*14 Decision will be entered under Rule 50.
Petitioner was the owner of a tract of land, and a six-story building thereon, in Denver. After receiving offers to lease the land for parking lot purposes, she decided in the summer of 1939 to demolish the building and enter into such a lease. Demolition started August 15, 1939, and was completed December 15, 1939. On November 24, 1939, petitioner accepted an offer made on November 22, 1939, to lease for parking lot purposes for five years and one month, conditioned upon procurement within 90 days of permits to cut the curb. At the time petitioner determined to demolish the building, securing permits to cut the curb were considered by her as routine, there being no expectation of long delay in securing such permits. Prior to December 31, 1939, the city of Denver flatly refused the permits, but the application was promptly renewed and continuously pressed until granted in September 1940. The offer to lease, of November 24, 1939, expired in February 1940. Negotiations, with a different party, in August and September 1940, resulted in a five-year lease, on September 28, 1940, for parking lot purposes. Held, that petitioner's stipulated*15 depreciated cost basis in the building and certain costs of obtaining the lease are amortizable over the term of the lease. Amortization of other expenses denied.
*1339 These proceedings were consolidated for hearing and involve a deficiency of $ 2,520.86 in income tax for 1941 in Docket No. 2833, and a deficiency of $ 4,321.31 in income and victory tax for 1943 in Docket Nos. 9064 and 9518. The issue is whether the petitioners are entitled to amortize over the term of a lease executed upon lots their unrecovered base of the improvements thereon which were demolished in 1939, plus certain other costs incurred in obtaining the lease. The stipulation of facts filed by the parties is incorporated in our findings of fact by reference, but portions thereof regarded as necessary for consideration of the issue will be set forth with findings made from other evidence.
FINDINGS OF FACT.
Laurene Walker Berger and Laurene W. Berger, the petitioners in docket Nos. 2833 and 9064 are the same individual. *16 She is the wife *1340 of George B. Berger, the petitioner in Docket No. 9518. The wife filed separate returns for 1941 and 1942 and a joint return with her husband for 1943. The returns were filed with the collector for the district of Colorado. The wife kept her books and filed her returns on the cash basis.
In 1939 and for several years prior thereto Laurene W. Berger, hereinafter sometimes referred to as petitioner, owned six lots on the corner of 15th and Curtis Streets, Denver, Colorado, improved with a six-story office building about fifty years old in 1939, having stores on the ground floor.
Beginning in 1937 the husband managed the property as agent for his wife. His recommendations and decisions were accepted and followed by petitioner in each instance.
The net income from the property, after deducting property taxes and before deducting depreciation of $ 3,100 each year, from 1928 to 1933, inclusive, decreased from a high of $ 30,094.33 in 1929 to $ 3,683.99 in 1933. From 1934 to 1938, inclusive, the losses before deducting depreciation were $ 520.01, $ 3,619.17, $ 3,858.21, $ 1,133.76, and $ 3,408.45, respectively.
The assessed valuations of the land from 1933*17 to 1944, inclusive, and of the improvements thereon to 1939, were as follows:
| Year | Land | Improvements |
| 1933-4-5 | $ 166,870 | $ 46,390 |
| 1936-7 | 165,070 | 46,270 |
| 1938 | 165,070 | 45,940 |
| 1939 | 142,310 | 45,300 |
| 1940 | $ 132,840 | |
| 1941 | 121,160 | |
| 1942-3 | 110,000 | |
| 1944 | 69,190 |
The cost of heating and lighting the property increased from $ 4,878 in 1933 to $ 12,427.86 in 1938.
Estimates were prepared for petitioner showing that by installing automatic coal stokers or burners and other equipment very substantial savings could be made in heating costs over and above proper depreciation on such new equipment.
In the spring of 1938 and 1939 the improvements on the lots had a value of about $ 15,000 and $ 13,323, respectively.
