29 T.C. 1205">*1205 The respondent has determined deficiencies in income and excess profits tax in the amounts of $ 7,518.58 for the year 1952 and $ 162,444.99 for the year 1953.

Petitioner filed a consolidated return with Forest Hills, Inc., a wholly owned subsidiary, for the year 1952 and with Forest Hills, Inc., and Loxley Gardens Annex, Inc., another wholly owned subsidiary, for the year 1953.

29 T.C. 1205">*1206 The deficiency for 1953 is due to1958 U.S. Tax Ct. LEXIS 220">*223 two adjustments explained in the notice of deficiency as follows:

(a) It is determined that you are entitled to a depreciation deduction on the depreciable assets of Forest Hills, Inc. and Loxley Gardens Annex, Inc. in the amount of $ 110,158.68, as shown on Exhibits A and B attached. Inasmuch as the amount of $ 133,195.07 was claimed on the return filed by you for the year 1953 the difference of $ 23,036.39 is added to your income.

(b) It is determined that the profit realized on contracts completed during the year 1953 which were performed for Forest Hills, Inc. and Loxley Gardens Annex, Inc. amounts to $ 192,598.92. Therefore, the amount of $ 192,598.92 should be eliminated as intercompany profits on the consolidated return filed by you with Forest Hills, Inc. and Loxley Gardens Annex, Inc. Inasmuch as you eliminated $ 447,463.17 as intercompany profits, the difference of $ 254,864.25 has been added to the income reported in your return for the year 1953.

The deficiency for 1952 is due to the respondent's determination that petitioner is not entitled to an excess profits credit carryback. The 1952 adjustment is wholly dependent upon the results reached on the issues involved1958 U.S. Tax Ct. LEXIS 220">*224 for 1953. Any adjustments necessary can be made under Rule 50.

By virtue of the pleadings the entire deficiencies are in issue.

FINDINGS OF FACT.

A stipulation of facts has been filed and is incorporated herein by this reference.

Algernon Blair, Inc., hereinafter referred to as petitioner, is a corporation organized under the laws of the State of Alabama on July 3, 1951. Forest Hills, Inc., hereinafter sometimes referred to as Forest Hills, a wholly owned subsidiary of petitioner, was incorporated under the laws of the State of Florida on December 24, 1951. Loxley Gardens Annex, Inc., hereinafter sometimes referred to as Loxley Annex, a wholly owned subsidiary of petitioner, was incorporated under the laws of the State of Virginia on March 27, 1953. Petitioner filed a consolidated income tax return with Forest Hills for the calendar year 1952 and a consolidated income tax return with Forest Hills and Loxley Annex for the calendar year 1953 with the director of internal revenue for the district of Alabama.

Issue 1. Intercompany Eliminations.

Petitioner is a general contractor engaged in the building construction business. It was organized by Algernon Blair, hereinafter sometimes1958 U.S. Tax Ct. LEXIS 220">*225 referred to as Blair, who died in 1952 and who had for many years, as sole proprietor, engaged in the same business with many of the same employees.

Blair had for many years reported his income from the business on the completed contract basis. The petitioner reported its income for 29 T.C. 1205">*1207 its first taxable period ending December 31, 1951, and for the years 1952 and 1953 on the completed contract basis. Respondent does not question petitioner's right to so report.

Under this method of accounting, the petitioner reported its gross profit from each contract in the year in which the contract was completed. Its gross profit on each contract was computed by deducting from the contract price (all receipts derived from the contract regardless of the period in which received) the total costs (during the life of the contract) which the petitioner considered directly related to the contract. The petitioner treated preliminary costs of securing a contract, on-the-job labor costs, cost of material used on the job, cost of subcontract work, and cost of on-the-job overhead, as direct costs relating to the contract.

