*2520 1. Deduction of the unextinguished cost or the March 1, 1913, value of permanent improvements made by the petitioner on leased premises allowed as a deduction upon the cancellation of the lease in the taxable year.
2. The Board is not convinced from the evidence that a lease had a fair market price or value on March 1, 1913, in excess of the rentals provided therein. A claimed loss in the taxable year for obsolescence of the lease upon cancellation thereof by the petitioner lessee under the provisions of an option contained therein due to petitioner's inability to obtain a license to continue sale of intoxicating liquor, is not warranted by the evidence.
*743 The Commissioner determined a deficiency in income and profits tax of $12,130.06 for the calendar year 1919. Petitioner's return for this year showed no tax. In its original petition it claimed that the Commissioner erred (1) in refusing to allow proper depreciation and obsolescence of the tangible assets, and (2) in refusing to allow a deduction for obsolescence of good will.
*2521 At the hearing and in the brief filed petitioner abandoned the claim for a deduction for obsolescence of good will and amended its petition at the hearing so as to claim a deduction of an alleged *744 unextinguished March 1, 1913, value of the lease. The specific questions urged at the hearing and presented for decision are (1) whether petitioner is entitled to a deduction in the taxable year due to the cancellation of its lease, of $18,389, representing the unextinguished cost or March 1, 1913, value for permanent improvements made to the leased premises; (2) whether a lease acquired prior to March 1, 1913, had on that date a fair market price or value for the purpose of exhaustion and if it did, whether petitioner is entitled to a deduction upon the cancellation of the lease in the taxable year of such unextinguished March 1, 1913, value.
The Commissioner determined, and now urges, (1) that the unextinguished cost or March 1, 1913, value of permanent improvements made to the leased premises is not deductible from gross income for the taxable year for the reason that the petitioner continued to use the leased premises and improvements, and (2) that petitioner's lease did*2522 not have a fair market price or value on March 1, 1913, and that petitioner is not entitled to any deduction from gross income by reason of the cancellation thereof in the taxable year.
Petitioner contends that the unextinguished cost of the permanent improvements to the leased premises was a proper deduction from gross income when it canceled its lease in the taxable year notwithstanding it continued to occupy the premises from month to month at the same rental. Petitioner attempts to prove and urges that it had proved a fair market price or value of $25,000 for the lease on March 1, 1913. Upon that basis it contends that it is entitled to a deduction of the unextinguished portion of this value, amounting to $14,290, from gross income as obsolescence of the lease.
FINDINGS OF FACT.
Petitioner is a Missouri corporation organized on November 23, 1912, with principal office in St. Louis. From the time of organization to the date when the sale of intoxicating liquor was prohibited, it was engaged in selling intoxicating liquors, soft drinks, and tobacco, and in conducting a restaurant in the basement and on the first floor of a leased building at the southwest corner of Washington*2523 Avenue and Ninth Street, St. Louis. The lease specifically stated that the premises were being leased "for use for restaurant purposes, and for the sale of cigars, tobacco and liquor." Upon the advent of prohibition petitioner continued to occupy these premises in the conduct of its restaurant business and in the sale of soft drinks and tobacco.
One Edward C. Melsheimer had been engaged in the restaurant business in St. Louis for about 40 years. On September 18, 1912, he individually entered into a lease with the owner of the premises *745 above described for a term of 13 years, 10 months, and 13 days, commencing on December 13, 1912, and ending October 13, 1926, at an annual rental of $5,000 per annum for the first 5 years, $6,500 during the second 5 years, and $7,500 during the balance of the term. The lease was subsequently taken over by the petitioner corporation before any improvements were made upon the leased premises. The lease contained no renewal privilege. The premises covered by the lease were situated on the dividing line between the principal wholesale and retail districts of St. Louis and were being used for storage purposes at the time the lease was entered*2524 into. The premises were in a bad state of repair. There was no demand for these particular premises at the time the lease was made and numerous unsuccessful attempts had been made to lease the building. The owner of the building had considered opening a store there but had not done so due to the fact that it would be necessary to expend considerable sums of money to remodel the building. At the time the lease was entered into the lessee knew that it would be necessary to make expensive repairs and improvements in order to adapt the property to his needs and it was agreed that the lessee would make such improvements at his own expense. The lease provided in part as follows:
The lessee shall surrender said premises at the end of said term in as good condition as received, ordinary wear and tear excepted. All repairs to the demised premises shall be done by the lessee. No alterations or improvements shall be made in said premises, without the written consent of the lessor, and any alterations, additions or improvements which may be made shall be and remain the property of the lessor, and be surrendered with the premises, as part thereof, at the termination of this lease.
