*138 Decisions will be entered under Rule 50.
A partnership, of which two of the petitioners were partners, owned land and buildings. In the early spring of 1964, the partnership commenced negotiations for a ground lease with a prospective tenant. The negotiations contemplated prompt demolition of the buildings. The lease, executed on Sept. 30, 1964, provided that the tenant should have the option to demolish. Demolition occurred in 1965. Held, the demolition was "pursuant to the requirements of a lease" ( sec. 1.165-3(b)(2), Income Tax Regs.); the partnership is not entitled to deduct a demolition loss in 1965 but is required to amortize the adjusted cost basis of the property over the period of the lease.
*1042 Respondent determined deficiencies with respect to the income tax of petitioners as follows:
| Petitioner | 1961 | 1962 | 1963 | 1964 | 1965 |
| Herman Landerman | $ 1,171.05 | $ 5,613.82 | |||
| Herman Landerman and | |||||
| Evelyn Landerman | $ 6,316.15 | $ 7,547.50 | $ 9,249.52 | ||
| Landerman Investment | |||||
| Co | 8,512.71 | 15,389.66 | 14,148.74 | 13,701.86 |
Because of concessions by the parties, the only issue remaining for our determination is whether a partnership, of which Herman Landerman and Landerman Investment Co. were the sole partners, was entitled, *1043 by reason of the demolition of its building by the lessee in 1965, to deduct its basis as a loss in the year of demolition or whether it should be required to amortize its basis over the term of the lease. The partnership treated the event as a demolition loss, which resulted in loss carrybacks to petitioners for the years 1962, 1963, and 1964.
FINDINGS OF FACT
Some of the facts are stipulated and are found accordingly. Petitioner Herman Landerman (hereinafter Herman) is an individual and petitioners Herman Landerman and Evelyn Landerman are husband and wife who*140 had their legal residence in Chicago, Ill., at the time of filing their respective petitions herein. Herman filed an individual Federal income tax return for the year 1962, and Herman and Evelyn filed joint Federal income tax returns for the years 1963 through 1965 with the district director of internal revenue, Chicago, Ill.
Petitioner Landerman Investment Co. (hereinafter Investment) maintained its principal place of business, at the time of filing the petition herein, in Chicago, Ill. It filed Federal Corporation Income Tax Returns for the years 1961 through 1965 with the district director of internal revenue, Chicago, Ill. During the period in question, Herman was the president and sole stockholder of Investment.
In 1958, the Hill and Eighth Streets Building partnership (hereinafter H & E) was formed, with Herman owning a 20-percent interest. In 1962, a new H & E partnership was formed, in which Herman held a 42 1/2-percent interest. On January 31, 1964, Investment purchased the 57 1/2-percent aggregate interest in H & E held by partners other than Herman, and a new H & E partnership was formed, with Herman having a 42 1/2-percent interest and Investment a 57 1/2-percent *141 interest.
The principal assets of H & E consisted of a building and land located at Hill and Eighth Streets, Los Angeles, Calif., and the furniture, fixtures, and equipment contained therein. The Hill and Eighth Streets building was constructed in 1922. The University of California Extension Division was one of the first tenants of the building, and during the period 1922 through 1960 the university leased a gradually increased amount of space, which was used primarily for classrooms.
On April 21, 1960, H & E leased approximately 60 percent of the rentable space in the building to the University of California for a term of 5 years. The lessee had the right to terminate the lease after 3 years by giving notice of the intention to terminate 1 year in advance of the termination. On March 23, 1964, the University of California served notice, pursuant to the termination provision, that it would terminate the lease as of March 24, 1965.
*1044 Between 1960 and 1965, tenants were moving out of the portion of downtown Los Angeles in the vicinity of Hill and Eighth Streets because of a lack of parking facilities and the deteriorating physical appearance of the neighborhood.
In the early*142 spring of 1964, a representative of H & E entered into negotiations for a ground lease with a prospective lessee. The negotiations contemplated the prompt demolition of the existing building and the erection of a multistory parking garage building on the site. The negotiations covered the rental terms of the lease in the context of whether the lessor or the lessee should be responsible for the demolition. The demolition of the existing building and disposal of its contents were an integral element of the bargaining between the parties to the lease and were at all times considered by them as an underlying condition of the lease.
