*2665 1. March 1, 1913, value of a leasehold determined.
2. The determination of the Commissioner that inadequate depreciation had been deducted in prior years in approved in the absence of sufficient evidence to show that it is erroneous.
*69 The Commissioner determined deficiencies for the fiscal years ended January 31, 1919, January 31, 1920, and January 31, 1921, in the respective amounts of $3,998.45, $2,643.21 and $235.93. The issues relate to the valuation of a leasehold on March 1, 1913, and the reduction of invested capital on account of insufficient depreciation taken on furniture and fixtures in prior years.
FINDINGS OF FACT.
Petitioner is a Missouri corporation with its principal office and place of business in St. Louis.
On October 30, 1905, Jacob M. Werner and Benjamin Werner secured a lease upon the premises located at the northeast corner of Sixth and Locust Streets, St. Louis, Mo. The premises had a frontage of 101 feet on Sixth Street and 85 feet on Locust Street. The lease became effective September 1, 1906, and*2666 ran for a term of 15 years from the last-mentioned date. It provided that the lessors should construct a building on the premises at their own expense which would cover, as nearly as practicable, the aforementioned plot of ground and which would be for occupancy by the lessees. The lease reserved a net yearly rental of $30,300 for the first 10 years, plus additional rental equal to 5 per cent of the cost of the building in excess of $108,000. The lease contained a provision that at the end of 10 years the land and buildings should be reappraised and the rent redetermined for the last five years of the term at an amount equal to 3 per cent of the then value of the land and 5 per cent of the then value of the building, determined separately, but the appraised value of the land was in no case to be fixed at less than $850,000. During the entire term of the lease, the lessees were obligated to pay, in addition to the aforementioned fixed rentals, all general taxes of every nature, to keep the property insured and to make necessary repairs and improvements at their own expense. The lease further provided that the building was to be used for the sale of ladies' apparel, men's clothing, *2667 furnishings, lingerie, notions, cloaks, wraps, *70 dry goods, hats, caps, boots and shoes and should not be used for other purposes or assigned to other persons or for other uses without the written consent of the lessors. It was, however, expressly provided that in the event the lessees therein should convert their partnership business into a corporation, in which the said lessees were substantially interested individually, the said lessees should have the right to assign and transfer this lease to such corporation, which would become a co-lessee with the lessees therein.
The lease was assigned by Jacob M. Werner and Benjamin Werner to petitioner very shortly after it was made and the petitioner occupied the premises as soon as the building was completed in 1906. The building provided for in the lease was constructed between 1905 and 1906, and is of steel-frame and concrete-ribbed construction, with floors filled in with concrete and tiled. It has four floors and basement. There had been no material change in the style of construction of such buildings between 1906 and 1913 and the building in question, on March 1, 1913, was modern in type and well adapted to the purpose*2668 for which constructed.
The cost of the aforementioned building when completed in 1906 was $121,326. Since this amount exceeded the minimum cost of $108,000 specified in the lease on which the rental reserved of $30,300 was based, the actual rental paid under the lease (exclusive of taxes, insurance, etc.), was $30,988 each year. On November 11, 1914, the petitioner asked for and was granted an extension of the original term from 1921 to 1924 at the same annual rental as heretofore existed, viz, $30,988 per annum. At this time the petitioner was indebted to the lessors in the amount of $5,000 on account of money advanced by the lessors, for the accommodation of the lessees, to pay taxes on the premises here in question. The aforementioned extension agreement provided that this amount should be repaid in equal annual payments of $1,000 per year during the last five years of the original term of the lease and at the same time as the rentals thereunder. This agreement provided further that the provision in the original agreement for fixing the rent to be paid during the last five years of the original term on the basis of a valuation to be made in 1916 would be rescinded and annulled. *2669 On February 8, 1917, another extension of three years was asked for and granted at the same rental figure as in the preceding agreement, thus extending the term of the lease to August 31, 1927.
The usual and prevailing rate of return on leases on down-town business property in St. Louis, Mo., in 1913, was 7 per cent on the value of the buildings and 5 per cent on the value of land, net to lessors.
The leasehold here in question had a value on March 1, 1913, of $35,121.78.
*71 The petitioner's business was that of a retail clothing and furnishing business and in such business petitioner owned and used wall fixtures, display fixtures, window fixtures, counters, office furniture and fixtures and such other similar equipment and fixtures as are customary and usual in such a business. From 1906, when petitioner began business, to January 31, 1916, petitioner charged off a total depreciation on the aforementioned furniture and fixtures of $6,000. This was not charged off at a uniform rate. For the years on appeal petitioner claimed depreciation at the rate of 10 per cent on these assets. This rate was reduced by the Commissioner to 5 per cent and depreciation disallowed*2670 as follows:
| 1919 | $900.03 |
| 1920 | 950.64 |
| 1921 | 950.54 |
| Total | 2,801.21 |
Furniture and fixtures were always maintained in a first-class condition. Charges for repairs, such as would be necessary when plate glass was broken or furniture damaged, or for the refinishing and revarnishing of furniture and fixtures were charged to expense. Likewise, minor replacements, such as replacements needed to take the place of broken chairs were charged to expense. New fixtures were otherwise charged to the appropriate capital account except in the case of display fixtures which were charged to expense. The policy of the petitioner with respect to the charges to its fixture account and the charges for repairs and maintenance was consistently followed both before and during the years on appeal.
