Appeal of A. Wilhelm Co.

[3] OPINION. Phillips : Substantially all of the facts are stipulated. Taxpayer leased its plant under an agreement by which the lessee covenanted to bear the “ expenses of maintaining its plant and assets according to the same standard and condition heretofore and at present existing, including the cost of new construction, new machinery, equipment, fixtures, furniture and other items of principal assets, where the same shall be necessary to replace depreciation and maintain said present existing standard and condition ” and, at the expiration of the lease, to return “ said plant, business and assets in the same condition as the same now exists, (except for such changes or replacements thereof as are necessary and usual to the normal conduct of its business) the aggregate of which assets, except the good will and trade marks, shall be of at least as great book value and actual value when so returned as the aggregate of such assets as at present existing.” The lease was to continue for five years, with the right to the lessee at any time to purchase at a stated price. The lessee made repairs in the maintenance of the plant and erected new buildings and installed new equipment at a cost considerably in excess of the depreciation claimed. The Revenue Act provides that in computing net income a deduction may be taken of a reasonable allowance for exhaustion, wear and tear. What is a reasonable allowance must be determined from all the facts and circumstances. In the peculiar circumstances hero involved, considering that the lessee was bound to make good all depreciation by replacements or additions, it is our opinion that no allowance could be justified as reasonable. Taxpayer lays stress upon the refusal of the Commissioner to allow such deduction to the lessee, taking the position that depreciation took place and is deductible by either the lessor or the lessee. [4] Since we are not called upon to determine the tax liability of the lessee in this proceeding, we express no opinion upon the ruling made with respect to it. Decision will be entered for the 0ommissioner.