S. H. Kress & Co. v. Commissioner

S. H. Kress and Company, Petitioner, v. Commissioner of Internal Revenue, Respondent S. H. Kress & Co. v. Commissioner Docket No. 86965 United States Tax Court 40 T.C. 142; 1963 U.S. Tax Ct. LEXIS 144; April 25, 1963, Filed *144 Decision will be entered for the petitioner. Sale of petitioner's store site to private garage operator under threat of condemnation, proceeds of which were invested in sites for other stores to be used by petitioner, held, on facts, an "involuntary conversion" under section 1033, I.R.C. 1954, entitling petitioner to non-recognition of gain. A. Chauncey Newlin, Charles C. Humpstone, and Guy B. Maxfield, for the petitioner. Colin C. Macdonald, Jr., and Joseph Wilkes, for the respondent. Opper, Judge. OPPER *142 Respondent determined a deficiency in income tax for 1956 in the amount of $ 123,979.33. The issues remaining for decision are (1) whether property sold in 1956 was involuntarily converted within the meaning of section 1033 of the Internal Revenue Code of 1954 and, if so, (2) whether the proceeds*145 of such conversion were used to purchase property similar or related in service or use for the purpose of replacing the property converted. Some of the facts are stipulated. FINDINGS OF FACT The stipulated facts are hereby found accordingly. Petitioner is a New York corporation with its principal office at 114 Fifth Avenue, New York 11, N.Y. Petitioner's Federal income tax return for the taxable year ended December 31, 1956, was filed with the district director of internal revenue for the Lower Manhattan district, New York, N.Y. The return was prepared in accordance with an accrual method of accounting. Petitioner operates a chain of retail variety stores in the United States, including Hawaii. In 1956 it operated 260 stores, located in 29 States. The stores were located principally in the South and Southwest and in the Far West and Northwest. There was a high concentration of stores on the Pacific coast, ranging from San Diego, Calif., in the south, to Bellingham, Wash., in the north. About one-third of all the stores were located on the Pacific coast. In 1956 about 60 *143 percent of the stores were owned by petitioner, in whole or in major part, and about 40 percent*146 were on leased ground, improved mostly by petitioner. The stores carry an assortment of soft goods, home furnishings, and variety lines. Each store carries the same type of merchandise and is furnished with the same type of fixtures. Gross annual sales from 1950 to 1957 ranged from approximately $ 161 million to approximately $ 173 million. Rentals received during this period from renting excess space in large store buildings and the temporary leasing of locations that were pending future construction ranged from $ 400,000 to $ 600,000. Stockroom space is a requirement for the operation of each store. Preferably, stockroom space is maintained in the building where the selling is done. If that is not possible, it is maintained close by. Where it is necessary to operate outside stockroom facilities, the costs and operations are charged to the store which such facilities serve and the stockroom operation is integrated with the store. Petitioner's comparative store statistics as shown by Moody's Industrial Manual from December 31, 1954, to December 31, 1958, are as follows: [1958] Number of stores [262] Average sales per store $ 641,730 $ 640,826 $ 644,752 $ 607,551 $ 608,234 Average profit per store 64,880 65,869 63,577 53,822 34,672 Average capital per store 183,306 189,281 190,737 183,673 189,254 *147 Article Third of the certificate of incorporation of petitioner as in effect from 1941 to May 22, 1958, contained the following limitation on the purposes and powers of petitioner: "Nothing in this certificate contained shall, however, authorize the Company to conduct any business other than a mercantile or a manufacturing business." Petitioner had a fixed company policy not to purchase or lease land for any purpose other than for store use. Prior to 1949 the purchasing or leasing of properties for store locations was first considered by petitioner's management committee, which made recommendations to the board of directors for final consideration. In the latter part of 1949, the management committee was discontinued and its functions were taken over by a "properties committee." On March 26, 1925, petitioner leased a portion of a building, as set forth in the lease, at 939-43 Market Street, San Francisco, Calif. (hereinafter called Market), for use as one of its stores. This building, located in the downtown commercial district, is 90 by 165 feet. The building is basically a five-story building, the front portion being six stories. Until about 1955, petitioner used the basement*148 and first *144 floor for sales and a few upper floors for stockrooms and service rooms. The balance of the building was rented by the owner to other tenants, there being a separate entrance servicing such space. Market was very popular, and to have lost its successful operation in San Francisco, a city offering a highly concentrated market of above-average consumers, would have been damaging to petitioner's prestige and Pacific coast business and would have resulted in the diversion of petitioner's following in the Market Street area to petitioner's competitors. The lease on Market was for a term ending December 31, 1951, with an option to petitioner, expiring December 31, 1950, to extend it for any term up to 10 years, at a rental to be agreed upon or