These negotiations resulted in a lease agreement executed on September 30, 1964, between H & E, as lessor, and the aforesaid prospective lessee, Hill-Olive Corp., as lessee, for the entire Hill and Eighth Streets land and building, together with a contiguous leasehold, held by H & E, upon which a parking lot business operated. The term of the lease was for somewhat less than 55 years, commencing on November 1, 1964, and expiring on April 30, 2019. Provisions were made for a rental of $ 2,188,600 for the first 30 years, with subsequent rentals for two successive*143 periods of 10 years and the remaining term thereafter, to be determined by a negotiated agreement between the parties or by three appraisers, in the absence of such agreement. In addition, the lessee was to pay the rent called for by the contiguous leasehold agreement and all taxes and insurance with respect to the property.
The lease provided in pertinent part:
3. RIGHT TO BUILD IMPROVEMENTS
There shall be no obligation on the Lessee to do so, but the Lessee shall have the right to demolish and remove from the demised premises the existing structures and improvements thereon * * * and to install, construct and erect on the demised premises such other buildings, structures and/or improvements as Lessee shall elect, provided, however, that the fair, reasonable cost of such buildings, structures and/or improvements shall in no event be less than $ 750,000.00. In such event, the Lessee shall bear all costs and expenses of demolition and removal of the existing structures and shall have the right to any and all proceeds from the sale of any and all salvage or personal property or materials of any kind saved and recovered out of the existing structures during the course of such*144 wrecking and demolition. * * *
The lease contained extensive provisions controlling the construction of new improvements by the lessee and providing for the participation of the lessor in the planning thereof. It also provided that title to any improvements made on the demised premises by the lessee would vest in the lessee for the term of the lease, and that, upon the expiration of the lease, title would pass to the lessor.
*1045 On May 6, 1965, Hill-Olive commenced demolition of the Hill and Eighth Streets building. The demolition was completed by October 20, 1965. Immediately thereafter, a multistory parking garage and branch bank were constructed on the cleared site at an aggregate cost of $ 2.4 million.
The H & E partnership began depreciating the demolished building over a 20-year useful life in 1958. As of December 31, 1964, the Hill and Eighth Streets building had an adjusted basis of $ 506,809.32 and the furniture and equipment an adjusted basis of $ 104,172.81.
OPINION
The sole issue herein is whether petitioners are entitled to a loss deduction pursuant to section 165(a)2 on account of the demolition by a lessee of a building (including disposal of the contents) *145 owned by a partnership in which Herman and Investment were the sole partners. The partnership treated the adjusted basis of the building, fixtures, and equipment as of January 1, 1965, in the amount of $ 610,982.13 as a demolition loss for the year 1965. Respondent in his notice of deficiency allowed a depreciation deduction to the partnership for the period January 1 to April 30, 1965, and required that the remaining basis of $ 584,475.11 be amortized over 54 years, the then remaining term of the lease.
There is no question but that, apart from the impact of a specific provision in respondent's regulations (see p. 1046, infra), the claimed demolition loss would not be allowable. Nickoll's Estate v. Commissioner, 282 F. 2d 895*146 (C.A. 7, 1960), affirming 32 T.C. 1346">32 T.C. 1346 (1959); Blumenfeld Enterprises, Inc. v. Commissioner, 232 F. 2d 396 (C.A. 9, 1956), affirming per curiam 23 T.C. 665">23 T.C. 665 (1955); Spinks Realty Co. v. Burnet, 62 F. 2d 860 (C.A.D.C. 1932), affirming 21 B.T.A. 674">21 B.T.A. 674 (1930); Young v. Commissioner, 59 F. 2d 691 (C.A. 9, 1932), affirming 20 B.T.A. 692">20 B.T.A. 692 (1930); Oscar K. Eysenbach, 10 B.T.A. 716">10 B.T.A. 716 (1928); Anahma Realty Corporation v. Commissioner, 42 F. 2d 128 (C.A. 2, 1930), affirming 16 B.T.A. 749">16 B.T.A. 749 (1929); Wm. Ward, 7 B.T.A. 1107 (1927); Chas. N. Manning, et al., 7 B.T.A. 286">7 B.T.A. 286 (1927). The focus of these decisions was an inquiry into the economics of each factual situation in order to determine whether the demolition constituted a benefit rather than a detriment to the lessor, i.e., could it be said that the lessor had suffered a loss at the time of*147 demolition or would any such purported loss in fact be compensated for through the receipt of future rentals?
