*3889 1. Under the evidence, held that the petitioner is entitled to deduct in each of the years 1919, 1920, and 1921, a reasonable allowance for obsolescence of its banking building.
2. The amount at which the building should be included in invested capital for the years 1919, 1920, and 1921, and the basis and rate for computing allowances for exhaustion, wear and tear, including obsolescence of the building, in those years, determined.
*1408 This proceeding is for the redetermination of deficiencies in income and profits taxes asserted by the respondent in the amounts of $122.59 for the year 1919, $5,190.12 for the year 1920, and $2,666.21 for the year 1921. The questions presented are (1) the amount at which the petitioner's bank building should be included in invested capital for the years mentioned; (2) the basis upon which depreciation of the building should be computed for those years; and (3) whether the petitioner is entitled to deductions in those years as allowances for obsolescence of the building.
*3890 FINDINGS OF FACT.
The petitioner is a corporation engaged in the banking business at Oakland, Calif., and it has been engaged in that business since some time prior to the year 1893. In the years 1892 and 1893 the petitioner constructed a five-story banking and office building in Oakland. It occupied a site 100 by 100 feet at Broadway and Fourteenth Streets, which was the most desirable business location in the city. The foundations of the building were concrete, the interior walls of rough brick and the exterior walls of red pressed brick, except for the first story, which was largely granite. The interior of the building was of wood and plaster construction, all the wood used being the best Oregon pine. The lower floor was used as banking premises and the upper floors were rented as offices. The physical life of the building was 70 years.
The original cost of the petitioner's building was $155,935.08. The cost of the land on which the building was situated was $112,500. Between 1894 and 1910 additions and betterments were constructed and made at a total cost of $128,038.71, and in 1916 the banking room was remodeled at a cost or $38,000. The building was kept at*3891 all times in an excellent state of repair. The cost of repairs was charged to expense. No depreciation or other charge-offs were made on the *1409 petitioner's books between the date the building was constructed and December, 31, 1916, except as follows:
| 1903 | $8,453.80 |
| 1904 | 11,081.28 |
| 1909 | 26,938.71 |
Additions to and deductions from the building account were made on the petitioner's books as follows:
| Building - original structure, 1892-1894 | $155,935.08 | |
| Additions to account: | ||
| 1895 | 400.00 | |
| 1896 | 700.00 | |
| 1906-1908 | 61,938.71 | |
| 1909-1910 | 65,000.00 | |
| 283,973.79 | ||
| Depreciation charged off: | ||
| 1903 | $8,453.80 | |
| 1904 | 11,081.28 | |
| 1909 | 26,938.71 | |
| 46,473.79 | ||
| Book value March 1, 1913 | 237,500.00 | |
| Additions to account, 1916 | 38,000.00 | |
| Book value, December 31, 1916 | 275,500.00 |
The fair market value of the land on which the petitioner's building was situated was $500,000 on March 1, 1913, and the fair market value of the building was $240,000.
The petitioner's income from its building during the years 1910 to 1922, inclusive, was as follows:
| Year | Total income | Net income before depreciation |
| 1910 | $37,220.85 | $18,605.81 |
| 1911 | 42,839.11 | 22,815.86 |
| 1912 | 51,678.45 | 34,740.85 |
| 1913 | 53,680.62 | 33,696.42 |
| 1914 | 50,408.92 | 30,069.72 |
| 1915 | 48,991.02 | 28,543.50 |
| 1916 | 48,824.22 | 24,564.10 |
| 1917 | $44,571.52 | $20,838.20 |
| 1918 | 45,667.42 | 17,464.70 |
| 1919 | 46,970.59 | 7,951.51 |
| 1920 | 56,601.25 | 24,435.79 |
| 1921 | 58,325.47 | 26,921.79 |
| 1922 | 58,292.62 | 22,819.62 |
*3892 The income set forth included an annual rental of $20,599.92, which the petitioner charged itself for the use of the banking rooms. The rental so charged was materially less than the actual rental value of the banking room.
