author: Disney :

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    Jamieson Associates, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Margaret Wainwright, John W. Wainwright, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent. Seaside Improvement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. John W. Wainwright, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wainwright and Smith Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wainwright, Remsen and Tator Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75717, 76899, 77018, 77019, 77212, 77213.
    Promulgated January 20, 1938.

      Benjamin Mahler, Esq., for the petitioners.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Disney :

There are numerous issues involved in these proceedings, some of them being common to all the cases and others having application only to some of the cases.

In considering and discussing the issues, if the same are only applicable to one or more but not all of the cases, we shall so indicate; otherwise, it will be understood that the issues discussed are applicable to all of the proceedings and petitioners.

It is first necessary to consider as a preliminary proposition the contention of the respondent that the petitioners, the estate of Margaret Wainwright, Jamieson Associates, Inc., and Seaside Improvement Co., Rad no title to the part of their lands constituting the foreshore condemned and taken in 1925, and therefore have no basis for a value as of March 1, 1913, or date of acquisition, for purposes of computing profit or loss.

The deficiency was originally computed by the Commissioner upon the assumption that the petitioners were the owners of the property condemned, and the question as to title arises because of increased deficiency asked by amended pleadings filed at the time of the hearing. The respondent adduced evidence to show such lack of title, and said petitioners contended that the question is not open here, for the reason that the judgment in the condemnation proceeding was conclusive in that respect.

Ordinarily and primarily, title is not the question in condemnation proceedings, but it is equally true that a condemner can not deny the title of the condemnee whose lands he condemns. In Village of Olean v. Steyner, 135 N. Y. 341, 343; 32 N. E. 9, the Court of Appeals of New York had before it a case wherein the village sought to condemn certain property of the defendants. It also sought to raise the question that the property had been dedicated to the public use. The court said:

* * * But the municipality waived any such claim, if it existed, by proceeding under the charter to condemn the landowner’s right, and to assess his damages for what was proposed to be taken from him. Manifestly, the village conceded his right when it instituted a proceeding to take it away, and under a provision of the charter having no application except where there is an owner other than the village and whose title is to be divested. To say that there is not such owner, and that the easement sought to be condemned belongs to the municipal corporation by the act of the owner, is to deprive the proceeding of all foundation and invite its dismissal for that reason. * * •

To the same effect are Westchester County v. Wakefield Park Realty Co., 129 N. Y. S. 156; Matter of Bronx Parkway Commission, 164 N. Y. S. 9; affd., 181 N. Y. S. 928; and Matter of Smith, 278 N. Y. S. 467.

In City of Geneva v. Henson, 195 N. Y. 447; 88 N. E. 1104, the issue of the ownership of the fee was raised in a condemnation proceeding not unlike the proceeding involved herein in that the land was situated on the west shore of Seneca Lake, a navigable water, and the question of the ownership in riparian lands as between the state and the claimant thereof was involved. The city in its petition alleged its ownership, which was denied by the defendants and the question was referred by consent to a referee. It was held that the municipality could not contest the defendant’s ownership, the existence of which it assumed as the basis of its proceeding, and the parties having tried out the question of title, the decision was binding on them.

In In re City of Buffalo, 132 N. Y. S. 926, the situation was similar to that herein. The city of Buffalo condemned land for park purposes. It developed that determination of title as affected by erosion or constant recession of the shore line of a lake was necessary, and it was assumed by all parties that the determination of such claims was essential in order to fix compensation to be awarded to the owner. It was held that the defendants, having joined in consenting to the determination of such question, could not thereafter object to such decision. See also Village of Medina v. Graves, 113 N. Y. S. 52.

The judgment in the condemnation proceeding involved herein shows on its face that the question of title was considered. The final judgment was entered pursuant to agreement in that the awards were paid only to those who filed stipulation accepting the amount of the respective awards in full settlement of their respective claims and permitting reservations for assessments. It is apparent, therefore, that in its final consummation the condemnation award involved herein'was essentially based upon agreement involving a determination of title in much the same manner as in the cases just above cited. We consider, therefore, that the parties to the condemnation proceedings are in the same position as if the question of title had been in every respect a proper one before the court. From this it follows that we will and do consider and hold that the Board is bound by an adjudication as to title, under the principles laid down in Freuler v. Helvering, 291 U. S. 35, and Blair v. Commissioner, 300 U. S. 5, a state court having determined the question of title. Respondent contends, however, that an adjudication as to title in 1925, at time of condemnation is no adjudication as to March 1, 1913, or other date, for basic value. (This argument as to March 1, 1913, value, of course, is applicable only to the Seaside Improvement Co., since the date of acquisition of property as to Jamieson Associates, Inc., and the estate of Margaret Wainwright is 1923.) But we think the contention will not stand. The local court did consider not only title as of 1925, date of condemnation, but previous title as well, as is evidenced by the journal entry wherein it refers to “Claim of title by avulsion”, and sustains “Claim of title upon the theory of avulsion.” Had there been no contention between city and condemnees as to title, no occasion would have arisen for considering avulsion or erosion. The condemnation judgment is a finding, binding on us, that the foreshore, including land condemned and taken, had not been lost to the previous owners because the physical loss of land was by avulsion. The evidence is that the Seaside Improvement Co., and the predecessors in title of the Margaret Wainwright estate and Jamieson Associates, Inc., had, prior to such avulsion, owned this part of the seashore, which was taken upon condemnation; therefore, after the avulsion, and at time of acquisition by the Margaret Wainwright estate and Jamieson Associates, Inc., title thereto passed to these two petitioners; and as to the Seaside Improvement Co., it remained owner. We conclude that the condemnation judgment was adjudication of title in petitioner, Seaside Improvement Co., on March 1, 1913, and in September and October 1923 as to the Margaret Wainwright estate and Jamieson Associates, Inc., respectively, and hold that the above-named petitioners held title to the foreshore on the respective dates for basic values. It therefore follows that the above-named petitioners are in a position to set up, as a basis against the. condemnation money received, such values as we conclude are shown as of the respective basic dates. The other petitioners in these proceedings held grants from the State of New York and, as to them, there is no contention as to title to foreshore, and therefore no question as to right to deduct proper values at basic dates.

Having decided the preliminary question of title, tne next question requiring our attention is as to consequential or severance damages which all petitioners seek to subtract from the condemnation moneys received. The condemning court, they say, did not specify as to whether such severance or consequential damages were allowed, but that they were required to be allowed, and therefore must be ascertained by evaluation of the properties taken and not taken. We agree that in general it was necessary for the condemning court to consider not only the value of the property taken, but the amount of severance or consequential damages, if any, to the remainder not taken; but we do not agree that because no consequential damages were awarded it therefore follows that the court did not consider such damages in this instance. A requirement that the court must consider the question of such damages is by no means the same as requirement that it award such damages — for the obvious reason that in the opinion of the court there may be no such damages to award. We think that this was the conclusion of the trial court in the matter here at hand and think, moreover, that the judgment of condemnation on its face so shows, for the judgment is not as silent on this question as petitioners urge. It does not simply award a lump sum, without more, in each case, but in two cases among the petitioners here involved, to wit, the Seaside Improvement Co. and Wainwright & Smith Co., a certain amount is awarded for land and a certain amount for improvements. The Wainwright & Smith Co. was awarded for land, $138,600, for improvements $25,000; while the Seaside Improvement Co. was awarded for certain lands $76,406, and for improvements $7,000. The judgment in condemnation involved not only the property in which these petitioners are interested herein, but a very large number of other tracts. The journal entry of judgment is before us in full, and we find a great many other instances where, just as above stated, an amount is awarded for land with a separate amount for improvements. This indicates that “land” meant land actually taken, as distinguished from land with improvements upon it. “Land” in general means real estate, not damages to other land or property. This careful particularization of “land” precludes the idea that it is a general term including consequential damage for land not taken. Title to land and improvements taken passed to the municipality. It could not be said that the designation as to improvements indicated merely damage to them, and that they were retained by the owner; no more can it be said that “land” designates mere damage done. In one instance the judgment refers to an “award of $25,000 made for improvements.” The court refers to “evidence as to values” and not to damages. The “final decree” prepared pursuant to the judgment, and giving more detail, likewise itemizes land and improvements and adds the amounts of interest computed in each case. Such itemization is inconsistent with tacit inclusion of consequential damages. We conclude that the condemning court considered that there was no consequential or severance damage, and if we were free to examine the correctness of its conclusion, as we are not, we having concluded that the opinion designates the elements of the award, we could not say, in the face of the form of the condemnation judgment, that the conclusion of the condemning court was incorrect, for the reason that the condemnation proceeding, as well as the statutes upon which it was based, preserved to the remaining property of condemnees the rights of “easements of light, air, and access over, along, and across” the boardwalk. The condemnees were left substantially, if not technically, in the position of riparian or littoral owners. The condemnation was for purposes of a public beach and title was taken for that limited purpose.

