United California Bank v. Commissioner

United California Bank (Successor to First Western Bank and Trust Company, by Merger), Petitioner, v. Commissioner of Internal Revenue, Respondent United California Bank v. Commissioner Docket No. 93862 United States Tax Court 41 T.C. 437; 1964 U.S. Tax Ct. LEXIS 168; January 3, 1964, Filed *168 Decision will be entered for the respondent. Petitioner's predecessor, a bank, had its main banking and administration offices in a bank building owned by it. Due to expansion of the bank's activities, additional office space was obtained in an adjoining office building and an adjoining hotel, both also owned by the bank. In 1957, new banking and administrative offices were opened in the office building and all employees were moved out of the hotel and the old bank building. Certain records, furniture and equipment remained in the two buildings until early in 1958. The bank building was likewise used for storing records for the comptroller and records relating to the banking operations of the main office. The records, furniture, and equipment were all removed on or before the first Monday in March of 1958. In October 1958, the old bank building and certain building accessories, equipment, and fixtures were written off and a deduction of $ 267,553.59 was claimed on the bank's 1958 income tax return as an abandonment loss. Early in 1959, the hotel property and the old bank property, together with an adjoining parking lot, were sold pursuant to the exercise of an option granted*169 prior to the write-off. Held, that the $ 267,553.59 is not deductible as an abandonment loss. George H. Koster, for the petitioner. James Booher, for the respondent. Turner, Judge. TURNER *170 *437 The respondent determined a deficiency in income tax against the petitioner's predecessor, First Western Bank & Trust Co., for the year 1958 in the amount of $ 137,333.85. The only issue for decision is whether First Western Bank & Trust Co. physically abandoned a certain building and certain building accessories, equipment and fixtures during 1958 and thereby sustained a loss deductible under section 165(a) or section 167(a) of the Internal Revenue Code of 1954. FINDINGS OF FACT Some of the facts have been stipulated and are found as stipulated. The petitioner is the successor corporation by merger to the First Western Bank & Trust Co. (hereinafter called the bank). The bank *438 was merged into the petitioner under a merger agreement dated January 10, 1961, approved by the California superintendent of banks on*171 February 24, 1961, and the petitioner thereupon succeeded, under the laws of California, to all of the rights, assets, and obligations of the bank. The bank was incorporated under the laws of California on February 10, 1868, under the name German Savings & Loan Society. Its name was changed in 1925 to San Francisco Bank, and in 1954 to First Western Bank & Trust Co. It filed its income tax returns for the years 1958 and 1959 with the district director of internal revenue at San Francisco, Calif. During 1958 the bank owned four parcels of real property located in the financial district of San Francisco, Calif., in a city block bounded by Montgomery Street on the east, Spring Street on the west, Sacramento Street on the north, and California Street on the south. These parcels are hereinafter described. The parcel hereinafter called the "526 California Street property" had a frontage of approximately 62 feet 7 inches on California Street and extended back approximately 139 feet 8 inches from the street. It was acquired by the bank at an undisclosed time prior to 1925, and was improved with an ornate building, four or five stories in height, designed for use as a bank and erected *172 in 1910. The building, which contained a high-ceilinged main banking floor and a balcony, was capped by a dome extending from the balcony level to the top of the building. For many years the bank used this building as its main banking headquarters. The portion of the property to the rear of the building was used as a parking lot. The parcel hereinafter called the States Hotel property was located on the corner of California and Spring Streets, adjoining the western boundary of the 526 California Street property. It had a frontage of approximately 63 feet 4 inches on California Street and extended back approximately 137 feet 6 inches from the street. This property was acquired by the bank in 1937. At an undisclosed time prior to its acquisition by the bank, the property had been improved with a six-story hotel building of brick veneer and wood construction. The bank continued the hotel operations until late in 1955, using part of the building for banking purposes and offices in the meantime. The parcel hereinafter called the 405 Montgomery Street property was located on the corner of Montgomery Street and California Street, adjoining the eastern boundary of the 526 California*173 Street property. It had a frontage of approximately 137 feet 6 inches on Montgomery Street and approximately 138 feet on California Street. This property *439 was acquired by the bank in 1945 for use in connection with expansion of the bank's premises. It was improved by a 15-story office building, which, at the time it was acquired, was known as the Financial Center Building. The name of this building was changed in 1949 to the San Francisco Bank Building, and later to the First Western Bank Building. The bank used some space in this building for its offices, but the amount of space it used was minimal until 1955. The remainder of the building was rented to various tenants. The parcel hereinafter called the parking lot property was located on the corner of Sacramento Street and Spring Street, adjoining the northern boundaries of the States Hotel and 526 California Street properties. It had a frontage of approximately 126 feet 6 inches on Sacramento Street and extended back approximately 137 feet 6 inches from the street. This property was acquired by the bank in 1930. At some undisclosed time prior to 1956, a one-story L-shaped structure was constructed thereon. The*174 bank used this property primarily as a parking lot. Prior to July 1954, the bank was primarily a local savings bank. In July 1954 it purchased the business of the Central Bank of Oakland, Calif., thereby acquiring 15 branch banking offices in various California cities. T.P. Coats, who had been president of the Central Bank, became chairman of the board of directors of the bank. At that time, the board of directors planned to expand the bank's commercial banking business and to further extend its activities throughout the State of California by means of additional acquisitions and the opening of new branch offices. At the time of acquisition of Central, the bank's main banking and administrative offices were located in the 526 California Street building, with additional quarters in portions of the States Hotel and the mezzanine of the 405 Montgomery Street building. There was an entrance to the main floor of the 526 California