arbitrated. One of the provisions of this lease was as follows: Lessee agrees with Lessor that for and in consideration of the granting of this lease, Lessee will not open a second store within a radius of fifteen hundred (1500) feet of any exterior boundary of the "Leased Area." Market was located approximately 550 feet southwest of the "hundred percent location in downtown San Francisco." During the period 1950 through 1953, *149 the prime retail area was moving easterly on Market Street and northerly on Powell and Stockton Streets towards recently improved property of F. W. Woolworth, R. H. Macy & Co., and J. C. Penney. Beginning not later than 1949, studies were undertaken of the possibility of building a new store on a nearby vacant property within 1,500 feet to the north and east of Market, between Ellis and O'Farrell Streets and Powell and Stockton Streets (hereinafter called Ellis and O'Farrell). A series of analyses was made to determine the cost of construction and the probable sales and profits to be expected from a store built on this site. These studies indicated that Ellis and O'Farrell afforded a store site superior to Market. It was considered to be the prime location for a variety store in downtown San Francisco and it was the only available site of such large size in a good location. It was near Woolworth, Macy, and Penney, and a store on this site could serve, in effect, as an arcade between other similar stores, thus affording great selling potential. It was estimated that a store on Ellis and O'Farrell would produce annual sales of about $ 2,500,000, which was more than could be expected*150 from a store on the Market Street property, a smaller site in a less desirable location. On January 23, 1950, petitioner's properties committee recommended that the land at Ellis and O'Farrell be leased from the owner, and on January 31, 1950, and February 1, 1950, additional estimates of cost of construction and expected sales of a variety store on Ellis and O'Farrell were prepared. *145 On February 21, 1950, the properties committee recommended the purchase of Ellis and O'Farrell at a cost of $ 925,000 and also recommended a 10-year renewal of the lease on Market. These recommendations were approved by the board of directors on February 21, 1950. On March 1, 1950, the properties committee recommended the purchase of Ellis and O'Farrell at a price of $ 1,107,500. The recommendation was approved by the board of directors on March 7, 1950. On April 26, 1950, petitioner purchased Ellis and O'Farrell for $ 1,124,082.64, with the intention of building and operating a variety store on it. At the time Ellis and O'Farrell was purchased by petitioner, the property was leased to an operator of a commercial parking lot. After purchasing the property, petitioner, on June 26, 1951, *151 leased it, for a period ending August 31, 1961, to parking lot operators, the leases providing for termination by petitioner at any time upon 90 days' notice. The annual rent was $ 27,500 plus all taxes as computed by the 1950-51 real estate tax rate, charges, and assessments. Thereafter the lessees operated the property as a parking lot. Petitioner had purchased the property as a store site and did not anticipate use of the property as a real estate investment or for permanent use as a parking lot. Leasing it as a parking lot was a temporary expedient to obtain some income from the property, awaiting the time when a store could be built there. The 90-day termination clause in the parking lot leases was to enable petitioner to get possession as soon as it was ready to start building its new store. Because of a backlog of work in petitioner's architectural division, it was anticipated that preliminary decisions and completion of architectural drawings would take about 2 years. On December 22, 1950, petitioner exercised its option, extending the lease on Market to December 31, 1961, notifying the lessor, in part, as follows: This is to notify you that we do hereby elect to extend*152 said lease dated March 26, 1925 for an additional term of ten years and do hereby exercise said option granted to us under said lease and said lease shall be and the same hereby is extended for an additional term of ten years, to-wit from January 1, 1952 to and including December 31, 1961 on the terms and conditions the case as in said lease expressed, except as to obligations heretofore fulfilled and except as to the amount of minimum guaranteed rental which shall either be determined by agreement between us or by arbitration, as provided in said lease. The lessor acknowledged the 10-year extension. The parties being unable to agree, the rental for the extended term was arbitrated in accordance with the lease. Petitioner exercised its right to extend for the maximum period in order to have plenty of time to plan and build its proposed new store at Ellis and O'Farrell without being required to elect a further extension, which might involve another arbitration as to rent, and in order to control the Market Street site as long as *146 possible so as to prevent its being used by a competitor. As the result of an oral "gentlemen's agreement" between the landlord and petitioner's*153 negotiator, the 1,500-foot restriction of the lease was not made applicable to the extension. Late in 1952 the Parking Authority of the City and County of San Francisco (hereinafter called city) adopted a resolution favoring Ellis and O'Farrell as a site for a downtown offstreet parking garage (hereinafter called garage proposal) and