Littoral or riparian rights are real and valuable, and such rights were expressly reserved to the remaining lands by the condemnation. In re City of New York, 61 N. E. 158, defines a riparian owner’s rights as “easement of passage and the transportation of merchandise, to and fro, between the navigable water and his land; to fish and draw nets; to land boats and to load and unload the same.” In that case they were held to be violated by the erection of a street to which riparian owner had no access, a veritable “Chinese Wall.” The case states that it is unnecessary to inquire as to the right to compensation if “a general street open to commercial traffic” had been opened in the tideway. Ennis v. Grover, 103 N. Y. S. 1088; affd., 85 N. E. 1110, holds that riparian rights are not destroyed by the existence of a public street between riparian lands and the water. To the same effect is Nevins v. Friedauer, 184 N. Y. S. 894, which also defines riparian rights, in-eluding therein right of access, of accretion, right to reasonable use of the water for all legitimate purposes, and right to have the shores of the owner’s land washed by the adjacent waters. Oelsner v. Nassau Light & Power Co., 118 N. Y. S. 960, decides that a riparian owner is entitled

* * * • only to a reasonable use of bis easement, consistent with the state’s right to make such use of the tide land under water as the public interest may require.

This is a fair statement of the general law on the subject. To the same effect is Hedges v. West Shore R. Co., 150 N. Y. 150; 44 N. E. 691. Herein the petitioners, so far as the land not taken and paid for is concerned, were merely shut off from the beach to the extent only that the boardwalk interfered. Otherwise they retained their original right to access to the sea. Such interference, as above seen, not calling for compensation because not a compensable invasion of riparian or littoral rights as properly defined, and petitioners having had preserved to them rights of access, light, and air across the boardwalk, we conclude that the construction of the boardwalk can not be said to, and in the opinion of the court did not, cause consequential or severance damages. It is our opinion, upon the record herein, that the boardwalk did not decrease the value of the remaining land, and, considering the easements left to it over the land taken, we believe that the condemning court intended to award none. The land above Ocean Avenue, being separated by a street from the property facing upon the boardwalk, can not be regarded as affected in value by its erection.

We hold, therefore, that no consequential or severance damages were awarded by the condemning court and that there was no severance or consequential damage suffered by any of the petitioners herein. Petitioners, therefore, can not deduct any amounts as consequential or severance damages from the amounts awarded, and the bases herein involved are only as to the lands condemned and taken.

This brings us to consideration of the proper bases as to the various properties involved in these consolidated proceedings.

The petitioners, the estate of Margaret Wainwright and Jamieson Associates, Inc., argue that the value of the properties involved was the same at the date of condemnation and taking on July 15,1925, as of the date of acquisition in September and October, respectively, 1928; while the other petitioners argue that the value on July 15, 1925, was less than the value on the basic date, March 1, 1913. Obviously, the fact of value on July 15,1925, is not directly material, since we have merely the question of value upon basic dates as against the awards received in 1931, and gain or loss is to be computed accordingly. Tlie value as of July 15, 1925, therefore, is to be regarded only upon the idea that the awards are to be presumed to be the same as the actual value of the properties condemned and taken. We think, however, there is, under the circumstances herein involved, little strength in any presumption that the awards determine actual values as of July 15, 1925, for the record shows that the awards as a whole in the general condemnation proceedings were reviewed and cut down from approximately $12,000,000 to approximately $9,000,000, and that even at this figure acquiescence therein was recommended to the city of New York by its counsel in order to put an end to litigation and avoid expense of interest charges and because of financial distress.

Petitioners adduced much detailed evidence in an attempt to demonstrate that real estate values on March 1,1913, were, because of an alleged monopoly, so to speak, upon the amusement business at Rock-away Beach, greater than values on July 15,1925, and greater than the awards made. As above stated, it would be largely immaterial if such values were greater than those of July 15, 1925, the direct question being whether they were greater than the awards made. In spite of some evidence of rental values being higher in 1913, we are unable to believe that the values of these properties were not less on the basic dates involved than the amounts of the awards involved herein. Rentals did not, in our opinion, in these circumstances, determine fair market value of realty. They are a circumstance to consider, but not exclusively. The testimony as to rental values was to a considerable extent rendered by interested persons and is, we think, offset by that of less interested parties, and by expert testimony that values of property had increased on July 15, 1925. In particular, the evidence as to rental values in 1913 can not, in our opinion, prevail over that as to actual sales. The Seaside Improvement Co. in 1913 made various lot sales at prices which amount to one dollar per square foot, above Rockaway Boulevard, south of the Long Island Railway tracks, and the record convinces us that the values there were not far different from those nearer and upon the beach, because of the seasonal character of the beach business and the permanence of that transacted farther away from the beach. Yet, evidence offered by petitioners values the beach land condemned up to $5 per square foot, and land under water at 50 cents per square foot, being half the value of land near Rockaway Beach Boulevard at the same date. Such disparity is too great for our credulity. Moreover, the idea of monopoly of amusement business by the particular section where petitioners’ properties lay is affected by evidence that in 1913 a boardwalk connecting with Ocean Avenue by an incline walk near Beach 100th Street extended eastward to Beach 92nd Street, or Holland Avenue, at which there was a railroad station. At the north end of Holland Avenue on Jamaica Bay, there was a landing called Holland’s Landing and that avenue corresponded in the Holland section with Seaside Avenue, or Beach 103d Street in the Seaside section. It was the main street in the Holland section. Obviously, such boardwalk connecting with Holland Avenue as well as Seaside section had a tendency to equalize the possibilities of advantage from bathing and beach amusements over the beach in front of it, and this is too much of a spread for acceptance of the idea of a monopoly along Beach 100th Street to Beach 104th Street, the location of those petitioners affected by March 1, 1913, values.

In addition, the idea of monopoly of amusement business in the Seaside section of Bockaway fails to be convincing when it is considered that at Arverne, from about Beach 56th Street to Beach 74th Street, there was on March 1, 1913, another boardwalk. Petitioners’ contention that this boardwalk was very short and only privately used is not borne out by the evidence. This extensive boardwalk at) Arverne, and the several stations on the railroad in close proximity to Seaside, such as the Bockaway Park station between Beach 115th. and Beach 116th Street stations, together with the fact that most of the business came by boat, coming to several piers along Jamaica Bay (obviously including the landing at Holland Avenue), tend toi negative, we think, petitioners’ contention that the Seaside section was highly valuable in 1913 because of a monopoly on amusement business. Also, we are not impressed greatly with the contention that business had so deteriorated by 1925 as to make values far lessi than in 1913. It is true that there is evidence of effect of daylight saving, prohibition, and discontinuance of the Brooklyn Bapid Transit service from the Long Island Bailroad tracks, but it is apparent from the evidence that any effect of this discontinuation was replaced by the augmented automobile traffic. The evidence is positive that the automobile did increase business for the business men, the amusement devices, and the concessions, and that the more that transient people came in the better business would be. Yet, these businesses are the distinctive feature of Seaside. A factor assisting these types of business could not fail to assist other businesses such as restaurants, etc. — which may indeed well be included in the term business men as used. Moreover, the evidence that most of the please ure seekers came to Bockaway by boat, which continued to run up to 1934, tends to refute the idea of serious recession of business by 1925. There is no substantial contradiction in the record that more, business, more people, came to the peninsula in 1925, and the only question is as to whether the diffusion of business to some extent over the whole beach was sufficient to cause decline in prices in the' Seaside section by 1925. The evidence does not so demonstrate. There were in Bockaway in 1913 several railway stations, several piers, another long boardwalk, and at least some diffusion of business at that time. We are not convinced that Seaside section did not receive, from the uncontroverted increased patronage of Rockawayj Beach by 1925, ample business to cause values not to deteriorate. Thel less interested testimony is that business in the Seaside section wasi fair in 1925, was about the same as in 1914, was good until 1928 or 1929, had not dropped off by 1925, and changed markedly after thei building of the boardwalk (which was finished in the autumn of 1928). We are unable, under all the evidence, to believe that realty] values in 1913 were greater than in 1925, or greater than the awards made. The idea that the boardwalk diffused business is wholly immaterial here, since it was not begun until after date of vesting of title, July 15, 1925, and not completed until 1928. Its erection in no wise demonstrates diffusion of business in July 1925, or that at that time 1913 values had decreased. The tendency, as expressed by John W. Wainwright, one of the petitioners, was for beach front property to increase in value with increase in population and consequent increase in demand for bathing facilities. We conclude that petitioners’ property that was condemned and taken was more valuable in 1925 than in 1913.

Considering now more particularly the properties here involved: The various properties differed greatly in value, as is indicated not only by the evidence, but by statements in briefs. The properties of the Wainwright & Smith Co., John W. Wainwright, and Wainwright, Remsen & Tator Corporation, however, adjacent to Beach 103rd Street and Beach 104th Street, the principal business section in Seaside, had not greatly different values. The front footage involved in the properties herein is not shown with exactness by the evidence, but upon briefs the petitioners and respondent adopt the same figures, and they are therefore adopted by us, in the absence of exact information. No distinction is made between footage on the ocean and on Ocean Avenue. Property north of Ocean Avenue was not affected by the condemnation.

