5 T.C. 964">*965 This case involves income and declared value excess profits taxes. The deficiencies herein involved were determined in the amounts of $ 27,006.72 in income tax and $ 19,639.01 in declared value excess profits tax, both for the calendar year 1939. At the hearing respondent asked for an increase in deficiency because of additional disallowance of $ 9,402.11 deduction, 1945 U.S. Tax Ct. LEXIS 58">*59 and petitioner agreed. Therefore, the matter will be reflected in decision to be entered under Rule 50. This leaves for consideration only the question as to whether the adjusted basis of certain buildings at the time of demolition thereof may be included in calculating depreciation upon new buildings erected on the same sites.

FINDINGS OF FACT.

The parties filed a stipulation of facts, presenting no further evidence, and we find the facts as so stipulated, as follows:

The petitioner is a corporation, organized and existing under the laws of the State of New York and having its principal office at 465 East 57th Street. New York 22, New York. The petitioner's Federal income and declared value excess profits tax return for the calendar year 1939 was made on the cash receipts and disbursements basis and was filed with the collector of internal revenue for the third collection district of New York.

In 1914 the petitioner purchased land and a building situated at 366-368 Madison Avenue, New York, New York. The building was demolished on January 1, 1919, and a new building was erected on the site thereof.

The cost to the petitioner of the demolished building was $ 52,000. The salvage1945 U.S. Tax Ct. LEXIS 58">*60 recovered upon demolition of the old building was $ 2,026. The depreciation allowable with respect to the demolished building from the date of its acquisition to the date of its demolition was $ 7,800. The depreciation allowed with respect to this building between these dates was for no year more than the depreciation allowable.

The cost to the petitioner of the new building (not including the adjusted basis of the demolished building which it replaced) was $ 400,000. This building had a useful life of 50 years from January 1, 1920. The total of the amounts allowed as deductions for depreciation with respect to the new building prior to 1938 was $ 213,522.67. The depreciation allowed for 1938 with respect to the new building was $ 5,827.42.

On November 17, 1913, the petitioner purchased the land and buildings situated at 580-586 Fifth Avenue and 1-11 West 47th Street, New York, New York, subject to long term leases of the property which provided that upon the termination of the leases the landlord 5 T.C. 964">*966 had the option either to renew the leases or to pay the tenants the just and full value of the buildings. The petitioner, upon termination of the leases, did not renew the1945 U.S. Tax Ct. LEXIS 58">*61 same, but, pursuant to the option given in the leases, paid for the buildings. Subsequently, the buildings were demolished, and new buildings, to be operated as a unit, were erected on their sites.

For the demolished building situated at 580 Fifth Avenue, the petitioner paid $ 200,000. No salvage was recovered upon demolition. The depreciation allowable with respect to this building from the date of its acquisition to January 1, 1927, the date of its demolition, was $ 21,500. The depreciation allowed with respect to this building between these dates was for no year more than the depreciation allowable.

For the demolished building situated at 582 Fifth Avenue, the petitioner paid $ 48,500. This building was demolished immediately upon acquisition. No salvage was recovered upon demolition.

The cost to the petitioner of the new building erected upon the sites of the demolished buildings situated at 580-582 Fifth Avenue (not including the adjusted basis of the demolished buildings which it replaced) was $ 350,000. This building had a useful life of 50 years from January 1, 1928. The total of the amounts allowed as deductions for depreciation with respect to the new building prior1945 U.S. Tax Ct. LEXIS 58">*62 to 1938 was $ 121,250. The depreciation allowed with respect to this building for 1938 was $ 5,718.75.

For the demolished building situated at 584 Fifth Avenue, the petitioner paid $ 49,680. No salvage was recovered upon demolition. The depreciation allowable with respect to this building from the date of its acquisition to January 1, 1927, the date of its demolition, was $ 2,235.60. The depreciation allowed with respect to this building between these dates was for no year more than the depreciation allowable.

For the demolished building situated at 586 Fifth Avenue, the petitioner paid $ 72,840. No salvage was recovered upon demolition. The depreciation allowable with respect to this building from the date of its acquisition to January 1, 1927, the date of its demolition, was $ 2,913.60. The depreciation allowed with respect to this building between these dates was for no year more than the depreciation allowable.

The cost to the petitioner of the new building erected upon the sites of the demolished buildings situated at 584-586 Fifth Avenue (not including the adjusted basis of the demolished buildings which it replaced) was $ 500,000. This building had a useful life of 1945 U.S. Tax Ct. LEXIS 58">*63 47 years from January 1, 1928. The total of the amounts allowed as deductions for depreciation with respect to the new building prior to 5 T.C. 964">*967 1938 was $ 147,649.20. The depreciation allowed with respect to this building for 1938 was $ 9,522.99.

