*3696 1. In the computation of profit or loss upon the sale of petitioner's assets, allowances for wear and tear sustained and properly deductible from income in prior years should be considered. United States v. Ludey,274 U.S. 295">274 U.S. 295, and Even Realty Co.,1 B.T.A. 355">1 B.T.A. 355, followed.
2. An abnormality of income is not discernible in profitable operation for a few months where further operation is thereupon ended by a voluntary sale of the business at the beginning of the usually dull season and a return is made upon the basis of a full year.
*893 This proceeding results from the determination by respondent of a deficiency in income and profits taxes for the calendar year 1920, amounting to $16,912.12.
Petitioner alleges error in that the net loss from a sale of capital assets has been (1) understated by reason of a failure to consider to an extent of $7,500 the entire original cost of the assets; (2) understated by reason of the deduction from the cost of alleged sustained depreciation; *3697 (3) or at least understated by reason of the deduction from the cost of an excessive amount of alleged sustained depreciation. In addition there has been (4) a failure to determine the profits tax liability under the provisions of sections 327 and 328 of the Revenue Act of 1918.
FINDINGS OF FACT.
Petitioner, a California corporation, was organized in 1908 with its principal place of business at Pasadena, and was engaged in the hotel business.
It was dissolved in January, 1921, and liquidation was completed and the trustees were discharged on December 15, 1922. At the date of dissolution there were outstanding 500 shares of the capital stock of petitioner owned as follows: R. R. Blacker, 1 share; H. M. Fowler, 250 shares; E. J. Blacker, 249 shares. All of the stockholders were citizens of the United States of America, and were residents of Pasadena, Calif.
At the time of its organization, petitioner took over from H. M. Fowler and E. J. Blacker a boarding house business located in Pasadena, together with title to certain land and buildings consisting of *894 a main building of frame construction and a number of bungalows constructed of wood framing and canvas. *3698 The business of petitioner expanded into a hotel business and, from time to time, adjacent properties were acquired and the buildings originally acquired were enlarged and remodeled. The canvas bungalows were replaced with frame construction. The annexes subsequently acquired were originally well built residences of wealthy people. The buildings were gradually modernized by additions of equipment. Furniture and fixtures were added from time to time. All of the property was kept in good repair.
The hotel business of petitioner was seasonal in that the annexes and the bungalows were customarily closed during the summer due to lack of patronage, and the operations during the summer yielded very little or no profit. The busy season extended from about December 20 to April or May.
Petitioner sold all of its land, buildings, furniture and fixtures in April, 1920, for a consideration of $150,000. The aggregate original cost of the properties at that time was as follows:
| Land | $78,059.44 |
| Buildings | 131,398.59 |
| Furniture and fixtures | 26,717.87 |
| Total | 236,175.90 |
The amounts of wear and tear allowed as deductions from income in certain prior years were as follows: *3699
| Year | Buildings. | Furniture and fixtures. |
| 1916 | $6,708.08 | $2,656.78 |
| 1917 | 6,958.08 | 1,906.79 |
| 1918 | 6,958.08 | 1,906.79 |
| 1919 | 6,958.08 | 1,921.78 |
In normal years reasonable allowances for wear and tear amounted for the buildings to 3 per cent of cost and for the furniture and fixtures to 7 per cent of cost.
OPINION.
TRUSSELL: The first three issues relate to the computation of the amount of profit or of loss through the sale of the hotel property of petitioner in the taxable year.
In the first issue is a question of the aggregate cost of the assets. It is disposed of by the findings and the stipulation of the parties.
In the second issue, petitioner raises the question of the propriety of a reduction of the original cost by any amount of sustained wear *895 and tear. In this we are controlled by , and .
In the third issue petitioner contends for a revision of the amount of the allowance for wear and tear which has been deducted by respondent from cost in computing the gain from the sale. Respondent has based the computation upon annual*3700 averages of 5 per cent of cost of buildings and of 10 per cent of cost of furniture and fixtures. It appears that one of the original buildings, after 40 years use, is still in active use. After careful consideration of the uncontroverted testimony of several qualified witnesses, we are satisfied that ordinarily annual rates of 3 per cent of cost for the buildings and of 7 per cent of cost for the furniture and fixtures will afford reasonable allowances for the wear and tear of the assets. The record shows, however, that deductions from income for wear and tear were allowed for the years 1916 to 1919, inclusive, with the full concurrence of petitioner in the amounts set out in detail in the findings.
We conclude that the aggregate deduction from cost for wear and tear of the assets sold by petitioner should be computed for the years 1916 to 1919, inclusive, on a basis of the amounts actually allowed as deductions from income as set out in the findings, and for all other years on a basis of 3 per cent of cost for the buildings and 7 per cent of cost for the furniture and fixtures. Cf. *3701
In the fourth issue petitioner contends for a computation of the profits tax upon the same ratio of net income as the average tax of representative corporations engaged in a like or similar trade or business. Such a computation is provided for in section 328 of the Revenue Act of 1918 in certain special cases specified in section 327 of the same Act. Petitioner claims inclusion in the class of cases thus specified in section 327(d):
Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328.
After three months operation in the taxable year petitioner saw fit, for reasons of its own, to sell out at a time when the dull season was about to set in.
Petitioner claims that the profits derived from operations are in excess*3702 of the amount it would have reported had it continued to operate for a full year, due to probable operating losses during the usually dull summer season. Obviously this is pure speculation and, furthermore, the income which petitioner realized in three months is *896 nevertheless reported on the basis of a year and petitioner has enjoyed on the full year basis the statutory exemptions derived from its invested capital the amount of which is not disputed. There is no abnormality here. Section 327 does not apply. Compare .
Judgment will be entered on 15 days' notice, under Rule 50.