*2622 LOSSES. - Petitioner in September, 1920, acquired a warehouse which it intended to use as a bed and spring manufacturing plant. At the time of the purchase its officers believed that approximately $15,000 would cover the cost of the necessary alternations. Almost immediately after the purchase it became apparent that alternations on a much larger scale were necessary. These alternations cost $129,465.21. In making such alterations, certain materials, which were a part of the warehouse when purchased, were junked. The reproductive cost new of such junked material less salvage and depreciation was $31,058.54. Held, the petitioner, in junking such material, did not sustain a deductible loss within the meaning of section 234(a)(4) of the Revenue Act of 1918.
*352 In this proceeding the petitioner seeks a redetermination of its income and excess-profits-tax liability for the calendar year 1920, for which the respondent has determined a deficiency of $1,584.28. The respondent in his computation of the deficiency, disallowed a certain loss*2623 in the amount of $31,058.54 claimed by the petitioner to have been sustained by it on account of the additional cost to it of the remodeling of its building within the taxable year. It is the petitioner's contention that this loss should be allowed, and that if it is allowed there would be, instead of a deficiency, an overpayment of approximately $15,000. A second issue was raised in the petition involving the reduction of invested capital on account of prior-year taxes but this was waived by petitioner's counsel at the hearing.
FINDINGS OF FACT.
The petitioner was incorporated in the year 1874 under the laws of the State of Illinois and has since that date engaged continuously in the manufacture of bed frames and wire springs.
The petitioner's plant was until 1920, located at 1100 Blackhawk Street, Chicago. This plant consisted of a group of adjoining buildings. The petitioner had occupied these buildings since 1905 under a series of leases from A. M. Castle Co. for successive terms, generally of three years. The lease existing in 1920 expired May 1, 1922. It contained a provision whereby the lessor could cancel it in any year on one year's notice to be given May 1. *2624 The plant so leased was always considered suitable for the petitioner's business.
*353 The petitioner, on May 1, 1920, received notice from the lessor that the lease would be canceled and terminated on May 1, 1921, and as the result it became necessary for the petitioner to find other buildings in which to house its plant. After a careful survey of the available locations, it was decided by the officers of the company that it was advisable to buy the property located at 4343 West Fifth Street, and on September 2, 1920, petitioner purchased said property, paying for the land the sum of $94,500 and for the building the sum of $245,500.
The tract of land was 196 feet wide and about 680 feet long. The building was a two-story structure approximately 30 feet high and 590 to 620 feet long and 125 feet wide. The building was built in 1910. It had a red brick exterior and was mill constructed. It was constructed for use as a warehouse but was believed by the company to be well adapted for its use in manufacturing with but relatively few and inexpensive alterations.
The walls of the building were constructed of brick and were what are termed 17-inch walls. The building*2625 had relatively few windows. These windows had iron bars and steel doors or shutters. These windows were 25 feet apart and were about midway from the top and bottom of the walls. They had no frames and were about 5 feet by 5 feet, 6 inches. The building was divided into eight sections by fireproof brick divisional walls.
The plant at 4343 West Fifth Street was advertised to the public as suitable for manufacturing purposes although the real estate broker made no representations to the taxpayer that it was especially adaptable to its particular manufacturing purposes. The officers of the company, after consultation with various employees of the company and after several trips to, and inspections of, the plant which the company proposed to buy, and after complete examination of it with an architect, decided that the building, if purchased, would require only a few alterations and the addition of a power and heating plant.
The plan for remodeling contemplated the making of openings through the divisional fire walls so that the eight sections of the building would be inter-communicating, and the enlarging of some of the windows. The cost of installing a heating plant was estimated*2626 by the petitioner's engineer at $60,000, and the cost of remodeling the building to be purchased at about $15,000.
The estimated additional cost for remodeling, as contemplated prior to purchase of the new plant, was considered by the petitioner in arriving at the price it was willing to pay for the new plant. Prior to purchase, the petitioner did not contemplate a general reconstruction of the plant; that the walls would have to be torn down, or the roof raised.
*354 Almost immediately after the purchase of the new plant had been made, further inspection of the building developed the fact that extensive remodeling would be necessary in order to provide sufficient ventilation and light. Sometime during September or October, 1920, the petitioner engaged architects to draw plans for remodeling, which plans were completed on October 28, 1920.
The officers of petitioner, after talking with the architects, were convinced that the original plan for remodeling was wrong and, accordingly, decided to undertake a general reconstruction of the building in order to secure more light and proper ventilation. After several consultations with the architects, and after careful consideration*2627 of the matter, it was determined that the most economical method of reconstructing the building so that it would meet petitioner's requirements, would be to tear down all four outside walls of the building and entirely rebuild them.
The contract for remodeling was agreed upon and the tearing down or wrecking of parts of the building was started the first week in December, 1920, and was completed within the year 1920.