From the gross profit on contracts completed during the year, the petitioner1958 U.S. Tax Ct. LEXIS 220">*226 deducted all general expenses incurred during the year. It did not allocate these expenses to the separate contracts. Its general expenses consisted of expenses which it did not consider to be directly related to the performance of any specific contract and which it did not consider to be properly attributable to any specific contract. These expenses included, inter alia, the following:

1. Salaries of home office employees in Montgomery. Home office employees included engineers, clerks, bookkeepers, accountants, secretaries, and stenographers.

2. Salaries of officers.

3. Salaries of project managers. The petitioner had four project managers who performed their work at the home office in Montgomery. Each one was usually in charge of a number of projects at the same time and during each year. They performed such work as bidding for contracts, purchasing materials, hiring personnel, and supervising the project superintendent.

4. Bonus. In 1928, Blair, by agreement with his employees, established a bonus plan which was followed by him at all times thereafter and was carried on by the petitioner. Under this plan, each year 40 per cent of the net profits before taxes was distributed1958 U.S. Tax Ct. LEXIS 220">*227 among all persons employed for a year or more, regardless of the type of work in which they were engaged. The amount allocated to each individual was fixed by Blair or his general manager during the existence of the sole proprietorship, and by the petitioner's president during the taxable years. The amount was based upon a consideration of the employee's loyalty, length of service (which, for 1952 and 1953, included service for the proprietorship as well as the corporation), his ability to get along with others, and his leadership. The amount paid an employee did not depend upon whether he was working or had worked on profitable or unprofitable contracts.

5. Expenses of unsuccessful estimating and bidding for contracts.

29 T.C. 1205">*1208 6. State income taxes.

7. Other general expenses of the home office, including legal and accounting fees, telephone, travel, donations, interest, insurance, postage, dues, subscriptions, and depreciation on office equipment.

During the year 1952, petitioner completed two construction contracts. Petitioner's net income as reported on its 1952 income tax return was as follows:

1958 U.S. Tax Ct. LEXIS 220">*228 Forest Hills did not earn any income during the calendar year 1952. Four contracts with accumulated costs amounting to $ 7,311,289.34 were incomplete at December 31, 1952. Included therein was the Forest Hills contract which had costs incurred of $ 2,958,252.64.

During the year 1953, petitioner completed nine construction contracts which included two completed for wholly owned subsidiaries. Petitioner's net profit as reported on the 1953 consolidated return was as follows:

29 T.C. 1205">*1209 Four contracts with accumulated costs amounting to $ 922,335.14 were incomplete at December 31, 1953.

Forest Hills and Loxley Annex reported their income for 1953 as follows:

The combined separate net income for 1953 (not taking into account any eliminations for unrealized profit or loss on intercompany transactions) was as follows:

Two of the contracts completed by petitioner during 1953 were for its subsidiaries, Forest Hills and Loxley Annex. (See schedule of petitioner's income above.) Under the terms of its contracts with its subsidiaries1958 U.S. Tax Ct. LEXIS 220">*230 petitioner constructed a housing project for Forest Hills consisting of 500 family units, and a housing project for Loxley Annex consisting of 135 family units. The subsidiary corporations held the property for rental purposes after construction. The Forest Hills construction project was begun in August 1952 and had an average completion date of March 3, 1953. The Loxley Annex project was begun in June 1953 and the average completion date was November 10, 1953.

As shown on the petitioner's schedule of gross profit, supra, it realized gross profit in 1953 on the contracts for its subsidiaries as follows:

In computing its consolidated net income for the year 1953, the petitioner eliminated the gross profit of $ 447,463.17 as intercompany profit realized on the construction of the housing projects for its two subsidiary corporations and also made certain other eliminations. The net income reported on the 1953 consolidated income tax return was, therefore, computed as follows: 29 T.C. 1205">*1210

1958 U.S. Tax Ct. LEXIS 220">*231 The respondent disallowed (adjustment B of the deficiency notice) the elimination of intercompany profit in the amount of $ 447,463.17 to the extent that it exceeded $ 192,598.92. The disallowance was based upon his determination that "net profit" should be eliminated rather than gross profit. He computed the net profit by allocating the petitioner's general expenses for 1953 to the contracts completed during 1953 in the same proportion that the gross profit on each contract completed in 1953 bore to the total gross income for 1953 (from both contracts completed and unrelated sources). Respondent's computation is as follows:

