*200 Decision will be entered under Rule 50.
1. Under a purported lease and option to purchase real property petitioner made payments in excess of the fair rental value of said property, prior to exercise of the option. Held, petitioner intended to and was acquiring an equity in the property and, therefore, the purported rental payments are not deductible under sec. 162 (a)(3), I.R.C. 1954.
2. Held, petitioner failed to prove that respondent's determination of the useful lives of certain leasehold improvements, for computing allowable depreciation, was erroneous.
*385 The respondent determined deficiencies in*201 petitioner's income taxes for the following years and in the following amounts: $ 37,212.62 for the taxable year ended June 30, 1964, and $ 36,414.78 for the taxable year ended June 30, 1965.
Due to the concessions of the parties two issues remain for our determination. The first is whether certain amounts paid by petitioner were rental payments for the use of land or were in fact payments on the purchase price of said land. The second issue concerns the proper useful lives of certain purported leasehold improvements for purposes of computing allowable depreciation thereon.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations and the exhibits attached thereto are incorporated herein by this reference.
M & W Gear Co. (hereinafter referred to as petitioner) is a corporation organized and doing business under the laws of the State of Illinois, with its principal office at Gibson City, Ill. Petitioner timely filed its corporate income tax returns for the taxable years ended June 30, 1964, and June 30, 1965, with the district director of internal revenue at Springfield, Ill.
Fifty percent of the petitioner's stock was owned by its president, Elmo*202 Meiners (hereinafter referred to as Meiners), and 50 percent was owned by the Ertel Manufacturing Co. of Indianapolis, Ind.Ertel is not actively engaged in the day-to-day affairs of the petitioner.
Issue 1Petitioner is in the business of manufacturing agricultural equipment. It maintains its manufacturing facility in Gibson City, Ill. In or *386 about 1961 petitioner began to expand its operations to include the manufacture of agricultural implements that were to be pulled behind a tractor; such as wagon fertilizer equipment, corn dryers, and chisel plows.
In order to test this equipment petitioner need expanses of land. Its policy was to actually use the equipment for a period of 2 years before releasing it for sale to the public. In 1962 petitioner tested this equipment in Arizona, but soon found the cost and inconvenience of journeying to Arizona prohibitive. It then searched for suitable land that was closer to Gibson City
During the latter part of 1961 the Nation Realty & Insurance Co. of Fairfield, Ill. (hereinafter referred to as Nation Realty Co.), began advertising a farm (hereinafter referred to as the Blairsville Farm) containing 1,490 acres for sale in *203 newspapers in Bloomington, Marion, and Decatur, Ill.
The Blairsville Farm was situated in Hamilton County, Ill., near Wayne City approximately 200 miles south of petitioner's principal office at Gibson City, Ill. The southerly location was beneficial to the petitioner because it allowed a longer season in which equipment could be tested.
In January of 1963, the Blairsville Farm contained two farmhouses, one of which had three bedrooms and both of which had indoor plumbing and were heated. Also on the farm were a building 60-feet square; two corncribs with steel floors; two 10,000-bushel grain tanks; a 250-ton silo; one barn which was 120 by 80 feet; a hog house; two barn sheds for machinery, approximately 40-45 by 60 feet; and assorted small outbuildings.
By January of 1963 the land had been cleared of timber and brush with the exception of approximately 96 acres. There were 750 acres of field tile and dragline ditches cut over most of the property in order to provide proper drainage. The land had also been gone over with a leveler. In addition, part of the property was fertilized and water traps were constructed.
Nation Realty Co. was advertising the property for sale for $ 335,250*204 or $ 225 per acre. Certain unharvested crops and various items of agricultural machinery were also advertised for sale at an aggregate price of an additional $ 90,500.
The Blairsville Farm had been owned by Ben Nation (sometimes hereinafter referred to as Ben) who acquired it in separate parcels at various times before 1961. In late 1961 or early 1962 Ben listed the Blairsville Farm for sale with his brother's real estate brokerage firm, the aforementioned Nation Realty Co.
In late 1962 George Kesner, one of Ben's neighbors, offered him *387 $ 352,000 in cash for the farm. Ben refused this offer because the petitioner had bid $ 6,000 more for the property.
Prior to this, in the fall of 1962, Meiners saw a newspaper advertisement indicating that certain property was for sale in the Wayne City, Ill., area and subsequently contacted Charles S. Nation (hereinafter referred to as Charles), Ben Nation's brother, with regard to the property. Charles told Meiners that his brother, Ben, had some property, i.e., the Blairsville Farm, that might be suitable.
