1925 BTA LEXIS 2383">*2383 March 1, 1913, value of leasehold determined.
2 B.T.A. 540">*540 Before GRAUPNER, TRAMMELL, and PHILLIPS.
The taxpayer appeals from the determination of a deficiency of $1,271.63, income and profits taxes for the year 1921, and alleges error by the Commissioner in two respects, one of which was abandoned at the time of the hearing. The remaining issue is whether the Commissioner erred in refusing to allow the taxpayer to deduct an aliquot part of the March 1, 1913, value of a leasehold interest in real estate.
FINDINGS OF FACT.
1. The taxpayer is a California corporation, and was incorporated in 1906. In that year it entered into a lease of certain property situated in the City of San Francisco, on Post Street between Kearny Street and Grant Avenue. This lease provided that the lessor should erect a seven-story and basement building in accordance with plans and specifications which had previously been agreed upon between the parties; that the lease should be for a period of 20 years from the completion of such building; and1925 BTA LEXIS 2383">*2384 that the lessee, 2 B.T.A. 540">*541 during the whole of the term, should pay the sum of $56,000 per year and, in addition, during the last 10 years of the term of the lease was to pay the lessor one-third of the net profits derived from the renting and use of such premises. The lessee was to pay all taxes and other charges against the property. The building was substantially complete, and the lessee entered into possession thereof on October 1, 1908.
2. The net profit derived from the operation of the building by the lessee after payment of all expenses for the years 1908 to 1913, inclusive, was as follows:
| Year | Profit | Loss |
| 1908 | $2,100.00 | |
| 1909 | 9,684.36 | |
| 1910 | $6,306.51 | |
| 1911 | 6,379.05 | |
| 1912 | 12,260.36 | |
| 1913 | 2,052.87 |
3. One-half of the ground floor was leased in January, 1909, for a period of ten years at a monthly rental of $1,300. Most of the other leases were for several years. The lessee of the remaining half of the ground floor vacated the premises late in 1912 and this portion of the property was not rented again until September 1, 1913. On March 1, 1913, there were several vacancies in the building which were afterward rented for a total monthly1925 BTA LEXIS 2383">*2385 rental of $2,190.
4. The property is situated in the San Francisco retail store district. The character of the location was not deteriorating in 1913. On March 1, 1913, it could be reasonably anticipated that the profits from the operation of the building over a period of years would be at least $6,000 per year. During the last 10 years of the lease, one-third of this was to be paid to the landlord, reducing the share of the taxpayer to $4,000 per year.
DECISION.
The deficiency should be computed in accordance with the following opinion. Final determination will be settled on consent or on 15 days' notice, in accordance with Rule 50.
OPINION.
PHILLIPS: In support of his contention that the lease to the taxpayer had a value on March 1, 1913, taxpayer proved the net income received from the property in 1913 and for the five preceding years. There was nothing in the real estate situation in 1913 which would indicate that the building would yield less return in the future than 2 B.T.A. 540">*542 in the past. The income for 1913 was much lower than was reasonably to be expected, as half of the ground floor was vacant during the greater part of that year, but because of the1925 BTA LEXIS 2383">*2386 location of the building this was a condition which was not likely to continue and these premises were, in fact, rented in September, 1913.
For the purposes of this appeal, it was stipulated between counsel that 10 per cent was a reasonable return on a leasehold interest and that when the Board had found, if it could find, what was on March 1, 1913, a reasonable annual return to be expected from this leasehold on March 1, 1913, that the value of the lease as of that date should be computed by the use of Hoskold's formula.
In accordance with this stipulation of counsel, the March 1, 1913 value will be computed upon the basis of an annual net income from the lease of $6,000 from March 1, 1913, to September 30, 1918, and of $4,000 from October 1, 1918, to September 30, 1928. In computing the deficiency the taxpayer will be allowed to deduct from his income twelve one-hundred-eighty-sevenths of the March 1, 1913, value of such lease as the amount of the exhaustion thereof suffered during 1921.
ARUNDELL not participating.