early in 1953 the Parking Authority formally approved the garage proposal and recommended to the board of supervisors of the city that the site be officially designated for such purposes and requested the power to appropriate funds for its acquisition. Petitioner was not aware of the garage proposal at the time it purchased Ellis and O'Farrell but learned of it prior to February 28, 1953, and retained counsel in San Francisco to contest the condemnation by sending the following telegram on February 28, 1953: We authorize you appear our behalf represent us meeting Board of Supervisors Monday March 2nd two o'clock protest proposed action Parking Authority take our Ellis O'Farrell property for city parking lot. We cooperate all over country acquire additional parking facilities to preserve established business districts but in this case city not preserving*154 but taking the business location. Secondary locations available furnishing superior parking facilities and as close to the business district. Proposals have been received from present tenant and other parking operators to develop our property for increased parking and resulting net increased income to this company. Anticipate submission proposal our executives after due negotiations but please bear in mind our initial purpose was and is to use property as a prime business location for our own use upon expiration lease of present store premises. At a meeting of the board of supervisors on March 2, 1953, counsel for petitioner requested a 3-week deferral of any proposed action with reference to the garage proposal. This request was approved by the board of supervisors. At this time, petitioner's counsel advised petitioner of the probability that the garage proposal would be carried out. On March 11, 1953, petitioner acquired an option to purchase Market. This option was taken in order to give petitioner time to see how the condemnation proceedings might develop, to assure petitioner of a downtown location, and to afford a better opportunity to negotiate with the owners for the*155 purchase of Market if that should become necessary. On March 23, 1953, counsel for petitioner appeared before the board of supervisors in opposition to the garage proposal, indicating that private interests were willing to provide parking facilities. Upon noting that petitioner had time to bring a concrete proposal and also recognizing that time would elapse before the appropriation was received, the board of supervisors adopted the garage proposal. *147 On March 27, 1953, petitioner's counsel sent a letter to the controller of the city questioning the legality of an authorization for the expenditure of funds for the garage proposal. In support of the several legal grounds upon which petitioner's counsel based their argument, the letter asserted the following: In the event that you are not aware of the facts surrounding this situation, we call to your attention that the property in question is now devoted and used for public parking purposes. It is submitted that any investigation of the facts will substantiate that the existing and planned facilities are adequate to meet the demands of the area in question. Moreover, the present tenant who has operated the property for parking*156 purposes for a period of time has clearly so stated. The controller asked the city attorney for an opinion as to the legality of the transaction on March 30, 1953. On April 6, 1953, the board of supervisors adopted a resolution approving a joint working agreement between the city and the Parking Authority concerning the acquisition, leasing, and construction of the garage on Ellis and O'Farrell. By letter dated April 7, 1953, the Parking Authority notified petitioner of the garage proposal, in part, as follows: The Ellis-O'Farrell site has been officially designated by the Parking Authority and the San Francisco Board of Supervisors. This is the first step in accomplishing the project. A Joint Working Agreement for project development has been approved by the Authority, approved by the Board of Supervisors' Finance Committee, and by the Board of Supervisors yesterday. This is the second step. The third step will be the approval of an appropriation ordinance for land acquisition by the Controller and its adoption by the Board of Supervisors. Under date of March 27, 1953, your attorneys * * * filed a letter of protest with the Controller, and, as a result, he has asked the City *157 Attorney for an opinion on the proposed transaction before approving an appropriation ordinance. As the above will take from two to three weeks to obtain, we thought this might give you an opportunity to submit some definite plan you may have been developing for additional parking on the property. Please be assured that the San Francisco Parking Authority is concerned only with the provision of adequate parking facilities at the Ellis-O'Farrell site to serve the parking needs of the San Francisco Triangle Shopping District, no matter who provides them. The Authority prefers that they be privately undertaken but must proceed as planned in the event such assurances are not forthcoming. Can you advise when we might have something definite from you? On April 30, 1953, petitioner purchased Market from the assignees of the lessor for the purchase price of $ 1,255,139. On the same day, the sellers assigned to petitioner the outstanding leases on Market. At that time, there were 27 tenants in Market other than petitioner. Petitioner did not intend to rent to these tenants, who were all on