the separate classification of assets each month at one-twelfth of the annual rate and credited to depreciation reserves established for each classification. The petitioner used*951 the same rate and method in accounting for depreciation on additions to its properties made or acquired after January 1, 1915.
*1075 A reasonable estimate, upon information available on January 1, 1915, of the probable economic life of the oil fields from which the petitioner received its oil for transportation to its pipe lines, was 20 years from January 1, 1915. There were no developments during or prior to the taxable periods here involved which would indicate that the probable economic life of those oil fields would extend beyond the 20-year period. A reasonable estimate of the probable economic usefulness of the pipe line properties purchased by the petitioner from Ohio, based upon information available on January 1, 1915, was 20 years from January 1, 1915. There were no developments during or prior to the taxable periods here involved from which it would indicate that the period of usefulness of those pipe line properties would be more than 20 years from January 1, 1915.
The Wooster field ceased to furnish oil for transportation over the line in 1926, due to the fact that the volume of oil produced in that field had declined below the point at which it could be*952 profitably transported over the petitioner's pipe line. One of the parallel lines running from Watt to Negley in Ohio was sold by the petitioner in 1926 and was used thereafter by the purchaser in the transportation of natural gas. The petitioner constructed or acquired other pipe lines located in Wyoming, Montana, Texas, New Mexico, and Kentucky, for the purpose of transporting oil produced in those areas. The Kentucky line extended to a point near the pipe line system acquired from Ohio. Those pipe lines were similar in construction to the pipe line system acquired from Ohio. The petitioner estimated the economic lives of those lines at 20 years, based upon the probable economic lives of the oil fields which they served, and computed depreciation on those properties, both on its books and on its income tax returns, at an annual rate of 5 percent. Some of the lines constructed in Wyoming, the line in New Mexico, and part of the Texas line, were abandoned in or prior to 1929 because oil production in those fields had failed to supply sufficient quantities of oil. There were no developments during the years 1929 and 1930, or prior thereto, which would reasonably indicate that*953 the economic lives of the remaining lines would extend beyond the estimated period of 20 years. The remainder of the Texas line was abandoned after 1930, when the Texas Railroad Commission prorated oil production in that State.
The petitioner retired, and made additions to, certain sections and equipment of its original pipe line during the period January 1, 1915, to April 30, 1930. The accounting procedure followed by the petitioner in recording retirements and additions was that prescribed in the regulations of the Interstate Commerce Commission, effective January 1, 1915. The petitioner set up investment accounts, as of January 1, 1915, for each pipe line division, designated by the following *1076 headings: "Land", "Rights of Way", "Line Pipe", "Line Pipe Fittings", "Pipe Line Construction", "Buildings", "Boilers", "Engines and Pumps", "Machine Tools and Machinery", "Other Station Equipment", "Oil Tanks", "Delivery Facilities", "Telegraph and Telephone Lines", "Office Furniture and Equipment", "Highway Equipment", and "Other Property". A depreciation reserve was set up for each investment account. Depreciation was credited to each reserve at the end of each month, *954 computed at one-twelfth of 5 percent of the debit balance in the corresponding investment account. The cost of the asset was credited to the appropriate investment account in accounting for the retirement of assets other than line pipe and pipe line construction. The depreciation accrued against the asset to the date of retirement was charged to the depreciation reserve. The difference between the cost and accrued depreciation, less salvage value, was charged to the retirement loss account. The procedure in accounting for retirements of laid pipe was different from that used in retiring other assets. The investment accounts for laid pipe were kept according to the size of the pipe. Thus, all 8-inch pipe was charged to one account, regardless of whether it was part of the original investment or a subsequent addition thereto. When a section of 8-inch pipe was retired, the amount credited to the investment account was computed by multiplying the number of feet of pipe retired by the average cost per foot of 8-inch pipe carried in the investment account on the date of the retirement. The amount so credited was diminished by a percentage which was equivalent to the ratio of the*955 total accrued depreciation in the depreciation reserve for 8-inch pipe to the total investment in 8-inch pipe, and the balance, less salvage value, was charged to retirement loss account. A similar procedure was followed in making adjustments to the "Pipe Line Construction" account for 8-inch pipe, the capital account which reflected the construction cost of the pipe retired. In its income tax returns for the years under review the petitioner claimed retirement losses, computed in the foregoing manner, as deductions from gross income.