In the early spring of 1962 Ben and Meiners orally agreed to a sale of the Blairsville Farm and certain farm equipment to petitioner*205 for $ 358,000 and $ 37,000 respectively.
In January of 1963 representatives of petitioner brought drafts of a "Lease Agreement for Agricultural & Experimental Work" and an "Option to Purchase" to Ben's office. These drafts were retyped in part by Ben's secretary.
The proposed lease agreement was for a term of 5 years commencing January 1, 1963, and provided for an annual rental of $ 34 per acre or $ 50,660. The document designated "Option to Purchase" stated in pertinent part:
This Option to Purchase shall be and is subject to a five (5) year lease dated January 1st, 1963, by and between Ben H. Nation and Maude A. Nation, his wife and the M. & W. Gear Company of Anchor, Illinois, and shall be subject to all the terms and conditions thereof.
* * * Sellers agree to sell said land at a price of Three Hundred Forty Two Thousand Seven Hundred ($ 342,700.00) Dollars plus all taxes, interest and insurance charged against said property from and after January 1st, 1963 until the date of consummation of this Option. Said insurance, taxes and interest shall be prorated at the date of closing of the Option and shall be less all monies received by Sellers on that certain lease which is for *206 a term of Five Years, that is to say, that all monies received under the terms of said Lease will be applied on the purchase of this property, provided the taxes, insurance and interest at six percent (6%) per annum is [sic] paid by Purchaser, leaving the balance after deducting the sum so paid by Lessee to Lessor, making the closing purchase price of said land Three Hundred Forty-Two Thousand Seven Hundred ($ 342,700.00) Dollars plus interest at six percent (6%) per annum, taxes and insurance from January 1, 1963, less the amount received under the term of said lease.
Purchaser shall have the further right of consummating this option at any time during the five year lease period that this purchase option is subject to by the payment to Sellers of the amount due on any annual period hereafter by paying the lease money up to that date and applying it on the purchase price of said land. * * *
After receiving a copy of the aforesaid lease Meiners, on January 18, 1963, went to the office of his tax adviser, Robert E. Johnson, in order to obtain his advice in the matter of the Blairsville Farm. Johnson, then, prepared the final draft of a document entitled "Lease."
*388 The lease*207 was to run from January 1, 1963, to December 31, 1967, at a rental of $ 50,660 per annum payable semiannually. The named lessors, Ben Nation and his wife, Maude, agreed to pay "all real estate taxes and special assessments * * * during the lease term."
Under the lease the Nations were under no obligation to make repairs or improvements to the property. Petitioner was permitted to make alterations and improvements. Petitioner was given the right to assign or transfer the purported lease or to underlease or sublet the premises. However, in such circumstances petitioner was to remain liable for "rent." 1
*208 Petitioner agreed to provide fire insurance in an amount not less that 80 percent of the insurable value of the buildings and improvements on the property. Said policies were to be made payable to the Nations and/or petitioner and/or any mortgagee or assignee designated by the Nations.
The lease contained an option to purchase which stated in part:
SIXTEENTH: LESSORS hereby give the LESSEE the right and option to purchase the leased premises and all buildings and improvements thereon including any alterations, buildings and improvements to the leased premises made by LESSEE * * * at the termination of this lease or at the termination of any extension or renewal of this lease for the sum of One Hundred Seventy Three Thousand Seven hundred Seven dollars fourty [sic] cents Dollars ($ 173,707.40). * * *
The lease further provided that upon its execution and the payment of $ 37,000 in addition to the rentals therein specified, title to certain agricultural equipment would pass to petitioner.
The lease was signed by Meiners and Wayne Powell, vice president and secretary of petitioner, on behalf of petitioner on January 22, 1963. The document was subsequently signed by Ben and Maude Nation*209 and mailed to petitioner.
Ben and Maude Nation treated the transaction as an installment sale of property on their Federal income tax return for 1963. In addition Ben paid Nation Realty Co. a commission of 5 percent of each "rental" payment that he received. He was obligated to pay 5 percent of the aggregate of rental payments and option price.
In analyzing the lease with respect to the Blairsville Farm Wayne Powell sent a memorandum to Meiners reconstructing the lease to show that Ben was to pay real estate taxes under the agreement.
*389 The memo from Wayne Powell to Meiners read as follows:
February 13, 1964
Memorandum: Elmo
Re: Farm Transaction
Today I received an invoice from Ben covering the insurance on the farm for 1963 amounting to $ 816.77. This amount of insurance is probably alright but we should investigate the amount of coverage and be named insured along with Ben.
