Washington Market Co. v. Commissioner

WASHINGTON MARKET COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Washington Market Co. v. Commissioner Docket No. 43912. United States Board of Tax Appeals 25 B.T.A. 576; 1932 BTA LEXIS 1503; February 23, 1932, promulgated *1503 1. Necessary expenses, such as engineering costs, costs of surveys and fees to lawyers and expert witnesses, incurred in connection with protecting taxpayer's interests in a condemnation suit, should be deducted in determining the amount of the net award which is used in computing profit, if any, arising therefrom. 2. Where, in a condemnation proceeding, the Government retains out of the award sufficient funds to satisfy liens and mortgages against the property and itself pays the same, the amount so retained should be included in determining the amount of the net award. The payment of such obligations by the Government on behalf of the taxpayer constitutes payment to the taxpayer equally as though the Government had paid the money to taxpayer and taxpayer had in turn satisfied the obligations. 3. Section 203(b)(5) of the Revenue Act of 1924 relating, in part, to a situation where property is taken in exercise of the power of requisition or condemnation and the taxpayer expends the proceeds of the award in replacing the property taken with other property similar or related in service or use to the property so converted, is a special or relief provision designed to prevent*1504 an inequitable incidence of taxation. 4. The last sentence of subsection (5) of section 203(b), which relates to a case where part only of the award is used in replacing the converted property, is a limitation on the amount of profit that may be determined and does not provide that the total amount of such excess remaining after partial replacement is profit. 5. Section 203(b)(5) was intended to protect and not to penalize a taxpayer whose property is taken on condemnation. In such a situation profit. If any, is determined by the ordinary method provided by section 204(b), subject to the limitations fixed by section 203. Chester A. Bennett, Esq., Hugh H. Obear, Esq., and J. V. Morgan, Esq., for the petitioner. Eugene Meacham, Esq., and C. A. Lowery, Esq., for the respondent. VAN FOSSAN *577 This proceeding was brought to redetermine an asserted deficiency for the year 1924 in the sum of $35,379.97. The petitioner alleges that the respondent erred (1) in adding to income the sum of $49,131.99 as interest received, and (2) in holding that the petitioner realized in the year 1924 a profit of $283.039.77, resulting from condemnation*1505 by the United States Government of property of the petitioner situated upon Reservation No. 7 in the city of Washington, D.C. The petitioner further alleges that the respondent is estopped from asserting the alleged deficiency because, with all pertinent facts before him, he held that no gain or loss arose by reason of such condemnation proceedings and award thereunder and so notified the petitioner on January 10, 1927, and because in reliance upon such notice and before the receipt of the deficiency notice dated March 2, 1929, the petitioner changed its position by disposing of its assets in connection with a certain corporate reorganization. By his amended answer the respondent avers that he erred in allowing as a deduction from the gross income of the petitioner the sum of $104,238.32 as litigation expenses in connection with the said condemnation proceedings and claims a corresponding increase in the petitioner's taxable income. The following facts are found essentially as requested by the petitioner. The respondent's counsel states in his brief that "the facts are substantially stated in the petitioner's opening brief and are not again recited herein." FINDINGS OF FACT. *1506 The petitioner is a corporation chartered under an act of Congress approved May 20, 1870. (16 Stat. 124.) Immediately after it was chartered the petitioner constructed suitable buildings upon Reservation No. 7 in the city of Washington, District of Columbia, for the conduct of a public market house and such other purposes as might be determined by such company not inconsistent with its use as a public market. The said act of Congress provided that the privileges conferred should be enjoyed by the petitioner for a term of 99 years, unless sooner terminated for a noncompliance with or abuse of the conditions embodied in that act. Pursuant to the authority so conferred the petitioner erected on Reservation No. 7 the following buildings, which were fully equipped for the purposes of the petitioner's business: 7, 9, and 1 floors B. Street wings, built 1871-73 Front and towers, 7th and 9th Street wings and Wholesale Row buildings, built 1878-79 Cold storage building, built 1898-1900 *578 Ninth Street extension, built 1898 Ice tank building, equipped new boiler plant, built 1904-1905 Paving in courtyard, remodeling Wholesale Row Building and Beef House, built 1915-1916. *1507 From the date of the erection and equipment of the aforesaid buildings to the date they were taken over by the Government of the United States they were used by the petitioner in the conduct of a market, cold storage and ice-manufacturing business in the city of Washington. By an act approved March 4, 1921, Congress provided for the cancellation of the lease made by Congress to the petitioner of Reservation No. 7 in the District of Columbia and for the condemnation and taking over by the said Government of the buildings and improvements of the petitioner on Reservation No. 7, then held and occupied by petitioner under authority of the act of Congress approved May 20, 1870, and subsequent acts. The act also provided that the President of the United States should appoint a commission to fix the amount to be awarded for the buildings and improvements at a fair and just valuation; that a finding of the