Street building from the lobby of the 405 Montgomery Street building. In or prior to 1949, an escalator had been installed to connect these two floors, which, due to the downward easterly slope of California Street, were not on the same level. Upon taking*175 office at the bank, Coats inspected the main offices and concluded that they were already overcrowded and inefficient and would be inadequate to accommodate the planned expansion of the bank's activities. In November 1954, the name of the bank was changed from San Francisco Bank to First Western Bank & Trust Co., to reflect the enlarged scope of its operations. In the same month, the bank acquired *440 the businesses of 23 additional banks, providing 31 new banking offices located in various California cities. At Coats' request, the bank's properties committee studied the 526 California Street and States Hotel buildings early in 1955 to determine the feasibility of remodeling them to provide additional operating space. The committee concluded that use of the two buildings on a permanent basis was impractical, citing the different construction and elevations of the two buildings, certain difficulties in complying with the San Francisco building code with respect to the States Hotel, and the costs which would be incurred in remodeling the 526 California Street building to provide usable space out of the dome area. They recommended that the bank either raze the two buildings *176 and erect a new banking building on the site, or else use the 405 Montgomery Street building for banking and administrative offices. In the meantime, additional offices were set up in some of the hotel rooms in the States Hotel to accommodate the bank's increasing staff. As of July 1955, the bank occupied approximately 14,000 square feet of space in the hotel building. The comptroller's department and the commercial banking department were located on part of the first floor of the building. An entrance and two or three steps connected the commercial banking department with the main floor of the 526 California Street building, which was on a slightly different level. The remainder of the first floor of the States Hotel was used as a hotel office until November or December 1955, when the hotel operations in the building were terminated. The States Hotel had faulty plumbing, which at times caused pieces of plaster to become loosened and to fall from the ceilings. The bank also maintained certain administrative offices in the 405 Montgomery Street building during 1955. In August 1955, it occupied approximately 3,500 square feet of space on the 15th floor of that building, approximately*177 1,000 to 1,500 square feet on the second floor, and additional space on the mezzanine. Some time in 1955 or early 1956 the bank decided to move the banking facilities to the main floor of the 405 Montgomery Street building and to utilize additional space on one or more of the upper floors of that building for offices. In order to obtain the necessary additional space, the bank purchased the leasehold interests of certain tenants, failed to renew leases of other tenants when they expired, and shifted some tenants to other locations in the building. Thereafter, portions of the 405 Montgomery Street building were remodeled by a contractor, Cahill Brothers, Inc., at a cost to the bank of approximately $ 2 million. The major part of the remodeling was done to the main floor, mezzanine, and basement areas of the building, and several of the upper floors were renovated. Certain exterior walls *441 were removed and new granite installed, giving the first three floors of the building a more modern facade. At or about the same time, the escalator between the 405 Montgomery Street and 526 California Street buildings was removed. The bank opened its new banking quarters in the 405 Montgomery*178 Street building during May 1957. Some of the administrative and executive offices had previously been moved to that building, but at that time the comptroller's department and certain other offices were still located in the States Hotel and 526 California Street buildings. Subsequently, the comptroller's department was moved to leased offices in a building at Kearny and Sacramento Streets owned by Cahill Brothers, Inc., and the remainder of the employees in the two buildings were moved to the 405 Montgomery Street building. By the end of August 1957, all employees had been moved out of the States Hotel and the 526 California Street buildings. After the banking quarters and administrative offices in the 526 California Street building and the States Hotel were vacated, certain records, furniture, and equipment remained in the buildings. Accounting records for the comptroller's department and certain records concerning main office banking operations were stored in the basement of the 526 California Street building. Furniture and office equipment were stored on the main floor and other areas of that building. In early 1957, Capital Co., a real estate development corporation, expressed*179 to the bank an interest in acquiring the 526 California Street, States Hotel, and parking lot properties for the purpose of constructing an office building thereon. Capital Co. was a subsidiary of Transamerica Corp., which at that time was also the majority stockholder of the bank. In June 1957, Capital Co. began a study of the economic feasibility of its proposed office building and also began attempting to obtain commitments of tenants for the building, in order to determine whether or not to proceed with the project. The bank advised Capital Co. that it would not dispose of the properties until Capital Co. reached its decision. In June 1957, Coldwell, Banker & Co., a real estate brokerage firm, submitted to the bank an offer by Benjamin H. Swig to purchase the States Hotel, 526 California Street, and parking lot properties for $ 1,300,000. Due in part to Capital Co.'s pending interest in the properties, the bank, on July 3, 1957, rejected this offer. Under insurance policies effective July 1, 1957, the bank insured the 526 California Street building in the amount of $ 533,000, and the States Hotel building in the amount of $ 325,000 against fire and other hazards for a 5-year*180 period. The premiums were $ 820.82 for the 526 California Street building and $ 1,316.25 for the States Hotel. These policies were not canceled until the properties were ultimately sold. *442 The minutes of a meeting of the bank's properties committee held on August 23, 1957, state the following: 2. It was reported by the Chairman that the Managing Committee, at its meeting of August 22, 1957, took the following actions;- * * * * c. At Administration #1: San Francisco Office #21 (Former) and States Hotel. "The old bank building on California Street and the States Hotel building have now been completely vacated and it was the consensus of this Committee that the buildings are no longer needed for bank use. Taxes and loss of income on the potential sales price of the building exceed $ 100,000 per year and