*1243 Before JAMES, LITTLETON, SMITH, and TRUSSELL.
This is an appeal from the determination of deficiencies in income and profits tax for the calendar years 1919 and 1920 in the amounts of $2,291.19 and $506.80, respectively.
The question in issue is the amount which the taxpayer was entitled to include in invested capital for these years in respect of the property acquired on December 31, 1915, from the Hardware Building Co. in exchange for that company's entire capital stock. The taxpayer claimed $105,000 representing the cost of reproduction less an estimated amount for depreciation of the building from the date of its construction. The Commissioner rejected this valuation and determined the amount which the taxpayer might include in invested capital to be the original cost plus additions to December 31, 1915, less exhaustion, wear and tear at the rate of 2 per cent per annum.
FINDINGS OF FACT.
The taxpayer is an Iowa corporation organized in 1885, engaged in the wholesale hardware business, with principal office at Sioux City. In 1901 it caused to be*2449 organized a corporation known as the Hardware Building Co., the entire capital stock of which, amounting to $105,000 par value, was issued to it in exchange for a certain building and land upon which it was located.
For years prior to December 31, 1915, the taxpayer and the Hardware Building Co. made separate tax returns of income received. All income of the Harware Building Co. was paid to the taxpayer in the form of dividends and included by it in its returns for the years 1909 to 1915, inclusive. On December 31, 1915, the outstanding capital stock of the Hardware Building Co., amounting to $105,000, was owned by the taxpayer. On December 31, 1915, the *1244 land and building hereinbefore mentioned were transferred by the Hardware Building Co. to the taxpayer in exchange for its own capital stock of the par value of $105,000 and the assumption by the taxpayer of a mortgage of $50,000, whereupon the Hardware Building Co. was immediately dissolved. On January 26, 1916, an appraisal was made on the building and its appurtenances which showed a reproduction cost of $167,277.09. This amount was reduced by the appraiser to $152,546.96 by an estimated amount for depreciation. *2450 On the same date the insurable value of the building and its appurtenances was fixed by the appraiser at $136,042.23. The values of the building and its appurtenances were segregated and entered by the taxpayer upon its books upon the basis of cost of reproduction as of January, 1916, less an estimated amount for depreciation, as follows:
| Building | $136,513.59 |
| Elevator | 3,245.00 |
| Heating plant | 2,161.20 |
| Electric wiring | 679.08 |
| Sprinkling apparatus | 7,418.85 |
| Warehouse equipment | 5,219.33 |
| Total | 155,237.65 |
| Real estate at cost | 20,000.00 |
| 175,237.65 |
No question is raised as to the value of the land.
For the purpose of eliminating appreciation, the taxpayer set up on its books the sum of $20,237.65 as a depreciation reserve.
In arriving at the amount to be included in the taxpayer's invested capital for 1919 and 1920 on account of the building acquired from the Hardware Building Co. for the latter's capital stock, the Commissioner determined the original cost of the building to have been $103,920.29. To this amount he added $5,284.17, the cost of additions to December 31, 1915, giving the building on that date a total cost of $109,204.46, which he reduced*2451 in the amount of $28,704.02, representing exhaustion, wear and tear at the rate of 2 per cent per annum to December 31, 1915.
The deficiencies are $2,291.19 for the calendar year 1919 and $506.80 for the calendar year 1920. Order will be entered accordingly.