22 T.C. 1146">*1146 Respondent determined deficiencies in income tax for the taxable years 1946 and 1947 as to petitioners Frieda Bernstein and Rose Bernstein, and for the taxable year 1948 as to the above named petitioners and their respective husbands, Abraham Bernstein and Herman Bernstein.

The issue presented is whether, upon the facts, purchasers of real estate subject to a lease have established the right (a) to an allowance for depreciation on improvements erected by lessee pursuant to the terms of the pre-existing lease, or (b) to an allowance1954 U.S. Tax Ct. LEXIS 115">*116 for amortization of any "premium" value attributable to the lease.

FINDINGS OF FACT.

Most of the facts are stipulated by the parties, and to the extent so stipulated are incorporated herein by reference.

Petitioner Frieda Bernstein is the wife of petitioner Abraham Bernstein. Petitioner Rose Bernstein is the wife of petitioner Herman Bernstein. The wives filed separate income tax returns for the taxable years 1946 and 1947. They filed joint returns with their respective husbands for the year 1948.

On February 1, 1945, petitioners Frieda and Rose formed a partnership for the purpose of owning and operating real estate. On March 23, 1945, they acquired by a bargain and sale deed from Columbia Homes Corporation certain property known as No. 73-79 1/2 Maiden Lane and No. 9-11 Gold Street in the Borough of Manhattan, New York City, subject to a first mortgage of $ 275,000. This property became an asset of the partnership.

22 T.C. 1146">*1147 Previously, on May 1, 1919, the property, which was then owned by Rebecca A. D. Wendel Swope and other members of the Wendel family, was the subject of a lease entered into between them, as landlords, and 75 Maiden Lane Corporation, as tenant. The lease1954 U.S. Tax Ct. LEXIS 115">*117 was for a term of 21 years at a net rental of $ 9,150 for the first year and a rental of $ 26,000 per year, payable quarterly, for the remaining 20 years of the term. The tenant agreed to pay all taxes, including State, Federal, and local taxes, that should arise by reason of the lease or the rental paid to the landlords; it being the intent of the parties that the landlords should enjoy the rental free and clear of all taxation

The tenant also agreed within 5 years from the date of the lease to improve the premises by erecting thereon, after demolishing the buildings then on the property, "substantial, fireproof, commercial office buildings of the kind and character approved by the landlords" at a cost of at least $ 200,000. The lease provided that the tenant should deliver to the landlords a bond in the sum of $ 200,000 guaranteeing that the tenant would erect the buildings, pay for the improvements, fully perform all the covenants of the lease, and indemnify the landlords against any and all claims arising out of the erection of the buildings.

The lease further provided in part as follows:

TENTH: That the Tenant, its successors and assigns, shall at all times during the term 1954 U.S. Tax Ct. LEXIS 115">*118 hereby granted, at its or their own cost and expense, and sufficiently and in a manner satisfactory to the Landlords, their heirs, successors and assigns put, uphold, preserve, maintain and keep in good order, condition and repair the buildings * * * to be erected on said land both inside and outside * * * and each and every fixture * * * including any and all replacements made by the Tenant, its successors or assigns from time to time on account of breakage, or wear and tear; * * * it being intended hereby that the entire demised premises, as well as the fixtures and personal property appurtenant thereto, and all replacements and betterments shall at all times during the term of this lease be kept, preserved and maintained by the Tenant, its successors and assigns in a manner befitting high class commercial and office buildings of the kind contemplated to be erected on said premises. And the Tenant further covenants and agrees * * * that, if at any time or times during the term of this lease the said buildings or improvements * * * or any part thereof, shall become so worn, damaged or broken as to be unfit or unsafe for use, the Tenant, its successors and assigns shall and will at1954 U.S. Tax Ct. LEXIS 115">*119 its or their own cost and expenses [sic] immediately repair or replace the same so as to make it safe and fit for use * * *.

The lease also provided that, in the event of partial destruction of the buildings, the tenant would be required to repair, restore, or rebuild them "so as to place the same in as good, usable and tenantable condition as they were required to be by the terms of this lease before such damage, and to the satisfaction of the Landlords, their heirs, successors or assigns." In the event of total destruction of a building, the tenant would be required to erect within 2 years thereafter a new 22 T.C. 1146">*1148 building "at least equal in value to the building or buildings so destroyed."

The lease further provided that, at the expiration of the term of the lease, the landlords were required to grant a renewal lease with "like covenants and conditions" for an additional 21 years at an annual rental of 5 per cent of the then full value of the land (as determined by a method set out in the lease) but not less than $ 26,000 per year. At the expiration of the first renewal lease, the landlords were required to grant a second renewal for 21 years at an annual rental determined1954 U.S. Tax Ct. LEXIS 115">*120 in the same manner as that for the first renewal but not less than the rental determined for the first renewal.