In July 1938 the petitioner's agent protested the assessed valuations on the property and requested a reduction in the amounts thereof. Early in 1939 he gave consideration to continued operation of all floors of the building, with changes in the facilities for heating and lighting the property, or blocking off or removing the upper four floors and operating the first two floors without elevator service and by obtaining steam from the Public Service Co. for heating purposes, *18 or razing the building and leasing the land for parking lot purposes. *1341 Estimates made showed that operation of the building on a two-story basis would yield a very modest return above taxes. No changes were made for continued operation of the building. In the spring of 1939 a real estate man recommended that petitioner attempt a two-floor operation of the building. Subsequently, one of the most important tenants on the ground floor served notice of its intention to vacate the property and another tenant went bankrupt. He then recommended that the building be demolished in order to be able to lease the land for a filling station and parking lot, the lessee to make the improvements on the lots after the office building was torn down.
In the summer of 1939 the petitioner decided to tear down the building in order to be able to lease the land for a parking lot for a period of five years. At that time the building was in a fair state of repair and about 80 per cent occupied. Prior thereto assurances were given by the taxing authorities of the city of Denver that the taxes on the property would be very substantially reduced for the future. Offers to lease the ground for*19 filling station and parking lot purposes were received by the petitioner from a real estate agent prior to the time she considered the demolition of the building. Two of the offers, made by the Silco Tire & Oil Co. and K. S. Barret, were for a term of five years at a monthly rental of $ 750, the lessee to make, at his expense, improvements costing not less than $ 3,000, and the improvements to revert to the lessor upon the termination of the lease.
The petitioner's husband investigated the financial standing of the offerers and was satisfied that they were financially responsible. The petitioner was confident that such a lease could be obtained if the building were demolished. Other inquiries were received for leasing the ground.
None of the offers made to lease the land for the purpose of operating a filling station and parking lot were accepted by the petitioner prior to the time she decided to demolish the building. Her husband hoped to obtain better offers while the building was being razed.
In July 1939 the petitioner entered into an agreement to wreck the building and, on August 1, 1939, delivered the building to the wreckers. The demolition of the building was commenced*20 on August 15, 1939, and completed on December 15, 1939.
On November 24, 1939, the petitioner accepted a written offer made two days prior thereto by the Silco Tire & Oil Co. to lease the land for a parking lot and filling station on the terms set forth in a draft of lease attached to the offer. The form of lease provided for a term of five years and one month, commencing December 1, 1939, at a monthly rental of $ 750, and improvement of the lots at a cost to the tenant of not less than $ 3,000, conditioned, however, upon the procurement by the petitioner within ninety days of permits for curb *1342 cuts and to construct driveways and a filling station, and it contained an agreement by petitioner to have the premises packed by a steam roller and the low spots filled in and rerolled. The lease was never signed. The offerer would have executed a lease for the lots at any time between November 1939 and September 1940 for a rental agreeable to him. He would not have executed a lease in and after September 1940 providing for a monthly rental of $ 750.
When petitioner determined to remove the building in order to get a long term parking lot lease, permits for curb cuts were considered*21 by her as a routine matter. There was no expectation of long delay in that regard.
During the latter part of November or the early part of December 1939 the petitioner made application to the city of Denver for a permit to cut the curbs at the lots. The granting of the permit was discretionary. The request was flatly refused in December 1939 upon the ground that the cutting of the curbs would create traffic jams. Promptly thereafter the application was renewed and pressed continuously thereafter until the permit was granted in September 1940. During the course of the negotiations the officials of the city denied the application for the second time. While the application to cut curbs was pending before the city of Denver, the petitioner, because of the difficulty she was encountering to obtain approval of her application, considered the erection of a small building on the lots. During that period the petitioner made no effort to sell the lots, but would have considered offers to buy.
During the period when the applications for a permit were pending petitioner made no change in her plans for the use of the lots. The offer of the Silco Tire & Oil Co. to lease the lots expired*22 in February 1940. Thereafter, until August 1940, petitioner had no binding offer before her to lease the lots, but she received inquiries from operators of parking lots in regard to a lease of the property.