The following parts of the building were wrecked and their values, based upon reproduction cost new in 1920 (including cost of installation), less salvage and depreciation, were as follows:
| Parts wrecked | Value | Salvage | Net value |
| Brick | $33,940.77 | $3,710.00 | $39,230.77 |
| Roofing | 630.00 | 630.00 | |
| 66 iron doors | 3,960.00 | 3,960.00 | |
| 66 mesh screens | 660.00 | 660.00 | |
| 33 iron grills | 660.00 | 660.00 | |
| 33 mesh screens | 165.00 | 165.00 | |
| Sheet metal | 320.00 | 320.00 | |
| Concrete stairways | 900.00 | 900.00 | |
| Iron railings | 225.00 | 225.00 | |
| 4 elevator gates | 340.00 | 340.00 | |
| 6 window frames | 150.00 | 150.00 | |
| 1,456 feet tile coping | 873.60 | 291.20 | 582.40 |
| 42,824.37 | 4,001.20 | 38,823.17 | |
| Less depreciation from 1910 to 1920 | 7,764.63 | ||
| Reproduction cost new in 1920 less salvage and depreciation | 31,058.54 |
*2628 The petitioner has not been reimbursed or compensated by insurance or otherwise for the portion of the plant which was torn down or destroyed as the result of remodeling in 1920.
The cost of reconstruction was $145,465.21, which included the cost of building the power house of about $15,000 to $16,000, but not the entire cost of building the power plant including equipment and machinery. The net cost of remodeling was, therefore, about $129,465.21.
This cost of $129,465.21 for remodeling or general reconstruction was far in excess of that originally estimated, and as a result the *355 petitioner's financial operations were seriously handicapped, a shortage of working capital resulted, and the petitioner was required to borrow considerable money.
The remodeled plant had a value not to exceed $307,000.
OPINION.
GREEN: The petitioner claims as a deduction from its gross income, a loss of $31,058.54, which it is alleged was sustained during the taxable year 1920. It is a manufacturer of beds and springs. Due to the cancellation of its lease it was forced to secure new quarters. It was decided to purchase a plant and after an extensive search, it purchased, on*2629 September 2, 1920, a tobacco warehouse which its officers thought would serve the petitioner's purpose with but mimor alterations. It paid $94,500 for the land and $245,500 for the building. It was estimated that the necessary alterations would cost about $15,000. Almost immediately after the purchase, however, it became apparent, after consulting an architect, that the remodeling would cost considerably more than had originally been estimated. The alterations were made at a cost of $129,465.21. During the course of remodeling, certain of the material contained in the warehouse when purchased, had to be scrapped. The reproduction cost new in 1920, less salvage and depreciation of such junked material, was $31,058.54. Testimony was introduced to show that the value of the building after the alterations had been completed, was no more than $307,000. The original cost of the building plus alterations amounted to $374,965.21, or $67,965.21 more than it was worth. The petitioner is not asking for a loss of the $67,965.21, but contends that it did sustain a loss in at least the amount of $31,058.54 representing certain brick, roofing, iron doors, screens, etc., of the old building, *2630 which had to be discarded.
The deduction is claimed under section 234(a)(4) of the Revenue Act of 1918, which is as follows:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise.
In , the taxpayer, in 1917 and 1918, purchased certain lands and buildings and later in 1918 wrecked the building intending to put up other buildings which would yield him a greater return on his investment. After the buildings had been removed, business conditions over which the taxpayer had no control compelled him to abandon for the time being *356 his proposed plan of improving the property. It was held the taxpayer had not realized a loss within the meaning of the taxing statute. Compare , and , wherein it was held that the unextinguished cost of buildings remodeled in order to obtain a lease upon the*2631 land represented the cost of the lessor of such lease.
The petitioner cites the cases of ; ; ; ; ; ; ; and . In each of the foregoing cases where the unextinguished cost of the building was allowed as a deduction, the taxpayer did the remodeling on premises which had been used in its business for several years prior to the year in which the reconstruction work was done. The petitioner at the time it acquired the tobacco warehouse, knew that it could not use such warehouse in its business until certain necessary alterations had been made. It knew at the time it purchased the building that some material would have to be discarded in making the alterations. To our minds it is immaterial that the actual alterations necessary*2632 were considerably greater than were in contemplation at the time of purchase. Their cost was a part of the cost incident to the acquisition of a new plant. We are of the opinion that the petitioner did not sustain any deductible loss on account of the materials discarded. The cost of the building to be capitalized on the petitioner's book is the original purchase price of $245,500 plus the cost of alterations in the amount of $129,465.21, less salvage.
We are of the further opinion that even were the petitioner entitled to a loss of the discarded materials, it has not proven the proper basis upon which such loss could be determined.
In the instant case, the basis upon which the alleged loss is caimed is the reproduction cost new at 1920 market prices of the material discarded less salvage and depreciation. The proper basis, even if the petitioner's theory of a loss were correct, would have been the portion of the purchase price properly allocable to the demolished portion of the building.
Judgment will be entered for the respondent.
Considered by STERNHAGEN and ARUNDELL.