Included in the invoice was $ 2,051.00 for land taxes for the year 1962 but was paid in 1963 which we should not be obligated for.
However, even though we are not obligated for the 1962 taxes but for the taxes hereafter Ben should not invoice us for these taxes because we made a $ 3,000.00 a year*210 allowance for the insurance and taxes during the five year lease.
The computation for the option to purchase amount was as follows:
| Payment dates | Lease | Taxes and | 6-percent | Unpaid |
| payment | insurance | interest | balance | |
| Purchase price | $ 342,700.00 | |||
| January 1963 | $ 25,330 | 317,370.00 | ||
| June 1963 | 25,330 | $ 3,000 | $ 9,521.10 | 304,461.10 |
| January 1964 | 25,330 | 9,136.83 | 288,367.93 | |
| June 1964 | 25,330 | 3,000 | 8,651.04 | 274,688.97 |
| January 1965 | 25,330 | 8,240.67 | 257,599.64 | |
| June 1965 | 25,330 | 3,000 | 7,727.98 | 242,997.62 |
| January 1966 | 25,330 | 7,289.93 | 224,957.55 | |
| June 1966 | 25,330 | 3,000 | 6,748.73 | 209,376.28 |
| January 1967 | 25,330 | 6,281.29 | 190,327.57 | |
| June 1967 | 25,330 | 3,000 | 5,709.83 | 173,707.40 |
As you can see Ben has been paid for land taxes and insurance. The lease agreement stipulated that Ben would pay the land taxes and insurance. It was a verbal agreement that we reimburse Ben for these expenses thru the lease payment schedule.
Charlie Nation has asked me for this breakdown several times. I didn't feel it was of any business to him plus the fact we didn't want any type of document indicating it was our intention to purchase this farm from the*211 beginning.
Now we are faced with the task of explaining the situation to Ben and I feel it should come from you in verbal form.
Respectfully submitted,
Although the record is unclear on this point, it appears that Ben Nation had mortgaged the Blairsville Farm as well as another farm of 400 acres not involved herein. When Ben sold the 400-acre farm and entered into the transaction hereinabove described, it became desirable to refinance the two mortgages and to sever them in some fashion. Consequently, Ben obtained a mortgage for $ 200,000 at 5 1/2-percent interest on the Blairsville Farm. The mortgage indenture was executed on May 25, 1964, by Ben and Maude Nation and by Meiners and Powell for petitioner. The mortgagee was the Connecticut General Life Insurance Co. Ben Nation signed a promissory note for the $ 200,000 that he received. Petitioner at this time was not made liable thereon.
*390 On December 5, 1967, petitioner notified Ben by telegram that it was exercising its option to purchase the Blairsville Farm. On December 7, 1967, the Nations were formally notified of this by petitioner's attorney.
Pursuant to the option, on February 7, 1968, Ben and Maude Nation as*212 grantors executed a warranty deed of the Blairsville Farm to petitioner as grantee. This document provided in part:
This deed is subject to the principal balance due on First Mortgage dated May 25, 1964, executed by Ben H. Nation and Maude A. Nation, his wife, and M & W Gear Company, as mortgagors, in favor of Connecticut General Life Insurance Company, as mortgagee * * * which mortgage the grantee herein assumes and agrees to pay in accordance with the terms thereof.
This deed is executed in compliance with the provisions of an Agreement dated January 1, 1963, between the parties hereto.
In accordance with the above deed petitioner paid Ben and Maude Nation $ 1,267.94 which represented the net amount payable after accounting for the assumption of the remaining outstanding mortgage indebtedness of $ 172,000 in addition to certain interest and taxes.
In March of 1966 Ben Nation and Meiners were approached by representatives of Hamilton County, Ill., with regard to the possible condemnation of part of the Blairsville Farm by the county for roadbuilding purposes. On March 28 and March 29, 1966, the Nations, as well as Meiners for the petitioner, executed four documents entitled "Dedication*213 of Right of Way for Public Road Purposes." 2 A total of approximately 2 acres was thus dedicated to public use. The dedications express only nominal consideration for the transfers, and it does not appear in the record whether the county provided any additional amounts.