1958 U.S. Tax Ct. LEXIS 220">*232 29 T.C. 1205">*1211 The bonus of $ 355,828 for 1953 was distributed as follows:

Of the eight home office employees whose duties pertained to specific contracts, five worked on the Forest Hills and Loxley Annex projects. Those five received salaries in the amount of $ 27,360 and bonuses in the amount of $ 36,980. An allocation of those salaries and bonuses to the specific jobs on the basis of time spent on the specific job is as follows:

As stated previously, the salaries of the field employees were allocated to the specific jobs on which they worked. An allocation of the bonuses paid to those employees on the same basis that their respective salaries were allocated is as follows:

1958 U.S. Tax Ct. LEXIS 220">*233 The amounts of salary and bonus allocated to Forest Hills and Loxley Annex in the two schedules in the previous paragraph were reasonably related to the Forest Hills and Loxley Annex contracts, respectively. In addition, $ 30,000 of the other general expenses was reasonably related to the Forest Hills contract and $ 8,000 of the other general expenses was reasonably related to the Loxley Annex contract.

Issue 2. Depreciation.

The following schedule shows the depreciation computed by Forest Hills and Loxley Annex for 1953, the amount eliminated due to a reduction in basis because of the elimination of intercompany profit (see Issue 1, supra), and the amount deducted on the consolidated return for 1953: 29 T.C. 1205">*1212

Of the $ 133,195.07 claimed on the return the respondent disallowed $ 23,036.39, computed as follows:

1958 U.S. Tax Ct. LEXIS 220">*234 The difference between the depreciation claimed and the depreciation allowed is due to the respondent's adjustments to the basis of the depreciable property. ¹

In the construction of the multiple-housing projects, Forest Hills and Loxley Annex segregated their costs into groups, viz, land, general improvements, building, building equipment, and furnishings. In addition to the direct costs which could be clearly segregated into the above-mentioned groups, there were a number of indirect costs which related to the projects as a whole, such as engineering and architect fees, interest on construction loans, legal fees, various types of insurance, depreciation on equipment, etc. The petitioner allocated these indirect costs to the categories of direct cost, except land, 1958 U.S. Tax Ct. LEXIS 220">*235 in the same proportion that each category of direct cost bore to the total direct cost, except land. The petitioner then treated the entire cost in each category, except land, as depreciable and computed its depreciation thereon.

The respondent made certain adjustments. First, he divided the direct costs in the category general improvements into depreciable and nondepreciable. (Petitioner had treated all direct costs in that category as depreciable.) In the nondepreciable category he included the direct cost of (1) items which he designated as additional land cost and (2) items which were maintained by the local governments 29 T.C. 1205">*1213 and dedicated to the public use. ² The former included the cost of site work, grading, landscaping, and planting grass and shrubs. The latter included the cost of street paving, curbs, sidewalks, and utilities such as water and gas mains, storm and sanitary sewers, and drainage facilities. The respondent then divided the indirect costs into depreciable and nondepreciable, the division being in the same ratio that the depreciable and nondepreciable direct costs bore to the total direct costs. The indirect costs, thus divided, were allocated to1958 U.S. Tax Ct. LEXIS 220">*236 all of the categories of direct costs in the same proportion that each category bore to the total direct costs.

The following schedule shows the cost allocation of the Forest Hills project by Forest Hills and by the respondent: 1958 U.S. Tax Ct. LEXIS 220">*237

29 T.C. 1205">*1214 A breakdown of the nondepreciable costs as determined by the respondent is as follows:

The following schedule shows the cost allocation of the Loxley Annex project by Loxley Annex and the respondent: 29 T.C. 1205">*1215 1958 U.S. Tax Ct. LEXIS 220">*239

A breakdown of the nondepreciable costs as determined by the respondent is as follows:

29 T.C. 1205">*1216 OPINION.

The issues will be discussed in the same order as the findings of fact relating thereto.

