Constitution Publishing Co. v. Commissioner

The Constitution Publishing Company, by Atlanta Newspapers, Inc., Successor on Consolidation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Atlanta Newspapers, Inc., Alleged Transferee of the Constitution Publishing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Constitution Publishing Co. v. Commissioner Docket Nos. 34234, 34235 United States Tax Court 20 T.C. 1028; 1953 U.S. Tax Ct. LEXIS 63; September 21, 1953, Promulgated *63 Decision will be entered under Rule 50. Constitution, a newspaper publisher, purchased land, together with the building thereon, in 1899 to house its business operations. The purchase price was $ 125,000. Of that amount, $ 25,000 was allocated as the cost of the land and $ 100,000 as the cost of the building. Substantial improvements, of particular benefit only to Constitution, were made to the building prior to March 1, 1913. Prior to March 1, 1913, the building sustained depreciation amounting to $ 34,222.05. From March 1, 1913, to March 1, 1948, depreciation in the amount of $ 135,641.11 was allowed. The fair market value of the land on March 1, 1913, was $ 58,000. The fair market value of the building on that date was $ 56,550. Its adjusted cost value on that date was $ 139,843.18. The property was sold in 1948 for $ 185,769.25. In 1950 Constitution merged with the Atlanta Journal Company to form petitioner, Atlanta Newspapers, Inc., pursuant to the provisions of the Georgia Code. Held, in computing the amount of capital gain realized on the sale of the property, petitioner may use the fair market value as of March 1, 1913, in determining the basis for the land*64 and the adjusted cost value in determining the basis for the building. Allen Post, Esq., and William P. McClure, Esq., for the petitioners. James Harper, Esq., for the respondent. Rice, Judge. RICE *1028 These consolidated proceedings involve a deficiency of $ 9,880.28 for the year 1948 determined against The Constitution Publishing Company*1029 (hereinafter referred to as Constitution) and against Atlanta Newspapers, Inc., as alleged transferee of the assets of Constitution. The issues raised by the pleadings are: (1) Whether Constitution was entitled to use the fair market value as of March 1, 1913, for land but the adjusted*65 cost basis for a building situated thereon in computing the amount of capital gain realized in 1948 upon the sale of the whole property originally acquired in 1899; and (2) whether petitioner, Atlanta Newspapers, Inc., is liable as a transferee of Constitution for any income tax deficiency for the year 1948, or whether it is liable as the principal taxpayer. Some of the facts were stipulated. FINDINGS OF FACT. The stipulated facts are so found and are incorporated herein. Constitution was organized under the laws of the State of Georgia on November 13, 1899. It filed its corporate income tax return for the year 1948 with the collector of internal revenue for the district of Georgia. In December 1899, Constitution purchased a parcel of land, together with the five and one-half-story building thereon, located at 148 Alabama Street, S. W., Atlanta, Georgia, for $ 125,000. Of the purchase price, $ 25,000 was allocated to the land and $ 100,000 to the building. Prior to March 1, 1913, certain improvements were made to the building at a cost of $ 74,065.23. Such improvements were necessitated by the nature of Constitution's business. Much heavy machinery was located on the upper floors*66 of the building. The major improvements consisted of the installation of additional heavy beams and posts for floor support. These improvements enhanced the value of the building only insofar as it might be used for newspaper publishing or other activity where correspondingly heavy machinery would be placed on the upper floors. Prior to March 1, 1913, the building had sustained depreciation amounting to $ 34,222.05. In 1923, an underpass on the property was filled in at a cost of $ 1,200. Respondent concedes that the cost of this improvement should be included in determining the proper valuation of the land. Between March 1, 1913, and March 1, 1948, additional improvements costing $ 9,590.73 were made to the building. The total depreciation sustained during that period amounted to $ 135,641.11. In 1947, Constitution requested the Atlanta Real Estate Board to make an appraisal of its property located at 148 Alabama Street, SW., to determine its fair market value as of March 1, 1913. Such appraisal was made by a committee appointed by the Board. The *1030 committee was composed of Howard H. Arnold, Alvin B. Cates, and Ward Wight. None of the three had any personal or financial*67 interest in the property nor were they in any way associated with Constitution. Arnold entered the real estate business in Atlanta, in 1899, and has been actively so engaged since. Cates first entered the real estate business in Atlanta, in 1905, and at the time of trial was the president of one of the city's leading firms. Wight