By the year 1914 three or four office buildings of a newer type and more modern construction had been erected in the business district of Oakland in the immediate vicinity of the petitioner's building, and other modern buildings were erected in that vicinity between 1914 and 1920. These buildings offered up-to-date and more desirable office space than did the petitioner's building, the office arrangement *1410 of which was old fashioned, and because of these facts the petitioner's building fell into the second or third class of office buildings. The population of the city increased rapidly between 1890 and 1920 - between 1890 and 1910 it more than trebled, and from 1910 to 1920 it increased 44 per cent. Land values also steadily increased during that period and on January 1, 1918, the value of the land on which the petitioner's building was located was $600,000, on January 1, 1923, it was $800,000, and in the year 1924 it was $1,000,000.
During*3893 the years 1892 to 1908, inclusive, the petitioner used the lower floor of its building for its own banking business. In the year 1909 it became associated with the Central National Bank and the two institutions occupied the building thereafter. The total assets of the two institutions were $10,663,374.83 in the year 1909, and they increased steadily until the year 1924, at which time they amounted to $55,844,757.88. In November, 1914, the petitioner acquired the accounts and business of the Union Savings Bank and thereafter the petitioner's building was found to be totally inadequate for the banking business conducted by the petitioner and its associate bank, the Central National Bank. Temporary improvements were put in the building and the petitioner also used practically the entire second floor of the building. In 1916 the petitioner's banking room was remodeled as above stated. In 1924 the building was razed and replaced with a larger building of more modern construction.
In its income and profits-tax returns for the years 1919, 1920, and 1921, the petitioner computed its allowance for depreciation on the building as follows: The original cost, plus additions up to March 1, 1913, was*3894 depreciated on the basis of a life of 33 1/2 years from 1892, and a depreciated cost of $176,255.94 as of March 1, 1913, was determined; this amount, plus additions subsequent to March 1, 1913, was then depreciated on a basis of a life of 14 years from March 1, 1913. In computing the petitioner's invested capital for the years 1919, 1920, and 1921, the respondent deducted from the cost of the building, plus additions, accrued depreciation on the basis of a life of 33 1/3 years from 1892. No deduction was allowed by the respondent in any of those years on account of obsolescence of the building.
OPINION.
MARQUETTE: The first two questions raised by the record in this proceeding relate to the amount at which the petitioner's building may be included in its invested capital for the years 1919, 1920, and 1921, and the basis and rate for computing allowances for depreciation of the building. The questions are so closely related and depend so largely on the same evidence, that they will be discussed together.
We are satisfied from the evidence that the building in question had a physical life of 70 years, and that it had a fair market *1411 value of $240,000 on March 1, 1913. *3895 These figures are established by the testimony of several witnesses, builders and real estate dealers, who were familiar with the building, the character of its construction, its location, and with other real estate and real estate values in Oakland. They showed themselves well qualified to testify as to these matters and their testimony was not overcome by the respondent. For purposes of invested capital we find that the building should be depreciated to January 1, 1918, on the basis of cost, with adjustments for improvements and betterments, and a life of 70 years from the date it was constructed, and from that date the depreciated cost should be spread ratably over the period ended December 31, 1925, we being of the opinion, as hereinafter set forth, that the building was obsolescent during the latter period. The cost so depreciated at the beginning of each of the years 1919, 1920, and 1921, should be included in invested capital for those years. The amount which the petitioner is entitled to deduct from gross income in each of the years under consideration for exhaustion, wear and tear, including obsolescence, should be computed on the basis of a March 1, 1913, value of $240,000, *3896 a physical life of 70 years from the date of erection, and an obsolescence period beginning in 1918 and ending in 1925.
We do not consider it necessary to indulge in an extended discussion of the reasons that impel us to the conclusion that the petitioner is entitled to deductions in the years mentioned on account of the obsolescence of its banking building. We are satisfied that the building was in an obsolescent state prior to 1918, although under the revenue acts no allowances on account of obsolescence were permitted prior to that year. While the physical life of the building was at least 70 years, and it no doubt could have been rented during that life with reasonable returns on the original investment, it was not, after 1918, economically profitable, in view of the greatly increased value of the land on which it was situated. Furthermore, due to the erection and construction of other and more modern buildings in the vicinity, it had fallen into the second or third class of office buildings. That it was obsolescent at that time is also borne out by the fact that in 1925, many years before its physical life would have terminated, it was razed and replaced by a larger and*3897 more modern building. We think that the building was clearly obsolescent in 1918 and became obsolete in 1925, and that allowances should be made for obsolescence in the years 1919, 1920, and 1921 on the basis.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.