During 1961 Ben Nation was approached by representatives of the Feed Grain Program of the U.S. Department of Agriculture. They agreed that Ben could place 125 acres of the Blairsville Farm in the soil bank and receive $ 32 per acre for permitting the land to lie fallow. For various reasons the transaction was never completed. On several subsequent occasions Ben refused*214 to place acreage in the soil bank. It *391 appears, however, in 1963 that 125 acres were placed in the soil bank at $ 34 per acre. 3
In and around Hamilton County where the Blairsville Farm was situated, the cash rental of farmland was unusual. The one farm on a cash-rental basis in that area was renting for approximately $ 12 per acre.
In January of 1963 4 the Blairsville Farm was subject to periodic flooding; at times the water would reach a height of 6 feet. This factor considerably diminished the rental value of the property. In 1963 the fair rental value of the Blairsville Farm would have ranged from $ 10 to $ 15 per acre.
*215 In January of 1963 the fair market value of the Blairsville Farm, including the buildings hereinbefore described, was not greater than $ 250 per acre or $ 372,500, and not less than $ 342,700.
For its taxable years ended June 30, 1964, and June 30, 1965, petitioner deducted rental payments in the amounts of $ 50,660 and $ 53,159.92, respectively. In his notice of deficiency respondent disallowed these deductions stating in part:
(a) It is determined that the deduction of $ 50,660.00 claimed as rental payments on 1,490 acres of land known as the Blairsville Farm in Hamilton County, Illinois, is not allowable. Such payments did not constitute rental payments but partial payments on the purchase price of the land since by virtue of the payments you acquired, or will acquire, title to or an equity in, the property. * * * 5
Issue 2In January*216 of 1963 when petitioner took possession of the Blairsville Farm it was necessary for it to make extensive improvements. Those ditching and draining operations that petitioner could not carry out itself, it hired Ben Nation to perform. 6 For the most part this work was done during 1963 and 1964.
In connection with petitioner's efforts to prepare the Blairsville Farm for its intended use certain other "leasehold" improvements were made. The following is a list of those items and petitioner's treatment of them for Federal income tax purposes and respondent's determination concerning that treatment. *392
| Petitioner's | |||
| Improvement 7 | Date acquired | Basis | method |
| Culvert pipe and flood gate | June 1963 | $ 616.52 | DDB |
| Metal culvert | June 1963 | 188.69 | DDB |
| Water lift and tubes | June 1963 | 479.13 | DDB |
| Culvert | June 1963 | 1,550.00 | DDB |
| Flood gates and water lifts | October 1963 | 1,096.22 | DDB |
| Tank culvert | November 1963 | 540.00 | DDB |
| Tank culvert | November 1963 | 540.00 | DDB |
| Tank culvert | April 1964 | 864.00 | DDB |
| Tank culvert | April 1964 | 540.00 | DDB |
| Water tank | May 1964 | 122.20 | DDB |
| 1,000 gallon tank | May 1964 | 1,655.82 | DDB |
| Tank culvert | June 1964 | 540.00 | DDB |
| Tanks (3) | June 1964 | 1,687.47 | DDB |
| Cement | June 1964 | 204.73 | DDB |
| Drop box | June 1964 | 132.50 | DDB |
| Tank improvements | June 1964 | 333.93 | DDB |
| 18-ton scale | July 1964 | 600.00 | SL |
| Scale house | October 1964 | 2,024.54 | SL |
| Scale transportation 1 | July 1964 | 240.00 | SL |
| Scale construction | September 1964 | 1,254.19 | SL |
| Grain dryer | November 1964 | 360.21 | SL |
| Shed 2 | November 1964 | 1,198.68 | SL |
| Steel cabinet | November 1964 | 412.67 | SL |
| Tank car | June 1965 | 540.00 | SL |
| Tank car | June 1965 | 540.00 | SL |
| Shed | February 1965 | 409.02 | SL |
| Tanks | April 1965 | 1,196.56 | SL |
| Total |
| Respondent's | Life | Life | Depreciation | |
| Improvement 7 | method | petitioner | respondent | 6/30/64 |
| Years | Years | |||