It is impossible to reconcile the highly conflicting evidence offered by the contending parties as to values, the petitioners’ witnesses valuing the property appraised generally speaking, as several times as valuable as respondent’s witnesses concede, and two or three times the amount of the awards. Respondent’s witnesses appraised according to footage upon the ocean or on Ocean Avenue, while those for petitioners placed value upon a square foot basis. Under all the circumstances and evidence shown in the proceedings, we do not believe that the values were as high as contended by petitioners’ witnesses. Their estimates often vary so much as to be impossible of acceptance. Thus, one witness valued the Wainwright and Smith properties at more than twice as much as did another witness — a difference of $810,800 on the same property; and a witness valued the John W. Wainwright property as worth $214,000 as against another’s estimate of $119,978.50. Again, a witness set the value of the property of the Wainwright, Remsen & Tator Corporation at $863,400 as against $196,596 set by another — little more than half as much. These figures included all damages. We conclude that the basis of front footage upon the ocean is the usual, and sounder and more reliable method of appraising value. The value of land under water we find under the evidence to be $25 per linear front foot on the ocean. We can not believe under all the evidence, that it was worth half as much as land in the neighborhood between Rocliaway Beach Boulevard and the Long Island Railway tracks — which is the effect of petitioners’ figures compared with actual sales made in 1913.

After consideration of all of the evidence, we have arrived at the following conclusions: Considering the property southward from Ocean Avenue, and including all rights under the ocean, we find and hold that the property of John W. Wainwright, condemned and taken, Docket No. 77019, with a frontage of 120 feet upon the ocean, had on March 1, 1913, a fair market value of $275 per front foot, making a total of $33,000. This is shown by the fact that the whole property before the condemnation had a fair market value of $700 per front foot, and that the property left after condemnation had a fair market value of $425 per front foot. We find and hold that the property of the Wainwright & Smith Co., condemned and taken, Docket No. 77212, with a frontage of 264 feet upon the ocean, had a fair market value on March 1, 1913, of $275 per front foot, making a total of $72,600; this is borne out by the fact that the whole property had a fair market value as of March 1, 1913, of $775 per front foot, and that the land left after condemnation had a fair market value on March 1,1913, of $500 per front foot. The property of the Wainwright, Remsen & Tator Corporation, condemned and taken, Docket No. 77213, with a frontage 'of 214 feet upon the ocean, had a fair market value on March 1, 1913, of $275 per front foot, making a total of $58,850; this is shown by the fact that the whole property had a fair market value of $725 per front foot, and that the property left after condemnation had on March 1, 1913, a fair market value of $450 per front foot.

As to the properties of the Seaside Improvement Co., Docket No. 77018; estate of Margaret Wainwright, Docket No. 76899; and Jamie-son Associates, Inc., Docket No. 75717, we, having rejected respondent’s contention as to lack of title, have likewise left for consideration only the proper bases. As to the Seaside Improvement Co., Docket No. 77018, we find that the March 1, 1913, value of the property taken was less than that of the Wainwright & Smith Co., the nearest property herein involved to the west. The evidence is clear that Remsen Avenue, or Beach 103rd Street, was the main business artery in the Seaside section, and that values decreased eastward therefrom. We have found the condemned portion of the property of the Wainwright & Smith Co. to have had a value on March 1, 1913, of $275 per front foot. Evidence adduced by the petitioner ascribes to the front foot value on the Atlantic Ocean and Ocean Avenue of the beach land lost by (i. e., condemned and taken from) the Seaside Improvement Co. a value of 82.5 percent of that ascribed to the Wainwright & Smith Co. We accept and adopt this proportion, consistent with other evidence, and applying it to the value of $275 per front foot already found for the Wainwright & Smith Co. property, we find that the Seaside Improvement Co. property condemned and taken had a fair market value on March 1, 1913, of $226.87 per front foot for 250 front feet on the ocean, or a total of $56,717.50.

As to the estate of Margaret Wainwright, Docket No. 76899: The value of the properties involved herein (including the entire lots, and not merely the property condemned and taken) was on September 10, 1923, the date of acquisition by petitioner by death of the decedent, $79,500, according to the estate tax return filed by the executor, and introduced in evidence by petitioner. This value in the estate tax matter was agreed to by the Government. The presence of Negroes affected the value of this property. Petitioner contends that the basic value of the property condemned and taken was, on September 10, 1923, not less than the amount of the award, $133,268.40. Upon this basis the entire lots would at date of acquisition obviously be worth a far greater amount. Such a value is so much greater than the value solemnly represented in the estate tax return that we are unable, with evidence also before us that this property is worth less, in part because of encroachment of Negro population, than the other properties involved in these proceedings, to accept such high figures. The respondent in the deficiency notice determined a basic value on the property actually condemned and taken of $60,353.10. Being unable to accept the values offered by the petitioner for this property, and believing that the evidence fails to overcome the presumption of the correctness of the respondent’s determination, which is borne out by and consistent with the valuations returned in the estate tax return, we sustain the respondent’s determination in the deficiency notice of a fair market value of $60,353.10. The respondent, having adduced no testimony as to the value of this petitioner’s property, can not be said to have abandoned the determination set in the deficiency notice.

As to the Jamieson Associates, Inc., Docket No. 75717: The board of directors of this company on October 5, 1923, passed a resolution expressing their opinion that all of the property then being acquired was of the fair market value of $95,000, and later issued stock of the company of the par value of $95,000 in payment therefor. This was all of the then stock of the company. The transferor was not in control of the corporation immediately after the transfer. In the absence of any evidence as to the fair market value of the corporation’s entire capital stock which was exchanged for the property, the basis of the property is the fair market value of the property received in exchange. John Glackner Realty Corporation, 11 B. T. A. 151; Gillette Rubber Co., 31 B. T. A. 483, 490; Ida I. McKinney, 32 B. T. A. 450, 456. Merely as par value of the stock issued, the figure $95,000 offers no criterion, but that amount as the fair market value of the properties then purchased provides a measure of value, which in turn represents the basis (cost) of the property. Said valuation was subject to and should have added to it $50,000, the amount of a mortgage subject to which the property was purchased, giving a total valuation of the then acquired properties of $145,000. Six tracts of land were acquired in the exchange for the $95,000 in capital stock, but only two of them are here involved, and the record shows that these two properties were entered upon the books of the corporation at time of acquisition at a total of $24,000. Moreover, these two tracts, and another valued at $21,000, were transferred in a single deed which bore revenue stamps of $45 — indicating an actual value of $45,000 for the three tracts, or $24,000 for the two here involved; This value for the two tracts was reduced to a base of $21,798.81 because of awards received in connection with the particular properties. These figures were represented as basic value in petitioner’s income tax return. We can not accept the value entailed in the evidence of the petitioner which is so wholly out of line with the valuation as set in the books of the corporation, with the records of the opinion of its board of directors at the date of interest here, with the value used for stamp tax purposes, and with the figures used by petitioner in its return. It was not until much later that petitioner contended for a higher figure. We conclude that the fair market value was as shown upon the corporate books, which amount represents cost; and that, the respondent having valued at the same figure the portion condemned, the presumption of correctness of respondent’s determination has not been overcome by petitioner, and it should be, and is, approved. The cost to petitioner in October 1923 of the condemned portion of the petitioner’s property is found to be $24,000, and the basis as of that date is found to be $21,796.81. Such basis, amounting to $120 per front foot on the ocean, is consistent with that of the properties of other petitioners several blocks westward, the evidence being that values decreased with the distance eastward from Beach 103rd Street. The respondent offered no testimony on the value of this property, and is not in the position of abandoning his determination of deficiency.

The next issue is whether that part of the award which was withheld from each of the petitioners by the comptroller of the city of New York should be treated as income in 1931.

The facts have been fully set forth. Although the assessments were not made until 1934, we find no distinction in principle between the situation herein involved and that in Carrano v. Commissioner, 70 Fed. (2d) 319; Wolf v. Commissioner, 77 Fed. (2d) 455, and Christian Ganahl Co. v. Commissioner, 91 Fed. (2d) 343; certiorari denied, 302 U. S. 748, wherein assessment and award are, in effect, offset, and only the difference regarded as income. In Central ds Pacijio Improvement Corporation v. Commissioner, 92 Fed. (2d) 88, there was in part involved, as here, an assessment made in a year later than that of the award, yet the cases last above cited were followed, and the same conclusion reached. The assessments herein involved were provided for by the same law governing the condemnation and contemplated in the condemnation proceedings. We therefore conclude and hold that the amounts withheld from the awards herein for purposes of meeting assessments, so far as used for that purpose, did not constitute income to petitioners in the taxable year when withheld.

The fourth issue, which we will now consider, is involved in all six cases and is with respect to the proper treatment of the amounts designated as “interest” and allowed petitioners in 1931 as part of the compensation to which the petitioners were entitled on account of the condemnation and taking of their property as indicated in our findings of fact.

The petitioners contend that the amounts constitute a part of the awards proper, whereas the respondent insists that the amounts designated as “interest” and set out in items separate from the awards proper are really interest on the awards and are ordinary income, taxable as such, and not taxable merely as capital net gain. Numerous authorities are cited by counsel of the respective parties to sustain their contentions.

