Loco Realty Co. v. Comm'r of Internal Revenue, Docket No. 80253.

• Decision Date: 28 March 1961
• Docket Number: Docket No. 80253.
• Citation: 35 T.C. 1059
• Parties: LOCO REALTY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

35 T.C. 1059

LOCO REALTY COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 80253.

Tax Court of the United States.

Filed March 28, 1961.

Held: That the money which petitioner received in 1955 from the City of St. Louis, Missouri, in settlement for the condemnation of a parcel of real property which it was holding as an investment for rental purposes was not invested in other property ‘similar or related in service or use’ to the converted property. Petitioner is not entitled to the nonrecognition of gain provisions of section 1033, I.R.C. 1954. Urban C. Bergbauer, Jr., Esq., for the petitioner.

William J. McNamara, Esq., for the respondent.

The Commissioner has determined a deficiency in petitioner's income tax for the year 1955 of $14,442.30. The deficiency is due to one adjustment which the Commissioner has made to the net income reported by petitioner on its return for 1955. That adjustment was ‘(a) Capital Gains $58,633.70,‘ and is explained in the deficiency notice as follows:

(a) Because the property was not converted into other property similar or related in service or use to the converted property, but was converted into property used as a grocery warehouse, capital gain of $58,633.70 is recognized on the proceeds from the condemnation of a building used for shoe manufacturing. Section 1033 of the Internal Revenue Code provides for a non-recognition of gain only when the condemned property is converted into property similar or related in service or use to the property so converted. Revenue Ruling 56-347. Cumulative Bulletin 1956-2, page 517 holds that a taxpayer who replaces involuntarily converted rental property with other rented property can obtain the benefits of Section 1033 of the Internal Revenue Code only if the replacement property is similar or related in service or use in the converted property.

To the foregoing adjustment, petitioner assigns error as follows:

In determining the taxable income for the year 1955 the Commissioner erroneously included as an addition to income proceeds from the condemnation of a building held by the petitioner for rental purposes, which proceeds were used by the petitioner to purchase other rental property.

FINDINGS OF FACT.

Some of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.

Petitioner is a corporation organized under the laws of the State of Missouri with its principal place of business in St. Louis. Petitioner filed its income tax return for the year 1955 with the director of internal revenue, St. Louis.

During the year 1955 petitioner's income, with the exception of $338.49 income from royalties, was from rentals from two buildings which it owned. Petitioner's business is that of owning buildings for investment purposes.

John G. Burdeau was president and Louis Desloge was vice president and secretary of petitioner. Its shareholders were John, his two sisters, and David Burdeau, a brother. The officers of petitioner served in the same capacity as officers of the Burdeau Real Estate Company which, like petitioner, held property for rental purposes. Its stockholders were the same as those of petitioner.

Petitioner acquired its 17th and Pine Street property (hereinafter referred to as the Pine Street property) in 1939. The building was constructed in 1922 and was two stories high, had a service basement, and contained approximately 28,500 square feet of floorspace. The building was of reinforced concrete and brick construction, was fireproofed, and heated by steam. It was wired for power, light and had gas. It had one freight elevator and a small portion of each floor was devoted to office space. The north side of the second floor was lined with glass block and the south side of the second floor was of steel sash. The south and west sides of the first floor had store fronts in them. The property was zoned central business district ‘I’.

Late in 1954 or early in 1955, the Pine Street property was under condemnation proceedings by a duly constituted governmental authority in connection with a program of the City of St. Louis to eliminate blight. Early in 1955, petitioner agreed to sell the property to the condemning authority for $101,000 and payment was received on June 8, 1955.

At the time of its condemnation, the Pine Street property was leased to L.J. O'Neill & Company, shoe manufacturers, which company was a subsidiary of Florsheim Shoe Company. L.J. O'Neill & Company subleased the entire first floor to Columbia of St. Louis, whose business was combining leather for shoes.

On May 1, 1955, the Champion Industries, Inc., formerly the Champion Shoe Machinery Company, by general warranty deed, conveyed a plot of improved land known as 3723-41 Forest Park Avenue (hereinafter referred to as the Forest Park property) to David Burdeau for a consideration of $84,000. The land was improved with two old factory buildings with partial second floors and having a total area of approximately 60,000 square feet. The buildings were of brick construction, had broken concrete floors, and had an open areaway between them. The first floors were obstructed by a number of columns supporting the second floors. There was a large concrete vault on the premises and in the middle of one of the buildings was a large tool and dye room. The buildings were located in an area immediately adjoining the downtown section of St. Louis, which area was zoned as central business district ‘I’.

At the time of purchase of the Forest Park property, David, in whose name title to the property was taken, gave back a first deed of trust in the amount of $59,000 to Champion Industries and $22,500 was borrowed from the Bank of Overland and paid on the purchase price. The note to the Bank of Overland was signed by the Burdeau Real Estate Company. The record does not disclose where the remaining $2,500 of the $84,000 purchase price came from.

On June 23, 1955, an agreement for lease of the Forest Park property was entered into between David, lessor, and the Stocker Hausmann Company, a Missouri corporation, lessee. Stocker Hausmann was engaged in the warehousing and distribution of wholesale groceries to institutional type businesses. Stocker Hausmann, through its president, had been negotiating for lease of the premises since about May 1955, but the Forest Park property was not suitable for Stocker Hausmann's purposes in its existing condition. Prior to execution of the lease, the property was inspected several times with a real estate salesman and a memorandum of extensive improvements to be made to the property, dated June 23, 1955, executed by David, was drawn up. The memorandum for renovation of the buildings was incorporated in the June 23, 1955, lease. The lease was for a term of 15 years and provided that the premises could only be used as a warehouse for wholesale groceries.

On or about July 12, 1955, Burdeau Real Estate Company entered into a contract for renovation of the Forest Park property with the Willingham Construction Company. As work progressed, Willingham Construction Company submitted partial billings to the Burdeau Real Estate Company. The date of these billings, amount, and date of payment were as follows:

+----------------------------------------+
                ¦Date of Billing¦Amount of¦Date paid     ¦
                +---------------+---------+--------------¦
                ¦               ¦billing  ¦              ¦
                +---------------+---------+--------------¦
                ¦Sept. 13, 1955 ¦$5,835.04¦Sept. 16, 1955¦
                +---------------+---------+--------------¦
                ¦Oct. 4, 1955   ¦11,129.74¦Oct. 11,1955  ¦
                +---------------+---------+--------------¦
                ¦Nov. 15, 1955  ¦20,267.84¦Dec. 9, 1955  ¦
                +---------------+---------+--------------¦
                ¦Dec. 6, 1955   ¦13,647.81¦(1  )         ¦
                +---------------+---------+--------------¦
                ¦Jan. 16, 1956  ¦5,636.05 ¦(1  )         ¦
                +----------------------------------------+
                

The above bills were paid by petitioner. In addition to the above, petitioner also spent $14,491.11 for installation of a sprinkler system at the Forest Park property. This money was expended on or about December 31, 1955.

The Burdeau Real Estate Company acted for and on behalf of the petitioner in contracting for the alterations and repairs to the Forest Park property. The Forest Park property was acquired by petitioner for rental and investment purposes; November 8, 1955, was the date petitioner acquired this property. The property was acquired by general warranty deed from David Burdeau. The...