| Culvert pipe and flood gate | DDB | 20 | $ 136.99 | |
| Metal culvert | DDB | 20 | 41.93 | |
| Water lift and tubes | DDB | 20 | 106.47 | |
| Culvert | DDB | 20 | 344.41 | |
| Flood gates and water lifts | DDB | 4 | 20 | 274.06 |
| Tank culvert | DDB | 4 | 20 | 135.00 |
| Tank culvert | DDB | 4 | 20 | 135.00 |
| Tank culvert | DDB | 4 | 20 | 216.09 |
| Tank culvert | DDB | 4 | 20 | 135.00 |
| Water tank | DDB | 4 | 20 | 30.56 |
| 1,000 gallon tank | DDB | 4 | 20 | 413.95 |
| Tank culvert | DDB | 4 | 20 | 135.00 |
| Tanks (3) | DDB | 4 | 20 | 421.87 |
| Cement | DDB | 4 | 20 | 51.18 |
| Drop box | DDB | 4 | 20 | 0 |
| Tank improvements | DDB | 4 | 20 | 83.89 |
| 18-ton scale | DDB | 3 | 20 | |
| Scale house | DDB | 3 | 20 | |
| Scale transportation 1 | DDB | 3 | 20 | |
| Scale construction | DDB | 3 | 20 | |
| Grain dryer | DDB | 3 | 20 | |
| Shed 2 | DDB | 3 | 20 | |
| Steel cabinet | DDB | 10 | 20 | |
| Tank car | DDB | 3 | 20 | |
| Tank car | DDB | 3 | 20 | |
| Shed | DDB | 3 | 20 | |
| Tanks | DDB | 3 | 20 | |
| Total | 3,058.74 |
| Respondent | Depreciation | Respondent | |
| Improvement 7 | allowed | 6/30/65 | allowed |
| Culvert pipe and flood gate | $ 61.65 | $ 211.00 | $ 55.49 |
| Metal culvert | 18.87 | 64.57 | 16.98 |
| Water lift and tubes | 47.91 | 163.72 | 43.12 |
| Culvert | 155.00 | 530.48 | 139.50 |
| Flood gates and water lifts | 82.21 | 411.08 | 101.40 |
| Tank culvert | 36.00 | 202.50 | 50.40 |
| Tank culvert | 36.00 | 202.50 | 50.40 |
| Tank culvert | 21.61 | 324.14 | 84.28 |
| Tank culvert | 13.50 | 202.50 | 52.65 |
| Water Tank | 2.03 | 45.82 | 12.02 |
| 1,000 gallon tank | 27.60 | 620.94 | 162.82 |
| Tank culvert | 4.50 | 202.50 | 53.55 |
| Tanks (3) | 14.06 | 632.80 | 167.34 |
| Cement | 1.71 | 76.78 | 20.30 |
| Drop box | 1.10 | 0 | 13.14 |
| Tank improvements | 2.78 | 125.02 | 33.12 |
| 18-ton scale | 60.00 | ||
| scale house | 151.84 | ||
| Scale transportation 1 | 686.46 | 24.00 | |
| Scale construction | 104.52 | ||
| Grain dryer | 60.04 | 24.01 | |
| Shed 2 | 199.78 | 79.92 | |
| Steel cabinet | 41.27 | 27.52 | |
| Tank car | 90.00 | 4.50 | |
| Tank car | 90.00 | 4.50 | |
| Shed | 68.17 | 17.05 | |
| Tanks | 199.43 | 29.91 | |
| Total | 526.53 | 6,064.51 | 1,584.28 |
*393 Of all the items in the above table only the water tank (with a cost of $ 122.20) and the grain dryer could have been economically removed had petitioner not exercised its option to purchase the Blairsville Farm. The physical life of the tanks which cost $ 1,687.47 was 8 years. These tanks were used for fertilizer which would cause corrosion of the metal during this period.
On its Federal income tax returns for its taxable years ended June*219 30, 1964, and June 30, 1965, petitioner deducted $ 3,058.74 and $ 6,064.51, respectively, as depreciation of leasehold improvements. In his statutory notice respondent disallowed $ 2,532.21 and $ 4,480.23 of these deductions for 1964 and 1965, respectively.
OPINION
Issue 1Section 162(a) (3) of the Internal Revenue Code of 19548 provides for the deduction of --
(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. [Emphasis added.]
The issue confronting us here is whether petitioner's payments under the purported lease of January 22, 1963, are deductible as rental payments within the purview of the above statute. We hold that they are not; petitioner was acquiring an equity in the property and, as a natural consequence thereof, was*220 planning on taking title to the property.
The question of whether purported rental payments are in substance payments of part of the purchase price is one of fact. We put it thusly in Norman Baker Smith, 51 T.C. 429, 438 (1968):
We adhere to our view that the substance of the transaction will be considered and whether an amount paid under the designation of rental payment is a part of the purchase price of the property or is a rental payment, will be determined from the substance of the agreement in accordance with which the payment is made.
