*4138 1. LEASES. - The March 1, 1913, value of certain leases of land and buildings owned by petitioner determined for the purpose of annual deductions for exhaustion.
2. FUTURE EXPENSES. - The cost of restoring leased premises which must be borne by the petitioner at or about the expiration of the lease may not be deducted as an expense prorated over the term of the lease.
*297 In this proceeding the petitioner seeks a redetermination of the income and profits tax for the one-month fiscal period ending January 31, 1918, for which the Commissioner has determined a deficiency of $2,015.65. The petitioner alleges error on the part of the Commissioner, (1) in failing to allow as a deduction from income an aliquot part of the value of leaseholds at March 1, 1913, due to exhaustion thereof, and (2) in failing to allow as a deduction from income an aliquot part of the estimated cost of restoring, at the expiration of the lease, the walls of certain buildings to their original condition, the removal of certain elevators and walls therein, the rebuilding of party*4139 walls, and a smoke stack.
Other errors assigned in the petition have been disposed of by stipulation.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of Iowa, having its principal place of business in Des Moines, and engaged in the operation of a department store.
The building in which the business of the petitioner is carried on is located at the southeast corner of Seventh and Walnut Streets *298 in the City of Des Moines, and stands upon two tracts or parcels of land, the one tract known as the Rothwell lease, comprising 66 feet of frontage on Walnut Street immediately east of Seventh Street, and the other tract known as the Weitz lease, comprising 22 feet of frontage on Walnut Street immediately east of the Rothwell lease.
Under appropriate instruments of lease the petitioner has occupied the foregoing described premises since April, 1900.
In the first instance the tenancy expired on March 31, 1910; later, the term was extended to March 31, 1915, and in June, 1908, by appropriate instruments of lease the term was extended to March 31, 1925. The lease agreements made in June, 1908, were existing and in full force*4140 and effect on March 1, 1913, and during the period from March 1, 1913, to March 31, 1925, the petitioner was required to pay rentals as follows:
| For the Rothwell lease | Amount | For the Weitz property | Amount |
| For the 1 month of | $1,109.93 | For the 1 month of | |
| March, 1913 | March, 1913 | $272.92 | |
| For the 1 year ending | 26,638.40 | For the 5 years ended | |
| March 31, 1915 | March 31, 1918 | 17,606.25 | |
| For the 5 years ending | 73,090.00 | For the 5 years ended | |
| March 31, 1920 | March 31, 1923 | 18,917.30 | |
| For the 5 years ending | 80,590.00 | For the 2 years ended | |
| March 31, 1925 | March 31, 1925 | 8,130.70 | |
| Total | 181,428.33 | Total | 44,927.17 |
| Total for the two leases | 226,355.50 |
Each of these leases contained provisions under which the petitioner had been permitted to remove in part and to make openings at other places in a party wall separating the buildings upon the two tracts of land. The petitioner had also been permitted to remove certain elevators from the Rothwell tract and reinstall them or new ones upon the premises of the Weitz tract and in consideration of these privileges the petitioner had undertaken as a part of*4141 the lease agreement to restore the party wall and to replace the elevators in the positions from which they had been moved or in such other positions as the lessors might require at the termination of the leases.
In the month of March, 1914, by appropriate instruments, each of the above-mentioned lease agreements were merged into new lease agreements extending the tenancy of the respective premises to March 31, 1940.
The book cost of petitioner's furniture and fixtures as of February 1, 1917, should be increased by the addition of $17,084.46 and the additional depreciation on account of this increase for the one month of January, 1918, is $99.66.
The leases held by the petitioner on March 1, 1913, had on that date a combined value of $60,000.
*299 OPINION.
TRUSSELL: The record of this action contains the testimony of two witnesses of long experience in dealing with property values and with transactions of selling and leasing in the City of Des Moines. The testimony of each of these witnesses went into great detail concerning the history and development of Des Moines real property value. They gave the figures of assessed valuations; valuations shown by selling*4142 transactions and valuations as fixed by leasing transactions upon several pieces of property in the near neighborhood of the property here under consideration, and especially compared values of the petitioner's property with another property on the same side of the street and less than one block distant which had been sold in January, 1912, for $170,000. This property had a frontage of 44 feet on Walnut Street and included a two-story building. There was also placed in evidence a lease, made by the trustees of Charles Weitz as lessors to the S. S. Kresge Co., of a property on the opposite side of the same street and not a corner, having a 22-foot frontage and a building three stories in height. This lease was made on the 13th day of January, 1914, for a period of 30 years, and the rental was $7,500 per year for the first 10 years; $8,250 per year for the second 10 years, and $9,075 per year for the third 10 years.
Considering all the facts and data available, one of the petitioner's witnesses gave it as his opinion that the petitioner's leases on March 1, 1913, had a value of $84,308.96. The other witness gave it as his opinion that the Rothwell lease on March 1, 1913, had a*4143 rental value represented by the amount of $5,700 per year for the term of the lease over and above the amount which the petitioner must pay under its then existing lease and that the Weitz lease had a rental value of $1,337 per year over the term of the lease in excess of the amount which the petitioner must pay under its then existing lease.
In view of all the testimony contained in this record and upon consideration of all the assembled data respecting values of properties and leaseholds, we have arrived at the conclusion that the two leases held by the petitioner on March 1, 1913, had a combined value on that date of $60,000 and we have so found.
The leases existing on March 1, 1913, expired on March 31, 1925, but in June, 1914, these leases were merged into a longer term expiring March 31, 1940. We are, therefore, of the opinion that the petitioner is entitled to an exhaustion deduction for the period here under review which should be computed upon the basis that from March 1, 1913, to March 31, 1914, a deduction had been allowed on the basis of a period of 12 years and one month, and that thereafter and during the period here under review the deduction should be based *4144 *300 upon the unexhausted value on April 1, 1914, prorated over the years and periods ending March 31, 1940. .
Petitioner's claim for a deduction from gross income computed upon the estimated cost of making the agreed restorations and replacements upon the leased premises at the time when the leases shall have expired is confronted with what appears to be statutory difficulties. While the claim must be taken to represent a future cost of carrying on business, and from the standpoint of cost accounting is entirely reasonable, and it would seem that any prudent business man or organization should, during the term of such leases, provide for such estimated cost and set aside and maintain a reserve for that purpose in order that his or its accounts may properly represent the annual or periodical gains or losses, we are nevertheless faced with the situation that under the Revenue Act of 1918 it is provided that net taxable income shall be the gross income less certain specific deductions provided by the statute. We have held, in the case of the *4145 , that the taxing act had made no provision for the deduction of future expenses however accurately the same may be estimated, and the rule laid down in that case will be followed in the instant case.
The deficiency should be recomputed in accordance with the foregoing findings of fact and opinion.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.