The opinion
Smith,
dissenting; The first question presented by this proceeding is the allowance for depreciation deductible from the gross income *359 of 1932. The respondent has determined the allowance in the amount of $7,756.57.
Section 23 (k) of the Bevenue Act of 1932 permits a taxpayer to deduct from gross income “a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.” The question in issue is what constitutes a “reasonable allowance.” In United States v. Ludey, 274 U. S. 295 , it was stated:
* * * The amount of the allowance for depreciation is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sum set aside will (with the salvage value) suffice to provide an amount equal to the original cost. * * *
The stipulated cost of the building was $375,991.74. The depreciation sustained upon the property to July 1, 1924, and deducted from gross income in the taxpayer’s return, was $42,057.96, leaving a remaining cost to the petitioner of $333,933.78. In the petitioner’s tax return for 1924 the petitioner treated the transaction as a sale of the building to the lessee. It received $60,000 cash upon the sale, which was applied against the remaining cost, thereby reducing the cost basis to $273,933.78. Subsequently, the lessee paid $205,000 upon the mortgage, which redounded to the benefit of the petitioner. This reduced the remaining cost of the building to the petitioner to $68,933.98. The parties are agreed that 4 percent of the remaining cost to the petitioner is a reasonable allowance for depreciation for 1932. Four percent of $68,933.78 is $2,757.35. The respondent did not, however, use as the remaining cost of the building $68,933.78, but added thereto $86,197.54, which was the profit returned by the petitioner for 1924 as having been realized upon the sale of the building. The respondent, therefore, determined the remaining cost of the building to the petitioner to be $155,131.32, and he has based his “reasonable allowance” for depreciation as 4 percent of this amount. I do not see how the reasonable allowance for depreciation is an amount greater than the respondent has determined. I think it is entirely immaterial that the petitioner should have returned the $60,000, received in 1924 as a part payment on the building, as additional rent, or the additional $205,000 paid by the lessee in subsequent years upon the reduction of the mortgage. The plain facts are that the only remaining cost of the building to the petitioner at January 1, 1932, was $68,933.78. It is not entitled to recover through depreciation allowance over the useful life of the building a greater amount than represents its investment in the building.