majority of the commission would constitute the award, but that any member thereof who should dissent should make a minority report in writing; and that either party to the condemnation proceedings could prosecute an appeal to the Court of Appeals of the District of Columbia, which*1508 court was vested with jurisdiction to determine the appeal and revise the amount of the award, and it was provided that the judgment rendered by the Court of Appeals would be final. Such commission was appointed by the President and commenced hearings on December 12, 1921, which finally closed on March 20, 1922. Two members of the commission made an award to the Washington Market Company of $960,254.70 for its physical property located on Reservation No. 7. The other member of the commission filed a minority report awarding to the Washington Market Company $1,506,201.60. Thereafter the petitioner prosecuted an appeal to the Court of Appeals of the District of Columbia and that court awarded the petitioner, as a just and fair valuation of its property, $1,522,197.87. The Government of the United States took possession of the property of petitioner located on Reservation No. 7 on April 1, 1922, although the final award of the Court of Appeals was not made until the month of February, 1924. On June 15, 1922, the petitioner caused to be organized a Delaware corporation under the name of Terminal Refrigerating & Warehousing Company, hereinafter known as the Terminal Company, *1509 and acquired all of the capital stock of the latter company, at a cost of *579 $1,134,919.78. The Terminal Company immediately after organization acquired a tract of land situated at 4 1/2 Street and Virginia Avenue, S.W., in the city of Washington and erected thereon buildings which were fully equipped for the conduct of its established cold storage and ice-manufacturing business. At the time of the award to the petitioner by the District of Columbia Court of Appeals of the sum of $1,522,197.87 for its property located on Reservation No. 7, there was an outstanding bond issue of $276,000, which was secured by a deed of trust placed on the property in the year 1907; there was interest on the said bonds due in the sum of $3,205; premiums on redemption of the bonds, which constituted a condition thereof, amounted to the sum of $13,800; and taxes were due upon the property in the sum of $17,204.67. The said bonds had all been issued and sold prior to March 1, 1913, and the bond issue of 1907 was a refunding issue to take up bonds that had previously been issued against the property, the proceeds of which had been used entirely in the construction costs of the buildings of*1510 petitioner located on Reservation No. 7. In settling with the petitioner the Government of the United States deducted from the award of $1,522,197.87 the aforesaid items of interest on bonds, premium on bonds, taxes and redemption of bonds in the total sum of $310,209.67, making the total cash payment received by the petitioner for its property, $1,211,988.28. The petitioner expended for counsel fees, engineering fees, appraisals, expenses of witnesses, etc., in protecting its rights before the Condemnation Board and before the Court of Appeals of the District of Columbia the sum of $104,238.32. In the year 1924, after final settlement had been made with the petitioner by the United States for its properties, the petitioner, pursuant to a published regulation of the bureau of internal revenue, duly applied to the Commissioner of Internal Revenue for a ruling as to whether or not it had incurred any income-tax liability by reason of the aforesaid condemnation and taking over of its properties by the United States Government. Thereafter several hearings were held in the office of the general counsel of the bureau of internal revenue on the application of the petitioner, which*1511 set forth all the facts with respect to the condemnation, payment by the Government, and acquisition of all the stock of the Terminal Refrigerating & Warehousing Company. The Commissioner of Internal Revenue on January 10, 1927, notified the petitioner that no taxable gain or loss under the revenue statutes had been realized by the petitioner as a result of the condemnation of its properties by the Government of the United States. While the application for ruling was pending before the Commissioner of Internal Revenue, the petitioner purchased Liberty Bonds in the sum of $100,000, which it set aside as a *580 reserve fund to pay any tax assessment for which it might be justly liable as a result of the said condemnation. Upon receipt of the official notice from the Commissioner of Internal Revenue that no tax liability had been incurred as a result of the condemnation, the petitioner proceeded to dissolve the reserve fund of $100,000 in Liberty Bonds and expended the proceeds in connection with physical improvement and development of the business of the Terminal Refrigerating & Warehousing Company. After the receipt of the said notice from the Commissioner of January 10, 1927, it*1512 consented to and caused the Terminal Refrigerating & Warehousing Company to merge its assets with the assets of another corporation and form a third corporation, namely, the Terminal Refrigerating & Warehousing Corporation. The first notice the petitioner had that the Commissioner of Internal Revenue would attempt to assert a tax liability against it by reason of the condemnation of its properties, and that he had rescinded his previous ruling that no such tax liability had been incurred, was on the date of the receipt of the 60-day deficiency notice, dated March 2, 1929, over two years after the original notice of no tax liability had been issued by the Commissioner of Internal Revenue to the petitioner. The properties of petitioner which were taken over by the Government of the United States cost the petitioner as of March 1, 