short-term leases, on a permanent basis. By the early part of 1955, all of the tenants of Market *158 had vacated the premises. *148 On June 18, 1953, the Parking Authority passed a resolution recommending to the board of supervisors that the board adopt a resolution to acquire Ellis and O'Farrell under the general eminent domain laws of the State of California and that such site be restricted to public parking of automobilies. On August 24, 1953, the board of supervisors adopted the recommendation of the Parking Authority and directed the preparation of an appropriation of $ 1,750,000 for the acquisition. In the latter part of 1953, the city brought a mandamus action against the controller, who had refused to certify to the availability of funds in the city's offstreet parking board fund for acquisition by eminent domain of Ellis and O'Farrell. The Supreme Court of California, in City and County of San Francisco v. Ross, 44 Cal. 2d 52, 279 P. 2d 529 (1955), denied the application for mandamus and found that the controller's refusal to certify was proper since the city could not condemn private property to be immediately leased to private parties without controlling the rates and regulating the operation of the parking, as such*159 action would not permit proper assurance that use of property condemned would be in the public interest. After this decision, an ordinance was adopted by the board of supervisors and approved by the mayor directing the Parking Authority to acquire Ellis and O'Farrell and directing the Parking Authority to adopt a parking fee rate schedule, and on May 11, 1955, the Parking Authority adopted a rate schedule. On May 9, 1955, the board of supervisors appropriated funds to acquire the property. On June 8, 1955, the Parking Authority noted that the director of property for the city had been instructed to proceed with the acquisition of Ellis and O'Farrell and that appraisals were being made preliminary to acquiring such property. On June 30, 1955, petitioner received a proposal from Fairfax Service, Inc. (hereinafter called Fairfax), to purchase Ellis and O'Farrell and build a garage in accordance with the garage proposal, provided the condemnation proceedings were stopped. This proposal also discussed the possibility of assembling the two adjoining lots with Ellis and O'Farrell into one parcel of land and concluded that: If the deadline, set by the City, for the erection of the Parking*160 Facilities does not allow time to assemble, the properties and Tenants of the adjoining lots, we will erect the building, on your property in a way that the Store spaces will fit into the overall plan. If you desire, this area lends itself to our building you the finest store on the West Coast with escalators leading directly down from the parking area to your store. On July 5, 1955, the Parking Authority passed a resolution deferring action on the acquisition of Ellis and O'Farrell for 45 days to allow petitioner an opportunity to dispose of the property to a private buyer *149 who would construct a public offstreet parking garage which would conform to the minimum requirements established by the city. On July 25, 1955, the board of supervisors took similar action. On September 21, 1955, petitioner executed a contract of sale, under which it agreed to sell Ellis and O'Farrell to Fairfax, subject to the purchaser's -- right to cancel this contract * * * if, within fifteen (15) days from September 26, 1955, Purchaser shall be unable to satisfy itself that the City of San Francisco will withdraw its contemplated condemnation proceedings against this property in favor of Purchaser's*161 parking project on terms and conditions satisfactory to purchaser. In the light of these developments, the board of supervisors deferred further action. By letter dated October 10, 1955, Fairfax notified petitioner, in part, as follows: This is to advise you that we have satisfied ourselves that the City of San Francisco will withdraw its contemplated condemnation proceedings in favor of our parking project on terms and conditions satisfactory to us and we herewith cancel and waive any right to terminate said contract * * * On December 13, 1955, petitioner notified the two tenants of Ellis and O'Farrell, Better Parking, Inc., of Ellis Street and Better Parking, Inc., of O'Farrell Street, that their leases were canceled so that the purchaser of such property could obtain possession. On January 10, 1956, petitioner sold Ellis and O'Farrell for $ 1,620,000, and the purchaser thereafter constructed a parking garage on it. Petitioner realized a gain on the sale of Ellis and O'Farrell of $ 495,917.36. Petitioner elected not to recognize the gain pursuant to section 1033 of the Internal Revenue Code of 1954. Petitioner did not include the gain in respect to Ellis and O'Farrell in its *162 taxable gross income reported on its 1956 return. Pursuant to section 1033(a)(3)(B)(ii) of the Internal Revenue Code of 1954, the Internal Revenue Service duly extended the period for the replacement of Ellis and O'Farrell to June 30, 1958. To retain its position in San Francisco and to replace the lost sales potential of a store on Ellis and O'Farrell, petitioner enlarged and completely rebuilt Market and acquired additional store sites. Such capital additions and improvements were necessary to meet competitive conditions. The properties committee was kept informed of the necessity of replacement of Ellis and O'Farrell by June 30, 1958. The replacement of Ellis and O'Farrell was discussed at