Mulroney, Judge:
The respondent determined deficiencies in petitioner's income tax for the years 1953,1954, and 1955 in the amounts of $672.63, $2,938.13, and $2,782.92, respectively.
Petitioner is the beneficiary of a testamentary trust and thus required to report trust income distributed or distributable to her, including rents from land decedent had leased on a long-term lease, and on which the lessee had built a building. The questions are:
(1) Whether, in reporting such rents, petitioner is entitled to a deduction for depreciation during the years before the Court;
(2) Whether petition is entitled to amortize any premium value of the lease, and
(3) Whether any deficiency for the year 1953 is barred by section 275(b), I.R.C. 1939.
FINDINGS OF FACT.
Some of the facts have been stipulated and they are found accordingly.
Petitioner's mother, Gazelle K. Millhiser, owned certain real estate in the business section of Richmond, Virginia. On October 2, 1941, she leased this property, described as 409 East Broad Street, to G. C. Murphy Company. This property was located about 61.36 feet from the intersection of Broad and Fourth Streets and it consisted of a frontage on Broad Street of 19.04 feet with a depth of 138 feet to an alley in the rear. At about the time of the execution of the above lease, G. C. Murphy Company entered into two other leases with the owners of adjacent property extending to the corner of Fourth and Broad Streets and to the rear fronting on Fourth Street. The three leases were all for a term ending in each case on January 31, 1973, and they permitted G. C. Murphy Company to demolish the buildings on the three properties, use or sell the salvage materials, and put up one building on the three parcels in accordance with certain plans and specifications.
The leasehold period of the Millhiser lease began November 1, 1944, and it provided for monthly rental thereafter of $1,000 per month through January 1948, $1,145.83% per month thereafter through January 1958 and $1,208.33% per month thereafter through January 1973. Some of the other provisions of the lease may be summarized as follows:
(a) The tenant was obligated to reimburse the lessor for all real estate taxes and charges against the property during the term in excess of $2,445.91 annually, that being the amount of such taxes for the year 1940.
(b) The tenant was obligated to reimburse the lessor each year for the cost of fire insurance on the building and improvements during the term in excess of $184.09 annually, that being the amount of such premiums for the year 1940.
(c) The tenant agreed in case of a new building being erected on the property by the tenant it would deliver up the same at the end of the term in as good order, repair, and condition as the same was in at the time of completion, ordinary wear and tear, and accidents by fire or other casualty excepted.
(d) The tenant agreed at the end of the term to erect individual walls along the boundary lines of the property, to restore separate water, sewer, and powerlines and other facilities so as to make the building upon the demised premises a separate rentable unit.
(e) The tenant agreed that any building constructed by the tenant should be unencumbered by any act of the tenant and should be and become the property of the lessor upon the termination of the lease.
(f) The tenant agreed to make all exterior and interior repairs during the term.
On or about May 1, 1947, demolition of the existing improvements was begun by the G. C. Murphy Company and was immediately followed by construction of one department store building on all of the several demised properties. This building, consisting of a basement and five stories, was completed on or about July 1, 1948, at a total cost of $1,442,969. The estimated useful life of the building is 50 years from July 1, 1948.
The estimated cost of the building insofar as it was constructed on Gazelle K. Millhiser's property was from $150,000 to $180,000 and it was borne by the tenant, except to the extent of any salvage value recovered by the tenant from the demolished building thereon.
The cost to Gazelle K. Millhiser of the improvements upon the demised property at the time of their demolition on May 1, 1947, after depreciation was $6,200. She claimed for income tax purposes on account of depreciation of the demolished improvements a deduc tion at the rate of $240.77 annually from May 1, 1947, until her death.
Gazelle K. Millhiser died on August 31, 1953, while a resident of the city and State of New York, and her will was duly admitted to probate in the Surrogate's Court of the County of New York on September 14, 1953. The will nominated decedent's son, E. Eoss Millhiser, as executor and directed that the residue of the estate, after gifts of tangible personal property, be divided into two parts, one of which was $275,000 greater than the other. The larger of the two parts was devised and bequeathed to E. Eoss Millhiser as trustee, for the benefit of petitioner for life (the net annual income to be paid to her in quarterly or more frequent installments) and remainder to her children, with authority in the trustee, "in his uncontrolled discretion" to pay principal for the benefit of the life beneficiary or her children. In dividing the estate the executor was authorized to allocate assets in kind at the value of such assets as of the date of testator's death.
E. Eoss Millhiser qualified as executor and trustee under said will and it is stipulated here that pursuant to the authority conferred upon him by the will the executor allotted the real property known as 409 East Broad Street, Eichmond, Virginia, to that part of the residuary estate devised and bequeathed in trust for petitioner. In the Federal estate tax return the above property was described and appraised as follows:
No. 409 East Broad Street, Richmond, Virginia, approximately 19.2 feet by 142.5 feet upon which other property not owned by deceased a department store has been built. Current annual gross rental $13,750. Owner's share of annual real estate taxes $2,445.19. Of annual insurance premiums $184.09. Value based on appraisal $200,000.