Issue 1. Intercompany Eliminations1958 U.S. Tax Ct. LEXIS 220">*241 .

Petitioner, a general contractor, filed a consolidated return for the year 1953 with two wholly owned subsidiaries, Forest Hills and Loxley Annex. The first issue requires a determination of the amount of unrealized profit arising from intercompany transactions which should be eliminated in the computation of consolidated net income on that return.

During the year in question, petitioner, which reports on the completed contract basis, completed nine contracts, including one for Forest Hills and one for Loxley Annex, both of which were wholly owned subsidiaries. Under the contracts with the subsidiaries housing projects were constructed. The subsidiaries held the projects for rental purposes.

Regulations 129, to which the petitioner consented by filing a consolidated return (see sec. 141 (a), I. R. C., 1939), ³ provide that "[the] consolidated net income shall be the combined net income of the several affiliated corporations" (Regs. 129, sec. 24.31 (a) (1)) and that "[the] net income of each corporation shall be computed in accordance with the provisions covering the determination of net income of separate corporations, except -- (i) There shall be eliminated unrealized profits1958 U.S. Tax Ct. LEXIS 220">*242 and losses in transactions between members of the affiliated group" (Regs. 129, sec. 24.31 (b) (1)).

Since the subsidiaries held the housing projects at the end of 1953, any profits realized on those contracts by the petitioner would be unrealized profits for consolidation purposes. Both parties agree to this. The dispute arises in the computation of the unrealized profits.

Petitioner computed its income on the completed contract basis. Under this method it accumulated the total revenues derived from the contract and the total costs which it considered were incurred in the performance of the contract. It characterized these costs as direct 29 T.C. 1205">*1217 costs. The difference between the two it reported as gross profit or loss in the year in which the contract was completed. The costs which it did not consider attributable to any specific contract were deducted currently, in the year in which incurred. These latter1958 U.S. Tax Ct. LEXIS 220">*243 costs which it characterized as general expenses included such items as officers' salaries, salaries of home office employees, other home office expenses, State income taxes, and bonuses (petitioner distributed among all employees 40 per cent of its net income before taxes as a bonus). This method of accounting is sanctioned by the regulations ⁴ and is in accord with accepted accounting principles. ⁵

The petitioner, in the computation of its net income for consolidation purposes, eliminated the gross profit on the two contracts completed for its subsidiaries. The respondent, in effect, determined that only the net profit should be eliminated. Respondent computed the net profit by allocating the general expenses for 1953 to the nine contracts completed in 1953 on a gross profit basis (in the same proportion that the gross profit on a contract bore to the total gross profit) and then deducted1958 U.S. Tax Ct. LEXIS 220">*244 from the revenue on each contract the total direct costs and the proportionate share of the general expenses. It may be pointed out that work was commenced in 1952 on some of the contracts completed in 1953 and that at the end of 1953 there were four uncompleted contracts on which costs had been incurred.

The regulations do not indicate whether the unrealized profit to be eliminated is gross profit or net profit. And although this is essentially an accounting problem there is disagreement among accountants as to the preferred practice. ⁶