In the case of Woodward-Brown Realty Co. v. City of New York, 197 N. Y. S. 162 (203 App.Div. 625), the court, in part, said:

The theory of the law is that, where land is taken from a private owner by right of eminent domain for a public use, payment of the value thereof should be coincident with the taking, and if for any reason payment is postponed the right to interest, from the date of the taking of the property until the date of payment, follows as a matter of strict constitutional right. People ex rel., Central Trust Co. * * *

A similar attitude is taken by the Federal courts, as is shown in Phelps v. United States, 274 U. S. 341, 344, wherein claim was made for just compensation for the value of the use of a wharf, on which petitioners had a lease and which was taken over for military purposes by the United States, the Supreme Court saying:

* * * Plaintiffs’ property was taken before its value was ascertained or paid. Judgment in 1926 for the value of the use of the property in 1918 and 1919, without more, is not sufficient to constitute just compensation. * * * The Government’s obligation is to put the owners in as good position pecuniarily as if the use of their property had not been taken. They are entitled to have the full equivalent of the value of such use at the time of the taking paid contemporaneously with the taking. As such payment has not been made, petitioner is entitled to the additional amount claimed. * * *

It is held, therefore, by both state and Federal courts that the party whose property is condemned and taken is entitled to and should receive full compensation therefor, paid contemporaneously with the taking.

In the instant proceedings the values found for the petitioners’ properties as at July 15, 1925, when their properties were taken and title thereto passed to the city, are set out in the opinion of June 9, 1931, and these are the amounts which petitioners would have received if payment to them had been made contemporaneously with the taking or passing of title; but payment was not made them until after June 8,1931.

Section 976 of the Greater New York City Charter provides that, where property is condemned by the city, “Interest at the legal rate upon the sum or sums to which the owners are justly entitled * * * shall be awarded * * * as part of the compensation to which the owners are entitled.” This interest is compensation, but not compensation for the property itself, not for the capital. It is interest upon and compensation for use of money due. If petitioners had, on July 15, 1925, when their properties were taken by the city, been actually paid the then value, there would have been no interest paid them, but they were not paid anything until 1931. The judgment of June 9, 1931, does not mention interest, but merely itemizes the amounts awarded. The “final decree” prepared in accordance with the judgment adds interest to the awards already computed. We hold that such interest was taxable income to petitioners in 1931 at ordinary rates, and that the respondent did not err in so determining. As to those petitioners on an accrual basis, the interest could not be accrued earlier than 1931, since prior to 1931 the amounts were not known.

This point has to do with John W. Wainwi'ight, Docket No. 77019, and the issue to be considered, as stated in assignment of error in bis petition, is as follows:

The Commissioner erred in including in petitioner’s income the sum of $16,117.34 fiduciary income received from the Estate of Margaret Wainwright representing petitioner’s share of interest received by the Estate on account of condemnation award. If such interest is taxable, Commissioner erred in not holding it subject to tax at capital rates.

The facts relied on to support said assignment of error are stated in the petition as follows:

The Estate of Margaret Wainwright distributed to petitioner and petitioner reported in his return as income subject to normal and surtax rates the sum of $16,117.34 interest on the award received by the Estate of Margaret Wainwright so distributed to him.

The respondent objects to the consideration of the petitioner’s contentions on this point, arguing that the question of whether John W. Wainwright received corpus of the trust estate was not raised by the pleadings of petitioner. Obviously, of course, the exact point now urged by petitioner was not set forth in his petition, yet in general he did plead that the sum of $16,117.34 was not income and furthermore, in the alternative, alleged that if income, it was not subject to tax at capital rates. We hold that this pleading is not insufficient to raise the question, particularly when it is considered in connection with a colloquy between counsel on that subject at the time of making the opening statements at trial, the result of which colloquy seems to have been an assumption by both counsel that the question was involved in the proceeding. We are not limited by the theory advocated by either party. John I. Chipley, 25 B. T. A. 1103. We proceed, therefore, to consider the question as to whether the amount was received as income from the trust estate or as legacy.

We have held above that the interest upon the amounts of the awards is not compensation for the property itself. Does this call for a conclusion that the interest on the awards is not “proceeds” of the sale of the property by operation of law, i. e., condemnation proceedings, within the meaning of the word “proceeds” as used in the will of Margaret Wainwright? We note that the same paragraph whieh makes provision for the payment of the proceeds of sale to John W. Wainwright also provides that the residue of her estate shall be held in trust by the executor, and the income paid to John W. Wainwright and his sister Margaret; and it is in comiection with the management of the trust that the executor is authorized to sell and devote the proceeds to the son and daughter of the testatrix. The connotation of the word “proceeds” may be broad or narrow, depending upon the context in connection with which it is used, but in general its meaning is by no means narrow. Considering the fifteenth clause of the will of Margaret Wainwright as a whole and in connection with the particular expression “proceeds” of sale, we conclude and hold that the amount in question was received by John W. Wainwright free from tax, as a devise of the proceeds of the land condemned.

As to the next question for decision, it is stated in brief of counsel for petitioners, in behalf of John W. Wainwright, that he was a stockholder in the Eockaway Beach National Bank, rendered his return on a cash basis, and in 1931 paid the amount assessed against him and was allowed a loss deduction in 1931 both for the cost of his stock and assessment paid, but that the loss allowance was limited to 12y2 percent, being treated as though it were a loss on the sale of capital assets. It is insisted in brief that such loss limitation was erroneous.

The petition of John W. Wainwright, however, assigns no such alleged error — the pleadings raise no such issue. Petitioners’ brief so agrees. The prayer of the petition is limited to the issues raised. Under such circumstances, we are of the opinion and hold that the alleged error, asserted only in brief and wholly omitted from petition and not supplied by amendment, should be disregarded. Dixie Manufacturing Co., 1 B. T. A. 641, 645; W. P. Weaver, 2 B. T. A. 709, 711; H. D. & J. K. Crosswell, Inc., 6 B. T. A. 1315, 1320; D. N. & E. Walter & Co., 10 B. T. A. 620, 632.

The next point for decision has to do with Jamieson Associates, Inc., Docket No. 75717, and the issue raised by the assignment of error is as follows:

The Commissioner erred, in not allowing as a deduction against income for 1931, the sum of $13,125 assessment levied against petitioner by the Superintendent of Banks of the State of New York on account of its liability as stockholder of an insolvent bank.

The record shows that petitioner purchased 175 shares of Eockaway Beach National Bank stock, par value $100 per share, for $21,000 in 1924, that the Eockaway Beach National Bank failed and a receiver was appointed, and that in October 1931 the United States Comptroller of the Currency made an assessment upon the shareholders of the Eockaway Beach National Bank of New York of the par value of their stock.

Jamieson Associates, Inc., claimed and was allowed as a deduction on its 1931 return the cost of its stock and the one-fourth of the assessment which was paid in 1931, and this petitioner insists that the remaining liability of the assessment, $13,125, paid in 1932, which was not allowed as a deduction in 1931, should have been then allowed. This contention is based on the fact that Jamieson Associates, Inc., was on an accrual basis and that the full assessment liability, though not paid in 1931, nevertheless was a liability that accrued then and therefore the full amount was deductible from income. The claimed deduction, in our opinion and we so hold, is, in the light of the facts shown in the record and above referred to,- authorized. The action of the respondent in disallowing same was error.

Our determination is in accord with the rulings on section 43 of the Revenue Acts of 1928, 1932, and 1934, as they appear in 0. B. SIV-1, p. 17, and is sustained by the decision of the court in the case of Burns Manufacturing Co. v. Commissioner, 59 Fed. (2d) 504. Cf. A. W. D. Weis, 13 B. T. A. 1284.

This point is with respect to error assigned by Jamieson Associates, Inc., as follows:

The Commissioner erred in including in income a sum of $3,420.87 part of an improvement assessment paid by the taxpayer in prior years and refunded to petitioner in this year. [1931]

That the Commissioner erred as above set out appears to be conceded in his brief, it being there very briefly stated: “This point is probably sustained by the evidence received to sustain assignment 4 (f) in the petition, Docket No. 75717.” However, be that as it may, we are of the opinion and hold that the Commissioner in this instance did err as above asserted by the petitioner, the issue being raised by the pleadings and there being sufficient competent evidence, not contradicted, sustaining petitioner’s assignment of error. The improvement assessment having been capitalized when paid, was not income when refunded.

Decision will be entered v/nder Rule 50.


source: Caselaw Access Project

author: Turner:

license: Public Domain

text:
    Transcalifornia Oil Company, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73111.
    Promulgated January 20, 1938.

      Mel/oin D. Wilson, Esq., and. George H. Rudd, O. P. A., lor the petitioner.

      J. O. Maddox, Esq., for the respondent.
   OPINION.

Turner:

The respondent’s contention that petitioner’s transactions in royalty interests resulted in receipt of income is based on the proposition of barter and sale. He argues that the transactions constituted absolute sales of property, and that since the lease was assigned to the petitioner without consideration, the total amounts received from such sales should be included in its gross income.