meetings of the properties committee and consideration was given to whether certain properties to be acquired would be considered as replacements for Ellis and O'Farrell. Members of the properties committee were advised of the tax importance of making replacements within the allotted time and decisions of the properties committee as to purchases to be made *150 were affected by these considerations. Since Ellis and O'Farrell was unimproved land, the tax department of petitioner advised*163 that Ellis and O'Farrell be replaced by other land acquired for store purposes, and not by any improvements which might be on such acquired land. The first property to be acquired, which was considered by petitioner to be a replacement, was Market. The cost of Market was $ 1,255,139, of which petitioner allocated $ 755,139 as cost of land and $ 500,000 as cost of improvements. At the time, for real estate tax purposes, the assessed value of the land was $ 513,140 and total assessed value was $ 678,140. Allocation of cost on the basis of such relative assessed values results in an allocation of $ 949,757.41 to the land. The land had a fair market value as of April 30, 1953, in excess of the amount allocated to it by petitioner. Petitioner used its allocation of $ 500,000 as cost of improvements for income tax depreciation purposes. Petitioner considered that the amount of $ 755,139, which it allocated as cost of the Market land, was to that extent in replacement of Ellis and O'Farrell, and, on or about August 1, 1958, in the course of the audit of its 1956 Federal income tax return, it so notified the Internal Revenue Service. The Market Street building was old. Petitioner rebuilt*164 the building and converted it into a modern store. The building has since been occupied only by it, in accordance with its intention at the time of acquisition. In rebuilding Market, petitioner spent $ 704,653.11 in 1955, $ 385,717.62 in 1956, $ 8,908.10 in 1957, and $ 3,463.67 in 1958 up to June 30. Small expenditures for improvements were made thereafter. These amounts were spent for improvements to the building and did not include cost of furniture or fixtures. In the reconstructed building petitioner uses three floors for sales and the balance of the building for stockrooms. Petitioner considered the following properties as purchased in replacement of Ellis and O'Farrell and in August 1958, in the course of the audit of its 1956 income tax return, so advised the Internal Revenue Service: Location of property Date of Cost purchase 939-43 Market St., San Francisco, Calif Apr. 30, 1953 $ 755,139 113 N. Main St., Midland, Tex June 29, 1956 77,980 1211-15 Fulton St., Fresno, Calif Jan. 31, 1957 301,809 900-934 S. Broad St., 3900-3930 Howard Ave., New Orleans, La Aug. 2, 1957 173,052 216-218 International St., 100-104 Nelson Ave., Nogales, Ariz Aug. 20, 1957 91,021 115-125 Maxwell St., Favetteville, N.C Aug. 24, 1957 121,173 1511 Newcastle St., Brunswick, Ga Dec. 27, 1957 80,993 219 E. High St., Jefferson City, Mo Jan. 31, 1958 50,403 Total 1,651,570 *165 *151 The improved property at 113 North Main Street, Midland, Texas, was purchased as a site for a new store. Petitioner demolished the improvements and built a new store. Petitioner intended to demolish the improvements when it purchased the property. The improved property at 1211-15 Fulton Street, Fresno, California, was purchased as a site for a new store. Petitioner demolished the improvements and built a new store. When petitioner purchased the property it intended to demolish the improvements. The vacant lot at 900-934 South Broad Street and 3900-3930 Howard Avenue, New Orleans, near petitioner's New Orleans store, was purchased to build a stockroom that would permit the conversion of the existing stockroom space into sales area. Petitioner subsquently changed its plans for building a stockroom on this site and the property was sold in 1959. The improved property at 216-218 International Street and 100-104 Nelson Avenue, Nogales, Arizona, adjoined petitioner's store there. At the time the property was purchased petitioner intended to demolish the improvements and to erect an addition to its store. It later changed its plans and decided to use the existing improvements. *166 Petitioner allocated $ 35,020.75 to the land and $ 56,000 to the improvements. For real estate tax purposes the improvements were assessed for $ 5,900 and total assessed value was $ 10,015. Allocating the purchase price in the ratio of assessed values attributes $ 37,398.97 to the land and $ 53,621.78 to the building. The land had a fair market value as of August 20, 1957 of $ 100,000. The improved property at 115-125 Maxwell Street, Fayetteville, North Carolina, adjoining petitioner's store there, was purchased to build an addition to the store. When it purchased the property, petitioner intended to demolish the improvements and these improvements were demolished, but the addition to the store has not yet been built. The improved property at 1151 Newcastle Street, Brunswick, Georgia, adjoining its store there, was purchased to build an addition to the store. Petitioner intended to demolish the improvements when it purchased the property. The improvements were demolished and an addition to petitioner's store was built on the property. The improved property at 219 East High Street, Jefferson City, Missouri, adjoined petitioner's store there. At the time of purchase, petitioner*167 intended to demolish the improvements and to erect a new structure, but it later decided to use the