Petition for Review from the United States Board of Tax Appeals.
Before BUFFINGTON and DAVIS, Circuit Judges, and JOHNSON, District Judge.
The petitioner filed a consolidated income and profits tax return which included the income of its subsidiaries, among which was the William Penn Hotel Company, which operated the William Penn Hotel in Pittsburgh, Pa. In the returns, the petitioner claimed 3 1/2 per cent. depreciation for "exhaustion, wear and tear," but the Commissioner on a reaudit allowed only 2 per cent., and the petitioner appealed to this court.
The parts of the building on which the 3 1/2 per cent. rate of depreciation is claimed consists of the foundations, framework, walls, roof, floors, trimming, inside stairways of steel and reinforced concrete, and other fixtures. Depreciation has been allowed at a higher rate on plumbing fixtures, heating and ventilating systems, electric wiring, elevators, lighting fixtures, tile floors, and elevator machinery, and there is no controversy here as to the rate on them.
The William Penn Hotel has nineteen stories above the ground and three stories below. It is 265 feet in height. That part of the building on which 3 1/2 per cent. depreciation is claimed, and constitutes the controversy here, costs $2,378,822.09.
The determination by the Commissioner of 2 per cent. depreciation is prima facie correct and must stand unless overcome by substantial evidence. The Board said that:
"The Commissioner introduced two witnesses who testified in his behalf before the Court of Claims and in substance stated the allowance customarily made by the Commissioner for depreciation of buildings of the character and construction of the William Penn Hotel building is 2 per cent. per annum. The testimony of these witnesses adds no weight to the prima facie correctness of the Commissioner's determination."
This left the case standing on the presumption of correctness of the determination by the Commissioner, for the two witnesses who testified for him are clerks in his office, never saw the property, and all their depositions amounted to was to state that the general policy of the Department on property of this general class was to allow a 2 per cent. annual depreciation. In other words, according to their testimony, in making allowance for depreciation, the Commissioner does not consider the circumstances surrounding the property and the particular facts affecting depreciation in any individual property. It is a well-known fact that in the same locality property which is not used with due care, not kept well painted, and in good repair generally, will depreciate much more rapidly than property which has been well kept. Property in one locality depreciates more rapidly than in another locality. Depreciation is a fact which in any particular case must be determined from the testimony of competent witnesses who know the facts upon which a just conclusion must be predicated. The Bureau of Internal Revenue published a bulletin of instructions for its agents which was in force at the time the taxes in question were determined, entitled, "Bulletin F -- Income Tax -- Depreciation and Obsolescence -- Revenue Act of 1918." On page 26 of that bulletin the following instruction is given:
"It is considered impracticable to prescribe fixed, definite rates of depreciation which would be allowable for all property of a given class or character. The rate at which property depreciates necessarily depends upon its character, locality, purpose for which used, and the conditions under which it is used. * * * The taxpayer should in all cases determine as accurately as possible according to his judgment and experience the rate at which his property depreciates. The rate used will, however, be subject to the approval of the Commissioner."
In the Revenue Acts of 1918 and 1921, in computing the net income of corporations subject to the tax, there shall be allowed as deductions: "A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence." Section 214(a) (8), 40 Stat. 1067, 42 Stat. 240.
Neither the Revenue Acts nor the Regulations define what is a "reasonable" allowance for depreciation. Each case depends upon its own facts. This principle of determining depreciation was declared by the Board of Tax Appeals in the case of Appeal of Eagle Dye Works, 1 B.T.A. 638, where the Board said:
"The probable useful life of the building and the amount of depreciation which should be allowed thereon must be determined from facts and circumstances, the materials of which the building is constructed, and the ...