The petitioner deducted $1,871,965.36 for depreciation in its return for 1929. This applied to all the depreciable assets owned by the petitioner in that year. Of this amount $537,400.58 was disallowed by the Commissioner for the following reason as stated in the deficiency notice:
Your physical property did not have a fair market value as great as $18,799,415 as claimed on Jan. 1, 1915, the basic date, and you have not established as a fact that at that date your physical assets had a market value in excess of $10,191,412.14, which was its net value on the books of your predecessor. The Ohio Oil Co., on the date of transfer. The Bureau holds*956 that the total value of all assets paid in for capital stock on Jan. 1, 1915, probably was $20,000,000, *1077 the best evidence of the value of the tangible property subject to depreciation was the depreciated cost of this tangible property on the books of the predecessor corporation on December 31, 1914, $10,191,412.14, and that the depreciation and retirement losses heretofore claimed and allowed have been more than sufficient to retire the actual value of physical assets acquired by you on Jan. 1, 1915.
The petitioner also deducted on that return $345,192.47 for losses on retirement of certain assets. The Commissioner disallowed $260,763.73 of this amount on the ground as stated in the deficiency notice:
It is in line with the policy of the Bureau to disallow retirement losses where composite rates of depreciation have been applied to a mixed aggregate of assets which have widely varying periods of life. Furthermore, losses claimed as unrecovered value of property included in your original plant account or its January 1, 1915 value as recorded on your books are held not to be deductible for the reason that the actual value of these items has been fully recovered through*957 depreciation and retirement losses allowed in prior years. The Bureau holds that the deductible loss comprises expenditures for labor and expense incident to making the retirements and no loss of capital value was sustained on property retired during the taxable year.
The Commissioner disallowed, for the same reasons, $179,133.53 of the $649,339.06 claimed by the petitioner for depreciation allowance, and $55,757.87 of the $70,552.02 claimed by the petitioner as retirement loss on its income tax return for the period January 1 to April 30, 1930.
OPINION.
MURDOCK: The first issue is whether the petitioner's basis for depreciation upon the depreciable assets which it acquired on January 1, 1915, from Ohio was, in the beginning, $18,799,415, as claimed by the petitioner, or was $10,191,412.14, the amount used by the Commissioner in determining the deficiency. 1 The petitioner claimed certain deductions for depreciation on its returns and the Commissioner disallowed the part thereof which was computed upon the assets acquired on January 1, 1915, from Ohio. He allowed the deductions claimed upon the remaining assets of the petitioner and approved the 5 percent rate used by the*958 petitioner, which was the same rate used in all prior years. The reason which he gave for disallowing the deductions upon the assets acquired from Ohio on January 1, 1915, was that the petitioner, through deductions for depreciation and retirement losses on those assets in years prior to the taxable years, had recovered an amount in excess of $10,191,412.14, and, consequently, the petitioner was not entitled to further recoveries on those assets. The amount actually recovered in prior years *1078 through depreciation and retirement losses on those assets is not disputed. The Commissioner was apparently satisfied that the petitioner had applied the 5 percent rate to the correct adjusted bases in computing deductions which it claimed for the two taxable periods here involved if the original cost was $18,799,415. The parties are agreed that the cost to the petitioner of the assets obtained by it on January 1, 1915, was the value of the stock given in exchange for them. They also agree that the petitioner's basis for depreciation on the depreciable assets obtained in that exchange is that portion of the total cost of all of the assets which may properly be allocated to the*959 depreciable assets. Thus, if the petitioner establishes that cost, it has met its full burden of proof on the first issue. This conclusion is stated advisedly as the only fair and reasonable one to be drawn from a study of the notice of deficiency, the pleadings, the briefs, and the statements and attitude of counsel during the trial.
The Commissioner stated in the notice of deficiency that $10,191,412.14 was the cost, less depreciation, of the depreciable assets to Ohio, as shown by the books of Ohio, at the time Ohio transferred those assets to the petitioner. The evidence shows that the book value of the assets, as shown by the books of Ohio at the close of 1914, was somewhat less, but the difference will in no way affect the result in this case.