The petitioner, on the other hand, contends that its development scheme was a joint venture, prosecuted by it and its coinvestors, and that payments received in exchange for interests in production, whether in cash, property, or services, constituted contributions of capital. It is argued that under the California law appertaining to such projects its status was that of a trustee charged with the duty of applying such capital contributions to the uses and purposes specified in its application to, and the permit issued by, the state corporation commission. In that connection petitioner cited the case of Differding v. Ballagh, 121 Cal.App. 1; 8 Pac. (2d) 201, wherein the District Court of Appeals, Fourth District, State of California, held that “a voluntary trust with the production owners as beneficiaries * * * was created by the payment of the various sums of money by the production owners, with an implied covenant on the part of the trustees to use the money to develop oil production on the leased property if it was oil bearing.”

Assuming but not conceding or deciding that a lessee might be the trustee or agent of the certificate holders, the Circuit Court of Appeals for the Ninth Circuit, in Rogan v. Blue Ridge Oil Co., Ltd., 83 Fed. (2d) 420, referring to Thompson v. Commissioner, 28 Fed. (2d) 247, stated that it was “equally conceivable that the lessee could realize a profit in creating such agency or trust, which profit would be personal to the lessee.” Referring later to a situation where a lessee sold percentage interests, contemplating the sinking of a new and particular well, the court said that in such a case “there is no obligation to return to the certificate holder the excess of moneys received by the lessee as consideration for the contract, above the cost of the well. Such excess constitutes income to the lessee.” In that case the court held that all of the proceeds from the sale of percentage interests constituted income to the lessee, since it had failed to show how much, if any, of the proceeds were actually used in drilling the well designated.

In the instant case there is no such failure of proof. The record shows that the sales were made for the specified purpose of obtaining funds to be used in drilling Saylin-Verge Well No. 1, and further, that the entire amount received by the petitioner from the sale of certificates was actually expended in the drilling of that well. We are of the opinion that the sums received by the petitioner from the certificate holders were received subject to an implied trust to use those funds in the sinking of the well, Diferding v. Bdllagh, supra, and, since in this case the petitioner received nothing from the sale of percentage certificates in excess of the amount necessary to sink the well or in excess of the amount actually expended therein, it never at any time received any such sums without restriction as to their use and disposition. There was no excess which the petitioner might have appropriated to its own use, and under such circumstances it can not be said that any part of the sums received by it from the certificate holders in the production of Saylin-Verge Well No. 1 constituted income to it. This issue must be decided for the petitioner. Cf. Rogan v. Blue Ridge Oil Co., Ltd., supra; United States v. Knox-Powell-Stockton Co., 83 Fed. (2d) 423; and Thompson v. Commissioner, supra.

The respondent has allowed petitioner a depletion deduction for the year 1931 in the amount of $2,010.77, which, according to the stipulation of facts, represents “50 per cent of the net income from the Saylin-Verge Well No. 1.” Section 114 (b) (3) of the Kevenue Act of 1928 provides that in the case of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. It is further provided, however, that the 27% per centum allowance shall not exceed 50 per centum of the net income of the taxpayer from the property and that in no case shall the depletion allowance be less than it would be if computed without reference to the section mentioned.

The petitioner contends that the depletion allowance computed on the cost basis amounts to $4,179.47 and, since that amount is greater than the amount allowed by the respondent, under section 114 (b) (3), supra, it is entitled to the larger deduction. In computing the deduction claimed, the petitioner first ascertained the unit cost per barrel of oil by dividing the total intangible expenditures on the well, amounting to $29,027.46, by the well’s oil content of 142,500 barrels, and then, by multiplying the unit cost so determined by the number of barrels produced in 1931, arrived at the depletion figure of $4,179.47. If the petitioner’s depletion deduction is to be computed on the basis of cost rather than by one of the methods prescribed by section 114 (b) (3), supra, the basis for that computation must be limited to petitioner’s actual depletable cost and may not include the cost to others. Clearly the facts of record do not support the claim of a depletable cost to the petitioner in the amount of $29,027.46. The total cost of the well, tangible and intangible, amounted to $81,848.39, of which amount $47,929.04 was supplied by the purchasers of percentage interests in production, leaving $33,-919.35 as the amount furnished by the petitioner. We have previously pointed out that the sums received by the petitioner from the purchasers of percentage interests did not constitute income to the petitioner, but represented sums held subject to an implied trust for use in drilling the well for the benefit of the certificate holders. It follows that no part of the $47,929.04 received from the sale of certificates and expended in sinking the well may be said to be cost of the well to the petitioner. The inconsistency of the petitioner’s position is that it contends that such receipts did not belong to it, for the purpose of computing its taxable income for the years 1930 and 1931, but at the same time seeks to include such part thereof as its cost in drilling the well. The petitioner is, of course, entitled to include only its actual depletable cost in computing the depletion deduction on a cost basis and is not entitled to include that portion of the depletable cost of the well representing expenditures by the certificate holders. Cf. Kell v. Commissioner, 88 Fed. (2d) 453; affirming in part, 32 B. T. A. 21.

On the facts before us, the petitioner’s depletable cost should be determined by allocating the actual amount expended by it and from its own funds between tangibles and intangibles. The amount thus allocated to intangible expenditures represents the amount recoverable by the petitioner through depletion if computed on the cost basis. If the depletion allowance computed on that basis is less than the allowance computed on the percentage basis, the petitioner is entitled to the larger deduction.

It is also apparent that the petitioner is not entitled to deduct the full amount of the depletion on Saylin-Verge Well No. 1 computed under section 114 (b) (3), supra. If a taxpayer has acquired or retained the right to share in the oil produced from a certain property, “he has an economic interest in the oil in place, which is depleted by production” and entitles him to a depletion allowance thereon. Palmer v. Bender, 287 U. S. 551; Thomas v. Perkins, 301 U. S. 655; Commissioner v. O'Donnell, 90 Fed. (2d) 907; Commissioner v. Elliott Petroleum Corporation, 82 Fed. (2d) 193; and Rocky Mowntain Oil Co., 36 B. T. A. 365. The statute provides for a single depletion allowance in respect of any given property, however, and this allowance is to be apportioned among the parties entitled to depletion on the basis of the economic interest of each party. Helvering v. Twin Bell Oil Syndicate, 293 U. S. 312. The deduction permitted to any one party is limited therefore to his proportionate share of the total allowance to all parties. Caroline C. Spalding, 35 B. T. A. 132. In this case the petitioner sold and exchanged percentage interest certificates covering 35.4124 percent of the entire proceeds to be derived from the well’s production, thereby reducing its depletable interest in the well’s recoverable reserve to 64.5876 percent. Accordingly, the petitioner is entitled, under section 114 (b) (3), supra, only to its proportionate share, or 64.5876 percent, of the total depletion allowance to all parties who owned depletable interests in the property.

The depletion deduction will be computed under section 114 (b) (3), supra, on the percentages above indicated, and on the basis of cost as previously outlined, and allowed in whichever amount is greater.

At the end of 1931 the petitioner had accrued on its books $1,895.78 representing unpaid landowners’ royalties. By agreement with the landowners, the petitioner was allowed to defer payment of such claims until after its more pressing debts were paid. The respondent does not question the petitioner’s right to deduct all accruable debts from its gross income, but argues in his brief that “Because the royalty was waived until creditors were paid * * * the payment of the amount by petitioner was uncertain and could not be an accrued liability until the condition of the corporation was such that there was at least some certainty that the amount would be paid.” There is no merit to this argument. The accruability test of a debt is not certainty of payment, but rather certainty of its liability, and a taxpayer on the accrual basis can not defer deductions for a debt which becomes fixed in a given year to a subsequent year. Art. 342, Regulations 74; Miller & Vidor Lumber Co. v. Commissioner, 39 Fed. (2d) 890; Lichtenberger-Ferguson Co. v. Welch, 54 Fed. (2d) 570; Desco Corporation v. United States, 55 Fed. (2d) 411; Southern Power & Light Co. v. United States, 72 Fed. (2d) 368. The record supports the petitioner’s contentions on this item and they are accordingly sustained.

Decision will "be entered wnder Rule 60.

       SEC. 1X4. BASIS FOR DEPRECIATION AND DEPLETION.
      *******
      (b) Basis for depletion.—
      *******
      (3) Percentage depletion por oil and gas wells. — In the ease of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.


author: Ttjenek :

text:
    Rawco, Incorporated, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77034.
    Promulgated January 21, 1938.

      Raymond R. Rails, Esq., and A. L. Moreton, Esq., for the petitioner.

      E. G. Algire, Esq., and Lloyd B. Harrison, Esq., for the respondent.
   OPINION.

Ttjenek :

The first issue presented for our determination is whether or not the proceeds received by the petitioner from its sales of production assignments in the four wells constitute income. In the alternative, if that question is decided in the affirmative, then it will be necessary to determine whether the respondent erred in excluding such sums from the “gross income from the property” for the purpose of computing petitioner’s depletion allowance.

The petitioner contends that the amounts received by it from such sales constitute contributions of capital, and not income. Thompson v. Commissioner, 28 Fed. (2d) 247. The respondent contends that the transactions constitute sales of property interests and that the gain realized therefrom is income to the petitioner.