because of this it is the Committee's recommendation to the Executive Committee that we commence negotiations for the sale of the property. It is also the consensus of the Committee that no attempt should be made to rent the property or to allow the property to be used for any purpose." The total combined area of the 526 California Street, States Hotel, and parking lot properties*181 was approximately 35,000 square feet. Because of the combined area and the proximity of the properties to the intersection of Montgomery and California Streets, which was in the center of the San Francisco financial district, the properties, if sold as a unit, were desirable as a site for a new office building. While Capital Co. was making its study, Coats had numerous discussions with real estate brokers seeking to sell the properties for the bank, particularly Coldwell, Banker & Co. Because Coldwell, Banker & Co. had submitted the Swig offer, Coats promised to contact it in the event Capital Co. decided not to acquire the properties. Early in October 1957, Coats instructed W. E. York, a vice president of the bank, to investigate the possibility of securing a reduction in the real property taxes assessed against the 526 California Street and States Hotel properties. On October 21, 1957, York replied to Coats by memorandum, which read in part as follows: Since the properties were occupied as of the first Monday of March 1957 and not considered to be abandoned as of that date, they were assessed for tax purposes for the tax year 1957-1958. * * * We will follow through with the Tax*182 Assessor's Office for the purpose of securing a reduction of the assessments of the improvements from the standpoint of having them abandoned. This can be done any time between now and the first Monday of March, 1958. Under the California property tax laws, the first Monday of March was the assessment date for property. 1 On November 8, 1957, certain officers of Mercantile Acceptance Corp., a company which did a large amount of business with the bank, *443 inquired whether the bank might be interested in leasing the States Hotel and 526 California Street buildings to it to house part of its operations. Prior to or on November 22, 1957, *183 York informed Mercantile Acceptance Corp. that the buildings were not available for lease at that time. On January 14, 1958, a representative of the assessor of the City and County of San Francisco inspected the interiors of the 526 California Street and States Hotel buildings. At that time, certain records, furniture, and equipment were still being stored in the buildings. Shortly thereafter, the assessor's office indicated to York that it would reduce the 1958-59 assessment of the buildings if the remaining items being stored therein were removed before March 3, 1958, the assessment date. The assessor's office also indicated to York that if it were informed prior to July 1, 1958, of definite plans to demolish the buildings, a further reduction would be possible. 2 On or about March 3, 1958, the removal of all the records, furniture, and equipment from the two buildings was completed. *184 On June 5, 1958, York, in a letter to the assessor, stated the following: all usable furniture and equipment have been removed except two (2) vault doors located on the first floor which are in place but which we plan to remove and use in other of our offices. * * * * This is to advise you that we have definitely abandoned and vacated the buildings, with the exception of the above referred to vault doors. It is expected that these buildings will be demolished however no definite schedule has been set for this demolition. We request that your Office give full consideration to these circumstances in arriving at the 1958-1959 assessments. Subsequently the assessor reduced the assessed values of the improvements on the 526 California Street, States Hotel, and parking lot properties for the tax year 1958-59 from those of the prior year as follows: Assessed value of improvements Property 1957-58 1958-59 526 California Street $ 150,000 $ 50,000 States Hotel 40,450 20,000 Parking lot 30,000 15,000 The bank paid the real estate taxes assessed against the land and improvements of the 526 California Street property for the first half of the tax year 1958-59. *185 After all of the records were removed from the 526 California Street building and until its subsequent sale, all utilities except water *444 were shut off, but the bank continued to pay "standby" utility charges for retention of the meters for steam, electricity, and gas therein. Water service was continued as a protection against fire. Some of the lighting fixtures and telephones were removed, but others remained, as did the gas heating plant. The electrical and telephone wiring also remained. Most of the doors were boarded up. The building was inspected periodically in order to prevent loitering and nuisances therein. On March 13, 1958, pursuant to a direction made by the bank's executive committee on February 11, 1958, entries were made in the bank's books transferring the amounts in the "Buildings," "Land," and "Building Assessories" accounts applicable to the 526 California Street and States Hotel properties to an account designated "Other Real Estate -- Bank Premises," with corresponding entries in the respective reserves for depreciation. The purpose of these entries was to reflect the cessation of active use of the properties in the banking business, since, under*186 California law, there were restrictions against the ownership by banks of real property not used in their banking operations. 3 *187 *445 On August 15, 1958, Capital Co. advised the bank that it was not interested in acquiring the States Hotel, 526 California Street, and parking lot properties, because of its involvement in another project and its inability to obtain commitments of tenants for its proposed building. Immediately thereafter, Coats notified Coldwell, Banker & Co. that the bank was in a position to sell the properties. Coldwell, Banker & Co. then produced a prospective purchaser, Cahill Brothers, Inc., the firm which had remodeled the 405 Montgomery Street building. In a letter dated August 25, 1958, Cahill Brothers, Inc., offered to pay $ 50,000 for a 90-day option to purchase the States Hotel, 526 California Street, and parking lot properties for the sum of $ 1,550,000, with the privilege of extending the option period for a further 60 days upon payment of an additional $ 25,000. Both the original $ 50,000 payment and the supplemental $ 25,000 payment, if made, were to be applied to the purchase price if the option were exercised. On August 27, 1958, Coats wrote a letter to the president of Firstamerica Corp. (which had succeeded Transamerica Corp. as the majority stockholder of the bank) *188 seeking its approval of the proposed sale. In his letter, Coats said: When we moved our banking quarters some fifteen months ago from the old San Francisco Bank building and the States Hotel building, we declared the property as being abandoned for