For the five old buildings situated at 1-11 West 47th Street, the petitioner paid $ 57,690.75. These buildings were demolished immediately upon acquisition. No salvage was recovered upon demolition.

The cost to the petitioner of the new building erected upon the sites of the five demolished buildings situated at 1-11 West 47th Street (not including the adjusted basis of the demolished buildings which it replaced) was $ 750,000. This building had a useful life of 50 years from January 1, 1925. The total of the amounts allowed as deductions for depreciation with respect to the new building prior to 1938 was $ 292,500. The depreciation allowed with respect to the new building for 1938 was $ 12,364.86.

In 1908 the petitioner purchased land and a building situated at 1457 Broadway, New York, New York. The building was demolished on January 1, 1915, and a new building was erected on the site thereof.

The fair market value of the demolished1945 U.S. Tax Ct. LEXIS 58">*64 building on March 1, 1913, was $ 325,000. No salvage was recovered upon demolition. The depreciation allowable with respect to this building from the date of its acquisition to January 1, 1915, the date of its demolition, was $ 17,975. The depreciation allowed with respect to this building between these dates was for no year more than the depreciation allowable.

The cost to the petitioner of the new building (not including the adjusted basis of the demolished building which it replaced) was $ 500,000. This building had a useful life of 50 years from January 1, 1916. The total of the amounts allowed as deductions for depreciation with respect to the new building prior to 1938 was $ 330,000. The depreciation allowed with respect to the new building for 1938 was $ 6,071.43.

In 1923 the petitioner purchased land and a building situated at 21-23 East 75th Street, New York, New York. This building was subsequently demolished and a new building was erected on the site thereof.

The cost to the petitioner of the demolished building was $ 25,000. No salvage was recovered upon demolition. The depreciation allowable with respect to this building from the date of its acquisition to January1945 U.S. Tax Ct. LEXIS 58">*65 1, 1925, the date of its demolition, was $ 1,500. The depreciation allowed with respect to this building between these dates was for no year more than the depreciation allowable.

The cost to the petitioner of the new building (not including the adjusted basis of the demolished building which it replaced) was 5 T.C. 964">*968 $ 40,680.05. This building had a useful life of 37 years from January 1, 1926. The total of the amounts allowed as deductions for depreciation with respect to the new building prior to 1938 was $ 16,551.60. The depreciation allowed with respect to the new building for 1938 was $ 965.14.

The cost of all the demolished buildings aforesaid, unreduced by depreciation with respect thereto, was treated on the books of the petitioner as an addition to the cost of the land upon which these buildings were situated, and the reserve for depreciation with respect to the demolished buildings was included in the reserve for depreciation with respect to the new buildings.

The demolition of all the demolished buildings aforesaid was necessary in order to construct the new buildings aforesaid erected on their sites and was effected for that purpose.

In its Federal income tax returns1945 U.S. Tax Ct. LEXIS 58">*66 for the years in which the aforesaid buildings were demolished the petitioner did not claim any deductions on account of their demolition, and the respondent has not allowed any deductions on account thereof.

In its Federal income tax return for the calendar year 1939 the petitioner did not include in the basis for computing depreciation for the calendar year 1939 with respect to the aforesaid buildings which were erected on the sites of the demolished buildings aforesaid the adjusted basis at the time of demolition of the demolished buildings. In his deficiency notice with respect to the calendar year 1939 the respondent, in computing the amount which the petitioner was entitled to deduct on account of depreciation, did not include in the basis for computing depreciation for the calendar year 1939 with respect to the aforesaid buildings which were erected on the sites of the demolished buildings aforesaid the adjusted basis at the time of demolition of the demolished buildings.

All of the aforesaid buildings which were erected on the sites of the demolished buildings aforesaid were owned by the petitioner throughout the calendar year 1939.

OPINION.

The petitioner relies primarily1945 U.S. Tax Ct. LEXIS 58">*67 upon Commissioner v. Appleby, 123 Fed. (2d) 700, affirming 41 B.T.A. 18">41 B.T.A. 18, to sustain its contention that it may include in its basis for computing depreciation upon certain buildings its adjusted basis in buildings demolished for the purpose of erecting the new structures. The respondent, in substance, contends that the deduction sought by petitioner was properly denied, because there was at the time of purchase of the buildings no intent to demolish them and rebuild; that in such case 5 T.C. 964">*969 loss must be claimed in the year of demolition; and that Commissioner v. Appleby, supra, does not apply for the reason that the petitioners therein had acquired the property as legatees and could not have acquired the property with intent to rebuild.