1913, $1,494,450.29. From March 1, 1913, to the date the properties were taken over by the Government, the said properties cost the petitioner an additional $117,098.20, capital expenditures, so that at the time the properties were taken over they represented cost, or a capital investment of $1,611,548.49. The petitioner, prior to March 1, 1913, had deducted*1513 and been allowed on its excise-tax returns, depreciation on the said properties in the sum of $61,334.93, and from March 1, 1913, to the date the properties were taken over by the Government, the petitioner had deducted, and been allowed on its income-tax return, depreciation on the properties in the sum of $121,918.50. On or about March 1, 1913, the petitioner had an appraisal made of its properties located on Reservation No. 7, by the American Appraisal Company. The said appraisal company valued the said properties at that time at $777,573, which value was entered on the books of the corporation. In 1922 the Government took over the properties of the Washington Market Company and paid to the petitioner the sum of $409,977.83. In 1924, after the decision of the Court of Appeals of the District of Columbia, the Government paid to the petitioner and additional sum of $802,010.38. The initial payment in 1922 was less the items of tax, premium on bonds, bond redemption, etc. At the date of the final payment, the Government also paid to the Washington Market Company an item of $75,147.28, which represented interest *581 on the difference between the amount that was paid*1514 at the time the Government took over the property in 1922 and the amount of the final award, less the amounts that were withheld by the Government. The payment of interest was required by the condemnation act. In filing its income-tax return for the year 1924 the petitioner reported and paid tax on interest received during that year in the sum of $99,619.21. The interest so reported, included the interest received from the Government of the United States, as aforesaid, on the date in 1924 when final settlement was made by the petitioner with the Government of the United States. While occupying its plant on Reservation No. 7 the petitioner was engaged in the following businesses: (1) Renting stalls for retail markets; (2) manufacturing and selling ice; (3) furnishing coldstorage refrigeration; (4) leasing space to wholesalers for use in storing and displaying goods to retailers. The site of the replacement plant at 4 1/2 Street and Virgina Avenue, S.W., was unsuited to retail-market purposes and, hence, retail-market stalls were not erected there. The plant and equipment situated on Reservation No. 7 were replaced to the extent of its ice-manufacturing and coldstorage-refrigeration*1515 facilities and by providing storage space for leasing to wholesalers. OPINION. VAN FOSSAN: The petitioner suggests that the Government is estopped to assert the deficiency. It cites no authority and makes little reference to the matter in its brief. We have held repeatedly that the respondent is not estopped to reverse a prior ruling made by him concerning the same tax year at any time prior to the expiration of the statute of limitations, provided no settlement has been made under the provisions of section 3229 of the Revised Statutes. ; ; ; affd., ; ; . Moreover, there is no evidence that petitioner has been damaged by reliance on the ruling in question. The respondent was not estopped to assert the claim for additional taxes. The petitioner claims that the item of $49,131.99 was unwarrantedly added to its income by respondent and introduced testimony to show that said item*1516 was included in the figure of $99,519.21 "interest received, etc." reported by it and resulting in a net income of $76,492.91 shown on the fact of petitioner's return. Petitioner's problem, however, is to show the error of respondent's determination. To do this he must meet respondent on his own ground. In computing the deficiency the Commissioner started with *582 the figure of $86,991.50 net income as disclosed by the books. To this he added, among other items, one of $49,131.99 "interest received." Both of these figures appear in Schedule L on page 4 of petitioner's return. The figure $99,619.21 does not appear in respondent's computation. The question, threfore, was not, as apparently conceived by petitioner's counsel, whether the figure of $49,131.99 interest received was already included in the figure of $99,619.21 "interest on bank deposits, etc." shown under item 5 of petitioner's return, but whether in respondent's computation the item of $49,131.99 was included in the basic figure of $86,991.50. A reasonable inference from the return is that it was not so included. In any event petitioner has not shown error in respondent's computation in this respect. *1517 At the hearing respondent raised as an affirmative issue the correctness of his previous action in allowing petitioner to deduct, in determining the amount of profit, if any, the sum of $104,238.32 from the gross award, as expenses incurred in securing the same. We have held in many cases that commissions and fees paid for effecting a sale of property should be deducted from the sale price in computing the profit earned. ; ; ; ; . The engineering expenses, surveys, witness fees and attorneys' fees incurred in this case in connection with the condemnation proceedings before the commission and in the Court of Appeals bear close resemblance to the necessary costs of a sale. The position of petitioner is sustained. We may pass without extended discussion the contention raised in petitioner's brief that all that petitioner was paid for was its equity in the property and that the amount of $310,309.66 withheld by the Government to satisfy mortgage bonds, *1518 taxes, and other liens standing against the property was never received by it. The relief from the obligations and liabilities