further occupancy. This action was taken in order to secure a reduction in taxes on the old property. * * * * [A summary of the offer follows.] The top of several appraisals of the property is $ 1,150,000. I am enclosing statement as of July 31, 1958, which, among other things, sets forth a net book gain of $ 697,014.07. Our Executive Committee at their meeting yesterday were in unanimous favor of proceeding to conclude the sale and were of the opinion that the offer was a highly acceptable one. It was pointed out that the cost of carrying these properties approximates $ 100,000 annually, with consideration given to taxes, insurance, maintenance and the loss of the use of the investment dollars. We shall appreciate your efforts in taking the necessary steps in order that we may proceed to sell the property. * * * Appended to the letter was the following schedule, which had been prepared by the comptroller's department of the bank: *446 *189 FIRST WESTERN BANK & TRUST CO. SCHEDULE OF PROPOSED SALE OF FORMER MAIN OFFICE AND STATES HOTEL AS OF JULY 31, 1958 Description Cost price Reserve for Net book Sales price depreciation value Land -- former main office and customer's parking lot $ 190,500.00 $ 190,500.00 Land -- States Hotel 134,941.29 134,941.29 Land -- lower parking lot 41,976.70 41,976.70 Building -- States Hotel 105,238.79 $ 105,238.79 Building -- former main office 965,033.14 773,230.52 191,802.62 Building accessories -- States Hotel 16,900.45 16,900.45 Building accessories -- former main office 75,285.67 44,960.56 30,325.11 Total per books 1,529,876.04 940,330.32 589,545.72 $ 1,550,000.00 Federal and State income taxes (28.84% of net taxable gain) Total -- net of taxes FIRST WESTERN BANK & TRUST CO. SCHEDULE OF PROPOSED SALE OF FORMER MAIN OFFICE AND STATES HOTEL AS OF JULY 31, 1958 Reserve for Net taxable Description Net book writedown for gain on gain on sale tax purposes sales only Land -- former main office and customer's parking lot Land -- States Hotel Land -- lower parking lot Building -- States Hotel Building -- former main office Building accessories -- States Hotel Building accessories -- former main office Total per books $ 960,454.28 1 $ 47,000.00 $ 913,454.28 Federal and State income taxes (28.84% of net taxable gain) 263,440.21 263,440.21 Total -- net of taxes 697,014.07 47,000.00 650,014.07 *190 *447 At an undisclosed date subsequent to the preparation of the foregoing schedule, the comptroller advised Coats that, on the basis of tax research done by a member of his staff and discussions with the bank's accountants and tax counsel, he had concluded that the bank should "write down" on its books the 526 California Street building, and its building accessories, vault equipment, and banking fixtures, and should claim an abandonment loss for the property on its 1958 income tax return. 4 On September 17, 1958, the board of directors of the bank unanimously approved the offer from Cahill Brothers, Inc. On September 22, 1958, the bank and Cahill Brothers, Inc., executed an option agreement, incorporating the terms of that offer and providing that the payments made for the option would be forfeited if the option were not exercised within the time allotted. Concurrently with the execution*191 of the option agreement, Cahill Brothers, Inc., paid to the bank the $ 50,000 payment required by the agreement. The option agreement contained the following provision: 5. Until the option is exercised by the Purchaser, and for a period of 25 days after the exercise of the option, the Bank shall have the right at its own expense to remove any bank fixtures, vault doors or lighting equipment located in the buildings presently in existence on the Optioned Property. Any such bank fixtures, vault doors or lighting equipment removed by the Bank under the provisions of this paragraph 5 shall remain the property of the Bank free of any claim on the part of the Purchaser. Another provision of the agreement required execution by the purchaser of an indenture containing the following covenant: (a) For a period of 20 years from and after the date hereof, [purchaser] shall not use or permit to be used parcel 1 1 or any structure located thereon for the purpose of conducting the business of a state or national commercial or savings bank or trust company or the business of a state or federal building and loan or savings and loan association or corporation or the business of a loan company similar*192 to the present business of Morris Plan and Fireside Thrift, provided that this restriction shall not prevent the use of parcel 1 or of any structure located thereon for clerical office space of such excluded type of tenant if said clerical office space is not generally used for the transaction of business with customers, and provided, further, that this restriction shall not prevent the use of any portion of a structure located on parcel 1 above the ground or street floor thereof by any person, firm or corporation other than a state or national commercial or savings bank or trust company. This restriction, which was inserted pursuant to a prior letter agreement between the bank and Cahill Brothers, Inc., dated September 3, 1958, was of a type customarily required by the bank in sales of former banking properties. *448 At a meeting held on October 15, 1958, the "abandonment" was brought to the attention of the board of directors. As shown by the minutes, Coats stated to the board that "all of the personnel and the bank offices were moved out of these buildings [526 California*193 Street and States Hotel] late in 1957, and all of the furniture and equipment was moved out of the buildings early in 1958 and the buildings were completely abandoned." He noted that an option to purchase the properties had been "extended" to Cahill Brothers, Inc., with the approval of the board. The minutes of the meeting reflect the board's approval of the "abandonment" as follows: During the discussion of this matter the Chairman expressed the view, concurred in by the Board, that the approval by this Board to the extension of option was also approval by this Board of the action of the officers in abandoning the properties as described by the Chairman, and that no further action in that regard need be taken at this meeting, but suggested that this matter be called to the attention of the Comptroller of the Bank so that proper accounting entries might be made in accordance with the facts as outlined by the Chairman. Coats then instructed the comptroller to make the appropriate accounting entries. On October 24, 1958, an entry was made removing the 526 California Street building, its building accessories, vault equipment and banking fixtures, and the related reserves for depreciation, *194 from the books of the bank and charging $ 267,553.59 to "Sundry Losses." This amount represented the net depreciated cost of the assets at October 31, 1958, computed as follows: Depreciation Depreciation Net depreciated Property 1 Cost reserve 1958 (Jan. 1- cost Dec. 31, 1957 Oct. 31) Oct. 31, 1958 Building $ 965,033.14 $ 764,250.64 $ 12,828.40 $ 187,954.10 Building accessories 75,285.67 41,065.55 5,564.30 28,655.82 Vault equipment 55,040.20 5,569.80 618.38 48,852.02 Banking fixtures 2,685.87 420.42 173.80 2,091.65 Total 1,098,044.88 811,306.41 19,184.88 267,553.59 The explanation of the entry read: "To write-off as abandonment 526 Calif. St. and States Hotel buildings as of 10/31/58." *195 5 Prior to or on December 19, 1958, Cahill Brothers, Inc., pursuant to the terms of the option agreement, extended the original 90-day period for an additional 60 days by paying an additional $ 25,000 to the bank. Sometime shortly after January 27, 1959, the bank, with the approval of Cahill Brothers, Inc., removed the two vault doors from the 526 California Street building. *449 On February 2, 1959, the sale of the 526 California Street, States Hotel, and parking lot properties was consummated. Rather than formally exercising the option in its own name, Cahill Brothers, Inc., arranged to have the transaction consummated with a nominee corporation named 550 California Street, Inc. The purchase price of $ 1,550,000 was paid by means of cash and a purchase money deed of trust, the necessary agreements were executed by the parties, and a deed to the properties was issued to 550 California*196 Street, Inc. Expenses totaling $ 41,705 were paid out of the funds in escrow and charged against the amounts owing to the bank. These expenses consisted of a $ 40,000 commission paid to Coldwell, Banker & Co. pursuant to the terms of the option agreement and $ 1,705 paid for revenue stamps. Also charged against the amounts owing to the bank was the sum of $ 1,575.93, representing the real estate tax assessment on the three properties for the period from January 1, 1959, to February 2, 1959, the date of sale, computed on a pro rata basis. The insurance policies covering the States Hotel and the 526 California Street buildings were canceled as of February 2, 1959, and the bank received premium refunds of $ 897.69 and $ 559.80, respectively. Shortly after the sale of the properties was completed, the purchaser demolished the States Hotel, the 526 California Street building, and approximately one-half of the L-shaped structure located on the parking lot, and constructed a nine-story office building on the site. On its 1958 income tax return, the bank claimed a deduction for "Loss on abandonment of furniture, bank premises and equipment." $ 267,533.59 of this deduction represented the*197 claimed abandonment loss on the 526 California Street building and the building accessories, vault equipment, and banking fixtures. The bank included in its deductions for depreciation on its 1958 return the amount of $ 19,184.88 representing depreciation through October 31, 1958, on the 526 California Street building and the building accessories, vault equipment, and banking fixtures written off. On the bank's 1959 return the amount reported as long-term capital gains included $ 1,093,877.01, the total gain reported on the sale of the 526 California Street, States Hotel, and parking lot properties, computed as follows: Sales price Cost Land -- 526 California Street and customer's parking lot (former main office) $ 803,650.20 $ 237,500.00 Land -- States Hotel 569,266.95 134,941.29 Land -- lower parking lot 177,082.85 41,976.70 1,550,000.00 414,417.99 Expense of Long-term sale gain Land -- 526 California Street and customer's parking lot (former main office) $ 21,623.38 $ 544,526.82 Land -- States Hotel 15,316.95 419,008.71 Land -- lower parking lot 4,764.67 130,341.48 41,705.00 1,093,877.01 *450 The respondent disallowed the $ *198 267,533.59 loss claimed on the 1958 return, on the ground that the bank had not abandoned the property. He allowed an additional deduction of $ 4,950.06 representing depreciation for the months of November and December 1958, rather than to October 31, 1958, as claimed. The bank did not abandon the 526 California Street building and its building accessories, vault equipment, and banking fixtures during the year 1958. Upon the sale of its property in 1959, the bank did not sustain a loss but realized gain, and that is true whether the amount charged off in 1958 is or is not included as a part of the basis of the property for computing gain or loss. OPINION The petitioner contends that its predecessor, First Western Bank & Trust Co., retired the 526 California Street building and certain building accessories, vault equipment, and banking fixtures by abandonment during 1958, and thereby sustained a loss deductible under section 165(a)6*199 or section 167(a) 7 of the Internal Revenue Code of 1954. It is the contention of the respondent that the bank sustained no loss due to abandonment of the property in 1958, but to the contrary sold the property in 1959, realizing a gain thereon. According to subsection (a) of section 1.167(a)-1, Income Tax Regs., the allowance for depreciation, which includes a reasonable allowance for obsolescence, is that amount which should be set aside for the taxable year under a reasonably consistent plan, so that at the end of the estimated useful life the aggregate of the amounts so set aside, plus the salvage value, will equal the cost or other basis of the property. By subsection (b), it is provided (1) that for the purposes of section 167, supra, "the estimated useful life of an asset is not necessarily the useful life inherent in the asset *200 but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production" of income, (2) that "experience with similar property taking into account present conditions and probable future developments" is a matter for consideration in determining the period of estimated useful life, (3) that salvage is not a factor, and (4) that "The estimated remaining useful life may be subject to *451 modification by reason of conditions known to exist at the end of the taxable year and shall be redetermined when necessary regardless of the method of computing depreciation. However, estimated remaining useful life shall be redetermined only when the change in the useful life is significant and there is a clear and convincing basis for the redetermination." Under subsection (c), "Salvage value must be taken into account in determining the depreciation deduction either by a reduction of the amount subject to depreciation or by a reduction in the rate of depreciation, but in no event shall an asset (or an account) be depreciated below a reasonable salvage value." In section 1.167(a)-9 of the regulations, dealing with obsolescence, *201 it is specifically provided that "In any case in which the taxpayer shows that the estimated useful life previously used should be shortened by reason of obsolescence greater than had been assumed in computing such estimated useful life, a change to a new and shorter estimated life computed in accordance with such showing will be permitted." The provisions covering the determination of the tax consequences of the retirement of a depreciable asset are set forth in section 1.167 (a)-8 of the regulations. As