*2092 Value of certain leaseholds for purposes of computing depreciation and exhaustion, determined.
*658 Respondent redetermined deficiencies in income taxes of the petitioner for the years 1924, 1925, and 1926, in the sums of $405.36, *659 $4,600.78, and $2,327.75, respectively, and an overassessment of $1,498.66 for the year 1923.
The issues presented are (1) whether petitioner was a reorganization of the W. M. James Company within the provisions of section 202(c) of the Revenue Act of 1921 and section 203(h) of the Revenue Acts of 1924 and 1926; (2) whether respondent erred in determining the value of certain leaseholds for computation of an allowance for depreciation and exhaustion; and (3) whether petitioner sustained a greater loss on the sale of its Ada Meade Theatre property in 1924 than that allowed by respondent.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Delaware on December 6, 1919. Its authorized capital stock was $500,000 divided into 3,600 shares of common*2093 stock and 1,400 shares of preferred stock, each of a par value of $100 per share. During December, 1919, it acquired in exchange for certain shares of its common stock leases on the following property, the first four parcels being situated in Columbus, Ohio, and the fifth, in Lexington, Ky.:
1. Lot No. 192, 62.5 feet wide and 188.69 feet deep, running from West Broad Street through to Capitol Street and bounded on the east by Wall Street, known as the Broadway Theatre property.
2. Inlot No. 191, adjoining the Broadway Theatre property on the west, 62.5 feet wide and running through from West Broad Street to Capitol Street 188.68 feet, and known as the Hayden property.
3. Inlot No. 190, adjoining the Hayden property on the west, 41.87 feet on West Broad Street and running through to Capitol Street 188.68 feet, and known as the Koerner property.
4. A strip of land 20.83 feet wide adjoining the Koerner property on the west and constituting a corner of West Broad Street and South Front Street, being 137.65 feet deep from West Broad Street, and known as the Koerner-Heide property.
5. Two pieces of land, known as the Ada Meade Theatre property located in Lexington, Ky.*2094 , on the north side of Main Street between Mill and Broadway Streets in said city, known as numbers 325 and 326 West Main Street.
The petitioner issued to W. M. James, its president, 2,023 shares of its common stock in consideration of his assignment of all stock owned by him in the W. M. James Company, and also the transfer of his interest in the leases on the Hayden, Koerner, and Ada Meade properties. The petitioner also issued 1,200 shares of its common stock in the name of W. M. James, but for the account of Robert Beck and William J. Moore for their services in placing a bond issue (this stock was actually owned by Beck and Moore); 150 shares of *660 its common stock and 50 shares of its preferred stock to John A. Connor for his interest in the Broadway Theatre and in the lease of the Koerner-Heide property and for legal services; 80 shares of its common stock to various persons for cash, and the remaining 147 shares of common stock to various persons for services and in exchange of property. Other preferred shares aggregating 977 were sold for cash to provide working capital.
At the time of their acquisition by the petitioner the leaseholds had the following fair*2095 market values:
| Broadway Theatre property | $160,000 |
| Hayden and Koerner properties | 125,000 |
| Koerner-Heide property | 100,000 |
The expiration periods of the leases on the several properties at the time of their acquisition by the petitioner were as follows:
| Years | |
| Broadway Theatre property | 11 17/24 |
| Hayden property | 98 1/2 |
| Koerner property | 98 1/2 |
| Koerner-Heide property | 98 1/4 |
| Ada Meade Theatre property | 8 1/2 |
Reasonable annual allowances for exhaustion or depreciation of the above leaseholds during the period from 1921 to 1926, inclusive, were as follows:
| Broadway Theatre lease, 1/11.708, or | 8.5411% |
| Hayden lease, 1/98.5, or | 1.0152% |
| Koerner lease, 1/98.5, or | 1.0152% |
| Ada Meade Theatre lease, 1/8.5, or | 11.7647% |
During 1920 the petitioner acquired the fee of the Koerner-Heide property for $30,000, according to the terms of the option contained in the lease.
In 1919 there was no modern theatre in Columbus. The petitioner was formed for the purpose of erecting a new theatre in a section of the city which was peculiarly conducive to its profitable operation. The petitioner proceeded to raze the old buildings situated on*2096 the Hayden and Koerner properties and to erect thereon a new theatre building called the James Theatre. The petitioner also remodeled the Broadway Theatre and the building erected on the Koerner-Heide property. The construction of these improvements was financed by a bond issue procured through Robert Beck and William J. Moore. The Broadway Theatre building was located on West Broad Street, approximately 200 feet from the corner of Broad and High Streets, the business center of Columbus.
In 1924 the petitioner abandoned the lease on the Ada Meade Theatre property and sold the equipment for $1,000. The cost of the lease to the original owner, W. M. James, was $25,000. The *661 nominal consideration of its transfer to the petitioner was placed on the schedule of assets at $100,000, but no allocation of common stock paid in exchange was made to the account of that lease. In 1922 W. M. James, the principal stockholder of the petitioner, submitted to the Collector of Internal Revenue at Columbus, Ohio, an affidavit setting forth the realizable value of the Ada Meade leasehold and theatre equipment on December 31, 1921, as $30,000, as against a book value of $85,795.77, which*2097 did not include amortization, depreciation or obsolescence. The respondent used a gross value of $26,340.19 ($25,000 cost and $1,340.19 additions), or a depreciated value of $14,706.33, and allowed said sum as a loss. The petitioner claims such amount should be increased to $38,136.61.
OPINION.
VAN FOSSAN: Respondent has apparently abandoned his contention that petitioner was merely a reorganization of the W. M. James Company and makes no mention thereof in his brief. The evidence demonstrates that at least 33 1/3 per cent of the stock of petitioner was held by persons who were neither stockholders of the W. M. James Company nor had transferred assets to petitioner. Petitioner was not a reorganization within the definition found in the statutes. The fair market value of the assets acquired by petitioner in December, 1919, is the proper basis for computation of depreciation and exhaustion.
The principal issue of the case is the value of the leaseholds acquired by petitioner on organization. In the findings of fact we have found and recorded the proper values of these several leaseholds. We have also indicated the applicable rates of depreciation. The allowances will*2098 be computed accordingly.
The evidence was not sufficient to establish a leasehold value for the Ada Meade Theatre property in excess of that allowed by respondent. This value was based on the cost of the lease to James, plus additions. Though the Ada Meade property was transferred to the petitioner in 1919 at a designated value of $100,000, such valuation being based on an appraisal made by real estate brokers of Columbus from book records and "general knowledge of successful theatre operations in growing cities," the testimony adduced at the hearing was insufficient to sustain this value or any figure of value in excess of that used by respondent. We will not disturb the finding of the respondent as to this leasehold.
The third issue is disposed of by our finding in relation to the value of the Ada Meade leasehold. The respondent has assigned a value of $26,340.19 to the leasehold, and, after deducting depreciation, has arrived at the sum of $14,706.33 as the loss allowable under *662 section 204. The petitioner has failed to sustain its allegation of error in respect to this item.
The Board has no jurisdiction of the year 1923, as to which respondent determined*2099 an overassessment. .
Judgment will be entered under Rule 50.