In the instant case petitioner agreed to buy and Ben Nation agreed to sell the Blairsville Farm for $ 358,000. Meiners, the president of petitioner, conferred with his tax adviser and expressed his desire to Ben Nation that the transaction be recast into the form of a lease with an option to purchase, so that petitioner could deduct its payments as rental expense. Ben testified that Meiners advised him that such a *394 change would have no adverse tax effects on him. The first unexecuted option agreement provided that: "all monies received under the terms of said Lease will be applied on the purchase of*221 this property * * *." The effect of this language is obvious, i.e., purported rental payments are used to reduce the purchase price. This is indicative of the acquisition of an equity in the property by those payments. See, e.g., Rotorite Corporation v. Commissioner, 117 F. 2d 245 (C.A. 7, 1941), reversing 40 B.T.A. 1304 (1939).
However, the documents were amended with the result that the lease, which was executed on January 22, 1963, provided that the option, contained therein, was not exercisable until the full term of the lease had run. This provision in conjunction with a low option price had a dual effect. Firstly, it guaranteed the seller five payments of $ 50,660 plus $ 173,707.40, on exercise, which in the aggregate totaled the fair market value of the property. And secondly, the low option price meant that petitioner's so-called rental payments would of necessity be credited towards the full purchase price.
We found as a fact that the fair rental value of the Blairsville Farm was at most $ 15 per acre. Petitioner paid "rent" of $ 34 per acre. This disparity indicates that petitioner was purchasing something*222 of value in addition to the mere use of the property. Petitioner was building an equity and such payments, therefore, did not constitute rent. In Chicago Stoker Corporation, 14 T.C. 441, 445 (1950), we said:
If payments are large enough to exceed the depreciation and value of the property and thus give the payor an equity in the property, it is less of a distortion of income to regard the payments as purchase price and allow depreciation on the property than to offset the entire payment against the income of one year. * * *
Petitioner argues on brief that in arriving at a fair rental value of less than $ 34 per acre respondent failed to consider the effect of the soil bank which indeed paid Ben Nation $ 34 per acre. However, the payments made by the soil bank were only on account of 125 acres and there was no offering of evidence to indicate that the soil bank would have been willing to pay $ 34 per acre on the entire 1,490 acres, or for that matter, on any acreage above 125.
Petitioner argues that the fair market value of the Blairsville Farm was approximately $ 117 per acre; 9 and based on this figure the option *395 price of $ 173,707.40, *223 10 agreed to, was reasonable. We give petitioner the benefit of the doubt when we find that the fair market value of the Blairsville Farm as of January 1963 was not less than $ 342,700. 11
*224 This disparity between the amount payable upon exercise of the option and the fair market value of the property bolsters our conclusion that the "rental" payments were used to reduce the purchase price; and petitioner was acquiring equity in the property, D. M. Haggard, 24 T.C. 1124 (1955), affd. 241 F.2d 288 (C.A. 9, 1956).
The relationship between the amount of the "rental" payments and the petitioner's contention as to the fair market value of the property is also instructive. Assuming that the fair market value of the farm was $ 173,707.40, then an annual rental of $ 50,660 would be approximately 29 percent of the fair market value. This seems an unreasonably high rent, particularly in view of the fact that 5 years' rent totally eclipses the purported purchase price. This is another factor indicating that petitioner was acquiring an equity in the property. See Judson Mills, 11 T.C. 25 (1948).
When petitioner's president, Elmo Meiners, was asked at trial why he preferred to pay some $ 253,300 in rent over a 5-year period as opposed to purchasing the property outright for approximately $ *225 173,707, he stated in essence that he did not want the petitioner to become obligated for such a large cash outlay and that in the event of the failure of petitioner's experimental work he could have terminated the lease. We note, however, that the lease contained no provision for cancellation without cause. And it appears that petitioner, in effect, guaranteed the payment of "rent" for 5 years.
In conjunction with its argument that the form of the transaction permitted it to maintain a more flexible financial position, petitioner argues that there was no obligation to exercise the purported option. See Norman Baker Smith, supra. We recognize the importance of this absence of obligation, but we do not find the argument controlling here. In the Norman Baker Smith case we noted that exercise required a substantial sum of money; in the instant case petitioner was "obligated" to exercise its option by dint of economics. It has already paid substantial amounts in "rentals," made costly leasehold improvements which could not be economically removed, and expended in excess of *396 $ 100,000 for ditching and draining operations. 12 If petitioner*226 was to retain the benefits of its expenditures, it behooved it to exercise the "option."