The lease also provided that the title to all buildings and all other improvements and fixtures that might be erected or placed on the premises by the tenants "shall vest in the landlords, their heirs, successors or assigns forever and become their property" at the expiration of the last term for which the lease might be renewed or other sooner termination of the lease.

Pursuant to the terms of the lease, the tenant demolished the 7 buildings then standing on the property and erected a 12-story, fireproof, commercial office building. On May 1, 1940, at the end of the first term of the lease, it was renewed for an additional 21-year period.

Subsequent to the execution of the lease, the landlords conveyed the fee of the realty to the Wendel Foundation which on February 2, 1945, by bargain and sale deed, conveyed the property to the Goldlane Realty Corporation. This company executed a first mortgage on the property as security for the sum of $ 275,000 which was a portion of the purchase price. Also on February 2, 1945, the Goldlane company, by bargain and sale deed, conveyed1954 U.S. Tax Ct. LEXIS 115">*121 the property to the partners' grantor subject to the mortgage. All conveyances including that to the partners were subject to the lease of the 75 Maiden Lane Corporation.

The "Annual Record of Assessed Valuation of Real Estate, Borough of Manhattan, The City of New York, For the Fiscal Year July 1st, 1946 to June 30th, 1947" states in part as follows with respect to the property involved in the instant case: That the owner or occupant is F. & R. Bernstein; that the value of the real estate unimproved (land) is $ 500,000; and that the value of real estate with improvements thereon (total) is $ 1,200,000. The "Annual Record" for the fiscal year July 1, 1953, to June 30, 1954, is similar in all respects to that mentioned above except that the valuations are $ 575,000 and $ 1,400,000, respectively.

OPINION.

Petitioners Frieda and Rose Bernstein formed a partnership on February 1, 1945, for the purpose of owning and 22 T.C. 1146">*1149 operating real estate. Thereafter on March 23, 1945, they acquired a piece of real estate known as No. 73-79 1/2 Maiden Lane and No. 9-11 Gold Street in New York City. This property became an asset of the partnership. The history of the particular piece of real1954 U.S. Tax Ct. LEXIS 115">*122 estate is pertinent to the instant case and is set out briefly below.

On May 1, 1919, this property, which was then owned by members of the Wendel family, was leased to the 75 Maiden Lane Corporation. The lease was for a period of 21 years and required the landlords to grant 2 renewals of 21 years each. It provided for a net rental of $ 26,000 per year (except for the first year). The annual net rental for the first 21-year renewal was to be 5 per cent of the full value of the land (as determined by a method set out in the lease) at the expiration of the first lease, but in no event less than $ 26,000. The annual net rental for the second renewal was to be determined in the same manner as that of the first renewal, but in no event was it to be less than the rental fixed for the latter.

The lease also provided that the tenant, after demolishing existing buildings, was to construct buildings of certain characteristics on the property within 5 years after the execution of the lease, and that at the expiration of the last term for which the lease might be renewed (or other sooner termination of the lease), title to the buildings "shall vest in the landlords."

Pursuant to the terms1954 U.S. Tax Ct. LEXIS 115">*123 of the lease, the tenant demolished the buildings then standing on the property and erected a 12-story, fireproof, commercial office building which is now known as the Perrin Building. On May 1, 1940, at the end of the first term of the lease, the lease was renewed for an additional 21 years.

At some time subsequent to the execution of the lease, the Wendels conveyed the fee to the Wendel Foundation which in turn conveyed it to the Goldlane Realty Corporation on February 2, 1945. Also on that day, the Goldlane company conveyed the property to Columbia Homes Corporation which in turn, on March 23, 1945, conveyed it to the partners, petitioners Frieda and Rose Bernstein. All of these conveyances were subject to the leasehold interest of the 75 Maiden Lane Corporation.

It appears from the statutory notices of deficiency (copies of which were filed with the respective petitions to this Court) that the partnership return for the taxable year ending January 31, 1946, claimed a deduction of $ 8,036.24 for "amortization of leasehold value," and that for each of the taxable years 1947 and 1948 claimed a deduction of $ 10,596.76 for "depreciation of buildings and improvements." These deductions1954 U.S. Tax Ct. LEXIS 115">*124 were reflected in the individual income tax returns filed by petitioners Frieda and Rose Bernstein for the years 1946 and 1947, and in the joint returns filed by each of the married couples for the year 1948. The respondent disallowed the deductions for each year 22 T.C. 1146">*1150 on the ground that the partnership was not entitled to deductions for amortization of leasehold value or for depreciation on buildings and improvements under the provisions of section 23 (l) of the Internal Revenue Code of 1939.

For the reasons set forth below, we must hold that there is nothing in the record properly before us for consideration upon which we may find that petitioners are entitled to deductions either for depreciation or for amortization of leasehold value or premiums.