1958 U.S. Tax Ct. LEXIS 220">*245 29 T.C. 1205">*1218 In Union Pacific Railroad Co., 32 B. T. A. 383, 384-388 (1935), affirmed on other points (C. A. 2, 1936) 86 F.2d 637, a somewhat similar issue was involved. The affiliated corporations transported for one another material used in additions and betterments. The cost of these materials was capitalized by the receiving affiliate. The transporting affiliate charged the receiving affiliate the published tariff rate. In computing the consolidated net income these charges were eliminated from the revenue account of the transporting affiliate and from the expense account of the receiving affiliate. Thus, on the transporting affiliate's books was left the cost incurred by it in transporting the goods. Both the taxpayer and the Commissioner agreed that this cost should not be deducted currently but must be capitalized as part of the additions and betterments. The dispute related to the computation of that cost. The actual cost could not be computed. The Commissioner contended that the cost should be a proportionate share of all the costs including general expenses. The taxpayer contended that the latter expenses1958 U.S. Tax Ct. LEXIS 220">*246 would have been incurred regardless of whether there was any intercompany transportation and that the cost should be only a proportionate share of the direct transportation costs. We rejected the contentions of both parties and held that the "cost" of transporting intercompany goods was a proportionate share of all costs reasonably related to transporting goods and, in the absence of such cost in the record, we used an Interstate Commerce Commission estimated figure.

The pertinent parts of the regulations in effect for the years involved in Union Pacific Railroad Co., supra, are for all practical purposes the same as involved here. ⁷ And although the problem there is stated in terms of "cost" rather than "profit," it is essentially the same as involved here.

1958 U.S. Tax Ct. LEXIS 220">*247 Also, by analogy, the problem here is the same as if the petitioner had built the projects for its own use. Instead of the question of intercompany profits there would be a question of cost to itself which, of course, requires the same determination. Cost to itself would depend on which costs are to be capitalized and which are to be deducted currently as ordinary and necessary business expenses. In Acer Realty Co., 45 B. T. A. 333, 336-338 (1941), affd. (C. A. 8, 1942) 132 F.2d 512, we held that costs incidental to the construction or improvement of buildings, or in connection with the acquisition of capital assets, is a capital expenditure and not ordinary and necessary expense of carrying on a business.

29 T.C. 1205">*1219 The rule emerging from these cases, stated in terms of cost, is that the cost of an asset includes all costs reasonably related or incidental to its construction or acquisition; in terms of profit for consolidation purposes it would be the gross profit less any other costs reasonably related or incidental to the construction or acquisition of the asset. This comports with an accepted accounting view ⁸ and1958 U.S. Tax Ct. LEXIS 220">*248 appears to be one based on practical necessities and reason. We follow it here.

Under the above rule we must determine which, if any, of the expenses characterized by the petitioner as general expenses are reasonably related or incidental to the two contracts completed for its subsidiaries. The petitioner has offered evidence showing an allocation of some of the general expenses. The respondent has offered no evidence supporting his determination and it is clear that his determination that all of the general expenses are allocable to the nine completed contracts on a gross profit basis cannot stand. Many of the general expenses are in no way related to any of the specific contracts. And even assuming that all of the general expenses were reasonably related to the specific contracts, the allocation is erroneous because there is no rational relation between the gross profit on a contract and1958 U.S. Tax Ct. LEXIS 220">*249 the general expense incurred. For example, the contract with a gross loss would receive an allocation of a minus amount of general expenses. "In these circumstances the general rule of the burden of proof falls short of a solution, Helvering v. Taylor, 293 U.S. 507">293 U.S. 507." Union Pacific Railroad Co., supra at p. 387.

It is clear, it seems to us, that a portion of the salaries and bonuses of the project managers and the bonuses paid to those who worked on the contracts for the subsidiaries are reasonably related to the contracts performed for the subsidiaries. Petitioner has prepared an allocation of these costs, which seems reasonable, and we have adopted it as part of our findings of fact. The amounts so allocated should be added to the cost of the contracts performed for Forest Hills and Loxley Annex. No attempt has been made to allocate any of the other general expenses. We are convinced that some portion of the other general expenses is reasonably related to the performance of the contracts for the subsidiaries. In the absence of any specific evidence or proof, we have exercised our best judgment and found that1958 U.S. Tax Ct. LEXIS 220">*250 an additional $ 30,000 of general expense incurred was reasonably related to the performance of the Forest Hills contract and an additional $ 8,000 of general expense incurred was reasonably related to the Loxley Annex contract. Cf. Cohan v. Commissioner, (C. A. 2, 1930) 39 F.2d 540, 543-544; Union Pacific Railroad Co., supra.