The petitioner paid for the assets with all of its own stock. That stock was to be distributed to the Ohio stockholders. There is evidence of sales of the stock of the petitioner at prices in excess of par near*960 the critical date of January 1, 1915. Those sales are substantial evidence that the stock which was transferred to Ohio in exchange for the assets was worth at least $20,000,000. There is also evidence in the record to indicate that the value of the assets transferred to the petitioner at that time was at least $20,000,000. The Commissioner conceded in the notice of deficiency that the total value of all of the assets paid in for stock on January 1, 1915, probably was $20,000,000. It is fair to assume that the stock was worth as much as the assets which were behind it. . The petitioner does not claim a total cost in excess of $20,000,000, and it may fairly be concluded for the purposes of this proceeding that the cost to the petitioner of all of the assets which it acquired on January 1, 1915, was $20,000,000.
However, error in the determination of the Commissioner on this first point is not shown by the conclusion that $20,000,000 was the cost of all of the assets. There remains the question of the cost of the depreciable assets, or the question of what part of the entire cost may properly be allocated to the*961 depreciable assets. The Commissioner apparently attributed to "going concern" value the difference *1079 between $20,000,00 and $10,191,412.14. He would allow no depreciation based upon the cost of "going concern value" on the ground that it represents the cost of an asset not subject to depreciation. However, error in his determination may be shown in several ways. For example, it might be shown that there was no intangible value such as "going concern value" or good will attached to or inherent in the pipe line system which the petitioner obtained through the purchase from Ohio on January 1, 1915, or it might be shown that no part of the consideration was paid for any such intangible value, or it might be shown that the intangible value disappeared ratably as the economic life of the tangible assets gradually drew to a close.
The parties to the transaction whereby the pipe line was transferred to the petitioner considered the question of the value of the various assets to be transferred in arriving at the figure of $20,000,000, yet they did not mention any intangible value or attribute any part of the value to intangibles. The petitioner, after it received the assets, *962 spent a great deal of time and effort in preparing a careful inventory and in appraising the items of that inventory for the purpose of distributing the total cost to the various assets on its books. There was never any mention in that process of any intangible asset, and no part of the cost was ever allocated to any intangible asset. While we are not called upon to approve or disapprove of each step in the appraisal, and while there may be some parts of the process about which we have some doubt, nevertheless, after due allowance is made for all uncertainties, the inventory and appraisal strongly indicate that the value of the tangible assets was at least $18,799,415. The evidence also shows that no part of the purchase price was paid for intangibles and, further, that any "going concern value" attached to the line exhausted with the line itself. Thus, even if there was some valuable intangible asset transferred, nevertheless it is proper to allocate to the tangible assets a cost of at least $18,799,415. The evidence supports and the Commissioner does not seriously question the method of allocating the cost of $18,799,415 to the various depreciable assets which the petitioner*963 used on its books and in computing the deductions in question. ; affd., . Decision on the first point must be for the petitioner.
The Commissioner, by amended answers, has made two contentions in regard to the rate of depreciation on all of the depreciable assets of the petitioner. The first amended answer claimed that a rate of 3 1/3 percent was proper instead of the rate of 5 percent which was used. He filed a second amended answer at the close of the hearing in which he alleged that if the 3 1/3 percent rate was not to be applied *1080 as a composite rate to all of the depreciable assets of the petitioner, then a rate of 2 percent should be applied to buildings and a rate of 2 1/2 percent should be applied to line pipe laid, line pipe construction, and tanks. He made claim for the increased deficiencies which might result and he recognizes that he has the burden of proof to establish the correct rates.
Witnesses for the petitioner have testified, and the petitioner concedes, that certain parts of the plant of this pipe line company have a physical life of substantially more than*964 20 years. The petitioner contends, however, that when they form a part of a pipe line, the entire cost of the investment must be recovered over the economic life of the pipe line. The petitioner estimated the useful life of its properties in 1915 in the light of the best opinion and experience then available. The resulting rate was the rate of 5 percent. The petitioner has consistently used that rate ever since. The Government seeks to change it in the fifteenth year of its use. The evidence indicates that a life of 20 years was a reasonable prediction in 1915 and that nothing happened in 1929 or in the first four months of 1930 to justify a change in that estimate. Deductions for depreciation are dependent upon estimates and can never be absolutely accurate. . Cf. ; ; . There was reason to believe in 1929 and 1930 that the line might possibly have some further use for transporting products of others, but the*965 evidence is not strong enough to justify a change in the method consistently used by the petitioner to recover its capital investment. It is not necessary in this proceeding to hold affirmatively from the evidence that the 5 percent rate is proper. The burden was upon the respondent to show that that rate was improper and we have no hesitation in saying that the evidence does not show error in the use of the 5 percent rate.
