General Electric, of which $496,525 is allocable to the land, and the balance of $9,695,000 is allocable to the buildings and improvements. The balance of the purchase price amounting to $1,777,342 was allocated to the cost of the other nine buildings, of which $147,342 represented the cost of the land, and $1,630,000 represented the cost of buildings and improvements.

In its first return for the taxable period ended December 31, 1961, the petitioners adopted the declining-balance method of depreciation and attributed a useful life of 15 years to all of the buildings and improvements. The petitioners have since modified their position. The petitioners now claim that for purposes of depreciation a part of the cost of the properties leased to General Electric should be amortized over the term of the leases as a "premium" paid for the so-called excess rents to be received during that term. The petitioners would depreciate the remainder of the cost of these buildings over the primary term (including the 2-year "tail" where applicable) of the General Electric leases. With respect to the remaining properties, the petitioners now concede that the buildings had a useful life of 3313 years.

At the outset, the Court is thus called upon to decide whether the petitioners may allocate some part of the purchase price of the properties to the value attributable to the General Electric leases separate and apart from the interest in the fee. In effect, the petitioners would carve out an estate for a term of years, coterminous with the primary term of the General Electric leases, as a separate and distinct amortizable interest in the properties. Such argument not only runs counter to the basic concepts of the laws of real property but is incompatible with certain prior decisions of this Court. Milton H. Friend, et al., Trustees, 40 B.T.A. 768 (1939), affd. 119 F. 2d 959 (C.A. 7, 1941); Martha R. Peters, 4 T.C. 1236 (1945); Rosalie M. Shubert, 33 T.C. 1048 (1960), affd. 286 F. 2d 573 (C.A. 4, 1961), certiorari denied 366 U.S. 960 (1961). We do not regard the decision in the World Publishing Co. v. Commissioner, 299 F. 2d 614 (C.A. 8, 1962), reversing 35 T.C. 7 (1960), as impinging in any way upon the cited cases.3

Commissioner v. Moore, 207 F. 2d 265 (C.A. 9, 1953), certiorari denied 347 U.S. 942 (1954), reversing and remanding the decision of this Court (15 T.C. 906), presented a situation where the taxpayer

2 See 1 Tiffany, Law of Real Property, par. 151 (3d ed. 1939); 3 Tiffany, supra, par. 901. Rev. Rul. 73-410, 1973–2 C.B. 53, also relied on by the petitioners, is wholly irrelevant. That ruling merely states that a taxpayer purchasing land and a building may allocate, for purposes of depreciation, such cost separately to the various depreciable components of the building rather than adopt a composite rate for the building as a whole. The ruling does not recognize any right on the part of the taxpayer to segregate the purchase price as between a term of years represented by a favorable lease and the remaining useful life of the building.

had acquired by inheritance property subject to a 99-year lease. In substance, the appellate court held that if the taxpayer's basis for the property had been determined by reference to the value attributable thereto on account of the lease, as distinguished from the same property free and clear, the excess, if any, of such value over the residual value of the land should be amortized over the remaining term of the lease. Even were we to accept that principle, it would have no application to the facts of the case now before us.

The petitioners did not purchase the leases, as such. They purchased the fee, including both the right to receive rents during the respective terms of the various leases, as well as the right to possession upon the expiration of those leases. Until the trial of this case, there was no attempt to allocate any part of the cost to the leases per se as distinguished from the depreciable properties. Petitioners would now make such allocation by assuming a residual value after the initial term of the leases and attributing the difference between such residual value and the total cost as the premium paid for the favorable aspects of the leases.

The value of any property acquired subject to a lease may either be enhanced or diminished on account of the benefits or inhibitions resulting from the lease. If we look at the General Electric leases as a whole, what we have is a basic term plus renewals, with the rentals beginning at a relatively high level and, in the event of such renewals, declining to a relatively low level. As a whole, the leases may either have added to or detracted from the value of the property. The opinion of the experts differed.

The petitioners' basic claim relates to the depreciation of physical properties, i.e., buildings, and not to the amortization of an intangible right. The properties in question had a physical life well beyond the terms of the leases, including renewals. All the petitioners are really contending is that they should be allowed to deduct a greater amount of the depreciable cost during the initial terms of the leases in recognition of the fact that higher rentals are provided for that period. Section 167 both permits and prescribes the limitations of such deduction.

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.

(b) USE OF CERTAIN METHODS AND RATES.--For taxable years ending after December 31, 1953, the term "reasonable allowance" as used in subsection (a) shall include (but shall not be limited to) an allowance computed in accordance with regulations prescribed by the Secretary or his delegate, under any of the following methods:

(1) the straight line method,

(2) the declining balance method, using a rate not exceeding twice the rate which

The more liberalized depreciation rules embodied in section 167 (b) were enacted as a part of the Internal Revenue Code of 1954 (H.R. 8300), in recognition of the fact that property generally contributes more to income in its early years of use than it does in the years immediately preceding its obsolescence (H. Rept. No. 1337, 83d Cong., 2d Sess., pp. 22-25; S. Rept. No. 1662, 83d Cong., 2d Sess., pp. 25–29). The report of the Committee on Ways and Means accompanying that Act thus states:

Interpretation of the word "reasonable" has given rise to considerable controversy between taxpayers and the Internal Revenue Service. The determination of useful life for a particular asset, or the average useful life for a group of similar assets, is a matter of judgment involving, in addition to physical wear and tear, technological and economic considerations. The method of allocating depreciation allowances to the years of use is also a matter of judgment. In many cases present allowances for depreciation are not in accord with economic reality, particularly when it is considered that adequate depreciation must take account of the factor of obsolescence. The average machine or automotive unit actually depreciates considerably more and contributes more to income in its early years of use than it does in the years immediately preceding its retirement. [H. Rept. No. 1337, 83d Cong., 2d Sess., p. 22.]