was president of the Wight Realty Company, but the record does not disclose how long he had been in the real estate business. He was ill at the time of trial. On May 1, 1947, the Board submitted to Constitution the results of its committee's appraisal, stating that, in its opinion, the property had a fair market value on March 1, 1913, of $ 114,550; $ 58,000 represented its valuation of the land, $ 56,550 its valuation of the building. The committee's appraisal was based on its knowledge of the real estate market in 1913, sales of comparable property in the immediate vicinity at that time, and the purpose for which the property could be used as it stood and its adaptability to other uses. On March 1, 1948, the property was sold to Rich's, Inc., for $ 185,769.25. In its return for that year, Constitution reported a long-term capital gain from such sale*68 of $ 100,845.46. Respondent determined such gain to be $ 145,776.45. Petitioner now agrees that the gain reported in Constitution's return was incorrect and that the correct amount should be $ 112,776.45. The difference in the amount of gain claimed by petitioner and that determined by the respondent arises over a dispute as to the proper basis for the land in computing the amount of gain. Respondent determined the basis for the land was its cost plus the improvement made in 1923, or $ 26,200. Petitioner used the fair market value as of March 1, 1913, plus the cost of the improvement, or $ 59,200. On April 14, 1950, Constitution and the Atlanta Journal Company entered into an agreement which provided, in part, as follows: Pursuant to the provisions of the laws of the State of Georgia, and in particular, pursuant to the Act of January 28, 1938, Georgia Law Ex. Sess. 1937-1938, pp. 214 et seq., known as the Corporation Act of 1938, all of the parties do hereby agree to consolidate such corporations and do hereby prescribe the terms and conditions of said consolidation and the mode of carrying the same into effect and the other necessary conditions thereof as follows: * * * * *69 Paragraph 1 of the agreement recited verbatim the principal provisions of section 22-1844 of the Code of Georgia providing that upon consolidation the constituent corporations should cease and the successor consolidated corporation should possess all of their assets and liabilities. Consolidation was effected, and outstanding stock of the *1031 old corporations was exchanged for stock of the new company, known as Atlanta Newspapers, Inc. Constitution's return was filed on March 15, 1949, and the notices of deficiency were mailed on February 21, 1951. The fair market value of the land at 148 Alabama Street, SW., as of March 1, 1913, was $ 58,000, and the adjusted basis of the land at the time of sale was $ 59,200. Of the total sales price for the property of $ 185,769.25, the sum of $ 59,200, at the least, was for the land. The fair market value of the building as of March 1, 1913, was $ 56,550, and its adjusted cost basis on the date of sale was $ 13,792.80. OPINION. In determining gain from the sale of property acquired prior to March 1, 1913, section 113 (a) (14) 1 of the Internal Revenue Code provides that the basis of the property shall be (1) the fair market value on*70 March 1, 1913, or (2) the adjusted basis as determined under section 113 (b), whichever is the higher. For purposes of computing the amount of capital gain realized on the sale of Constitution's business property acquired in 1899, petitioner seeks to use the March 1, 1913, fair *71 market value for the land, but the adjusted cost basis for the building. The question for decision is whether such land can be separated from the building so that a different basis may be applied to each in determining the proper amount of capital gain realized on the sale of the whole property. The common law identified land and fixtures or improvements thereon as a single asset, in the absence of specific agreement to the contrary. See Kinkead v. United States, 150 U.S. 483 (1893); Kutter v. Smith, 2 Wallace 491 (1864). For purposes of Federal taxation, however, the rule of the merger of land and buildings, in many instances, has been held to be inapplicable; and the two are treated separately. Helen M. Dunigan, Administratrix, 23 B. T. A. 418 (1931), affd. 66 F. 2d 201 (1933). There have been, we think, sound reasons for not adhering to the common law doctrine. Land cannot be depreciated; hence, a separation is required to allow depreciation for buildings situated thereon *1032 which are subject to depreciation. Regs. 111, sec. 29.23 (l)-4. Mineral*72 resources are recognized as an asset separate and distinct from the land in which they are found, and section 23 (m) of the Code provides that allowance be made for their depletion. Likewise, a separation of land and building is necessary when the structure is voluntarily removed or demolished. Regs. 111, sec. 29.23 (e)-2. In addition to these instances, this and other courts insist on a separation of land and other assets located