These adjustments can be made under Rule 50.

29 T.C. 1205">*1220 Issue 2. Depreciation.

The respondent partially disallowed the depreciation claimed by Forest Hills and Loxley Annex. The dispute here relates only to the basis for depreciation.

In the construction of the multiple-housing projects, Forest Hills and Loxley Annex segregated their costs into groups, viz, land, general improvements, building, building equipment, and furnishings. In addition to the direct costs which could be clearly segregated into the above-mentioned groups there were a number of indirect costs which related to the projects as a whole such as engineering and architect fees, interest on construction loans, legal fees, various types of insurance, depreciation on equipment, etc. The petitioner allocated these indirect1958 U.S. Tax Ct. LEXIS 220">*251 costs to the categories of direct cost, except land, in the same proportion that each category of direct cost bore to the total direct cost, except land. The petitioner then treated the entire cost in each category, except land, as depreciable and computed its depreciation thereon.

The respondent made certain adjustments. First, he divided the direct costs in the category general improvements into depreciable and nondepreciable. (Petitioner had treated all direct costs in that category as depreciable.) In the nondepreciable category he included the direct cost of (1) items which he designated as additional land cost and (2) items which were maintained by the local governments and dedicated to the public use. The former included the cost of site work, grading, landscaping, and planting grass and shrubs. The latter included the cost of street paving, curbs, sidewalks, and utilities such as water and gas mains, storm and sanitary sewers, and drainage facilities. The respondent then divided the indirect costs into depreciable and nondepreciable, the division being in the same ratio that the depreciable and nondepreciable direct costs bore to the total direct costs. The indirect1958 U.S. Tax Ct. LEXIS 220">*252 costs, thus divided, were allocated to all of the categories of direct costs in the same proportion that each category bore to the total direct costs.

The respondent, on brief, has made certain concessions of error relating to the adjustments underlying his disallowance of a portion of the claimed depreciation. These concessions should be given effect under Rule 50. Although it is not clear from certain remarks at the hearing and from the brief which of the adjustments are still being contested, we will hereafter discuss the three basic adjustments of respondent which result in the disallowance, all of which (disallowance) was put in issue by the pleadings.

(a) Additional land cost. -- The petitioner included the direct cost of such items as clearing, grading, and landscaping, including planting of grass and shrubs, in the category of general improvements and 29 T.C. 1205">*1221 claimed depreciation thereon. The respondent has determined that the cost of these items, less a portion which he attributed to depreciable assets, such as buildings, should be added to the cost of the land and treated as nondepreciable.

The petitioner offered no evidence on this point. It would seem that1958 U.S. Tax Ct. LEXIS 220">*253 a portion of the clearing cost would be attributable to the buildings and respondent has allocated a portion thereto. The other items, from their description, appear to be "inextricably associated" with the land rather than the buildings. Furthermore, there are no patent inconsistencies in the adjustments made by respondent relating to these items as there are in some of the other adjustments.

In this state of the record we must uphold the respondent on these adjustments subject, of course, to any concessions made by him in his brief on this point.

(b) Facilities maintained by local governments and dedicated to public use. -- Forest Hills and Loxley Annex, concurrently with the construction of the housing units, constructed sidewalks, curbs, paved streets, sewers, and water mains. Upon completion of the projects the local government units took over all of the functions of maintenance of these facilities and they became part of the street systems for public use and convenience.

The costs of these facilities were capitalized and depreciation was claimed on the capitalized costs. Respondent disallowed the depreciation claimed thereon and contends that Forest Hills and Loxley1958 U.S. Tax Ct. LEXIS 220">*254 Annex had no depreciable interest in these facilities. Petitioner, on the other hand, contends the facilities were constructed for the benefit of the housing units which they held for rental purposes, had no value other than in connection with the housing units, and that they are entitled to recover their cost through depreciation allowances.