used therein, "retirement" is defined to mean "the permanent withdrawal of depreciable property from use in the trade or business or in the production of income." The withdrawal "may be made by selling or exchanging the asset, or by actual abandonment" and "the asset may be withdrawn from such productive use without disposition as, for example, by being placed in a supplies or scrap account." Where, as here, the basis of the claim of loss is abandonment, the pertinent regulation is subsection (a)(4) of section 1.167(a)-8, and petitioner does not claim otherwise. Subsection (a)(4) reads as follows: Where an asset is retired by actual physical abandonment (as, for example, in the*202 case of a building condemned as unfit for further occupancy or other use), loss will be recognized measured by the amount of the adjusted basis of the asset abandoned at the time of such abandonment. In order to qualify for the recognition of loss from physical abandonment, the intent of the taxpayer must be irrevocably to discard the asset so that it will neither be used again by him nor retrieved by him for sale, exchange, or other disposition. As for section 165 of the Code, also relied on by the petitioner, the regulations thereunder, section 1.165-2, specifically refers to section 1.167(a)-8 as the regulation covering the allowance "of losses arising from the permanent withdrawal of depreciable property from use in the trade or business or in the production of income." In order to establish actual physical abandonment, there must be an intention on the part of the owner to abandon the property coupled with an act of abandonment, both to be ascertained from all facts and surrounding circumstances. Beus v. Commissioner, 261 F. 2d 176, *452 affirming 28 T.C. 1133; Talache Mines v. United States, 218 F. 2d 491.*203 Mere nonuse of the property is not sufficient. Beus v. Commissioner, supra;Citizens Bank of Weston, 28 T.C. 717; Ewald Iron Co., 37 B.T.A. 798; I. G. Zumwalt, 25 B.T.A. 566. The facts show that in 1955 the bank had decided that the 526 California Street building was unsuited and inadequate for its needs and either in 1955 or at the latest early in 1956 decided to remodel the 405 Montgomery Street building to meet its requirements and to move its banking operations into that building when the remodeling had been completed. The question was what would it do with the 526 California Street building, States Hotel, and the parking lot property. By the end of August 1957, all employees had been moved from 526 California and States Hotel. Certain furniture, equipment, and records remained and 526 California was also used for storing records for the comptroller and records relating to the banking operations of the main office. At or about the same time, the bank's managing committee was recommending that negotiations for the sale of the property be commenced and*204 that no attempt be made to rent the property or to allow its use for any purpose. As a matter of fact, Capital Co., a real estate development corporation and likewise a subsidiary of Transamerica Corp., was studying the feasibility of buying the three properties as a site for an office building and the bank had agreed not to dispose of the properties until Capital Co. had reached its decision. In keeping therewith, the bank in July of 1957 rejected an offer of $ 1,300,000 for the properties and on November 8, 1957, received an inquiry from a corporation with which it did a large amount of business about leasing the properties. The response to the inquiry, made on November 22, was that the buildings were not available for lease at that time. In October of 1957, Coats, the president, instructed York, a vice president, to investigate the possibility of securing a reduction in real property taxes. York learned that the critical date was the first Monday in March of each year, the asseessment date, and that the first date for his purpose would be the first Monday in March of 1958. He also learned that he would be expected to make a showing that the buildings were not being used on*205 that date. To make the required showing, the records and furniture were removed by March 3, 1958, and reduction in the real estate taxes was procured, with the assessor's office indicating to York that if prior to July 1, 1958, word was received of definite plans to demolish the buildings, a further reduction in taxes would be possible. To that end, York on June 5, 1958, made an attempt to make a satisfactory showing to the assessor's office, writing that the buildings had been definitely vacated and abandoned and that "It is expected that these buildings will be demolished however no *453 definite schedule has been set for this demolition." With respect to demolition, however, we are satisfied from the evidence that the bank's purpose and intention was at all times to sell the properties, including the buildings, and that demolition by the bank was not in fact ever very seriously in the picture. The facts further show that after removing the records and furniture from the building, to obtain the reduction in real estate taxes, the bank continued to maintain its insurance against fire and other hazards. Water service was continued and though the other utilities were cut off*206 the meters for steam, electricity, and gas were retained and "standby" charges were paid therefor. Some lighting fixtures and telephones were removed, but others remained, as did the gas heating plant. The electrical and telephone wiring also remained. Two vault doors which the bank planned to retain were also left in place. The bank continued to carry the 526 California Street building as an asset on its books and to record depreciation thereon. On August 15, 1958, Capital Co. advised the bank that due, among other things, to involvement in another project it was not interested in acquiring the properties in question, whereupon Coats immediately notified Coldwell, Banker & Co., who had submitted the earlier offer of purchase, and Coldwell quite promptly produced the offer from Cahill Brothers, Inc., which proved to be the successful offer. Cahill Brothers, Inc., had done the remodeling of 405 Montgomery for the bank. The formal offer was received by letter dated August 25, 1958, wherein it was proposed that $ 50,000 be accepted for a 90-day option to purchase the three properties for $ 1,550,000, with the privilege of extending the option for a further period of 60 days upon*207 a further payment of $ 25,000. Both of these payments were to be applied to the purchase price upon exercise of the option. Two days later, August 27, 1958, Coats wrote the president of Firstamerica Corp. (which had succeeded Transamerica to the position of majority stockholder of the bank), seeking approval of the sale pursuant to the Cahill offer. Appended to the letter was a schedule setting forth that the result of the sale would be the realization of gain in the amount of $ 697,014.07 and the details from which this result was derived. There was no reduction of basis which in any