In Breece Veneer & Panel Co. v. Commissioner, 232 F.2d 319 (C.A. 7, 1956), reversing 22 T.C. 1386 (1954), the court rejected the above economic test as the sole criteria for deciding cases of this genre. We find Breece Veneer to be distinguishable and not persuasive here. In Breece Veneer the rental payments were found to be reasonable. The petitioner had been a lease of the property prior to executing the agreement in question and the increase in rent was not found to be so substantial as to warrant a finding that the rental was more than fair. Further, the court was without evidence, we have before us, of a prior agreement to purchase, as well*227 as evidence of an initial intent to purchase. In support of our conclusion that petitioner intended, ab initio, to purchase the Blairsville Farm, we refer to the intraoffice memorandum of February 18, 1964, set forth in our Findings of Fact. This memorandum makes it clear that petitioner always intended to purchase the property.
On brief, petitioner argues that under the law of Illinois the petitioner, as lessee, acquires neither title nor equity in the property by the payment of rent. 13 It is axiomatic that mere payment of rent only secures continued use and possession of the leasehold to the lessee; however, here petitioner has paid more than mere rent and the cases to which we have been referred do not touch upon this factor. More importantly, since we are not determining with whom title lies, but rather, the deductibility of rental payments for Federal income tax purposes, the law of Illinois does not control. Weiss v. Weiner, 279 U.S. 333, 337 (1929).
*228 In conjunction with its assertion that title resided in Ben Nation during the years in issue petitioner stresses the importance of three additional factors: First, Ben Nation joined in certain condemnation proceedings; second, Ben Nation made provision for a preexisting tenant on the Blairsville Farm; and third, Ben Nation mortgaged the property after petitioner took possession of the property.
Ben Nation did join with petitioner in the dedications of portions of the Blairsville Farm for public roads; however, this is of doubtful probative force on the issue of with whom legal title resided, because in three of the four documents petitioner was the first to sign. In fact, *397 this seems to imply that petitioner was the primary grantor. It is not inconsistent with our decision, herein, that Ben Nation joined in the dedication. Despite the fact that he was in the process of selling his property, until the final payment was made he maintained a substantial interest in the Blairsville Farm.
The fact that Ben Nation requested the petitioner to permit a former tenant to remain in possession does not aid the petitioner's cause. The request seems to us to have been of a personal*229 nature and in any case was hardly inconsistent with the sale of the property.
On May 25, 1964, Ben and Maude Nation and petitioner executed a mortgage indenture on the Blairsville Farm. Ben received $ 200,000 at 5 1/2-percent interest and he alone was personally liable on the note therefor. These circumstances do not militate against our decision. A similar situation was presented in D. M. Haggard, supra at 1127, and this Court, in holding for the respondent, did not feel the issue merited discussion. In the case at bar the mortgage permitted Ben Nation to obtain $ 200,000 cash in hand, relieving him of the necessity of waiting for the balance of the purchase price. The transaction was also beneficial to the petitioner, because by assuming the mortgage, on February 7, 1968, it reduced its cash obligation to Ben Nation to $ 1,267.94. If they have any relevancy, these factors seem to indicate a convenient method of financing a sale.
Another point that petitioner raises is that breaches of various provisions 14 in the lease agreement could have resulted in a termination of said agreement rendering it impossible for petitioner to exercise its option. *230 It suffices to say that the remedies to all of these eventualities lay within the control of petitioner. Petitioner also refers to its option to terminate in case of a defect in Ben Nation's title. Needless to say that in any sale of property this possibility is present.
Finally, petitioner alludes to the fact that it could terminate the transaction in the event of the condemnation of all or a part of the property. Petitioner, however, did not offer any evidence to show that a condemnation, so substantial as to make termination a possibility, was in the offing. In the event of a lesser condemnation petitioner was given the option to continue in possession and to apply the award towards restoration of the property. In addition, in the event of a partial condemnation provision was made for a partial*231 abatement of "rent" which, in effect, means a partial abatement of the purchase price.
In summary, upon consideration of the entire record we are convinced that through purported rental payments petitioner was acquiring *398 a substantial equity in the property in accordance with the result intended by the parties. Consequently, we hold that said payments were not deductible as rent under section 162(a)(3).
Issue 2This leaves for our consideration the question of the several useful lives of certain "leasehold" improvements. At the outset we should state our conclusion that the purported lease of the Blairsville Farm was in substance a sale of the property means that the petitioner cannot depreciate the contested items over the term of the purported lease, but rather, must depreciate them over the term of their actual useful lives. The respondent determined that each improvement set forth in the notice of deficiency had a useful life of 20 years, with the exception of certain expenditures for clearing work which respondent had disallowed in their entirety. Rule 32 of the Tax Court Rules of Practice provides that "The burden of proof shall be upon the petitioner." We find*232 that, with the exception of one item, petitioner has failed to satisfy this burden.