improvements, and, of the total purchase price, it allocated $ 18,358.50 to the land and $ 32,045 to the improvements. The land had a fair market value as of January 31, 1958 of $ 40,000. In addition to the aforementioned properties, petitioner purchased the following additional properties during the period between January 1953 and June 30, 1958. In those cases where the properties were improved at the time of purchase, it allocated the total cost between land and building. These properties were purchased, as indicated, for the following purposes: *152 A -- Addition to existing store B -- Warehouse C -- Purchase of existing leased store Date of acquisition Location Land Feb. 25, 1953 Natchez, Miss $ 58,809 Oct. 15, 1953 Hilo, Hawaii 55,813 June 2, 1954 Calexico, Calif 7,604 July 23, 1954 Phoenix, Ariz 4,026 July 28, 1954 Winston-Salem, N.C 31,470 Dec. 17, 1954 Riverside, Calif 118,904 Dec. 22, 1954 El Paso, Tex 29,826 May 23, 1955 Gastonia, N.C 9,432 June 30, 1955 San Jose, Calif 220,070 Dec. 1, 1955 Miami Beach, Fla 62,238 Jan. 19, 1956 La Grange, Ga 25,805 Jan. 30, 1956 Muskogee, Okla 121,570 Apr. 2, 1956 Jacksonville, San Marco, Fla 57,961 May 24, 1956 Sumter, S.C 11,735 July 2, 1956 Kingsport, Tenn 174,219 July 13, 1956 Dallas, Tex 38,217 July 23, 1956 San Pedro, Calif 179,232 Dec. 7, 1956 Provo, Utah 125,327 May 20, 1957 Birmingham, Ala 197,344 July 23, 1957 Phoenix, Ariz 297,220 Aug. 2, 1957 Boulder, Colo 39,391 Oct. 9, 1957 Greenville, S.C 145,460 Dec. 30, 1957 Baton Rouge, La 28,600 Dec. 31, 1957 do 10,930 Mar. 24, 1958 Spartanburg, S.C 82,777 Apr. 23, 1958 San Bernardino, Calif 298,803 Total 2,432,783 *168 Date of acquisition Building Total Purpose Feb. 25, 1953 $ 33,660 $ 92,469 A Oct. 15, 1953 50,000 105,813 A June 2, 1954 12,650 20,254 B July 23, 1954 34,295 38,321 B July 28, 1954 19,530 51,000 A Dec. 17, 1954 11,849 130,753 C Dec. 22, 1954 29,826 B May 23, 1955 9,432 A June 30, 1955 383,062 603,132 A, C Dec. 1, 1955 88,500 150,738 C Jan. 19, 1956 60,500 86,305 A Jan. 30, 1956 79,273 200,843 A Apr. 2, 1956 172,960 230,921 A, C May 24, 1956 11,735 A July 2, 1956 174,219 A July 13, 1956 38,217 A July 23, 1956 50,431 229,663 C Dec. 7, 1956 125,327 A May 20, 1957 139,236 336,580 C July 23, 1957 365,608 662,828 C Aug. 2, 1957 53,000 92,391 C Oct. 9, 1957 108,398 253,858 A, C Dec. 30, 1957 28,600 A Dec. 31, 1957 10,930 A Mar. 24, 1958 68,425 151,202 C Apr. 23, 1958 180,124 478,927 C Total 1,911,501 4,344,284 No adjustments have been made in petitioner's books and records to the basis of any real property acquired from 1953 to June 30, 1958, on account of its claim of nonrecognition of gain. In his deficiency notice, respondent determined that "the gain realized * * * on the sale *169 of * * * Ellis and O'Farrell * * * in January of 1956 does not constitute a gain resulting from the involuntary conversion of property which is subject to the non-recognition provisions of section 1033 * * * [and is] includible in your gross income * * * as a long-term capital gain in the amount of $ 495,917.36." The sale of Ellis and O'Farrell was made under threat of condemnation and the proceeds from the sale were used to purchase property similar or related in service or use for the purpose of replacing the property converted. OPINION When the land acquired by petitioner for use as the site of a large store in downtown San Francisco was sold under threat of condemnation and the proceeds invested in similar properties for identical use with the purpose of replacing the original site, we *153 think petitioner properly elected nonrecognition 1 of the gain on the sale of the original site pursuant to section 1033, I.R.C. 1954. The basic purpose of section 1033(a)(3)(A) undoubtedly is to allow the taxpayer to replace his property * * * without realizing gain where he is compelled to give up such property because of circumstances beyond his control. S. E. Ponticos, Inc., 40 T.C. 60 (1963).*170 *171 Initially, respondent contends that the property was not "compulsorily or involuntarily converted" since it was not sold under a threat of condemnation and, in any event, was not sold to the condemning authority. Respondent concedes that the city's garage proposal was impending and unavoidable. 2 The only realistic alternatives available to petitioner were to have the city condemn the property, or itself sell to someone who could in turn satisfy the city's requirements. 3 A sale to private interests as a result of condemnation, actual or threatened, did not render inapplicable the provisions of the predecessor of section 1033. Harry G. Masser, 30 T.C. 741 (1958), acq. 1959-2 C.B. 5. The involuntary conversion of petitioner's property seems to us inescapable. *172 *154 In the alternative, respondent objects to the application of section 1033 because, with the exception of Market Street, no property was purchased "for the purpose of replacing the property so converted." Respondent insists that "petitioner was constantly engaged in a search for new and/or larger store locations in order to expand." In the same breath, he "submits that to satisfy the Code, there must be an acquisition of property which would not have been purchased but for the involuntary conversion" and that "The * * * thing accomplished by the conversion of the Ellis & O'Farrell Street property was to release cash which would otherwise have been tied up." We think this sequence of statements eliminates any doubt that the purpose of the acquisitions specified was to replace the old property. Certainly petitioner could