Some of the facts have been stipulated. The stipulated facts and the exhibits attached to the stipulation are incorporated herein by this reference.
Petitioner Watson Land Company was incorporated on April 1, 1927. Petitioner is a California corporation, having its principal office located at 3435 Wilshire Boulevard, Los Angeles, California. For each of the taxable years ended December 31, 1973, through December 31, 1975, petitioner filed its Federal income tax returns with the Internal Revenue Service Center at Fresno, California.
Petitioner was incorporated for the purpose of engaging in the real estate business. Prior to 1960 petitioner's real estate holdings were primarily used as farmland. From time to time, parcels were sold to others for housing or for industrial use. In the early 1960's petitioner decided to retain and to develop its remaining land for its highest and best use, which was and presently is industrial use. Petitioner began doing business as Watson Industrial Properties and its primary purpose became the development of Watson Industrial Center (WIC herein) in the City of Carson.
From its inception WIC was designed as a large, master-planned industrial park. Virtually all the buildings in WIC are large single-story structures with concrete tilt-up walls, glue-lam beam roofs, and concrete floors. They average 125,000 square feet in size, with office space accounting for approximately 3 percent of the total area. Building coverage is approximately 45 to 50 percent of the developed land area.
WIC is bisected by the San Diego Freeway and adjoins two of its on-and-off ramps. The Harbor and Long Beach Freeways are located approximately 1 mile from WIC. Of six streets bordering WIC, four are four-lane thoroughfares. Rail spurs from the main line of the Southern Pacific Railroad serve WIC.
WIC is the industrial center nearest to the Los Angeles and Long Beach Harbors. It is only 3 miles from these deep water ports, and thus, in the Interstate Commerce Commission "Harbor Free Zone." Preferential rates are in effect for truck transportation between the harbors and the warehouses in this zone.
Depending on traffic conditions, Los Angeles Airport is between 15 and 30 minutes by freeway from WIC. Long Beach Airport, which is a modern, jet-age facility, is approximately 10 minutes by freeway from WIC. Passenger and freight services and facilities for stowing company and privately owned aircraft are available at both airports.
WIC is zoned M-4. This zoning classification generally permits light, medium, and heavy industrial uses, including uses of the type tending to be obnoxious to neighbors. Lands predominantly used for industrial purposes border WIC on three sides. Petitioner's "Fact Sheet" on WIC indicates that the City of Carson is responsive to industrial requirements and that over 53 percent of the city is devoted to industrial development.
Petitioner leases most of its buildings to industrial tenants on a net, net, net basis. As of January 1, 1975, the average lease life was approximately 18 years. Petitioner had two standard lease agreements, one for tenants moving into newly constructed buildings and one for tenants moving into premises which had already been improved. These standard leases, which did not differ in any material respect, read, in pertinent part, as follows:
ARTICLE IX
Repairs, Maintenance, Alterations and Removal of Equipment
9.1. Lessee, at its sole cost and expense, shall maintain the entire demised premises in a clean and orderly condition and appearance, state of repair, and operating order; except, however, Lessor shall maintain landscaping at Lessee's expense. Without limiting the generality of the foregoing, Lessee shall perform all maintenance detailed in paragraphs I (exterior repainting), J (resurfacing paved areas), and K (mechanical service controls) of the Performance Standards of the Watson Industrial Center attached hereto as Exhibit A; and Lessee shall promptly make all necessary repairs and perform such other required maintenance, interior or exterior, ordinary as well as extraordinary, as may be required to maintain the demised premises in such clean and orderly condition. For example, the roof of the building shall be kept free of debris and all roof drains shall be kept fully open at all times to allow for maximum water drainage. Lessee shall also maintain any of Lessee's property visible from outside the building in the same condition with the surfaces thereof painted at such intervals and with such colors as Lessor shall approve. At the termination of this Lease Lessee shall surrender the improvements thereon in a clean and orderly condition, in proper and efficient operating order, and in full compliance with all Federal, State and Local laws, rules, regulations , ordinances, and administrative directives. If Lessee fails to maintain and repair the demised premises or any of Lessee's property as herein required, Lessor shall have the right, but not the obligation, after ten (10) days prior written notice to Lessee specifying the maintenance or repairs required, to enter upon the demised premises and cause such maintenance or repairs to be performed. In that event, Lessee agrees to pay Lessor, within ten (10) days, of receipt of Lessor's invoice, as additional rent, for all repair and maintenance costs incurred by Lessor, plus an overhead allowance to Lessor of ten percent (10%) of such cost.
9.2. Lessee shall have the right, subject to prior wirtten approval of Lessor, to make such additions, alterations, changes and improvements to the demised premises as Lessee shall deem necessary or desirable; however, no addition, alteration, change or improvement shall be made which will weaken the structural strength, lessen the value of, interefere with, or make inoperable any portion of the building or the building service equipment, or change the architectural appearance of any building. All additions, alterations, changes and improvements shall be made in workmanlike manner, in full compliance with all building laws and ordinances applicable thereto. They shall become a part of the demised premises, and become the property of Lessor when installed; and, unless Lessor shall require removal thereof as required in Paragraph 16.2 of Article XVI, all such improvements, including all building service equipment improvements, shall remain in and be surrendered as a part of the demised premises upon the termination of this Lease. Lessee shall furnish Lessor with a set of "as built" drawings which accurately set forth the nature and extent of improvements made by Lessee to the demised premises.
The phrase "building service equipment" shall include, but not be limited to, equipment and property ordinarily necessary or convenient for the operation and utilization of a building, such as heaters, air conditioners, solar panels, power panels, transformers, light fixtures, sprinklers, * * *. Building service equipment shall also include any related power installations, plumbing installations, water installations, air conditioning * * *. Building service equipment shall also include installations affixed to the building which serve machinery and equipment such as, but not limited to, conveyers, crane ways, dust collectors, and paint booths.
9.3. Lessee shall have the right, without Lessor's prior written approval, to install, within the demised premises Lessee's machinery, equipment, trade fixtures, furniture and furnishings (hereinafter collectively called "Lessee's Equipment"). Provided however, Lessee shall notify Lessor in writing and Lessee shall obtain Lessor's prior written approval before the installation of heavy machinery, heavy equipment, or heavy trade fixtures, on the demised premises and prior to placing any load on the roof or attaching any load to the walls or the underside of the roof of any building. Lessee shall not place any load on the floor of any building in excess of the design load. Lessee shall not install any of Lessee's Equipment in such manner as to weaken the structural strength of the building, interfere with, or make inoperable any portion of the building or the building service equipment. If Lessee makes any addition, alteration, change, or improvement to the demised premises described in paragraph 9.2 without Lessor's consent; or if Lessee installs any of Lessee's Equipment in violation of this paragraph 9.3; then Lessee agrees, upon receipt of written notice from Lessor, to promptly remove, replace, or otherwise correct such installations in such manner as Lessor shall reasonably require and direct; and Lessee, upon demand, shall reimburse Lessor, as additional rent, for all reasonable architect's, engineer's and legal fees incurred in connection therewith. If Lessee or any person with whom Lessee is engaged in business causes any structural damage to the demised premises, Lessee assumes all risk of such damage * * *
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