The Federal estate tax was paid upon the above appraised value of $200,000. E. Eoss Millhiser, as trustee, paid petitioner, who resides at the Hotel Surrey in New York, the annual income as computed by him since August 31,1953. E. Eoss Millhiser also, as petitioner's attorney in fact, filed income tax returns for petitioner for the years in question with the district director of internal revenue for the district of Virginia at Eichmond. These returns report as income the net rents from 409 East Broad Street, which were computed by E. Eoss Millhiser as trustee, as follows:
Respondent disallowed the deductions for depreciation in the above computations of net income for the years in question thereby increasing the net income distributed and distributable to petitioner from the trust estate by $1,666.67 for the year 1953, $5,000 for the year 1954, and $5,000 for the year 1955. The above adjustment gives rise to the entire deficiency determined in respondent's notice of deficiency.
OPINION.
In Albert L. Rowan, 22 T.C. 865, the taxpayer inherited a one-third interest in property on which a building had been constructed by the lessee under a 66-year lease. We held the taxpayer was not entitled to a depreciation allowance on the building and our opinion reviews earlier opinions of this Court, Mary Young Moore, 15 T.C. 906; Charles Pearson, Jr., 13 T.C. 851; and Charles Bertram Currier, 7 T.C. 980, where upon similar facts we had reached an opposite result. Our opinions in the Moore and Pearson cases had been reversed by the Ninth and Fifth Circuits (Commissioner v. Moore, 207 F. 2d 265, and Commissioner v. Pearson, 188 F. 2d 72) and in our Rowan opinion we stated that we were reexamining our position and we concluded that the cited opinions of the Fifth and Ninth Circuits in the Pearson and Moore cases "lay down the correct rule of law" and we specifically overruled our prior opinions in the Moore, Pearson, and Currier cases. The rule which we drew from the said Circuit Court decisions was stated in our Rowan opinion in the following language:
The effect of those decisions, as we understand them, especially the decision of the Ninth Circuit in reversing us in Mary Young Moore, supra, is to hold that in situations such as we have here where the term of the lease extended beyond the useful life of the building and where the taxpayer would not sustain any economic loss as the building wore out and could not sell her interest in the building apart from the land or the rentals, the value of her interest in the building was zero and she could not take depreciation on the building.
We applied the rule in the Rowan case, stating:
What Ellen Rowan was receiving at the time of her death was ground rental of $16,500. She was receiving no rental from the building; she had no investment in the building. Ground rental was all that the heirs of Ellen Rowan, including petitioner, received from the property. During the taxable years they were not receiving any rental income from the building itself. The rental income from the building was being received by the lessee who had erected the building on the leased land at his own expense. The lessee was the one to whom annual depreciation deductions on the cost of the building were properly granted.
Petitioner argues the instant case is not within the rule of the Rowan case; that the case only holds no depreciation will be allowed when the term of the lease extended beyond the useful life of the building. Here the term of the lease will not be expected to extend beyond the useful life of the building.
Any deduction for depreciation must be under section 23 (1), I.B.C. 1939, and section 167,1.E.C. 1954. The statutes allow 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."
As stated in Commissioner v. Moore, supra:
The statutory allowance is available to him whose interest in the wasting asset is such that he would suffer an economic loss resulting from the deterioration and physical exhaustion as it takes place.
Petitioner in the instant case had no interest in the building gained by her inheritance of the interest in the land plus the right of reversion at the end of the lease that would suffer an economic loss by reason of the physical wasting of the building during the 3 years in question.
In Goelet v. United States, (S.D. N.Y. 1958) 161 F. Supp. 305, it fairly appears that the useful life of the lessee constructed building would extend beyond the end of the lease. In denying the claim of the devisees of the lessor, for depreciation, the Court stated:
Plaintiffs inherited the fee subject to the lease, the right to receive the ground rentals reserved by the lease, and a reversionary interest in the building itself. Their interest in the building is restricted to a right to occupy it some 32 years after the crucial date in 1941. It is plain that such right suffers no diminution in value as a result of the passage of time; on the contrary, the value of the right must increase as the time for its actual enjoyment advances. This reversion is the only interest which plaintiffs have in the building as such; and as pointed out above, it is not depreciable.
Upon appeal to the United States Court of Appeals, Second Circuit, the above case was affirmed (266 F. 2d 881), the opinion rejecting the very contention here made that the case is distinguishable from such cases as Commissioner v. Moore, supra, and Commissioner v. Pearson, supra. The court then goes on to say:
Appellants fail to show how a depreciable interest in the building was supplied to them in the taxable years by the circumstance that prior to 1946, when the lease term was extended for an additional ten years, the estimated useful life of the building extended eight years beyond the original term of the lease.
We hold respondent was right in disallowing the claimed deductions for depreciation.