The final question is whether or not the Commissioner erred in disallowing deductions for retirement losses on all of its assets. One reason for the disallowance of those deductions was that the "value" of the assets acquired on January 1, 1915, was only $10,191,412.14, and that "value" had already been recovered tax free in prior years through deductions for depreciation and retirement losses. We have held, in deciding the first issue, that the cost of those assets was $18,799,415. The only other reason timely advanced by the Commissioner for disallowing the deductions for retirement losses is that the 5 percent rate is a composite rate, and where a composite rate is used, deductions on account of losses for retirements are improper. Obviously, if a rate*966 of 5 percent is consistently applied to the same basis for a period of 20 years, the annual deductions will equal the cost *1081 of the property. However, if the basis is reduced as assets are retired, the entire cost of the assets can not be recovered unless the depreciated cost of the retired assets is allowed as a deduction at the time of their retirement. This is because the subsequent deductions will be 5 percent of a basis which does not include the cost of the retired assets.
The method of recovering its capital investment which the petitioner has consistently used since it acquired the pipe line from Ohio has been to apply a rate of 5 percent to the cost of the different classifications of assets in each district. It maintains a separate reserve account for each separate class of assets in each district. In case any asset was retired or replaced during the period from January 1, 1915, through April 30, 1930, the undepreciated balance of the cost of that asset remaining on the books at the time of the retirement was written off, and the amount written off, reduced by salvage, was taken as a deduction in the year of the write-off as a loss upon retirement. The*967 original basis was reduced as amounts were written off. This method, consistently applied, will return to the taxpayer the exact cost of its assets over a period of 20 years. It will not result in any double deduction, it will not fail to return any part of the cost tax free, and it will not distort income for any year. The statute allows a taxpayer deductions for losses upon the retirement of assets. It is, of course, proper to consider the method of computing depreciation and to see that double deductions do not result. There is in the present case no distortion of income resulting from double deductions in this connection. On the contrary, if the retirement losses are disallowed, the deduction for depreciation would have to be increased in order to reflect income correctly. Applying a rate of 5 percent to the original cost of the assets acquired on January 1, 1915, would give the petitioner a deduction for 1929 of $939,970.75. 2 The petitioner is only claiming a deduction of $537,400.58 as depreciation on those assets, and a deduction of $260,763.73 as retirement losses on all of its assets. The total which it is claiming is $798,164.31, or $141,806.44 less than it would*968 be entitled to deduct for depreciation alone on the original assets were it to apply 5 percent to the cost of those assets. The petitioner is entitled to the deductions which it claimed for retirement losses for the two periods here involved.
The Commissioner in his brief has made a further argument for disallowing the retirement losses. The petitioner extended its properties and made additions to its old properties after January 1, 1915, from time to time. It capitalized the cost of each addition and applied the 5 percent rate thereto in computing depreciation. The contention *1082 of the petitioner has been that the economic life of all of its assets will end with the close of the year 1934. The Commissioner therefore argues that depreciation on the additions to the plant after January 1, 1915, should have been computed at a rate in excess of 5 percent, which was not done, and, therefore, the retirement losses in the taxable periods before the Board are excessive, since they were computed upon an excessive basis from which the sufficient depreciation for prior years had not been deducted. *969 The record does not disclose the amount of retirement losses applicable to the assets acquired on January 1, 1915, the assets added to the original pipe line after that date, or to the assets constituting pipe line systems located in other states. Consequently, the Commissioner urges that the entire deduction for retirement losses for each of these periods must be disallowed. He also points out that the method used by the petitioner in computing retirements of laid pipe was faulty in that there again the basis upon which the retirement losses were computed was excessive due to inadequate deductions for depreciation in prior years. These arguments were raised for the first time in the respondent's brief. The petitioner had no reason to believe at the time of the trial that evidence to rebut such arguments would be expected, and it contends that the burden of proof would be upon the Commissioner. Theoretically, the petitioner may have been entitled to larger depreciation deductions on some of these items in the past. However, it has consistently followed its method of computing depreciation deductions and retirement losses. The evidence does not show that actually it deducted*970 less depreciation in prior years than was allowable. It is possible that the excess, if any, in the basis is so small as to be negligible. The petitioner is entitled to a large part, if not all, of the deductions which it has claimed. The losses which it has claimed should not be denied because of this belated argument of the Commissioner.
Decisions will be entered for the petitioner.