*1046 The critical problem is whether section 1.165-3(b)(2), Income Tax Regs., 3*148 brought about an abrogation of this long-standing consistent judicial interpretation so as to permit the deduction of the claimed demolition loss herein. Respondent asserts that no such abrogation has occurred. 4 Petitioner argues that the demolition was not required by the lease as specified in the regulation and that, under the rule of Feldman v. Wood, 335 F. 2d 264 (C.A. 9, 1964), reversing an unreported opinion ( D. Ariz. 1963, 11 A.F.T.R. 2d 1359, 63-1U.S.T.C. par. 9428), a loss deduction on account of the demolition of leased premises by the lessee is allowed to the lessor, when the demolition is permitted rather than mandated by the terms of the lease. We agree with respondent.
Neither Regs. 118, which applied to the Internal Revenue Code of 1939, nor the regulations initially proposed under the 1954 Code, sec. 1.165-1(b), Proposed Income Tax Regs., contained any provision with respect to demolition losses in a lease context. In 1959, new regulations were proposed which provided that, upon demolition of a building by the lessor or the lessee "pursuant to the terms of a lease," no loss deduction would be allowed to the lessor, but the adjusted basis of the demolished structure could be amortized over the term of the lease. *149 Sec. 1.165-3(d), Proposed Income Tax Regs., 24 Fed. Reg. 8177, 8180 (1959). In the regulations as finally promulgated, section 1.165-3(d) became section 1.165-3(b)(2) and the phrase, "pursuant to the terms of a lease," was replaced by the language "pursuant to the requirements of a lease or the requirements of an agreement which resulted in a lease." See 25 Fed. Reg. 381, 383 (1960).
As we see it, the attempt by respondent to deal with demolition in a lease context and the evolution of his regulations were designed to make the immediate contemplation and the bargaining stance of the parties, at the time the lease arrangements were made, the focal point of determination. By so doing, problems of optional demolition by a lessee at a much later period of the lease would be avoided. In such a situation, the demolition might well not be an essential inducing *1047 element of the lease and the extent, if any, of loss to the lessor could depend upon the time relationship between the date of demolition and the terminal date of the lease, i.e., it might be difficult to say that a demolition by the lessee only a year or two before *150 the end of the lease would not produce such a loss. In this frame of reference, the replacement of the word "terms" with the word "requirements" becomes clear, since an optional demolition near the end of a lease would still be pursuant to its "terms."
Nor do we think that, as a semantical matter, the word "requirements" is restricted to an interpretation which demands the presence of a formal mandatory undertaking by a lessee. The dictionary definition of "requirements" includes "something that is wanted or needed" as well as "something required." See Webster's Third New International Dictionary, Unabridged.
In short, we hold that respondent's regulations were intended to encompass an examination of whether demolition was sufficiently within the contemplation of the parties at the time the lease arrangements were made that it can be said that the demolition was an essential underlying condition of those arrangements. So viewed, the standards to be applied are very similar to those involved in determining whether a purchaser is entitled to a deduction for a postdemolition loss. Wood County Telephone Co., 51 T.C. 72 (1968); Hillside National Bank, 35 T.C. 879">35 T.C. 879 (1961);*151 see Blumenfeld Enterprises, Inc., 23 T.C. 665">23 T.C. 665, 670 (1955).
In the instant case, as our findings of fact reveal, the demolition of the existing building and the disposal of its contents were an integral element of the bargaining between the parties to the lease and at all times considered by them as an underlying condition of the lease. The fact that such demolition and disposal were begun very soon after the commencement of the term of the lease and completed with dispatch tends to confirm our findings. We conclude on the basis of the entire record before us that the parties to the lease bargained for the land. Certainly, it cannot be said that petitioners have sustained their burden of proof that such was not the case. 4*152 Consequently, we hold that the demolition and disposal were "pursuant to the requirements of a lease." 5
Feldman v. Wood, supra, so heavily relied on by petitioners, is distinguishable on its facts. It appears that, in that case, the lease *1048 was entered into in 1955 and the optional demolition by the lessee did not occur until 1957. There is no indication that demolition was sufficiently within the contemplation of the parties at the time the lease was made so as to have been an element of the bargaining. Indeed, an examination of the briefs and the limited record submitted on appeal indicates that such demolition was in fact not contemplated. Under such circumstances, it would seem clear that the demolition was not "pursuant to the requirements of a lease." Cf. Estate of Clara Nickoll, 32 T.C. 1346">32 T.C. 1346 (1959), in which respondent's*153 regulations were impliedly approved.
