*113 Decision will be entered for the respondent.
The petitioner purchased certain improved real estate with the intention of demolishing the existing building and erecting an addition to its bank. Due to building restrictions imposed during the war, it was impossible to carry out the petitioner's intention and the existing building was rented. In 1946 fire destroyed a portion of the existing building and insurance proceeds were received by the petitioner as a result of the loss. A replacement fund was established and the insurance proceeds were thereafter used to construct the bank addition as originally intended. Held, functionally the bank addition differed from the existing building which had been used for rental purposes; therefore, the insurance proceeds were not expended to acquire property similar or related in service or use to the property destroyed by fire within the meaning of section 112 (f) of the Internal Revenue Code. Held, further, since the improved realty was purchased with the intention of demolishing the existing building, the entire cost was attributable to the land; therefore, no value subject to depreciation existed for tax purposes.
*671 The respondent determined a deficiency in the income tax of the petitioner for the year 1946 of $ 2,490.42.
The issues presented for our decision are:
1. Whether the petitioner is entitled to the benefits of section 112(f) of the Internal Revenue Code with respect to certain insurance proceeds received in 1946 as the result of the destruction by fire of certain of petitioner's real property.
2. Whether the petitioner is entitled to depreciation where the building, on which depreciation is claimed, was acquired by the petitioner with the intention of demolishing the building and erecting a bank addition.
*115 FINDINGS OF FACT.
The facts stipulated are found accordingly.
Petitioner is a corporation engaged in the general banking business in Lynchburg, Virginia. Petitioner filed its income tax return with the collector of internal revenue for the district of Virginia at Richmond.
In 1940 petitioner purchased certain improved real property known as 905 Main Street, Lynchburg, Virginia, located immediately adjacent to its bank building and on which was located a 3-story brick building.
The total cost of such property was $ 37,500, of which petitioner allocated $ 32,274.75 to land and $ 5,225.25 to the building. Petitioner further took annual depreciation of 2 per cent on the building for tax purposes.
The aforesaid property was acquired by petitioner with the intent of demolishing the building situated thereon and erecting in its place an addition to its main building in order to expand its available space to carry on its banking activities. Due to war restrictions, demolition of the existing building and construction of the bank addition were postponed.
At the time of the purchase, the building situated on the property acquired was rented to a retail shoe store and a restuarant. The front*116 half of the ground floor was occupied by the shoe store, and the rear half of the ground floor and the second and third floors were occupied by the restaurant. The entire rear half of the building was destroyed by fire on April 29, 1946. The restaurant occupied the premises continuously until the time of such fire on April 29, 1946, *672 paying rent therefor to petitioner. The shoe store occupied the premises continuously until eventual demolition of the front half of the building in 1949, paying rent therefor to petitioner.
On June 13, 1946, petitioner received fire insurance proceeds of $ 9,902.84 because of the fire loss and set up on its books an account entitled "Reserve for Future Building Operations," which it credited with such amount. Permission to establish such replacement fund was duly obtained from the Commissioner of Internal Revenue. Form 1114 was filed and approved, and bond in the amount of $ 2,000 was deposited with the collector of internal revenue at Richmond. The time limit within which replacement could be made was thereafter duly extended from time to time to June 1951 on account of building restrictions in effect.
The fire damaged the entire rear*117 half of the building to such an extent that that portion was torn down in 1946. The cost of this demolition, plus the cost of cleaning up debris, in the amount of $ 2,273.51, was charged to "Reserve for Future Building Operations" in 1946. No deduction therefor was claimed in petitioner's return for such year.
In 1949, due to lifting of building restrictions, the front half, or remainder, of the building was demolished and construction of an addition to the bank was begun on the entire property. Reconstruction was completed during 1950 at a cost in excess of the insurance proceeds received in 1946.
The new building occupies the same land as the old building, and frontage and depth are the same. The new building has been used since its completion in 1950 entirely for petitioner's own private offices and safe deposit boxes. No part of the building has been used for rental purposes.
The insurance proceeds received by the petitioner were not expended to acquire property similar or related in service or use to the property destroyed by fire.
OPINION.