*2525 It is hereby agreed by and between the lessor and the lessee that in case the lessee shall not be able to obtain a license to operate a dram shop at above said premises, during any period of time covered by this lease, without fault of said lessee, this lease shall then become null and void, by giving to the lessor thirty days notice, in writing, of his intention to terminate said lease.
The lessee expressly covenants and agrees that any and all fixtures which at any time during the term of this lease may be placed in or upon or about the demised premises or any part thereof shall become and be a part of the real estate and remain the property of the lessors or their assigns, provided, that if the lessee keep, fulfill and perform all the covenants and agreements herein assumed by him for and during the entire term hereby created, then at the end of the term of said lease, said fixtures shall become and be the property of the lessee, his successors or assigns, and the lessee, his succesors or assigns shall have the right to remove the same from the demised premises; but if the removal of the same shall in any manner damage or mar the demised premises or any part thereof, the lessee*2526 shall be obligated to repair such damage.
No improvements or fixtures had been placed in the leased premises at the time petitioner took over the lease. Thereafter petitioner expended the sum of $32,099.15 for the installation of permanent *746 improvements, such as plumbing, electric wiring and fixtures, ventilating system, new flooring, new ceiling, stairways, etc. In addition petitioner acquired for use in the leased premises, either before or after March 1, 1913, fixtures as follows:
| Kitchen fixtures | $6,217.53 |
| Restaurant fixtures | 4,755.96 |
| Bar fixtures | 384.94 |
| Office fixtures | 362.80 |
| China and glass | $5,405.07 |
| Silver | 1,063.27 |
| Linen | 2,276.04 |
The Commissioner allowed a deduction for the taxable year of $2,050.91 for depreciation of kitchen, restaurant, bar and office fixtures and 50 per cent on table silver, glass, china and linen. There is no controversy as to this allowance nor does the cost of these items enter into the deduction now claimed by the petitioner.
Petitioner's income and expenses for the years 1913 to 1918 were as follows:
| LIQUOR BUSINESS | ||||||
| 1913 | 1914 | 1915 | 1916 | 1917 | 1918 | |
| Receipts | $22,926.98 | $27,761.85 | $41,826.70 | $45,137.15 | $48,861.74 | $36,467.25 |
| Expenses | 18,947.48 | 21,208.16 | 25,230.77 | 26,389.95 | 31,716.08 | 28,498.42 |
| Profits | 3,979.50 | 6,553.69 | 16,595.93 | 18,747.20 | 17,145.66 | 7,968.83 |
| RESTAURANT BUSINESS | ||||||
| 1913 | 1914 | 1915 | 1916 | 1917 | 1918 | |
| Expenses | $37,518.49 | $42,288.36 | $50,305.63 | $52,818.82 | $63,854.48 | $81,716.58 |
| Receipts | 28,858.49 | 37,470.91 | 43,302.60 | 39,792.80 | 55,589.24 | 74,796.81 |
| Loss | 8,660.00 | 4,817.45 | 7,003.03 | 13,026.02 | 8,265.24 | 6,919.77 |
The figures stated above show the following result:
| 1913 Loss | $4,680.50 |
| 1914 Profit | 1,736.24 |
| 1915 Profit | 9,592.82 |
| 1916 Profit | $5,721.18 |
| 1917 Profit | 8,880.42 |
| 1918 Profit | 1,049.06 |
Petitioner's net profit from the operation of its business for the year 1919 was $23,826.10.
Within two or three months after the lease had been executed it became known that plans were being perfected for the erection of a theatre and a large hotel within a short distance of the leased premises. These buildings were subsequently constructed.
Sometime in 1919 petitioner was unable to secure a license to operate a dram shop upon the leased premises and in that year petitioner gave the lessor notice of its intention to cancel the lease. The lessor at once entered into negotiations with petitioner with the view of inducing it to continue occupancy of the premises*2528 in the conduct *747 of a restaurant and coffee shop, and for the sale of soft drinks and tobacco. After discussion of the matter the parties agreed that the lease would be canceled and that the petitioner would continue to occupy the premises from month to month at the same rental then being paid under the prior lease. The lease was canceled. Petitioner continued to occupy the premises throughout the year in conducting its restaurant, using the barroom as a coffee shop and for the sale of soft drinks and tobacco. None of the fixtures were removed from the premises prior to the middle of January, 1920.