Examination of the various cases cited to us clearly indicates that petitioner's contention should be sustained. It is true that cases hold that, where there is at time of acquisition of property intent to demolish and rebuild, no deductible loss occurs and the basis of the former property may be used in computation of depreciation; but it does not1945 U.S. Tax Ct. LEXIS 58">*68 follow that such former basis may not likewise be included in other circumstances, that is, where, as here, there is the requisite intention to rebuild at the time of demolition. The Circuit Court of Appeals for the Second Circuit in the Appleby case so states, saying (referring to the contention that the rule allowing the use of former basis does not apply where there is no intent at time of purchase to raze and rebuild or where taxpayer acquires otherwise than by purchase):

* * * It would be unreasonable to hold that the statement of a rule for this single instance excludes application of a similar rule to cases where the intent to raze and rebuild was formed after the property was acquired. Losses are recognized only when they result from a closed transaction. If a building is demolished because unsuitable for further use, the transaction with respect to the building is closed and the taxpayer may take his loss; but if the purpose of demolition is to make way for the erection of a new structure, the result is merely to substitute a more valuable asset for the less valuable and the loss from demolition may reasonably be considered as part of the cost of the new asset and 1945 U.S. Tax Ct. LEXIS 58">*69 to be depreciated during its life, * * *.

With reference to the contention that that case is not authority because of acquisition as legatees, we said (41 B. T. A. 22): "The rationale of the prior decisions is no less applicable to property acquired by inheritance than to property purchased."

In Young v. Commissioner, 59 Fed. (2d) 691 (relied upon by the Circuit Court in the Appleby case), the court, in referring to the rule that intent at acquisition to raze and replace buildings is ground for denial of loss, says:

* * * But that rule does not by implication exclude cases where the taxpayer has not the intent at the time he purchases improved property to demolish existing buildings. * * *

The Board was affirmed in its holding that the taxpayers could not deduct the depreciated cost of the buildings destroyed, but must consider the amount as expense incurred in procuring a long term lease, in order to obtain which the demolition took place. To the same effect is Anahma Realty Corporation v. Commissioner, 42 Fed. (2d) 128. Union Bed & Spring Co. v. Commissioner, 39 Fed. (2d) 383,1945 U.S. Tax Ct. LEXIS 58">*70 5 T.C. 964">*970 is distinguishable from the instant case, for therein, and in other cases following it, deduction of a loss incurred in business was allowed because of purchase of property for the definite purpose of conducting a certain business, which business suffered loss because of the necessity of repairs or changes not anticipated by the buyer at the time of fixing the purchase price of the property. We held that this is the true test in such cases, in Parma Co., 18 B. T. A. 429, 431, saying that Regulations 45, article 142 (as to loss not being allowable where a building is purchased and razed with view to erect another):

* * * is rebutted by showing that the purpose of taxpayer in so purchasing the building was with a view of the actual use of a part of the building and for a fixed and definite purpose and that he was not able so to use it because of latent defects which were not discovered at the time of purchase. * * *

We have found Union Bed & Spring Co., supra, followed in no case wherein there was found not only demolition of buildings not acquired for demolition, but, as herein, rebuilding thereof. (Here we1945 U.S. Tax Ct. LEXIS 58">*71 assume, without deciding, that there was no intent at purchase to demolish.) We discern clear distinction between allowance of a business loss in necessary, but unexpected, repair of a building purchased at a certain price for a business purpose, so that in truth a business loss was suffered, and a case such as this, where an owner merely substitutes one building for another on property already owned, and we consider his basis for depreciation. That the rebuilding, and not merely demolition, is a crucial element in the question is indicated in Dayton Co. v. Commissioner, 90 Fed. (2d) 767, where, in holding that loss was allowable where the property was purchased for certain business uses, but without intent to demolish, but the building was shortly thereafter demolished, the court pointed out: "The demolition was not in pursuance of any plan to replace or renew the structure or to further use the property." Since the petitioner there contended that the deduction could not be taken until sale of the property, it is obvious that the court had in mind that if the building had been replaced by another, as in the instant case, deduction of the loss would1945 U.S. Tax Ct. LEXIS 58">*72 have awaited sale. This is in accord with the Appleby case, involving cost basis of property replacing that which had been demolished.

We conclude and hold that the petitioner is entitled, under section 114 (a) of the Internal Revenue Code, to include in depreciation basis on the new buildings the adjusted basis for determining gain (less salvage recovered with reference to the demolished buildings). This conclusion renders it unnecessary to consider petitioner's view, in substance in the alternative, that under the stipulated facts the old buildings were acquired with intention to demolish and rebuild.

Decision will be entered under Rule 50.