thereon to determine the character of each asset for purposes of computing capital gains where there is a sale of the whole property. M. A. Paul, 18 T. C. 601 (1952), remanded on other grounds 206 F. 2d 763, (C. A. 3, 1953); Watson v. Commissioner, 345 U.S. 544 (1953), rehearing denied 345 U.S. 1003; Helen M. Dunigan, Administratrix, supra. We are persuaded that an equally sufficient reason exists to justify recognition of the separate identity of Constitution's land and building and, hence, the application to each of whichever of the two bases provided in section 113 (a) (14) will give it maximum value*73 in computing the amount of capital gain realized on the sale of the whole property. Without question, Constitution owned two assets -- a tract of land, and a five and one-half story building. Of the purchase price, $ 25,000 of the price paid was allocated as the cost of the land and $ 100,000 as the cost of the building. Depreciation allowance on the building was taken in all succeeding years until the time of sale. The cost of capital improvements was specifically allocated to each asset. Had the building been demolished or removed, its basis would have been determined independently of the land. Or, had Constitution sold only the land and taken a lease thereon, separate valuations of the two assets to determine their bases would have had to be made. Only upon sale of the whole property does respondent want to merge the two and call them one. The plain language of section 113 (a) (14) is that in determining the amount of gain on the sale of "property acquired before March 1, 1913" the basis shall be its fair market value as of that date or its adjusted basis, whichever is higher. We have found that the land here in question had a fair market value as of March 1, 1913, of $ 58,000, *74 and its cost was $ 25,000. The building, on the other hand, had a fair market value on March 1, 1913, of $ 56,550; its adjusted cost basis on that date was $ 139,843.18; and its adjusted cost basis at the date of sale was $ 13,792.80. We think the tax benefit which accrues to petitioner here, by the use of two bases, is no more than that to which it is legally entitled. The law of taxation deals with realities. To say that petitioner must apply only one of the bases provided in section 113 (a) (14) to two *1033 assets on the fiction that they are one would be unrealistic and a distortion of the meaning of that section. We find no evidence that Congress intended to restrict the meaning of the word "property" as it applies to real estate in that section, so as to prohibit the separate valuation of land and buildings by applying to each whichever of the two bases provided in the section will give each its maximum value. We think the petitioner has sustained the burden of proving the fair market value of the land here in question as of March 1, 1913. The appraisal of the Atlanta Real Estate Board was made by three of its members who were actively engaged in the real estate business*75 in 1913 and who drew upon their extensive knowledge of the real estate market at that time in making their appraisal. Their opinion was supported by detailed information of comparable property, located in the same area, which was sold during the year 1913. Our determination that petitioner is entitled to use the March 1, 1913, fair market value of $ 58,000 in computing the amount of capital gain realized on the sale of Constitution's business property reduces by $ 33,000 the amount of such gain as determined by respondent in his deficiency notice. Petitioner concedes that the amount of such gain is $ 11,930.99 more than reported on Constitution's 1948 return, and that figure will be used in a recomputation under Rule 50. Having determined the only issue raised in Docket No. 34234 and the identical issue raised in Docket No. 34235 for petitioner, it is unnecessary for us to decide the additional issue raised in Docket No. 34235 of whether petitioner would be liable for any additional deficiencies determined against Constitution, as a transferee or as the principal taxpayer. It has conceded its liability for that part of the deficiency to be computed in accordance with this opinion*76 under Rule 50 and the question as to whether it is liable therefor as a transferee or as the principal taxpayer becomes moot so far as this proceeding is concerned. Decision will be entered under Rule 50. Footnotes 1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (a) Basis (Unadjusted) of Property. -- The basis of property shall be the cost of such property; except that -- * * * * (14) Property acquired before March 1, 1913. -- In the case of property acquired before March 1, 1913, if the basis otherwise determined under this subsection, adjusted (for the period prior to March 1, 1913) as provided in subsection (b), is less than the fair market value of the property as of March 1, 1913, then the basis for determining gain shall be such fair market value. In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.↩