We consider first the question of depreciation. As a foundation for a discussion of the question of whether or not during the existence of the lease (including the taxable years here involved) any depreciation is allowable to the owner or lessor with respect to improvements erected at the expense of the lessee, petitioners must first establish, under the principles announced in Commissioner v. Moore, (C. A. 9) 207 F.2d 265,1954 U.S. Tax Ct. LEXIS 115">*125 certiorari denied 347 U.S. 942">347 U.S. 942, and Albert L. Rowan, 22 T.C. 865, a depreciable interest in the improvements, subject to the lease. This includes proof of a depreciable basis for the improvements, subject to the lease, as well as the extent, if any, to which the probable life of the improvements will extend beyond the termination of the lease.

Petitioners' position appears to be based upon the assumption that, if proportionate values may be allocated to land on the one hand and improvements on the other, a basis for allowance of depreciation on the improvements may be established by applying the resulting ratios to the original cost of the whole. In taking the above position, however, petitioners appear to have ignored the essential factor that their interest in the improvements is solely one which has been variously described as subject to the lease, or a reversionary interest, or a right to possess the improvements at the termination of the lease (all three expressions being utilized in Commissioner v. Moore, supra).

It is clear from the record that whatever may have been petitioners' 1954 U.S. Tax Ct. LEXIS 115">*126 cost in purchasing the entire property (including such interest as they may have acquired in the improvements), there is no evidence of any specific allocation of such cost as between land and either improvements or petitioners' interest in such improvements. Petitioners seek to establish a basis for allocation by introducing into evidence assessments by the taxing authorities of the City of New York establishing, for local tax purposes, separate assessed values for land and improvements. Whether or not the evidence of the separate assessments for local tax purposes may have probative value for the general purposes of allocation of basis between land and improvements, such evidence is of no significance in the instant case because it is based upon the value of the land and the full value of the improvements without giving effect to the fact that petitioners' interest is subject to the lease.

22 T.C. 1146">*1151 In Commissioner v. Moore, supra, in disposing of a like issue, Judge Pope made the following comments:

The proof of values offered on behalf of the taxpayer ignored the difference between a building unaffected by a lease, and a building subject to1954 U.S. Tax Ct. LEXIS 115">*127 a lease. [207 F. 2d, at p. 269.]

If those who did the stipulating * * * considered that the * * * interest was one in a building subject to a lease, they may have attached little or no value to the interest in the building. [207 F. 2d, at p. 270.]

It is thus apparent that the testimony of the witnesses, * * * based upon the value of the building alone, viewed as a physical structure, do not reflect the taxpayer's true interest in that building, as that interest is, in fact, affected by a lease whose term exceeds the useful life of the building. [207 F. 2d, at p. 271.]

Since there is no evidence, other than that already discussed, upon which we may determine a basis for depreciation of petitioners' interest in the improvements, it is apparent that petitioners have failed to establish an essential element of their claim for allowance of depreciation.

We also find that there is no evidence (and nothing in the stipulation of facts) demonstrating the extent, if any, by which the probable life of the improvements may exceed the period of the lease.

In the light of the principles established in Commissioner v. Moore, supra,1954 U.S. Tax Ct. LEXIS 115">*128 and Albert L. Rowan, supra, and in the absence of essential proof as indicated by the foregoing analysis, we must hold that petitioners have failed to establish the right to an allowance for depreciation for any of the years in question.

We now consider whether petitioners have established the right to any allowance for "amortization of leasehold value." In Commissioner v. Moore, supra, the court recognized the principle that if property is purchased subject to a pre-existing lease, and if, at the time of such purchase, the rentals provided for in the lease were greater than could have been obtained had the lease been negotiated at the time of purchase, such a lease has a "premium" value, and if such premium value (attributable to such favorable rentals) is subject to ultimate exhaustion, the premium value should be amortized through annual deductions allowable to the acquiring lessor.

Assuming, arguendo, the validity of the principle so announced (although we are not called upon, for the reasons hereinafter set forth, to accept or reject it in this case), we are nevertheless unable to hold, upon the facts, that1954 U.S. Tax Ct. LEXIS 115">*129 petitioners are entitled to an allowance for amortization of any premium value. There is no evidence (and nothing in the stipulation of facts) upon the basis of which the existence or amount of any such premium value may be ascertained. No facts are presented as to whether the rentals are favorable or 22 T.C. 1146">*1152 unfavorable within the conception under discussion, and no standard of measurement or calculation is suggested.

We add that while petitioners did not formally abandon the issue of amortization of leasehold premium value, the point is not pressed in the briefs filed on their behalf.

Petitioners have not assigned error in relation to other adjustments made in the statutory notices of deficiency.

Decisions will be entered for the respondent.