In Rogan v. Blue Ridge Oil Co., Ltd., 83 Fed. (2d) 420; certiorari denied, 299 U. S. 574, the court held that where certificates sold cover the production or net income of a completed well specifically described in the certificates, the proceeds from the sale of such certificates constitute income to the lessee and, further, that where the well the production of which is sold is to be drilled or is only partially drilled and there is no obligation on the part of the lessee to return to the certificate holders the excess of moneys received over and above the cost of the well, such excess is income to the lessee. In that case the entire proceeds from the sale of certificates were included in income by reason of the taxpayer’s failure to show how much, if any, of such proceeds were actually used in drilling the well designated.

In the instant case the proof is more complete and definite as to certain of the sums received by the petitioner from production assignments. As to the $25,000 received under the contract of August 23, 1929, in respect of the production of Lewis Well #1, the $40,000 received under the contract of January 2, 1930, in respect of the production of Noll Well #1, and the sum of $24,000 received under the contract of January 15, 1930, for the assignment of production in Colter Well #1, the contract in each instance specifically provided that the money so paid by the G. P. Corporation to the petitioner was to be used in either drilling or completing the particular well in question. In the first two contracts mentioned it was also provided that the G. P. Corporation could require a showing that the money so paid was actually used in drilling the well or was available to cover the cost of drilling. These contracts fixed the rights and obligations of the parties and under none of them did the petitioner have the right to convert the funds so received to its unrestricted use. Furthermore, •we have no reason to assume that the contracts were not carried out and that the money was not expended by the petitioner in accordance with its obligations thereunder. In the case of each of the three wells the cost of drilling was in excess of the respective sums above mentioned. None of the sums here dealt with constituted income to the petitioner. Transcalifornia Oil Co., Ltd., 37 B. T. A. 119.

Similarly the sum of $6,000 received from the G. P. Corporation on October 18, 1929, for use in drilling Lewis Well #1, should be excluded from income. The contract there recited that the well was being drilled and the sum of $6,000 was desired for the purpose of its completion. While the contract did not contain a provision for an accounting, it does appear that the petitioner did proceed with the drilling of the well after the receipt of the $6,000 mentioned, bringing it to completion eighteen days later. Furthermore the sum of $25,000 already received and the $6,000 here considered were well within the total cost of the well and it may not be said that upon completion of the well there was any excess of the amounts so received over the cost of the well.

The same ruling applies to the compensation of P. G. Cumming for services rendered in connection with the drilling of Noll Well #1 and Colter Well #1, for which he received production assignments in each well. The amounts here unquestionably represented the measure of the labor of Cumming which was completely applied to the drilling of the wells and for which he received his interests in the wells. Clearly the petitioner received nothing that might be classified as income.

So far as the record discloses the remaining sums received from the sale of production assignments were received either after completion of the particular well, at or within a very few days of its completion, or the record is silent as to the state of drilling operations at the time of receipt. Further, there is nothing in the record to show that any of the production assignments for which the said sums were received were sold for the purpose of procuring money to drill the particular well or any well. Neither does it appear that there was any understanding or intention on the part of the parties that the moneys so paid to the petitioner should be so used and no proof has been offered by the petitioner to show that any of the sums so received were actually expended in sinking the well in respect of which the said certificates were sold. On this state of the record the sums so received should be included in petitioner’s income for the year in which they were received. Rogan v. Blue Ridge Oil Co., Ltd., supra.

The petitioner contends in the alternative that if the proceeds from the sale of production assignments constitute income the sums so received should be included in “gross income from the property” in computing its depletion allowance under section 114 (b) (3) of the Eevenue Act of 1928. The respondent contends that the disposition of production assignments by the petitioner were sales of property interests and that the1 proceeds from such sales were not “gross income from the property” within the meaning of the statute.

On this issue the respondent must be sustained. The allowance for depletion is permitted where the income in question is derived from an economic interest owned and retained by the taxpayer and which economic interest is subject to exhaustion by reason of the production of oil and gas therefrom. Burnet v. Harmel, 287 U. S. 103; Herring v. Commissioner, 293 U. S. 322; Thomas v. Perkins, 301 U. S. 655. On the other hand, a taxpayer is not entitled to a depletion allowance in respect of money received from the sale or disposition of the economic interest itself. In such a case the proceeds from the sale are not derived from property owned and retained by the taxpayer, which property so owned and retained is susceptible of depletion by reason of the production of oil and gas thereon and in respect of which production the payments so received are made. Darby-Lynde Co. v. Alexander, 51 Fed. (2d) 56; Commissioner v. Fleming, 82 Fed. (2d) 324; R. R. Ratliff, 36 B. T. A. 162; and Caroline C. Spalding, 35 B. T. A. 132. See also Helvering v. Twin Bell Oil Syndicate, 293 U. S. 312. In this case the petitioner parted specifically and finally and for a definite sum of money paid in cash with the production assignments in question. The transactions were sales of the economic interests themselves and not the receipt of income in respect of economic interests in the property owned and retained, and the petitioner is not entitled to the depletion allowance claimed.

On the next issue the petitioner contends that the transaction of April 28, 1930, whereby it transferred certain assets to the G. P. Corporation in exchange for capital stock of that corporation, comes within the meaning of section 112 (b) (4) and (i) (1) (A) of the Revenue Act of 1928, hence was a reorganization, and its gain is not recognized for tax purposes. The pertinent provisions of the Kev-enue Act of 1928 are shown in the footnote.

The respondent contends that the exchange was not made pursuant to a plan of reorganization. He argues that it constituted an outright sale and that the difference between the cost of the assets sold and the value of the stock received, or $32,593.81, constituted taxable income to petitioner.

When the petitioner entered into the contract of April 28, 1930, it already owned 37,300 shares of capital stock of the G. P. Corporation. Under the terms of that contract and the supplemental agreement of May 19, 1930, petitioner acquired 243,409 additional shares, making a total of 280,709 shares, or approximately 59 percent of the total outstanding stock of 'the G. P. Corporation. That petitioner acquired “at least a majority of the voting stock and at least a majority of the total number of shares of all classes of stock” of the G. P. Corporation, is not denied by the respondent, and we think that such acquisition was made within the meaning of the parenthetical clause of section 112 (i) (1) (A), supra. Charles A. Dana, 36 B. T. A. 97. The respondent’s position is that such acquisition was not made pursuant to a plan of reorganization as required by section 112 (b) (4), supra.

We think that the provisions of the contract of April 28, 1930, show that the parties entered into the agreement in pursuance of a plan. The agreement constituted a plan of reorganization if the acts to be performed fall within the meaning of the term reorganization as defined by section 112 (i) (1), supra. The respondent places a great deal of importance upon the fact that the parties referred to the transaction as a sale in their supplemental agreement of May 19, 1930. We do not think the fact that they referred to it' as a sale would change its nature or effect, nor operate to exclude it from the meaning of the statute if it would otherwise fall therein. Weiss v. Steam, 265 U. S. 242. The important fact is that the transaction amounted to a reorganization within the meaning of the statute, and that it was entered into in pursuance of a plan. “The plan of reorganization was the contract made and performed.” Watts v. Commissioner, 75 Fed. (2d) 981; affd., 296 U. S. 387.

The respondent argues in his brief that there is no proof of a continuity of interest on the part of the petitioner in the properties transferred to the G. P. Corporation. . We do not see how it could be otherwise. The petitioner owned certain leases and oil drilling equipment. It transferred these assets to the G. P. Corporation in exchange for capital stock in that corporation. No cash or other securities were involved in the transaction. After the transfer petitioner owned a substantial majority of all the outstanding stock of the G. P. Corporation, which would give it absolute control over the assets transferred as well as all the other assets owned by the G. P. Corporation.

In view of the foregoing we are of the opinion that the transaction in question constituted a reorganization within the meaning of section 112 (b) (4) and (i) (1) (A), supra, and petitioner’s gain is not recognized for tax purposes. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U. S. 599; Helvering v. Minnesota Tea Co., 296 U. S. 378; and Charles A. Dana, supra.

The respondent has disallowed the deduction claimed by the petitioner for the year 1930 in respect of the indebtedness of the Biltmore Petroleum Corporation on the ground that there were definite possibilities of collecting the account as at December 31, 1930. The petitioner claims that the debt was worthless in 1930 and that he is entitled to the deduction claimed. In our opinion, however, the facts of record are not sufficient to sustain that claim. It is true that the only prospect of payment was from the Lewis lease and the production therefrom. It is also true that production of oil from Lewis Well #1 had ceased in November of 1930 and that operating costs in December of that year exceeded the proceeds from the sale of gas, and, further, that operating costs continued to> exceed revenues from production until June 1931. It appears, however, that the G. P. Corporation was striving to put the well back on production on a paying basis and the only reasonable inference that may be drawn from the facts stipulated is that it did succeed in accomplishing that purpose by June of 1981, even though the production so obtained may have been light. It is also a fact that the condition of the well and lease was such that in December 1931 the G. P. Corporation was able to find a purchaser for the property for a reasonably substantial sum and that the petitioner at that time, for the surrender of the 21% percent interest in production held by it, received cash in the amount of $5,160. While all of the amount so received may not be attributed to the 12% percent interest looked to for repayment of the indebtedness of the Biltmore Petroleum Corporation, the amount attributable to that interest did further reduce in a substantial way that corporation’s indebtedness to the petitioner.

