719 Fifth Ave. Co. v. Commissioner

*567OPINION.

In attempting to prove that on March 1, 1918, it owned a leasehold which had a net value of $300,000 over and above its obligations, the petitioner has offered the opinions of three witnesses. These opinions, considered in the light of the experience *568and reasoning upon which they are founded, may not safely be relied upon as establishing the price which a willing purchaser able to buy would pay for the leasehold in addition to the cost of the building and the current obligations fixed by the lease. Two of the witnesses had little or no qualifications to give weight to their opinions. The opinion of one was expressed in response to a hypothetical question which was not in accordance with the facts. It assumed that the building had been constructed and fully occupied for a year, whereas it was actually completed less than three months and there is no evidence whatever that it was occupied at all. Many of the facts were entirely omitted from the hypothesis. The other, who was the petitioner’s president, supported his valuation by general statements in reference to the history and experience of hotel buildings in the neighborhood, leaving it entirely uncertain how much of such experience was known on March 1, 1913. It was clear that some of the circumstances which he considered had occurred between March 1, 1913, and the time of hearing. The third witness arrived at a valuation by an empirical process. He took an assumed cost of the building at 60 cents per cubic foot, to which he added assumed annual costs such as taxes (assumed to remain constant) and maintenance and the fixed rental stated in the lease. These he compared with an assumed future income from the building based upon continued occupancy and rentals from the stores and 90 per cent occupancy at assumed rentals from the hotel apartments. The net income thus arrived at was reduced to a present value as of the beginning of the period. His assumptions, however, are not sufficiently established to warrant their acceptance. The record shows that a small apartment hotel in this vicinity was practically a new venture in 1913, the success of which was so doubtful that the lessor prescribed that the building to be erected should be readily convertible into an office building. Hotels in this vicinity were not an assured success and several of them were abandoned and the buildings either torn down or reconstructed for other purposes.

The testimony of the witnesses as to the uncertainties of the future is difficult to reconcile with their testimony as to the reliability of mathematical prognostications made as of March 1, 1913. For the purpose of proving that the building and the leasehold should be depreciated upon the basis of a short life, the testimony of the witnesses is to the effect that the uncertainties of the future require the o per cent depreciation rate claimed. The same witnesses, however, expressed with assurance their opinion that on March 1, 1913, they would have been reasonably certain that conditions of the then future would have been so reliable as to justify an appraisal of the leasehold with no discount factor except the *56910 per cent vacancy of the hotel space. This is not consistent and does not justify the finding of fact of value sought by the petitioner. Furthermore, it precludes a finding of any value. Since it is entirely a constructive value and the method of its construction fails, there is nothing left upon which the Board can find value in any other amount. It is therefore held that the petitioner has proven no value on March 1, 1913, of the leasehold and is entitled to no deduction for its exhaustion during the years in question.

It is sufficiently clear from the evidence that on March 1, 1913, and ever since, rapid changes were and have been taking place in the vicinity of the property in question. The question then is whether in 1920 and 1921 the building which had cost $438,921.19 in 1912 could reasonably be expected to represent capital value to this taxpayer beyond the expiration of the initial term of the lease in 1931. IVe are of opinion that 3 per cent is a reasonable allowance to take care of the preservation of the petitioner’s capital investment unimpaired. In other words, giving consideration to the conditions of the neighborhood and the probabilities of the future as indicated by the facts of the past, we are of opinion that the allowance for exhaustion, wear and tear and obsolescence may reasonably be based upon a probable life of 33½ years from the date of construction of the building.

It can not be said that merely because the lessee has reserved the legal right to quit the premises at the end of 21 years this fact measures the reasonable allowance for exhaustion of the building. The word “reasonable ” in the statute implies an appraisal of the probabilities. An examination of the lease in its entirety indicates that the parties contemplated that the lessee would continue to occupy the premises and that provision should be made for an alteration from time to time of the rental. Since some estimate must be made, we are of opinion that it is more probable that the lessee will continue to occupy the building than that it will abandon the entire project at the end of the initial term under the conditions prescribed in the lease. That it can not be said as a matter of law that the mere term of the lease establishes the meas'ure of the exhaustion allowance, could be illustrated by assuming a lease of an initial term of three years with a renewal for a much longer period. Such a lease would clearly not justify the lessee in writing off the building in the first three years.

It thus becomes necessary in the light of the evidence to determine only what is a reasonable allowance for exhaustion, wear and tear and obsolescence of the building itself, and as to this it is our judgment that this deduction should be based upon an assumed life of 33½ years, th'us giving a 3 per cent annual deduction.

*570The deficiency should be redetermined by excluding any deduction for the exhaustion of the leasehold and by including a deduction for the exhaustion and obsolescence of the building measured by 3 per cent on its cost to the petitioner.

Judgment will 5e entered in accordance with the foregoing opinion on 15 days’ notice, under Bule 50.