Negotiations had with Louis K. Sigman in August and September of 1940 resulted in the execution on September 28, 1940, of a lease for the property for a term of five years, commencing October 1, 1940, at a gross rental of $ 39,000, payable in monthly installments of $ 550 for the first year and for each twelve months thereafter $ 50 per month more, plus one-fourth of the net income derived by the lessee from the property. The lease also provided for the occupancy of the premises by the lessee principally as a parking lot and incidental thereto, at his option, as a filling station; that improvements necessary to the premises for the conduct of the lessee's business would be at his expense, any improvements made, gasoline pumps excepted, to become the property of the lessor at the termination of the lease, and that in the event (1) of a sale of the lots by the lessor; (2) the leasing of the *1343 premises by the lessor for a term of 10 years or more; (3) or to a lessee covenanting*23 to construct at his expense a building covering one-third of the area of the lots or costing more than $ 30,000; or (4) the lessor deciding to so improve the lots, the lessor could terminate the lease upon sixty days written notice, but should compensate the lessee in a specified manner for nonremovable improvements made by him on the premises. The lessor agreed to keep in repair at her expense all sidewalks except in driveways.
During 1939 and 1940 the petitioner paid the following amounts, which she claims as part of the cost of obtaining the lease from Louis K. Sigman:
| Paid in 1939. | |||
| Payment to assignee of the Martin Drug Co., a bankrupt tenant, to | |||
| obtain lease and possession of portion of premises covered by the | |||
| lease | $ 400.00 | ||
| Counsel fee to J. G. Holland to obtain possession of premises under | |||
| lease to the Martin Drug Co | 125.00 | ||
| Part of cost of wrecking building | 3,675.00 | ||
| Legal services of J. G. Holland in connection with the wrecking of the | |||
| building | 100.00 | ||
| Steam roller service to harden ground used to make fills after the | |||
| building was demolished | 96.00 | ||
| Paid in 1940. | |||
| Balance net cost of wrecking building | 2,074.00 | ||
| Petitioner's one-half share of the cost of cement work in repairing | |||
| sidewalks, constructing a curb abutting the sidewalks to comply | |||
| with a requirement made by the city in connection with the issuance | |||
| of the permit to cut curbs; cutting curbs, constructing aprons, etc. | |||
| (The other half of the cost was borne by the lessee, | |||
| Louis K. Sigman.) | 421.91 | ||
| To J. G. Holland for legal services as follows: | |||
| Obtaining possession of premises from the assignee of | |||
| the Martin Drug Co | $ 25.00 | ||
| Attempting to obtain a permit to cut curbs | 100.00 | ||
| Lease to Silco Tire & Oil Co | 100.75 | ||
| $ 225.75 | |||
| To C. E. Morgan for legal services in obtaining permit to cut curbs | 508.00 | ||
| To Bartels, Blood & Bancroft as follows: | |||
| Legal services in connection with attempts made to | |||
| obtain permit to cut curbs | 135.00 | ||
| Approval of final lease | 15.00 | ||
| 150.00 | |||
| Total | 7,775.00 |
*24 At the time the building was demolished it had an adjusted basis to petitioner, for income tax purposes, of $ 41,591.67, after deducting $ 1,808.33 for depreciation for the first seven months of 1939.
In accordance with the terms of the lease, the lessee filled, leveled and paved the entire premises, constructed a filling station, including *1344 a small office building, gasoline pumps, and underground tanks, and installed necessary lighting equipment for night use, consisting chiefly of four heavy metal standards about 30 feet high. The cost of such improvements was $ 3,340.72.
In 1939 the petitioner's lots were, and for a number of years thereafter probably would be, a good location for a parking lot and filling station. The petitioner's husband was of the opinion that the premises would be a good location for such a business for a long period of years if conditions did not change too drastically, and took the fact into account when he considered the matter of leasing the land for a parking lot.
During 1941 to 1943, inclusive, the parking lot and filling station business was greatly depressed on account of gasoline and tire rationing, and the lessee was financially unable*25 to continue payments at the agreed rental. Petitioner, therefore, commencing May 1, 1942, remitted all future rentals in excess of $ 450 a month, plus 50 per cent of the net profits. Otherwise the terms of the lease remained in effect throughout the years 1941, 1942, and 1943.