Petitioner's alternative argument is that she should be allowed a deduction in the tax years representing the amortization of the capitalized value of what is to be considered a favorable lease. This argument is based upon the proposition that the lease is a separable property interest which is to be valued separately at the date of lessor's death and the difference between the high rentals being paid under the lease and those which could then be obtained in the market, sometimes called premium value, should be amortized over the remaining term of the lease.
We rejected the same argument here made in cases with similar facts in Milton H. Friend et al., Trustees, 40 B.T.A. 768, affd. 119 F. 2d 959 (C.A. 7, 1941), certiorari denied 314 U. S. 673, and Mary Young Moore, 15 T.C. 906, reversed on this point 207 F. 2d 265 (C.A. 9, 1953), certiorari denied 347 U. S. 942. In both cases we held that the difference between the total rentals payable under the unexpired term of the lease and the estimated fair rental value for the term was not amortizable over the remaining life of the lease. Cf. Martha R. Peters, 4 T.C. 1236. In our opinion in the Moore case, we cited our earlier opinion in Milton H. Friend et al., Trustees, supra, and the affirming opinion of the Seventh Circuit in that case, and stated:
What petitioner inherited from her mother was an undivided half interest in the land under the Barker Bros. Building and a reversionary interest in the building. Petitioner has attempted to separate the right to receive rent from the bundle of rights possessed by the holder of the fee. The right to receive rent under the lease to which the land was subject at the time of her mother's death was merely incident to the ownership of the fee. The lease grew out of the land, is reflected in the value of the land, and it neither constitutes a separate capital asset, nor increases the value of the building.
In the opinion of the Ninth Circuit in Commissioner v. Moore, supra, reversing our opinion in Mary Young Moore, supra, on this point, the Court noted its disagreement with the opinion of the Seventh Circuit in Friend v. Commissioner, supra.
It is conceded decedent could not amortize any favorable features of the lease during her lifetime. We see no justification for the separability of the favorable lease value from the many elements that determine the entire value of realty. It was apparently held in Commissioner v. Moore, supra, that there is no difference between a transfer by death or purchase; that the devisee of the land is to be considered a purchaser of the lease paying "a bonus or premium for the acquisition of the 'favorable' features of the lease," which he should be allowed to recover as his "investment" in the property by depreciating a portion of the rents he will receive over the remaining period of the lease.
If the purchaser would be entitled to isolate the lease from the fee and take deductions for the favorable portion of the lease, it means some of the rents reserved in the lease would escape ordinary income taxation altogether. This is so because the seller of, favorably leased property is entitled to treat the sale as a single transaction or the sale of a single asset with the lease merged in the fee subject to capi tal gains treatment. If it is logical to say an amount of rent due under the lease, which is considered in excess of normal rent, can be deducted by the purchaser of the favorably leased realty, then it would be equally logical to say the seller should be forced to isolate this amount of rent due under the lease and take it into his ordinary income.
We think the sound solution is to treat the lease interest as merged into the fee. We have not detailed the testimony of the expert who first gave his opinion as to the value of the land, then his opinion as to the normal rental for the property on August 31, 1953. From these figures he arrived at a conclusion that the premium value of the lease on the date of decedent's death was $38,685. We hold that the fact, if it be a fact, that the property was advantageously rented at the date of decedent's death, does not give rise to any claim for deduction for amortization or depreciation of the capitalized value of excess rentals over what might be considered market rentals, on the date of decedent's death. In so holding we follow our opinion in Milton H. Friend,, supra, and its affirmance by the Seventh Circuit in Friend v. Commissioner, supra.
Petitioner argues any deficiency for 1953 is barred by section 275(b), I.E.C. 1939, which provides, as follows:
SEO. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
Except as provided in section 276—
*
(b) Request for Prompt Assessment. — In the case of income received during the lifetime of a decedent, or by his estate during the period of administration, or by a corporation, the tax shall be assessed, and any proceeding in court without assessment for the collection of such tax shall be begun, within eighteen months after written reguest therefor (filed after the return is made) by the executor, administrator, or other fiduciary representing the estate of such decedent, or by the corporation, but not after the expiration of three years after the return was filed. This subsection shall not apply in the case of a corporation unless—
(1) Such written request notifies the Commissioner that the corporation contemplates dissolution at or before the expiration of such 18 months' period; and
(2) The dissolution is in good faith begun before the expiration of such 18 months' period; and
(3) The dissolution is completed.
The executor made and filed with the Commissioner the written request for prompt assessment of income tax. The record does not show the date of the request. The executor was asked if any "assessment for the year 1953 [was] made within 18 months following that requested assessment or adjustment or any phase of it," and he answered "No." We do not know whether he meant an assessment against the estate or petitioner for 1953 income. At any rale, it is clear the statute merely limits time for an assessment of income tax for income received by a decedent in his lifetime or by his estate during the period of administration. It does not limit the time of assessment of a deficiency in the individual return of a taxpayer.
Reviewed by the Court.
Decision will he entered for the respondent.
The three properties had existing leases on them in 1941, the longest of which expired in 1944.