At trial we were presented solely with the uncorroborated testimony of one of petitioner's employees. To put it mildly, this fails to convince. In each instance this witness merely stated his opinion as to the useful life of a particular item without giving any reason therefor.
We stated above that there was one exception. Petitioner's witness stated that three tanks with a cost of $ 1,687.47 15 have a useful life of no more than 8 years. As to these tanks alone petitioner's witness provided an explanation for his estimate. Admittedly our knowledge of the effects of fertilizer on steel is limited but it seems reasonable to us that corrosion will destroy a tank's usefulness in 8 years. Accordingly, we hold for the respondent except as to those tanks used for fertilizer and identified by their purchase price of $ 1,687.47. As to these we hold the useful life to be 8 years.
*233 In view of the foregoing,
Decision will be entered under Rule 50.
Footnotes
1. Prior to the transactions described above Ben Nation had leased approximately 200 acres at the Blairsville Farm to a tenant farmer, named Thompson. Ben asked Meiners if Thompson could remain in possession for 2 years to complete his term. Meiners agreed to this. It is not clear from the record to whom Thompson paid rent, although it does not appear on petitioner's income tax returns that it reported rental income.↩
2. Three of these documents were signed by Meiners for petitioner on Mar. 29, 1966, and beneath Meiners' signature both Ben and Maude Nation signed. The fourth document was executed on Mar. 28, 1966, by the Nations and approved by Meiners for the petitioner. This document was different from the other three in that it stated that it was subject to the option and petitioner's approval.↩
3. In negotiating the amount of purported rental payments Meiners offered to pay $ 34 per acre per annum for the entire 1,490 acres despite the fact that only 125 acres were presently in the soil bank.↩
4. Prior to extensive drainage work undertaken by petitioner.↩
5. The statutory notice for 1965 was substantially identical to the one herein set forth, with the exception of the amount of the deduction disallowed, which was $ 50,659.92.↩
6. The amount that Ben Nation invoiced to petitioner for these operations was $ 107,363.41.↩
7. On its tax returns for 1964 and 1965 petitioner claimed deductions, for depreciation of certain clearing work performed on the Blairsville Farm, in the amounts of $ 397.34 and $ 613.01, respectively. These specific items were not alluded to in respondent's statutory notice. It appears that respondent has disallowed these deductions in their entirety.↩
1. The statutory notice reads "tanks," however, petitioner's reconstruction of depreciation reads "trans."↩
2. The statutory notice reads "shed," however, petitioner's reconstruction of depreciation reads "skid."↩
8. All section references are to the Internal Revenue Code of 1954 unless otherwise stated.↩
9. At trial petitioner introduced evidence of sales of similar property near the Blairsville Farm. Such property, according to petitioner's witness, changed hands for from $ 90 to $ 100 per acre. While we recognize that such objective evidence may be preferable to the testimony of expert witnesses, we chose not to accept this valuation, because the circumstances surrounding these purported sales were not explicated. It may be that such sales were identical to the transaction involved herein, i.e., here petitioner has stated that the Blairsville Farm changed hands for $ 173,707.40.↩
10. As respondents points out, the intraoffice memorandum, dated Feb. 13, 1964, helps to explain the odd amount of the purported option price. It appears that the figure $ 173,707.40 was reached, at least in part, by using a sales price of $ 342,700 and subtracting therefrom the "rental" payments.↩
11. We are cognizant of the fact that the critical value is that which the parties could reasonably contemplate the property to have at the time of the option's exercise. However, no evidence was offered which indicates that the Blairsville Farm could have been expected to decline in value by 1967.↩
12. We note, here, that these ditching and draining operations commenced in January of 1963. This together with the size of the expenditure indicates the petitioner's intent to purchase the property from the outset.↩
13. We note that petitioner may be mistaken in its construction of the law of Illinois. In Arco Bag Co. v. Facings, Inc., 18 Ill.App.2d 110, 151 N.E. 2d 438↩ (1958), it was held that when rent is equivalent to value and the lessee has an option to purchase the transaction is a sale as opposed to a lease.
14. Provisions such as failure by petitioner to pay rent and utilities, to make repairs after removal of fixtures, to keep liens off the property and to provide fire insurance, or Nation's failure to pay property taxes.↩
15. The deductions pertaining to these tanks were $ 421.87 and $ 632.80 for 1964 and 1965, respectively.↩