not have obtained "new and * * * larger store locations" and could not "expand" if at the same time it did not at least replace property of which it was deprived; 4 and the freeing of the cash upon the involuntary conversion of Ellis and O'Farrell was, on respondent's own hypothesis, the necessary prerequisite for the purchase of future sites. It seems to*173 us to follow that the store sites, for which the Ellis and O'Farrell cash became directly or indirectly available, were clearly acquired upon threat of condemnation for the purpose of replacing the lost property. *174 Respondent's further contention is that the replacement properties were not "similar or related in service or use to the property so converted," because Ellis and O'Farrell had been rented as a parking lot before and after its purchase by petitioner, and petitioner had never actually devoted the property to store use. 5 Since, as has been amply shown, the only realistic purpose for the purchase of Ellis and O'Farrell was as a store site, this argument turns on whether petitioner is to be denied section 1033 treatment because it never has been able to devote property purchased for a specific purpose to that use. *175 There can be no question here of petitioner's purpose with regard to the converted property. It intended to build a large retail establishment. *155 "When the accomplishment of the objective was thwarted by the exercise of the power of eminent domain, petitioner took the normal steps to be expected under the circumstances. It bought another piece of property suitable to its purposes." Gaynor News Co., 22 T.C. 1172, 1177 (1954). Respondent attempts to limit the holding of Gaynor News Co. to "changes in use which are actually in process, or which are to occur immediately." We think this is too narrow an interpretation. Petitioner incontrovertibly established its purposes with reference to Ellis and O'Farrell, the necessary postponement of the intended action, the temporary steps taken to assure its position, and the final abandonment of the project when it became hopeless. [The] facts in the present case establish clear identity of intended function, use, and purpose of both the old and the new property and, therefore, * * * the statutory test of "similar or related in service or use" is here fully met. [Gaynor News Co., supra at 1179.]*176 Respondent's reliance on Lynchburg National Bank & Trust Co., 20 T.C. 670 (1953), affd. 208 F. 2d 757 (C.A. 4, 1953), seems to us misplaced. There, the property destroyed by fire was not acquired as a proposed addition to the taxpayer's bank. The intention was to demolish it in any event. Only the land was to be used and that was not destroyed. Unlike Gaynor News Co., supra, and the present case, which are otherwise similar, the replacement property consisting of an addition to the bank's own building was not at all related in use to the rented shoe store and restaurant which were lost by the fire. On the present record, the service and use of Ellis and O'Farrell as a store site for petitioner was not only similar and related but identical with the service and use of the replacement properties. Finally, respondent objects to the purchase of Market in replacement of Ellis and O'Farrell since Market was improved property and Ellis and O'Farrell was unimproved. Sec. 1.1033(a)-2(9)(i), Income Tax Regs. But -- The involuntary conversion of land held vacant for an indefinite time and purpose, *177 and the investment of the proceeds of the conversion thereof in improved land, presents an issue differing widely from the situation of an involuntary conversion of land in the process of being fitted for use for a particular purpose and the investment of the proceeds in property consisting of land and partially usable improvements designed to be used for the identical purpose. Gaynor News Co., supra at 1178. Ellis and O'Farrell was intended to be a store site, and an allocable portion of the purchase price of Market was for land to be used as a store site. 6 *156 Respondent has not argued that because one site in San Francisco*178 was partly replaced by a number of sites in several cities in other parts of the country, 7 the gain does not qualify for treatment under section 1033. It is clear that several properties may replace one larger property, Wilmore S. S. Co. v. Commissioner, 78 F. 2d 667 (C.A. 2, 1935), reversing on other grounds 30 B.T.A. 866 (1934). And in Clifton Investment Co., 36 T.C. 569 (1961), affd. 312 F. 2d 719, 573 (C.A. 6, 1963), we said: The fact that the property sold was located in Cincinnati and the property acquired was located in New York City, we think, makes no difference. *179 During this period, and in addition to the more distant properties specified as replacements, petitioner made several purchases of store sites in California. 