We recognize that the language of the opinion of the Ninth Circuit Court of Appeals in Feldman v. Wood, supra, presents a rationale broader than that required by the facts. To the extent that the rationale of that decision rests upon the presence of a formal mandatory obligation on the lessee to demolish, we must respectfully disagree. 6 In our opinion, such a straitjacket interpretation is unwarranted. In Massey Motors v. United States, 364 U.S. 92">364 U.S. 92 (1960), the Supreme Court was confronted with language of the statute and regulations dealing with depreciation which it described as not "precise and unambiguous," a phrase not without applicability to respondent's regulations herein. Nevertheless, the Court refused to adopt a semantical analysis in order to impart a restrictive interpretation to changes in language which had occurred over the years. Moreover, in that case, the Fifth Circuit Court of Appeals, whose decision was affirmed by the Supreme Court, made the following observation which supports our approach herein:
It must be borne in mind that there has been no change*154 in the basic statute in any matter here relevant during the entire period of time. We should be thus inclined to look with considerable disfavor on any contention that a slight change in Regulations worked such a double shift in the effect of a simple statute allowing reasonable depreciation. * * *
* * * *
The statute allows a reasonable amount for depreciation. No regulation, although valid and binding to the extent it does not enlarge or conflict with the statute, can bind the Commissioner to the allowance of anything more than a reasonable deduction for a whole class of taxpayers. A construction of this regulation as contended for by this taxpayer would result in not only a grossly unreasonable deduction for depreciation, but would offend the basic concept of depreciation and its purpose. We, therefore, cannot approve a construction of the regulation that would reach this result, or if we did so, we would have to hold it invalid as to the factual situation here present as not being authorized by the statute. [See 264 F. 2d 552 at pages 557, 558.]
*155 In order to reflect the concessions of the parties on other issues,
Decisions will be entered under Rule 50.
Footnotes
1. Cases of the following petitioners are consolidated herewith: Herman Landerman and Evelyn Landerman, docket No. 3076-68, and Landerman Investment Co., docket No. 5229-68.↩
2. All references, unless otherwise specified, are to the Internal Revenue Code of 1954, as amended.
SEC. 165. LOSSES.
(a) General Rule. -- There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.↩
3. Section 1.165-3. Demolition of buildings.
(b) Intent to demolish formed subsequent to the time of acquisition. * * *
(2) If a lessor or lessee of real property demolishes the buildings situated thereon pursuant to the requirements of a lease or the requirements of an agreement which resulted in a lease, no deduction shall be allowed to the lessor under section 165(a)↩ on account of the demolition of the old buildings. However, the adjusted basis of the demolished buildings, increased by the net cost of demolition or decreased by the net proceeds from demolition, shall be considered as a part of the cost of the lease to be amortized over the term thereof.
4. At the trial, respondent also sought to establish that disallowances of the portion of the demolition loss attributable to the 57 1/2-percent partnership interest in H & E acquired by Investment on Jan. 31, 1964, and a further portion of the remaining loss attributable to certain personalty should, in any event, be sustained. Our decision herein makes consideration of these points unnecessary, but we note that respondent has made no arguments on brief with respect to such issues, with the result that they may properly be considered as abandoned.↩
4. Petitioners complain that respondent failed to call one Lazoff, the agent of H & E in most of the lease negotiations, and that we should therefore not accept the testimony as to the character of the negotiations by the representative of the lessee. In so doing, petitioners fail to recognize that the burden of proof was upon them and not respondent. Rule 32, Tax Court Rules of Practice.↩
5. In light of the particular facts of this case, we need not decide whether, as respondent contends, the provisions of sec. 1.165-3(b)(2) are, under all circumstances, merely declaratory of previously existing case law. See Rev. Rul. 67-410, 2 C.B. 93">1967-2 C.B. 93↩.
6. Under any circumstances, Feldman v. Wood is not controlling in this case because any appeal herein would go to a different circuit court of appeals. See Jack E. Golsen, 54 T.C. 742">54 T.C. 742↩ (1970).