way reflected that any abandonment of the improvements had occurred or was intended. The response of Firstamerica is not shown, but on September 17, 1958, the board of directors unanimously approved the offer from Cahill Brothers, Inc., and on September 22, 1958, the bank and Cahill Brothers, Inc., executed an option agreement, incorporating the terms of the offer and providing that the payments made for the option would be forfeited if the option were not exercised within the time *454 allotted. Concurrently therewith Cahill Brothers paid the $ 50,000 as required by the agreement. The agreement*208 contained a provision whereby the bank, for the period until the option was exercised and for 25 days thereafter, should have the right to remove "any bank fixtures, vault doors or lighting equipment located in the buildings," such property to remain the property of the bank free of any claim on the part of the purchaser. The agreement required execution by the purchaser of a covenant that for a period of 20 years from the date of purchase, the purchaser would not use or permit the use of the property for conducting "the business of a state or national commercial or savings bank or trust company or the business of a state or federal building and loan or savings and loan association or corporation or the business of a loan company similar to the present business of Morris Plan and Fireside Thrift." This restriction was of the type customarily required by the bank in sales of former banking properties and had been previously agreed to by a letter between the parties dated September 3. On some undisclosed date after the receipt of the Cahill offer and after the preparation by the comptroller of the schedule showing what would be the result of the sale of the properties pursuant to the*209 offer which was sent to Firstamerica on August 27 (but whether before or after the approval of the offer on September 22 is not shown), the comptroller advised Coats that on the basis of tax research by a member of his staff and of discussions with the bank's accountants and tax counsel, he had concluded that the bank should "write down" on its books the 526 California Street building, its building accessories, vault equipment, and bank fixtures, and should claim an abandonment loss for the property on its 1958 income tax return. The "abandonment" of the 526 California Street improvements was brought up before the bank's board of directors at a meeting held October 15, 1958. According to the minutes, Coats stated to the board that "all of the personnel and the bank offices were moved out of these buildings late in 1957, and all of the furniture and equipment was moved out of the buildings early in 1958 and the buildings were completely abandoned." He noted that the option to purchase the properties had been "extended" to Cahill Brothers with the approval of the board. Also according to the minutes, "the Chairman expressed the view, concurred in by the Board, that the approval by*210 this Board to the extension of option was also approval by this Board of the action of the officers in abandoning the properties as described by the Chairman, and that no further action in that regard need be taken at this meeting." The minutes further recited that the chairman suggested that "this matter be called to the attention of the comptroller of the bank so that proper accounting entries might be made in accordance with the facts as outlined by the Chairman." *455 Coats thereafter instructed the comptroller to make the appropriate accounting entries, and on October 24, 1958, entries were made writing off the 526 California Street building, the building accessories, vault equipment, and bank fixtures. As entered, the writeoffs were Building -- $ 187,954.10, Building Accessories -- $ 28,655.82, Vault Equipment -- $ 48,852.02, and Banking Fixtures -- $ 2,091.65, for a total of $ 267,553.59, the explanation of the entry being "To write-off as abandonment 526 Calif. St. and States Hotel buildings as of 10/31/58." The record is unclear as to the extent to which the categories Building Accessories, Vault Equipment, and Banking Fixtures written off included bank fixtures, vault*211 doors, or lighting equipment, specifically reserved to the bank under the option agreement until the exercise of the option and for a period of 25 days thereafter. The facts do show that the bank did remove the vault doors and from the evidence relating to their removal it may not be concluded that they were a minor or insignificant item. Further, the evidence shows that not later than early 1956 and possibly in 1955 the bank concluded from a study of the 526 California Street building that it did not meet its needs and feasibly could not be remodeled to do so, and the plans were set to move its operations therefrom as soon as the remodeling of the 405 Montgomery Street building should be completed. It does not appear, however, that at the end of 1955, 1956, or 1957, the bank, pursuant to the provisions of sections 1.167(a)-1(b) and 1.167(a)-9 of the regulations, made a redetermination as to whether by reason of the developments set forth there had been a curtailment in the previously estimated useful life of the property due to obsolescence, allowance for which should be made in those years. Be that as it may, there was no such redetermination, and the bank continued to record*212 and claim depreciation on the basis of the previously estimated useful life of the properties until October 1958, when the entire undepreciated cost of Building, Building Accessories, Vault Equipment, and Banking Fixtures remaining on its books was written off "as abandonment 526 Calif. St. and States Hotel buildings as of" October 31, 1958. On the facts as shown by the evidence of record, we are convinced and accordingly conclude and hold that there was no abandonment of the properties in question within the meaning of the statute and the regulations thereunder, but there was at all times the purpose to retain and hold the properties for sale. And whatever the references to abandonment in the minutes and the intraoffice communications or in the correspondence with the assessor seeking a reduction in the real estate taxes there was never any intention on the part of the bank to scrap or demolish the property or irrevocably to discard it so that it would not be retrieved for sale. *456 In our consideration of the evidence and the questions posed, we have not ignored the opinions expressed by one or more of the witnesses that the improvements were not in fact assets but liabilities*213 and the land would be of greater value without them. Although there is no showing as to the value of the salvage when compared to cost of demolition, it could well be that where the purpose to which the land was to be put by the purchasers was such as to require complete removal of existing improvements the property would have commanded a higher price absent the improvements. If, however, it be accepted as a fact that the improvements were a liability in 1958, it