In their returns, petitioners elected to compute depreciation on these properties under the "declining balance" method provided in section 167 (b) (2). A shift by the petitioners to some alternate method would be subject to the same limitations. Thus, section 167 (b) (4) would foreclose the petitioners' claim with respect to the General Electric properties irrespective of any prior decisions by this Court. With respect to the properties in question, the petitioners admit "to a physical life of forty years or more and that the buildings are not 'single' or 'special' purpose buildings as the terms are normally defined." Rather the petitioners argue that the economic life of the properties is limited because of the magnitude of the space leased to General Electric, for which it will be difficult to find another comparable tenant, and the limitations of the market in the Syracuse area. With respect to the office building occupied by General Electric, the petitioners make further point that the land use (including parking) would not warrant the continued utilization of the site for that purpose beyond the tenancy of General Electric. See, for example, Adda, Inc., 9 T.C. 199 (1947), affd. 171 F.2d 367 (C.A. 2, 1949).

would have been used had the annual allowance been computed under the method described in paragraph (1),

(3) the sum of the years-digits method, and

(4) any other consistent method productive of an annual allowance which, when added to all allowances for the period commencing with the taxpayer's use of the property and including the taxable year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used had such allowances been computed under the method described in paragraph (2). Nothing in this subsection shall be construed to limit or reduce an allowance otherwise allowable under subsection (a).

The initial terms and renewal periods of the leases covering the properties occupied by General Electric ran from terms of 22 years to 27 years. The last lease with General Electric covered a period of more than 30 years from its original occupancy in the Syracuse Industrial Park. Without engaging in abstract speculation as to the future, the length of such terms would indicate at least that General Electric had an interest in these properties over a period extending well beyond the initial term. Looking at the situation as it existed on November 30, 1961, the date of acquisition of these properties by the petitioners, General Electric had occupied building No. 9, representing a cost of $1,149,592, only some 18 months. As of that time, it could hardly be inferred that any change in plans was imminent.

Furthermore, with admittedly favorable leases covering the renewal terms, as one of the experts pointed out, General Electric would have every reason to hold on to the buildings and, if not needed in its business, to sublet rather than to relinquish its right of renewal. While it admittedly would be difficult to find a tenant or tenants for the entire 775,200 square feet occupied by General Electric at one time, there is no reason to suppose that General Electric would relinquish the entire complex at the same time. When we look 25 or 30 years into the future, the risks faced by the owners of these buildings is no greater from an economic standpoint than those faced by any owner of longlived property. Such risks do not constitute tangible proof of economic obsolescence. See Atlanta Biltmore Hotel Corp. v. Commissioner, 349 F. 2d 677 (C.A. 5, 1965), and cases cited there.

Finally we reach the question whether the evidence in this case is sufficient to overcome the presumption of correctness attaching to the respondent's determination that the 19 buildings acquired by petitioners had a useful life of 40 years from the date of acquisition. Obviously, conditions might vary with respect to each particular building. For the most part, however, the parties have chosen to treat the properties as a whole for purposes of determining useful life. On the basis of the record before us, and taking into account the factor of obsolescence, it is our opinion that, as a group, the useful life of the 19 buildings acquired by the petitioners for the purpose of determining a reasonable depreciation allowance under section 167 (a) and (b) was 3313 years from November 30, 1961.

Decisions will be entered under Rule 155.

RICHARD M. COOPER AND MARY J. COOPER, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 2496-72-2499-72. Filed February 4, 1974.

The petitioners, who were shareholders in a corporation, entered into an agreement establishing an alleged joint venture to provide additional funds to the corporation equal to its accumulated net operating loss. The alleged joint venture conducted no other activities. Held, under the circumstances, the alleged joint venture served no business purpose and shall be disregarded for tax purposes; the transaction is in reality a contribution of capital to the corporation.

R. Paul Sorenson, for the petitioners.

Harry Morton Asch, for the respondent.

SIMPSON, Judge: The respondent determined the following deficiencies in the Federal income taxes of the petitioners for the year 1968:

2496-72 Richard M. Cooper and Mary J. Cooper... 2497-72 Harry C. Neer and Mary Neer.___

2498-72 W. Albert Johnson and Lulu S. Johnson__ 2499-72

Robert D. Brown and Loretta Maye Brown..

Deficiency
$547.84

989. 82

1, 067. 28

1, 421. 42

Certain issues have been conceded by the petitioners in docket Nos. 2497-72 and 2499-72, and the only issue remaining for decision is whether the petitioners may deduct as a loss payments made by them to an alleged joint venture established to provide additional funds to a corporation of which they were the shareholders.

FINDINGS OF FACT

Some of the facts have been stipulated, and those facts are so found. The petitioners are Richard M. and Mary J. Cooper (husband and wife), Harry C. and Mary Neer (husband and wife), W. Albert and Lulu S. Johnson (husband and wife), and Robert D. and Loretta Maye Brown (husband and wife). All the petitioners were legal residents of Las Vegas, Nev., at the time the petitions were filed herein. They all filed joint Federal income tax returns for the year 1968 with the Internal Revenue Service Center, Ogden, Utah. Messrs. Cooper, Neer, Johnson, and Brown will be referred to as the petitioners.

1 Cases of the following petitioners are consolidated herewith: Harry C. Neer and Mary Neer, docket No. 2497-72; W. Albert Johnson and Lulu S. Johnson, docket No. 2498-72; Robert D. Brown and Loretta Maye Brown, docket No. 2499-72.