The Commissioner reduced invested capital as at February 1, 1918, in the amount of $8,236.74 on account of insufficient depreciation taken in prior years.
OPINION.
LITTLETON: The Commissioner claims that the leasehold here in question had no value on March 1, 1913, whereas the petitioner contends that the leasehold had a value on this date of $118,746.90, and that it is entitled*2671 to an annual deduction of $13,964.35 for the exhaustion of the leasehold.
At the hearing, evidence was presented as to the estimated savings under the leasehold, the rentals paid for numerous comparable properties, the character of the location where the property is situated, the changes in the business character of petitioner's location from 1906 to March 1, 1913, the reason for granting the extensions referred to in our findings of fact, the restricted use of the premises, the usual net rental return on land and buildings on March 1, 1913, and other evidence relating to the value here in issue. On a consideration of *72 the entire evidence, we are of opinion that the fair market value of the leasehold on March 1, 1913, was $35,121.78.
We can not, however, agree with the petitioner that it is entitled to a deduction in the years involved on account of this value on the basis of 8 1/2 years which the leasehold had to run on March 1, 1913, for the reason that two extensions thereto were later granted - one on November 11, 1914, of three years and another on February 8, 1917, for three additional years, thus causing the lease to expire on August 31, 1927, instead of August 31, 1921.
*2672 The deduction allowable for each of the years should be based upon a spread of the portion of the March 1, 1913, value, which was unextinguished on February 8, 1917, over the period from February 8, 1917, to August 31, 1927. Prior to February 8, 1917, a part of the March 1, 1913, value had expired either under the terms of the original lease, or the extension as granted on November 11, 1914. What, therefore, the petitioner had on February 8, 1917, was an asset the useful life of which to it would expire on August 31, 1927, and through which period it would enjoy the beneficial use of the rights under the leasehold. Consequently, the unextinguished value on February 8, 1917, should be spread from this latter date to August 31, 1927. Cf. .
In the next issue as to a reduction of invested capital on account of an alleged insufficiency of depreciation taken in prior years, the petitioner relies upon the decisions of the Board in ; *2673 ; and . In each of these cases there was evidence that the petitioner had charged off depreciation in prior years and that such depreciation was substantially correct; and, as between depreciation charged by the petitioner and that claimed by the Commissioner, we considered petitioner's contention as more nearly representing the correct facts and refused to disturb the surplus shown on petitioner's books. In this proceeding we have an entirely different situation. From 1906 to January 31, 1916, petitioner charged off a total depreciation on its furniture and fixtures of $6,000, but this was not charged off at a uniform rate. What relation this bore to cost, we do not know, since no evidence was presented as to the cost of the assets here in question. For the years here involved petitioner claimed depreciation on these assets at the uniform rate of 10 per cent. This rate was reduced by the Commissioner to 5 per cent, with the result that depreciation was disallowed allowed by the Commissioner in the total amount of $2,801.21 for the three years. Since the rate allowed is one-half of*2674 that claimed, it seems reasonable to suppose that depreciation was claimed in these three years of approximately $5,600, whereas the petitioner contends that $6,000 is adequate for approximately 10 years prior to January *73 31, 1916. Allegations in the petition indicate that much greater amounts were claimed in 1917 and 1918. As to the policy of the company with respect to repairs and treatment of capital expenditures for the prior years as compared with the years in question, both the bookkeeper and the vice president of the petitioner testified that there had been no change, that ordinary repairs and minor replacements were charged to expense and that new fixtures and major replacements were properly charged to the fixture account, except in the case of display fixtures, which were uniformly charged to expense. What the total expended for display fixtures which were improperly charged to expense amounted to, we are again without information and have no way of determining whether a restoration of these items to the fixture account, after allowing depreciation thereon, would result in showing a depreciated cost for furniture and fixtures equal to that at which they were*2675 carried on the books of the petitioner. At the hearing, petitioner submitted an appraisal of its furniture and fixtures made in 1920 which purported to show the depreciated reproduction cost of these assets in 1920, but an objection to its admission was sustained on the ground that the appraisal in the form offered was improper and incompetent to prove any of the facts in issue. We are of the opinion that the presumption of the correctness of the determination of the Commissioner is not overcome by the evidence presented as to this issue and accordingly such determination is approved. ; ; ; and .
Judgment will be entered on 10 days' notice, under Rule 50.
Considered by SMITH, TRUSSELL, and LOVE.