The unextinguished cost or March 1, 1913, value in 1919 of the permanent improvements made upon the leased premises by the lessee was $18,212.87.
OPINION.
LITTLETON: The Board is of the opinion that petitioner was entitled to a deduction of $18,212.87 from gross income for the taxable year, representing the unextinguished cost or March 1, 1913, value of permanent improvements made by it to the leased premises in question. The improvements had a useful life greater than the term of the lease. The Commissioner determined a deduction for the taxable year of 8 per cent*2529 on the improvements. The lease contained no privilege of renewal. The improvements became the property of the lessor. The petitioner was entitled to exhaust its expenditures for the improvements over the term of the lease. ; .
The Commissioner contends that inasmuch as petitioner continued to use the leased premises, together with the improvements thereon, it was entitled to a deduction in the taxable year of only a reasonable allowance for the exhaustion of the improvements which he determined to be 8 per cent. Had the petitioner upon the cancellation of the lease in question entered into a new lease for a term of years and had continued the use of the same premises in its business, we would require it to exhaust the unextinguished cost or March 1, 1913, value of these permanent improvements over the term of the new lease. . However, petitioner did not make a new lease for a term of years. It merely continued to occupy the premises at will upon the solicitation of the owner. So far as petitioner's investment*2530 was concerned. it was in no different situation than it would have been had it rented another building. Upon cancellation of the lease there was no basis for the further ratable exhaustion of the cost of the improvements unless it would be upon the basis of the remaining useful life. We think that would be carrying the matter too far.
*748 The lease did not become obsolete in the taxable year and even if it had a fair market price or value on March 1, 1913, which had not been exhausted at the date of cancellation, such unexhausted value could not be allowed as obsolescence. At January 1, 1919, the lease had 7 years, 9 months and 13 days to run. One feature of petitioner's business carried on in the leased premises had been prohibited but that does not prove that the lease was thereupon rendered valueless or obsolete. This probably caused the lease to be of less value to petitioner in its business; however, decline in value of property does not give rise to a deductible loss. New York Life Insurance Co.v. Edwards, 271, U.S. 109; *2531 ; . Nor does the mere fact that property becomes of no use or of less use to a particular taxpayer in his business give rise to a deduction as a loss through obsolescence. . There is nothing in the record to indicate that the petitioner could not have sold the lease for some amount rather than cancel it. The mere fact that petitioner was given a right to cancel the lease, in the event it could not secure a license to conduct a dram shop, does not prove that whatever unexhausted March 1, 1913, value remained was deductible in its entirety in the year 1919 when the lease was canceled. The lease specifically provided that the premises were to be used in the conduct of a restaurant and in the sale of soft drinks, cigars, tobacco and liquor. Petitioner was not compelled to surrender the lease but was merely given the right to cancel it if he so desired. The lease still had a value in the conduct of the petitioner's business as is evidenced by the fact that it continued to lease the premises from month to month at the same rental.
Two*2532 witnesses testified that in their opinion the lease, as a whole, had a fair market value of $25,000 on March 1, 1913, but from a consideration of their testimony and the entire evidence in the record, the Board is not convinced that the lease, independent of the improvements made by petitioner, had any such market value on that date. These witnesses apparently based their opinion of the March 1, 1913, value upon the lease as a whole including the improvements which had been made costing more than $32,000. The only other circumstance mentioned by the witnesses as a basis of their opinion was that sometime after the lease was executed it became known that plans were being made to erect a large hotel and a theatre within a short distance of the leased premises. On the whole the Board is of the opinion that the March 1, 1913, value claimed, independent of the cost of improvements made by the lessee, has not been established. Petitioner could probably have sold the lease on March 1, 1913, for some amount in excess of the *749 rentals stipulated therein after it had expended large sums upon the premises for permanent additions and improvements, but these improvements do not enter*2533 into consideration of the March 1, 1913, value of the lease because the Commissioner and the Board have valued those improvements and the Board, as hereinbefore stated, has allowed a loss in respect of the unextinguished cost or March 1, 1913, value thereof. We are of the opinion that this deduction is all that the petitioner has established.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.
PHILLIPS concurs in the result.