*3200 1. The March 1, 1913, value of leaseholds of sugar cane lands determined for the purpose of fixing a reasonable allowance for the exhaustion thereof.
2. The evidence shows that in the taxable year petitioner replaced a broken roller of its sugar mill and charged the cost to expense, that such rollers have a life of from one day to three years, that breakage is frequent, and that replacement does not extend the life of the mill as a whole. Hold, that the cost of such roller is deductible as an expense.
*684 These consolidated proceedings are for redetermination of deficiencies in income and profits taxes for the calendar years 1918, 1919, 1921, and 1922, amounting to $11,466.68, $40,686.81, $2,928.40, and $20,412,84, respectively.
FINDINGS OF FACT.
Petitioner is a corporation existing under the laws of the Territory of Hawaii, with its principal office at 119 Merchant Street, Honolulu. It is engaged in the operation of a sugar cane plantation and*3201 sugar mill. Its plantation is located on the Island of Kauai, Territory of Hawaii. It was organized for the purpose of taking over leases upon approximately 6,914 acres of waste and arid land on the island of Kauai and for the purpose of developing a sugar plantation on said land. On or about November 4, 1889, petitioner acquired for $50,000 a lease covering 5,720 acres and a sublease covering 1,194 acres. The lease will expire on December 31, 1929. The sublease expired on December 31, 1917. Petitioner agreed to pay as rental for these premises one-sixteenth of the first 5,000 tons of sugar produced on the leased lands; one-twentieth of the next 2,500 tons of sugar produced on such lands; and one-thirtieth of all sugar produced on such lands in excess of 7,500 tons. Petitioner agreed to pay taxes and assessments and a minimum rental of $5,000 a year. The said lease also provided that petitioner should furnish water to a 600-acre tract owned by the lessors and should have the right to grind the cane produced on such tract, retaining seven-sixteenths of the proceeds for such grinding. This grinding contract will expire on December 31, 1939. The lease and sublease also provided*3202 that petitioner should have the right for one year after the end of the term of the lease and sublease to remove machinery, mills, mill buildings, mill warehouses, tool shops and mill fixtures. Petitioner, however, was not given the right to remove other warehouses and other fixtures.
When petitioner acquired the right to develop the lease lands, they had never been cultivated and were barren and dry. Shortly after acquisition of the lease, petitioner developed a water supply, built a mill and cultivated and irrigated the fields. A project for bringing additional water to the land was completed in 1905.
On March 1, 1913, petitioner had a complete sugar plantation, with all necessary facilities for irrigating and cultivating the soil and for milling cane and converting it into raw sugar. It had about 6,851 acres planted with sugar cane. The said lease, together with the grinding contract, had a fair market value on March 1, 1913, of $1,200,000. In computing the taxable net income the Commissioner allowed no deduction for the exhaustion of these leaseholds.
During the course of manufacturing the 1922 crop of cane into raw sugar one of the rollers in the crushing mill broke*3203 and was replaced *685 at a cost of $2,543.43. Crusher rollers are used in crushing cane to extract the juice from which the sugar is manufactured. These rollers are about 35 inches in diameter and about 78 inches long and consist of a shell and shaft. The shell is made of cast iron, weighs from 12 to 13 tons, and the rollers operate under a pressure of about 450 tons and are subject to considerable wear. Their life is indefinite. They may last from one day to three years. Hawaiian sugar mills customarily carry a few spare shells and shafts on hand at all times. In 1922 it had become petitioner's customary practice to charge the expense of replacing its crusher rollers as an expense. In his computation of taxable net income for 1922, the Commissioner disallowed as a deduction for repairs the amount expended by petitioner in that year for the replacement of the said broken crusher roller.
OPINION.
PHILLIPS: The principal issue in each of these appeals is the March 1, 1913, value of the petitioner's leaseholds. These proceedings were heard at the same time as those of *3204 , and . Much of the evidence with respect to the general situation of the sugar industry in the Hawaiian Islands is the same in all of these cases and much that we have said in the opinions in those cases applies here with equal force.
The leasehold interest of the petitioner as of March 1, 1913, included a sublease of 1,194 acres, which sublease expired on December 31, 1917. Since the first year before us is 1918, no deduction for the exhaustion of this sublease can be or is claimed. We are concerned with the value of the lease upon 5,720 acres, expiring December 31, 1939, and the grinding contract which was an inherent part of the lease agreement.
When the lease was obtained these lands were arid. They were brought under irrigation by the construction of a system of ditches, flumes, tunnels, and a syphon which brought water from the mountains by gravity. This system appears to have been very successful and economical, for the petitioner operated its plantation upon a much smaller investment in improvements and tangible assets than the other companies mentioned above and*3205 realized very substantial profits despite an average production of less than seven tons an acre. The comparatively low cost of production per ton placed it in a favorable position to withstand the threatened lower prices for its product. We are of the opinion that the fair market value of the leasehold interest expiring December 31, 1939, together with the grinding contract which formed a part thereof, exclusive of that portion of the leasehold interest which expired in 1917 and exclusive of the value of any improvements upon the premises, was $1,200,000 on *686 March 1, 1913, and have so found. A reasonable allowance for the exhaustion thereof during each of the taxable years involved is $44,720.50.
The petitioner further alleges that the taxable net income for 1921 was incorrectly increased by $21,611. Error is admitted by the respondent. Taxable income should be adjusted accordingly.
With respect to the year 1922, it is alleged that the Commissioner erred in disallowing as an expense $2,543.43 expended to replace a broken crusher roller. The testimony discloses that such rollers are only a part of the mill, that they are operated under heavy pressure, and are*3206 subject to frequent replacement, that such replacement is necessary to the operation of the mill but does not extend the life of the mills as a whole, that such rollers have a maximum useful life of three years and a much shorter average life. Breakage is so frequent an occurrence that spare rollers are always carried at the mills in order that broken rollers may be replaced without loss of operating time at the mill. We have no doubt that in such circumstances the petitioner was justified in charging the cost as an expense and that the respondent erred in disallowing the deduction claimed. See ; .
Decision will be entered under Rule 50.