The petitioner argues that it expended the insurance proceeds here in question in the acquisition of other "property similar or related*118 in service or use to the property" destroyed by fire and is, therefore, entitled to the benefits of section 112 (f) of the Code 1 as *673 it existed prior to its amendment by the Revenue Act of 1951. This argument is based upon the following facts: The property destroyed by fire was acquired by the petitioner for the purpose of building an addition to its bank. In 1950 the addition to the bank was completed. Both the addition and the preexisting rental property were business properties that occupied the same land and had the same frontage and depth. The petitioner received rental income from stores in the old building and from safe deposit boxes in the new building. Thus, reasons the petitioner, the bank addition was clearly related in service or use to the rental stores destroyed by fire.
*119 In support of its argument the petitioner cites the case of Massillon-Cleveland-Akron Sign Co., 15 T. C. 79, 83, where we said:
Section 112 (f) is a relief provision, which takes cognizance of the inequity of taxing a gain resulting from the involuntary conversion of property where the proceeds are used to replace the property, and should be liberally construed to effectuate its purpose. Washington Railway & Electric Co., 40 B. T. A. 1249; Davis Regulator Co., 36 B. T. A. 437; Washington Market Co., 25 B. T. A. 576. * * *
However, this does not aid the petitioner here for if Congress had intended to apply the benefits of section 112(f) to all cases of involuntary conversions the restrictive language "similar or related in service or use to the property so converted" would have been unnecessary. A mere showing that both the old property and the new are general business properties is insufficient. Nowhere have the courts so far extended the meaning of "similar or related in service or use" as to be of benefit to the petitioner. Functionally the new building*120 was not similar to or related in use to the old building. Therefore, we must sustain the position of the respondent.
The second issue grows out of the respondent's disallowance of a claimed deduction for depreciation with respect to the old building for the year 1946. The respondent based his determination upon the fact that the old building was acquired with the intent of demolishing it for the purpose of erecting a bank addition and upon the provisions of section 29.23 (e)-2 of Regulations 111, which deny a loss upon demolition in such circumstances.
Where, as here, there is a purchase of land with the intent to demolish a building situated thereon and erect a new one, no part of the price paid is allocable to the building, since it is deemed that *674 the building has no value to the purchaser and it is the land which is purchased and which alone has value. The entire purchase price, therefore, represents the cost of the land and becomes the purchaser's basis. N. W. Ayer & Son, Inc., 17 T.C. 631">17 T. C. 631. The fact that a certain value was placed on the building at the time of purchase, that the buildings were rented and rent collected, and depreciation*121 claimed is deemed immaterial. The original intention is the determining factor. Providence Journal Co. v. Broderick, 104 F.2d 614">104 F. 2d 614. Therefore, the old building had a basis of zero to the petitioner. No value subject to depreciation existed for tax purposes. For these reasons we sustain the respondent with respect to this issue. The fact that the basis of the underlying land will some day have to be adjusted for the depreciation already allowed with respect to the old building is here immaterial.
Decision will be entered for the respondent.
Murdock, J., dissenting: A property improved with a 3-story brick building was occupied by rent-paying tenants who desired to continue their leases. The petitioner purchased the property because it desired to construct on the land, which was adjacent to its bank building, a building more suitable to its own uses. It paid $ 37,500 for the property, allocating $ 5,225.25 as the cost of the building. Had it demolished the building and built another in its place the entire cost of the property would have been recognized as the cost of the land. However, it found that it could not rebuild, so*122 it changed its plans, at least temporarily, and continued to lease the building to the then tenants. Thus the building actually had value and produced income. The petitioner should be allowed to recover through depreciation some amount representing the cost of the building to it.
Later, a fire partially destroyed the building and the insurance proceeds were placed in a replacement fund and eventually used to pay a part of the cost of a bank building constructed on the land. The new building, although different in some respects from the old one, was, nevertheless, similar or related in service or use to the old one within the meaning of section 112 (f), since both were commercial buildings making business uses of land on Main Street in Lynchburg. The difference in service and use is not sufficient to preclude the application of section 112 (f), a relief provision. Washington Market Co., 25 B. T. A. 576; Washington Railway & Electric Co., 40 B. T. A. 1249; Massillon-Cleveland-Akron Sign Co., 15 T.C. 79">15 T. C. 79.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(f) Involuntary Conversions. -- If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain shall be recognized, but loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized to the extent of the money which is not so expended (regardless of whether such money is received in one or more taxable years and regardless of whether or not the money which is not so expended constitutes gain).↩