could well follow that, at some point in 1955 or early 1956, and possibly even before, a redetermination of useful life was required as provided by sections 1.167(a)-1(b) and 1.167(a)-9 of the regulations. No such question has been argued, and we are not called on to decide it. Relying on S. S. White Dental Mfg. Co. v. United States, 102 Ct. Cl. 115, 55 F. Supp. 117, petitioner argues that it matters not that the property was sold if prior to sale it was discarded or abandoned. We think such reliance is misplaced. In that case, the taxpayer operated three manufacturing plants, located at Frankford, Pa., Northwood, Pa., and Staten Island, N.Y. In 1936 and 1937 the Northwood*214 plant was in good condition and adequate for the taxpayer's operations. However, to effect operating economies, the taxpayer's executive committee decided, on April 1, 1936, to transfer the operations of the Northwood plant to Staten Island and to build a new plant at the latter location to house the consolidated operations. The new plant was completed and all operations of the Northwood plant were moved into it by May 1, 1937, at which time the Northwood plant was vacated. It was not thereafter used by the taxpayer. The Northwood plant was offered for sale in 1936 and was sold on July 1, 1937, for a net sale price substantially less than its adjusted basis. The Commissioner treated the taxpayer's loss as a loss in 1937 on the sale of a capital asset. Under section 117(d) of the Revenue Act of 1936, such losses were deductible only to the extent of $ 2,000 plus the amount of capital gains. The taxpayer contended that its loss was deductible in full as a loss on abandonment under section 23(f) of the 1936 Act, the predecessor of section 165(a) of the 1954 Code. Interpreting the regulations then applicable, Regs. 94, article 23(e)-3, in a manner not entirely free from controversy, *215 the Court of Claims held the loss to be a loss on abandonment. Since the decision in S. S. White Dental Mfg. Co. turned entirely on the interpretation of certain regulations differing significantly from those involved in this case, we do not consider that decision to *457 be controlling here. In S. S. White Dental Mfg. Co. it was found as a fact that the Northwood plant had been in good condition and adequate for the taxpayer's manufacturing operations. Apparently the taxpayer intended from the outset to sell the plant. However, no provision of the regulations then applicable expressly denied recognition of the loss where the intent of the taxpayer was to retrieve the property for sale, exchange, or other disposition. The regulation applicable in this case, section 1.167(a)-8, Income Tax Regs., does contain a provision to that effect. 8 *216 Decision will be entered for the respondent. Footnotes 1. Cal. Rev. & Tax. Code: Sec. 405. Annual Assessment; time Annually, the assessor shall assess all the taxable property in his county, except State assessed property, to the persons owning, claiming, possessing, or controlling it at 12 o'clock meridian of the first Monday in March. The assessor shall ascertain such property between the first Mondays in March and July.↩ 2. The assessor was required to complete the local tax rolls on or before the first Monday in July. Cal. Rev. & Tax. Code, sec. 616↩. 3. Cal. Fin. Code Ann.: Sec. 750. Power to acquire and dispose of realty; purposes. A bank or trust company may purchase, acquire, hold, or lease real property or an interest therein only as follows: (a) Such as may be necessary or convenient for the use, operation or housing of its head office and branch offices, or for the storage of records or other personal property, or for office space for use by its officers or employees, or which may be reasonably necessary for future expansion of its business, or which is otherwise reasonably related to the conduct of its business. Real property used by a bank as its banking premises may include in addition to the space required for the transaction of its business other space which may be let as a source of income. * * * * Sec. 751. Holding of realty; duration; sale or exchange; book value↩. All real property not held for any purpose permitted by subdivision (a) of Section 750 of this chapter shall be: (a) sold, or exchanged for other real property, within 10 years from the date of its acquisition or within 10 years from the time when it ceases to be held for any such purpose; or (b) written down on the books of the bank or trust company to a valuation of one dollar ($ 1). Any real property taken in exchange may be held for such period as the superintendent may determine but for not more than 10 years from the date of the exchange unless it is used for one of the purposes set forth in subdivision (a) of Section 750 of this chapter, or is written down on the books of the bank to a valuation of one dollar ($ 1). In any case any real property not held for any purpose permitted by subdivison (a) of Section 750 of this chapter shall be sold whenever the same can be sold for an amount sufficient to reimburse the bank or trust company for all loss arising out of the loan for which such real property was security or arising out of the original investment unless the superintendent consents to the retention of such real property by the bank or trust company for such period as he may prescribe, which consent shall be conditioned upon the real property being written down to a valuation of one dollar ($ 1) and shall not be given unless the same may be written down to such valuation without encroachment upon the bank's capital or surplus. * * * 1. This item was not explained.↩ 4. The States Hotel building and accessories were already fully depreciated at the time.↩ 1. "Parcel 1" embraced generally the States Hotel, 526 California Street, and parking lot properties.↩ 1. York's testimony indicates that a portion of the amounts shown under "Building Accessories" may have been attributable to the States Hotel. The record is unclear as to the extent to which the assets written off included "bank fixtures, vault doors or lighting equipment," which, under the option agreement with Cahill Brothers, Inc., the bank had the right to remove until the option was exercised and for a period of 25 days thereafter.↩ 5. Since the States Hotel building and its accessories were already fully depreciated no loss was recorded on the writeoff of them.↩ 6. SEC. 165. LOSSES. (a) General Rule. -- There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.↩ 7. SEC. 167. DEPRECIATION. (a) General Rule. -- There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) -- (1) of property used in the trade or business, or (2) of property held for the production of income.↩ 8. In passing it may be observed that the years involved in the S. S. White Dental Mfg. Co↩. case were 1936 and 1937 and that by the enactment of sec. 117(j) in the 1942 Act, now included in sec. 1231, 1954 Code, losses on the sale of property used in the trade or business are no longer restricted to $ 2,000 plus the amount of capital gains realized.