It is clear that the facilities in question depreciate, i. e., they are subject to wear, tear, and exhaustion. It is also clear that if these facilities were constructed by the two subsidiary corporations on property owned by them and which they continued to own and possess, they would be entitled to recover their cost by depreciation allowances. Clinton Cotton Mills v. Commissioner, (C. A. 4, 1935) 78 F.2d 292, 296, reversing 28 B. T. A. 1312 (1933). But the question here is whether the depreciation allowance is still available where the facilities are maintained by others and dedicated to the public use.

In F. M. Hubbell Son & Co. v. Burnet, (C. A. 8, 1931) 51 F.2d 644, affirming 19 B. T. A. 612 (1930), the taxpayer, 1958 U.S. Tax Ct. LEXIS 220">*255 an owner of rental property, was required by special assessments to make expenditures on account of paving, curbing, and sidewalk improvements in connection with property owned by it. It capitalized these costs and claimed an allowance for depreciation thereon. The court held that although 29 T.C. 1205">*1222 the improvements increased the rental value of, and benefited, the taxpayer's property that they were not used exclusively in the taxpayer's trade or business but were used primarily in the business and for the service of the public. Also, the property being public property, the taxpayer would not have that special pecuniary interest in the property concerning which a depreciation deduction is allowable.

In the instant case, the facilities were built by the petitioner and turned over to the local governments rather than built by local governments and paid for through special assessments as in the Hubbell case, supra. But any real distinction in what occurred or in principle is at most tenuous. The fact that Forest Hills and Loxley Annex owned all of the adjoining properties is without controlling significance in view of the fact that the facilities are used primarily in the1958 U.S. Tax Ct. LEXIS 220">*256 public business. Obviously, if the local governments had built the facilities and then assessed the adjoining landowner, the landowner could not recover the assessment by way of depreciation allowances. We think the instant facts require the same result. See Wilshire-LaCienega Gardens Co. v. Riddell, (S. D. Calif., 1956) 148 F. Supp. 938">148 F. Supp. 938, 148 F. Supp. 938">940-941, where the same result was reached on facts similar to those here involved.

The petitioner's reliance on Clinton Cotton Mills v. Commissioner, supra, is misplaced. We stated (28 B. T. A. 1312, 1315-1316) that:

If these improvements were on the streets of Clinton dedicated to public use, the cost of paving is not amortizable; F. M. Hubbell Son & Co., 19 B. T. A. 612; affd., 51 Fed. (2d) 644; certiorari denied, 284 U.S. 664">284 U.S. 664; if on its own property and used in its business, it is entitled to recover its investment therein by ratable annual deductions from income. * * *

However, we held for the Commissioner because of a failure of proof. The Court of Appeals1958 U.S. Tax Ct. LEXIS 220">*257 for the Fourth Circuit reversed us on that point on the ground that expenditures were made on private property. The court distinguished the Hubbell case, supra, and in effect agreed with us in principle. Union Electric Co. of Missouri, 10 T.C. 802 (1948), the other case relied on by petitioner, is clearly distinguishable on its facts.

Accordingly, we uphold the respondent on these adjustments subject, of course, to any concessions made by him in his brief on this point.

(c) Allocation of indirect costs. -- Petitioner allocated the indirect costs to all of the direct costs except the land cost. Respondent has adjusted this by allocating a portion of the indirect costs to the land. As pointed out by petitioner, the respondent's allocation contains certain mathematical inconsistencies. Aside from that, we think that respondent was in error in allocating a portion of the indirect costs to basic land cost.

29 T.C. 1205">*1223 A mere glance at the items listed as indirect costs shows that they relate only to the improvements. In these circumstances it is difficult to see why any of them should be allocated to the basic land cost. We, therefore, 1958 U.S. Tax Ct. LEXIS 220">*258 think the indirect costs should be allocated proportionately to all of the direct costs except the basic land cost. Of course, under this holding some of the indirect costs will be allocated to the other items which we have held to be nondepreciable.

Decision will be entered under Rule 50.