In the light of these facts and in the absence of a more definite showing by the petitioner that it could not reasonably be expected that the well would be brought back on production on a paying basis, we conclude and hold that the petitioner has failed to show that the debt of the Biltmore Petroleum Corporation was worthless at December 31, 1930, the date on which it was charged off.

Decision will be entered, under Bule 60.

       SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
      *******
      (b) Basis for depletion.—
      *******
      (3) Percentage depletion foe oil and gas wells. — In tbe ease of oil and gas wells tbe allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.

       SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS.
      (a) Computation of gain or loss. — Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized.
      SEC. 112. RECOGNITION OF GAIN OR LOSS.
      (a) General rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      (b) JHcochanges solely in hind.—

      * ***** e
      (4) Same. — Gain oe corporation. — No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
      * ■ * * * # * *
      (i) Definition of reorganization. — As used in this section and sections 113 and 115—
      (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however, effected.
      (2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

      BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Property acquired after February 28, jbis. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; * * *


text:
    Fidelity-Bankers Trust Company, Trustee, for Hugh W. Sanford et al., and Fidelity-Bankers Trust Company, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83421.
    Promulgated January 21, 1938.

      Forrest Andrews, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Disney :

The deficiency involved herein was determined against the Fidelity-Bankers Trust Co. as trustee for the Fidelity Realty Co. No determination was made against the Fidelity-Bankers Trust Co. in its individual capacity and the Board has no jurisdiction as to it. Accordingly the proceeding is dismissed in so far as it relates to the Fidelity-Bankers Trust Co. in its individual capacity. E. N. & O. M. Ennis, 21 B. T. A. 406.

The petitioner contends that the Fidelity Realty Co. had no existence in fact, arguing that the designation was merely a loose term to describe the parties who had subscribed to the fund; that the income from the property constituted earnings of the Trust Co., as the equitable owner of the property of the syndicate; that the certificates issued to the subscribers for the amount of their paid-in subscriptions were nothing more than receipts given as evidence of a promise to pay a specified amount of interest at stated intervals, and, in general, that the agreement created the relationship of borrower and lender between the Trust Co. and the certificate holders.

The evidence of record establishes beyond doubt that the parties to the organization did adopt a name for their venture and subsequently recognized their act. A group formed to carry on a business venture may not avoid being classed as an association, taxable as a corporation, by failing to select an official name under which to conduct the activities of their organization. Helvering v. Combs, 296 U. S. 365.

The purpose of the group is determined by the instrument they signed. Helvering v. Coleman-Gilbert Associates, 296 U. S. 369. The agreement shows the formation of an organization to engage in the business of acquiring, encumbering, leasing, and selling property belonging to or thereafter acquired by the Trust Co., with a central form of management controlled through transferable certificates evidencing ownership of beneficial interests; limited liability of participating members; and a continuation of the enterprise uninterrupted by death of a certificate holder or by transfer of ownership of beneficial interests. These terms of the agreement are characteristic of an association under the guides set forth in Morrissey v. Commissioner, 296 U. S. 344. The fact that the venture was to terminate on a specified date or could be terminated prior thereto, is not determinative of the question. Swanson v. Commissioner, 296 U. S. 362.

The terms of the agreement were broad enough to permit the syndicate to acquire from the Trust Co. for the purpose of the enterprise, property other than real estate obtained through foreclosure proceedings. The only limitation upon the right was that the acquisition be property then owned or thereafter acquired by the Trust Co. This broad power gave the syndicate a wide range within which to exercise its activity. That one of the dominating purposes of the organization was profit is definitely shown by the provision of the agreement guaranteeing the participating members an annual return of 6 percent on the face value of their certificates of beneficial interest. This was a minimum and maximum return to the certificate holders. If the earnings of the syndicate exceeded such an amount, the excess was distributable to the Trust Co. as profits. The activities of the pool were in pursuance of the agreement signed. Considering both the purpose expressed in the agreement and the activities of the syndicate, as above set forth in our findings of fact, we conclude and hold that the respondent did not err in holding the petitioner to be an association taxable as a corporation.

During the taxable years the earnings of the syndicate were insufficient to give the certificate holders a return of 6 percent on their investments, and as a result the Trust Co. paid to the trustee for the syndicate under its guarantee to the certificate holders amounts equal to the deficiencies. The consideration cited in the agreement of October 20, 1931, for the payments made by the Trust Co. was the right of the Trust Co. to annual profits of the syndicate exceeding 6 percent of the paid-in subscriptions. The respondent treated the amounts so received from the Trust Co. as gross income of the syndicate. The amounts were paid to the trustee for the certificate holders under an obligation running directly from the Trust Co. to the certificate owners. The amounts do not constitute taxable income of the syndicate. New England Power Co., 25 B. T. A. 195. On this issue the respondent is reversed.

The respondent imposed a penalty of 25 percent because of the failure of the syndicate to file a return within the time prescribed by law. The imposition of a 25 percent penalty is mandatory in case a taxpayer fails to file a return. Douglas L. Edmonds, Administrator, 31 B. T. A. 962; affd., 90 Fed. (2d) 14; Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698; affd., 80 Fed. (2d) 519; certiorari denied, 297 U. S. 723. If we could treat the fiduciary return filed by the Trust Co. as trustee for the syndicate as a return of the petitioner, the answer would not be different. It does not appear that such return was filed within the time provided for by statute and no evidence was offered to establish that the failure to file the return at such time was due to reasonable cause or not due to willful neglect. The imposition of the 25 percent penalty was proper and is sustained.

Keviewed by the Board.

Decision will be entered under Rule 50.


author: Hill:

text:
    Palladium Amusement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79746.
    Promulgated January 21, 1938.

      Walter D. Kibler, O. P. A., for the petitioner.

      William E, Davis, Esq., for the respondent.
   OPINION.

Hill:

This proceeding involves a deficiency in income tax for the year 1933 in the amount of $3,858.36. Several issues were raised by the pleadings, but on brief petitioner, without objection by respondent, has abandoned all issues except one involving the question whether respondent erred in determining the amount of taxable profit derived by petitioner as the result of a condemnation award. .

There is no controversy respecting the facts. Petitioner is a Missouri corporation, organized in 1916, with its principal place of business at St. Louis. During the year 1933 petitioner was the lessee of a certain tract of land, together with the improvements thereon, located in the city of St. Louis. Petitioner held the premises under a 25-year lease contract, expiring May 20, 1937. The land was owned by the Dubinsky Realty Co., lessor. The building on the leased premises contained a total area of 34,100 square feet, and in 1933 the city of St. Louis condemned a portion thereof, containing an area of 14,850 square feet, for street widening purposes. Petitioner was awarded as damages the sum of $49,700.95, and there was assessed against petitioner’s remaining property, as benefits arising out of the improvement, the sum of $8,000. The amount of the benefits in the sum of $8,000 was set off against and deducted from the amount of the award; also the sums of $1,214.10 general taxes and $312.10 special taxes were deducted from the amount of the award, leaving a balance of $40,174.75, which was paid by the city to the petitioner in the taxable year.

The award for damages made no mention of the portions that should be considered as having been paid for the property taken and for damages to the remainder of the property, if any.

The cost of petitioner’s building on the leased premises was $49,-003.92 at December 20, 1913; the unamortized cost at December 31, 1932, was $11,001.38; and that portion of the unamortized cost allo-cable to the 14,850 square feet taken by the city of St. Louis was $4,790.93.

Out of the proceeds of the award petitioner expended in restoring the property the amount of $11,407.89.

In computing the deficiency respondent determined that petitioner derived taxable profit, as the result of the condemnation proceeding, in the amount of $38,293.06, computed as follows:

Net award received from City of St. Louis_$40,174.75
Plus: General taxes withheld by City- 1,214.10
Special taxes- 312.10
Benefits Assessed by City- 8,000. 00
Total gross award-$49,700. 95
Less: Unamortized cost of property taken- 4,790.93
Profit derived-$44, 910. 02

However,, respondent held that the entire profit derived was not recognizable for tax purposes, but, under the provisions of section 112 (f) o’f the Eevenue Act of 1932, quoted in the margin, was taxable in an amount not in excess of the money not expended in restoration of the property, computed as follows:

Gross amount of award-$49,700.95
Less: Amount expended in restoration of property- 11,407.89
Amount not so expended, which represents portion of profit subject to tax_$38,293.06

Petitioner contends that respondent erred in his computation of net taxable profit in failing to .deduct from the gross award the amount of $8,000 representing benefits assessed against the property of petitioner not taken by the city; and, in the alternative, petitioner contends that the $8,000 benefits assessed should be added to the unamortized cost of the whole property, to wit, $11,001.38, in order to arrive at the “basis” for computing the cost of the portion of the building condemned.

