*3047 Respondent's determination of value of leasehold approved because of insufficient evidence to show error.
*1360 These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income and profits taxes for the period of 11 months ended December 31, 1919, and the calendar year 1920 in the respective amounts of $3,285.48 and $57.87 in Docket No. 16314, and for the calendar year 1923 in the amount of $221.78 in Docket No. 25059. The only issue is the March 1, 1913, value of a certain leasehold.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office at Chicago. On February 5, 1910, the petitioner acquired a lease on the premises known as 32-38 West Washington Street, Chicago, legally described as "the South Thirty-six (36) foot of Lot Five (5), in Block Thirty-seven (37), of Original Town of Chicago." The lease provided for possession for 20 years and a total rental of $360,000 to be paid in installments as follows:
| First two years | $16,000 per year |
| Next six years | 17,000 per year |
| Next seven years | 18,000 per year |
| Last five years | 20,000 per year |
*3048 The lease provided that the lessee (the petitioner) should pay all taxes and assessment levied against the property during the term of the lease and that it should make certain improvements to the five-story and basement building which was on the land. Improvements costing $61,316.76 were made by the petitioner in 1910.
The petitioner entered the expenditure of the $61,316.76 on its books of account as the cost of the said improvements and alterations, and, at the same time, or shortly thereafter, entered an additional $33,686.24 as appreciation in the value of the leasehold due to the making of the said improvements and alterations, thereby recording the value of the leasehold at that time at $95,000.
From May 1, 1910, to January 31, 1919, the petitioner had written off its books, by annual charges to operations, an aggregate sum of $42,500 as depreciation in the value of the said leasehold.
*1361 For the period from January 31, 1919, to December 31, 1923, the following amounts were written off as depreciation of the said leasehold:
| Period | Amount |
| Eleven months ended Dec. 31, 1919 | $4,583.33 |
| Year ended Dec. 31. 1920 | 5,416.67 |
| Year ended Dec. 31, 1921 | 5,000.00 |
| Year ended Dec. 31, 1922 | 5,000.00 |
| Year ended Dec. 31, 1923 | 4,913.80 |
| Total | 24,913.80 |
*3049 At December 31, 1919, 1920, 1921, 1922, and 1923, the following aggregate amounts had been so written off:
| December 31, 1919 | $47,083.33 |
| December 31, 1920 | 52,500.00 |
| December 31, 1921 | 57,500.00 |
| December 31, 1922 | 62,500.00 |
| December 31, 1923 | 67,413.80 |
Upon examination, the Commissioner of Internal Revenue disallowed the depreciation taken by the taxpayer and allowed the following amounts:
| Period | Amount |
| Eleven months ended Dec. 31, 1919 | $2,810.28 |
| Year ended Dec. 31, 1920 | 3,065.83 |
| Dec. 31, 1921 | 3,065.83 |
| Dec. 31, 1922 | 3,065.83 |
| Dec. 31, 1923 | 3,065.83 |
| Total | 15,073.60 |
The depreciation so allowed by the Commissioner is based upon the cost of the improvements and alterations in 1910, i.e., $61,316.76.
The net rentals paid to the petitioner as subrentals on space occupied by tenants in the property in question were $11,238.39 for 1913, $16,050.33 for 1914, $13,917.40 for 1915, and $15,935.62 for 1916. The petitioner paid real estate taxes of $5,700.43 in 1913, $4,976.57 in 1914, $5,928.47 in 1915, and $5,814.45 in 1916.
The petitioner, on acquisition of the lease, occupied the ground floor and sublet the upper four floors. By March 1, 1913, the*3050 building was fully occupied.
OPINION.
SIEFKIN: The only question is the March 1, 1913, value of a leasehold. The respondent has allowed depreciation upon $61,316.76, the amount expended on improvements in 1910, but the petitioner contends for approximately $39,000 additional value. In support of its position it points to an entry upon its books in 1910 placing a value *1362 of $95,000 upon the leasehold, which amount included the sum spent for improvements. The petitioner also had as an opinion witness a well qualified real estate operator who had been personally familiar with the property and who placed a value of $100,000 upon the petitioner's interest as of March 1, 1913. Questioned as to his basis he showed that he valued the land at $432,000, assigned a theoretical return of 5 per cent or $21,600, valued the building at $70,590 and provided for a 7 1/2 per cent return on that sum, or $5,294, and thus arrived at a total annual rental value of $26,894. Contrasting this with the average rental of $18,000 payable annually under the lease by the petitioner, he arrived at an annual profit of $8,894, and assumed that the lease had 20 years to run, resulting in a total*3051 profit of $177,880. This amount he discounted to present worth by Robinson's tables, using a 6 per cent rate, and thus arrived at the figure of $100,000.
In addition to the fact that the computation of the witness disregarded the fact that on March 1, 1913, nearly three years of the term of the lease had already run, there is no basis in the evidence for the starting point of his computation, either the value of the land or the building. Nor do we have any evidence from which we can adopt the witnesses' percentages of return on land and building or the percentage to be used in bringing the total amount of future payments down to present worth. The formula may be unimpeachable but its application to the facts must be shown. We are unable to conclude that the respondent was in error.
Judgment will be entered for the respondent.