8 All but one of these, including Market, were purchases of existing leased stores, and the sixth was to provide a new store site in Fresno. Since the properties purchased are concededly store sites, they also would have had the requisite similarity for purposes of section 1033. Respondent, however, raises no issue as to the geographical distance of the replacement properties, and we see no reason here to interfere with the list originally designated by petitioner. The parties are in agreement that only those properties which petitioner originally considered*180 as such should be employed in specifying the replacement property. The administrative convenience of such a rule is obvious. The designated properties here, being adequate to support petitioner's position, need not be further examined; but we intimate no opinion whether, in some other proceeding where the appropriateness of different property as a replacement is incontrovertible, the permissibility of its substitution may not be properly considered. The involuntary conversion section requires that petitioner be deprived of useful property by outside forces, Harry G. Masser, supra; that it acquire other property which shall be similar or related in service *157 or use, cf. S. E. Ponticos, Inc., supra; and that its purpose in so doing shall be replacement of the property of which it has been deprived. Gaynor News Co., supra. We think, in its dealings with respect to Ellis and O'Farrell, petitioner has adequately met all of the statutory requirements. Decision will be entered for the petitioner. Footnotes 1. SEC. 1033. INVOLUNTARY CONVERSIONS. (a) General Rule. -- If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted -- * * * * (3) * * * the gain (if any) shall be recognized except * * * (A) * * * If the taxpayer * * * for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted * * * at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion * * * exceeds the cost of such other property or such stock. Such election shall be made at such time and in such manner as the Secretary or his delegate may by regulations prescribe. * * * (B) Period Within Which Property Must Be Replaced. -- The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending -- (i) one year after the close of the first taxable year in which any part of the gain upon the conversion is realized, * * * Income Tax Regs. Sec. 1.1033(a)-2(c)(2). All of the details in connection with an involuntary conversion of property at a gain (including those relating to the replacement of the converted property, or a decision not to replace, or the expiration of the period for replacement) shall be reported in the return for the taxable year or years in which any of such gain is realized. An election to have such gain recognized only to the extent provided * * * [by sec. 1033(a)(3)(A)] shall be made by including such gain in gross income for such year or years only to such extent. If, at the time of filing such a return, the period within which the converted property must be replaced has expired, or if such an election is not desired, the gain should be included in gross income for such year or years in the regular manner. A failure to so include such gain in gross income in the regular manner shall be deemed to be an election by the taxpayer to have such gain recognized only to the extent provided * * * [by sec. 1033(a)(3)(A)↩] even though the details in connection with the conversion are not reported in such return. * * * 2. He says in his brief: "It would only be in the event that private development was not forthcoming that the City would proceed to acquire by condemnation for the stated purpose. * * *"↩ 3. This distinguishes the present case from Creative Solutions, Inc. (Formerly Alprodco, Inc.) v. United States↩, (N.D. Tex. 1962) F. Supp. , on appeal (C.A. 5, June 19, 1962). 4. The effect of the involuntary conversion proceeds upon petitioner's fiscal policy was explained by the controller of the company in the following manner: "During that period of time the company was engaged in a program of modernizing and bringing up to date its store properties. We were straining every effort to bring our properties into a more competitive position by installing a self-service facility and by other modernization proceedings in the various stores. To that end we were investing all that we could invest in an attempt to bring ourselves back to a more competitive position. When it came time, the tax section urged the properties committee to take advantage of the involuntary conversion provisions of the Code, and they had to either defer wanted improvements or use this money obtained from the Ellis and O'Farrell sale to buy the new locations."↩ 5. Respondent objects to only one of the replacement properties as not being a store site. That is the New Orleans plot purchased as the site for a stockroom in conjunction with a plan to convert the stockroom of its existing store into sales area. Since a stockroom is an integral part of every store, and since the proposed Ellis and O'Farrell store would have included a stockroom area, we have found the properties to be "similar or related in service or use" despite the descriptive labels which the parties have assigned.↩ 6. Even the improvements on Market were only partially usable since extensive alteration was required. Petitioner does not attempt to avail itself of the value of the useful improvements as part of its replacement cost as was permitted in Gaynor News Co., 22 T.C. 1172↩, and we, accordingly, express no opinion in that regard. 7. We have found that: "Petitioner considered * * * [specified] properties as purchased in replacement of Ellis and O'Farrell and in August 1958, in the course of the audit of its 1956 income tax return, so advised the internal revenue service." This was actually the first opportunity available to petitioner in view of the provisions of section 1033(a)(3)(B)↩, and the extension of the time therein prescribed. 8. ↩ Date of Location Land cost acquisition 4-30-53 Market Street, San Francisco, Calif $ 755,139 12-17-54 Riverside, Calif 118,904 6-30-55 San Jose, Calif 220,070 7-23-56 San Pedro, Calif 179,232 1-31-57 Fresno, Calif 301,809 4-23-58 San Bernardino, Calif 298,803 1,873,957