and their payment by the Government constituted a payment to petitioner equally as though the money had been paid to petitioner and petitioner had in turn satisfied the same. The last and principal question in the case is whether or not petitioner realized a profit of $283,039.77, or profit in some other amount, as a result of the condemnation proceedings under which the property of the petitioner, known as Center Market, in Washington, was taken for public purposes. The respondent computed the profit by deducting from the gross award of $1,522,177.87 the sum of $104,238.32, expenses of suit, and from the remainder the cost of replacing property, $1,134,919.78, thus arriving at a figure of $283,039.77, which *583 he characterized as profit. It is the contention of petitioner that respondent has totally misapplied the provisions of the revenue act in this determination. Section 203(a) and (b)(5) of the Revenue Act of 1924 is as follows: SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under*1519 section 202, shall be recognized, except as hereinafter provided in this section. * * * (b) (5) 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. At the time the Government condemned and took over the physical assets of the business which the petitioner was conducting on Reservation No. 7 in Washington, D.C., that business consisted of four activities or divisions: (1) Renting*1520 stalls for retail markets; (2) manufacturing and selling ice; (3) furnishing cold storage refrigeration; and (4) leasing space to wholesalers for use in storing goods and displaying them for sale to retailers. After the petitioner was forced to abandon its business on Reservation No. 7 it was unable to secure another location in Washington at which it could carry on its retail business and, hence, was compelled to eliminate that division in its new plant at 4 1/2 Street and Virginia Avenue, S.W. The facilities constructed at the new plant at a cost of $1,134,919.79 and represented by the stock of the Terminal Refrigerating and Warehousing Company, which the petitioner owned, constituted a complete replacement of the petitioner's former equipment used in operating the various phases of its business except that of providing stalls for retail market dealers. We are of opinion, and there does not seem to be any dissent by either party from the conclusion, that the erection of the new plant was the "acquisition of other property similar or related in service or use to the property so converted" or "the acquisition of control of a corporation owning such other property" as provided in*1521 section 203(b)(5). Cf. . The notice of deficiency recognized that the above quoted section is applicable. Petitioner does not dispute this, but contends that the tax has been incorrectly computed thereunder. In *584 this contention we concur. It does not follow from the fact that there has been a replacement under this statute that the excess above the replacement cost is all gain. The test to be applied in determining whether there is a replacement is the character of the service or use. It is not a financial test. But whether a gain results requires a consideration of the money involved. As we view it, section 203(b)(5) is a special or relief provision designed to prevent an inequitable incidence of taxation, perhaps to prevent the very action that is here proposed. Under the first part of this section, as we interpret the same, it is laid down that where an owner of property is deprived of it by condemnation for public use or other specified cause and by the expenditure of all of the proceeds acquires another property equivalent in usefulness to replace the old, no gain or loss is realized from the mere fact*1522 of disposal of the old and the acquisition of the new property. Petitioner did not expend all of the proceeds in acquiring property equivalent in usefulness. Thus the case does not fall under the first provisions of section 203(b)(5). The last sentence of this subsection provides however: "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." This contemplates the instant situation. It is in the application of this provision that the respondent erred. It does not provide that all of such excess shall be deemed to be profit. Nor does it hold that any of the excess is profit. This last sentence of subsection (5) of section 203 merely provides a limitation on the gain, if any, to be determined in the event some part of the fund be not expended. The very language recognizes that the amount of gain does not depend on the fact of there being a remainder in hand after replacement. The parenthetical clause "if any" is significant. It recognizes that though there be an excess there may be no gain. It thus refers us back to the fundamental principles normally used in determining*1523 gain or loss. Obviously, this section was intended not to penalize but to protect parties whose property may be taken on condemnation. Approaching the question in the light of these considerations, we find that the gross award was $1,522,197.87, from which should be deducted the sum of $104,238.32 on account of expenses, leaving a net award of $1,417,959.55 applicable to the payment of bonds, taxes and liens and in reimbursement of petitioner for its property. The cost of petitioner's entire plant, as of March 1, 1913, was $1,494,450.29, to which there had been added expenditures aggregating $117,098.20, making a total cost of $1,611,548.49. Against this there had been allowed depreciation amounting to $183,253.43, making a depreciated *585 cost of plant at the time it was taken by the Government of $1,428,295.08. This sum is greater than the net award after payment of expenses and consequently there was no gain as contemplated by section 204(b) of the Revenue Act of 1924. It follows that there is no deficiency for the year 1924. Decision will be entered for the petitioner.