The rentals received by petitioner under the lease with Louis K. Sigman and the taxes paid on, and other expenses for, the property for the years 1941, 1942, and 1943, were as follows:
| Year | Rentals | Taxes | Other |
| expenses | |||
| 1941 | $ 6,848.00 | $ 5,499.58 | $ 64.73 |
| 1942 | 5,715.41 | 4,776.85 | 96.58 |
| 1943 | 5,248.21 | 4,282.11 | 80.31 |
The return of petitioner for 1939, in which net income of $ 7,640.79 was reported, contained no deduction for the adjusted basis of $ 41,591.67 for the building, or the additional amount of $ 7,775.70 claimed as a part of the cost of the lease, a total of $ 49,367.37, directly or in the form of amortization.
In her return for 1940 the petitioner claimed as a deduction the amount of $ 2,468.37 as amortization of the cost of the lease attributable to the last three months of 1940, the amount being three-sixtieths of $ 49,367.37. The deduction was questioned by the revenue*26 agent's office, but the case was closed with no deficiency and no overassessment.
In her returns for 1941, 1942, and 1943 deductions in the amount of $ 9,873.48, or one-fifth of $ 49,367.37, were claimed each year as amortization. The deductions were disallowed by the respondent in his determination of the deficiencies, upon the ground that the amount was not a part of the cost of the lease entered into on September 28, 1940.
*1345 OPINION.
The respondent recognizes the rule of long standing to the general effect that where a building is demolished for the purpose of securing a lease under the terms of which the lessee erects, at his own expense, a new building, the depreciated cost of the old building is recoverable ratably over the term of the lease. See ; ; affd., ; ; . The new asset is regarded as compensating value for the old asset, a substitution of assets, and*27 operates to prevent a loss deduction of the unrecovered cost of the asset destroyed in the year the demolition takes place.
The respondent argues that the facts here are not within the rule. He contends that the petitioner sustained a loss in 1939 either because no new asset was in existence as a substitute for the one destroyed or because she demolished the old building on account of its lack of useful value in her business, depending upon the construction we place upon the facts.
Considering nothing more than that the lease, over the terms of which we are asked to amortize the cost, was not entered into until September 1940, there was no asset in existence in December 1939, when the demolition work was completed, to serve as a substitute for the one destroyed. However, our answer must be reached from a consideration of all of the facts. ; . So viewed, there appears to be sufficient interrelation between the razing of the building and the lease entered nine months later to warrant the application of the rule.
It is clear that*28 the petitioner, after considering several uses for the property, concluded that the most profitable future use of the asset would be a lease of the land for parking lot purposes. Offers made to lease the lots for such use had convinced her that she would experience no difficulty in obtaining a tenant when the land became available for occupancy. She refrained from entering into such a lease before work of razing the building commenced in order to derive the benefit of competition among prospective lessees for the lot.
While the work of tearing down the building was being done the petitioner received and accepted an offer to lease upon specified terms, subject to obtaining a permit from the city of Denver to cut curbs for passageways to the lots. Thus, when the demolition work was completed an agreement to lease was in effect, and continued to be until about the end of February 1940, when it expired by the limitation placed upon the offer. Until then the petitioner was legally bound to enter into the lease when the permit was granted.
*1346 The lapse of time between the expiration date of the agreement to lease and the actual execution of a lease seven months later is immaterial*29 under the facts here. It is obvious that obtaining a permit was as essential to the preparation of the lots for parking purposes as clearing the land of improvements. Failure to receive a permit would have defeated the purpose petitioner had for future use of the lots. There was no relaxation on the part of petitioner in her efforts to obtain the consent, and promptly upon the issuance of a permit a lease was executed as the result of negotiations commenced during the preceding month. At no time from the summer of 1939 was there any change in the plans of petitioner to lease the land for a parking lot.
No cases are cited by the respondent holding that to be within the rule a substituting asset must be in existence when the old asset ceases to exist. He regards the facts in , as analogous to those here with respect to substitution or replacement of the asset demolished. In that case the building was not destroyed pursuant to a plan for further use of the property. Here, there was a purpose, from which there was no deviation, and a lease was entered into promptly when the land was available for use*30 as a parking lot.