Petitioner further argues on brief that the amount of $11,407.89 expended in restoration of the property should be deducted from the gross profit in determining the amount of the net profit subject to tax. This contention can not be sustained. The statute quoted, supra, plainly provides that in case any part of the money into which a taxpayer’s property is involuntarily converted is not expended for replacement, the gain derived shall be recognized but in an amount not in excess of the money which is not so expended. Hence, the amount “not so expended” is not the difference between the amount expended and the gross profit, but it is the difference between the amount expended and the gross amount of the award received by the taxpayer. So much of the profit as does not exceed the latter amount is subject to tax.

Respondent’s computation of the profit derived by petitioner by reason of the condemnation of its property, above set out, treats the entire amount of the gross award as gross income received by petitioner. From the gross award so received there is then deducted the cost basis of the property taken, the balance representing the profit derived. The profit derived is recognized and taxed to the extent that the gross award exceeds the amount expended in restoration of the property. This method of computing the profit treats the $8,000 benefits assessed as additional cost of the property remaining or not taken in the condemnation proceeding, and not as a reduction of the award. It is the latter action to which petitioner objects.

The city of St. Louis is a separate municipality of the State of Missouri under the provisions of sections 20-26 of Article IX of the Constitution of Missouri of 1875, and is governed by a special charter.

Under the charter of the city of St. Louis and particularly Article XXI thereof, the city of St. Louis is authorized to condemn -or damage private property, real or personal, or any easement or use therein for public use.

The following are the applicable provisions of Article XXI of the charter of the city of St. Louis, Missouri:

Section 1.
Condemnation of or damage to private property, real or personal, or any easement or use therein for public use shall be effected as herein provided and as may be further provided by ordinance not inconsistent with this charter * * *.
Section 5.
The Commissioners shall view the property to he taken, damaged, or assessed; fix the benefit or taxing district; publish in said newspaper for ten days before beginning their assessment a notice of the boundaries of the benefit or taxing district and of the time and place at which they will assess such damages and benefits; hear the evidence submitted by the parties interested, assess the damages and benefits as of the date said ordinance became effective; and make a report, in which at least two commissioners shall concur, of such assessment in writing and under oath to the Circuit Court. In such report the compensation allowed to and the benefits assessed each owner shall be separately stated. When the commissioners both assess benefits and allow damages against one property owner they shall deduct the lesser from the greater.
Section 6.
At any time after the commissioners file their report the City may pay into court the amount of damages assessed, less benefits, if any, and thereupon it shall be entitled to take possession of or damage the property, assuming the lien of all general taxes not then payable on the property actually appropriated.
Section 8.
The court upon approving the commissioners’ report shall render final Judgment thereon reciting the report and adjudging that the City have and hold the property petitioned for, describing the same, for the purposes specified, upon payment of the damages less the benefits assessed in each instance: * * *

Article IX, section 21, of the Constitution of Missouri, 1875, provides that all courts shall take judicial notice of the copy of the scheme and charter of the city of St. Louis.

Under the Constitution of Missouri and the charter of St. Louis “just compensation” for private property taken for public use may be paid in benefits specially conferred upon property not taken and such compensation to be paid in cash is measured by the amount by which the damages sustained by the taking of property exceeds the benefits conferred upon that not taken. See State ex rel Chicago, B. & Q. R. Co. v. City of Kansas, 89 Mo. 34; 14 S. W. 515.

Pursuant to the authority conferred by the charter of St. Louis and the procedure therein prescribed, the amount of damages in the present case to the property taken for public use, plus the severance damages to the residuary property, was determined to be $49,700.95, and the amount of benefits assessed to the property not taken was $8,000. The amount of the damages less the amount of the benefits assessed was paid to petitioner. Thus, the compensation received by petitioner was $41,700.95 in cash and an increment to the value of the remaining property in the amount of $8,000. The net amount of damages sustained by petitioner was $41,700.95, the remainder of the damages being offset by an increase in value of the property remaining to the extent of $8,000. What then was the amount of the award for the purposes of taxation? Petitioner was paid in cash only the net amount of the damages sustained, to wit, $41,700.95. It did not receive the remaining $8,000 of the award in any form segregated or derived from the remaining property. To the extent of $8,000 the award of $49,700.95 was not income to petitioner. It represented merely an increment to the value of the property not taken. That increment will become income only when, if ever, there is such disposition of the property in question as will convert such increment into realized gain. Until that eventuality occurs, the amount of $8,000 of the award represented by benefits to the land not taken is not taxable and should be excluded from the award of $49,700.95 and from gross income in determining petitioner’s tax liability.

The $8,000 benefits should not be added to the cost basis of the remaining property. While the benefits represent an increment in the value of such property, petitioner, having paid nothing therefor, is not entitled to increase the cost basis. No benefit assessment was in fact made, and hence it can not be said that $8,000 of the gross award was used to discharge a legal obligation of petitioner. The determination was that the value of the property taken, plus damages, was $49,-700.95, and that the remaining property was benefited to the extent of $8,000. The “just compensation” for the property taken and the damage to the remainder was, therefore, $8,000 paid in benefits to the remaining property and $41,700.95 paid in cash, which latter amount only constituted gross income to petitioner, and leaves undisturbed the cost basis of property not taken. If the amount of benefits be excluded from the gross award in computing gross income and also be added to the cost basis of the remaining property, then petitioner would have the benefit of the exclusion in the taxable year, and would recover tax-free in a subsequent year, the same amount, thus for tax purposes in effect getting a double deduction.

Eespecting the inherent nature of a benefit assessment, the Court of Appeals for the Second Circuit, in Carrano v. Commissioner, 70 Fed. (2d) 319, said:

In this instance the “gain” in dispute could arise only on the hypothesis that so much of the award as paid the assessment was received before the assessment itself was paid. This was demonstrably not the case; it was received at the same time. Thus it does not affirmatively appear to be a “taxable” gain at all, and the taxpayer wins. Moreover, this is the direct and natural way to look at the transaction. The taxpayer has “gamed," only what he has received above his cost; so far as his award has been cancelled by the assessment, it is not a “gain” at all, it is instantly absorbed by a new cost which arises and is paid without atloioing him even a momentary possession of the “gain.” [Italics supplied.]

In the case of Wolf v. Commissioner, 77 Fed. (2d) 455, the Court of Appeals for the Ninth Circuit quoted with approval the above extract from the Carrano opinion, but said:

The gain, if any, derived by the taxpayer from the transaction was in the increased value of the property already owned by him. This increase is not a taxable gain. [Italics supplied.]

The identical question presented here, and on facts in all material respects the same, was first considered by the Board in the case of Antonio B. Carrano, decided in a memorandum opinion entered April 18, 1933. There respondent determined a gain by the same method employed in this proceeding; that is, by deducting from the gross award the cost of the property taken, treating a benefit assessment as additional cost of the property retained and including the full amount in gross income. The petitioner specifically contended that, since he actually received only the difference between the gross award and the amount assessed for benefits, the taxable income, if any, derived from the condemnation of his property was the difference between the net amount so received and the cost of the appropriated property. The Board rejected this theory and approved the deficiency determined by respondent. The decision was reversed by the Court of Appeals for the Second Circuit in Carrano v. Commissioner, supra.

A situation substantially similar in principle to the case at bar was presented to the Board in L. H. Wolf, 29 B. T. A. 702, promulgated in January 1934. There, as here, respondent computed the taxable gain by deducting the allocated cost of the property condemned from the whole award for the same property, thus including a benefit assessment in gross income. However, only two questions were raised before the Board, namely, whether the proceeding constituted a closed transaction, and whether it resulted in the acquisition by the petitioner of “property similar or related in service or use.” The first question was answered in the affirmative, the second in the negative, and respondent’s determination of gain approved. On appeal, the decision was reversed in Wolf v. Commissioner, supra.

The same question was presented and like decisions rendered by the Board in Christian Gandhl Co., 34 B. T. A. 126, and in Central & Pacific Improvement Corporation, 34 B. T. A. 208. The Board’s decision in the Gandhi case was reversed by the Circuit Court of Appeals for the Ninth Circuit on July 12, 1937, 91 Fed. (2d) 343; certiorari denied, 302 U. S. 748, and the decision in Central do Pacific Improvement Corporation, was reversed by the same court on September 13, 1937, 92 Fed. (2d) 88. The decisions of the court in the above cases were followed by the Board in Calvin C. Green, 37 B. T. A. 25.

The deficiency in controversy will be redetermined by computing the taxable profit derived by petitioner from the condemnation of its property as follows:

Gross award_$49,700.95
Less: Benefits assessed--- 8,000.00
41,700.95
Less: Cost of property taken- 4,790.93
Profit realized_ 36,910.02

However, of the profit realized, only the amount of $30,293.06 is recognizable for tax purposes, under the provisions of section 112 (f), supra. Of the gross award of $49,700.95, $8,000 consisted solely of benefits to the remaining property in the form of increased value, and of the net or cash award of $41,700.95, the amount of $11,407.89 was expended in restoration of the property, leaving $30,293.06 not so expended, which measures the amount of the profit subject to tax.

Reviewed by the Board.

Judgment will be entered under Rule 60.

       SEC. 112. RECOGNITION OP GAIN OR LOSS.
      *******
      (f) Involuntary Conversions. — If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or Imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property ■similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.