The record discloses a demand for the site as a parking lot, and a situation, not whether a lease could be obtained, but to whom the ground would be leased when available for use. Under the peculiar facts present here, we do not think it is material that a lease was not in effect when the building was torn down.
From what has been said it is apparent that there was no abandonment of the building except for the purpose of removing it in clearing the land for a parking lot.
The respondent contends in the alternative that the unextinguished cost of the building removed should be amortized over the life of the improvements, a period of more than five years, and that, in the absence of proof of a proper basis for such amortization, his action should be sustained. He cites . The case is distinguishable. There the amount involved represented an additional expenditure made by the petitioner on a new building to meet the special needs of the lessee and in order to obtain its consent to a postponement of the date of occupancy of the premises under the lease. The Board concluded that the amount represented*31 part of the cost of the building constructed by the lessor and was not deductible over the five-year term of the lease. Here, it is clear that the building was removed to obtain a lease, not the improvements made by the lessee on the cleared land to meet the needs of his business.
The parties stipulated that the adjusted basis for the building was $ 41,591.67 at the time it was destroyed. The petitioner is claiming *1347 the additional amount of $ 7,775, as set forth in our findings of fact for costs in obtaining the lease. The respondent contends that only the amount of $ 15, paid to counsel for approval of the lease entered into with Louis K. Sigman, may be so regarded.
Concerning the amount of $ 400 paid to obtain the lease with the Martin Drug Co., and the counsel fees of $ 125 and $ 25 for legal service in connection with the matter, the respondent contends that the expenditures were made to obtain the unexpired term of the lease. The benefits derived by petitioner, as lessor, did not extend beyond the termination date of the lease canceled. Such benefit as she derived from the property after the expiration of the original term of the lease resulted from ownership of*32 the premises. The cost is deductible ratably over the unexpired term of the lease acquired. ; . The term of the lease is not disclosed by the evidence. The parties may under Rule 50 be able to compute an allowance for amortization.
The form of lease agreed upon by petitioner and the Silco Tire & Oil Co. obligated petitioner to harden fills made on the premises after the building was torn down. The expenditure of $ 96 in 1939 for steam roller service seems to have been made to comply with that term of the lease anticipated. No proof was made that the cost was incurred to comply with a provision of the lease later entered into with Louis K. Sigman. Under the circumstances we do not regard the amount as a cost of obtaining the Sigman lease. Our answer concerning the fee of $ 100.75 paid to J. G. Holland for legal services must be the same. The services were rendered in connection with the proposed lease with the Silco Tire & Oil Co. and had no relation to the lease entered into with Sigman.
The amount of $ 843.82 was expended for several*33 kinds of cement work, of which one-half, or $ 421.91, was borne by the petitioner as her share. The lease entered into with Sigman obligated the petitioner to keep sidewalks, except in driveways, repaired at her expense. It does not appear that she was obligated to assume the cost of any other part of the work. Under the circumstances it is apparent that the $ 421.91 cost assumed by the petitioner resulted from compliance with a term of the lease, rather than a transaction to acquire a capital asset. The amount therefore can not be treated as a capital expenditure amortizable over the life of the lease. The amount of expense of repairing sidewalks is not separable from any other expenses entering into the above total.
The remaining costs were incurred in wrecking the building and obtaining a permit to cut curbs. The respondent makes a distinction between fees paid for unsuccessful and successful efforts to obtain the *1348 permit. There is no material difference. It was necessary to obtain legal permission to cut the curbs for entrances to the premises; otherwise, the land could not have been used as a parking lot. The effort was expended for the sole purpose of making*34 the lots available to lease. The amounts, together with the fee of $ 15 for approving the Sigman lease, and the adjusted basis for the building, constitute costs of obtaining the Sigman lease and are deductible ratably over the five-year term of the lease.
Decision will be entered under Rule 50.
Murdock, J., dissenting: I think the unexhausted basis of the building was deductible as a loss in the year the building was demolished because economically worthless and not because of a condition in a lease.