50 T.C. 813 (1968), 1867-66, Fox v. Commissioner of Internal Revenue

Docket Nº:1867-66, 1868-66.
Citation:50 T.C. 813
Opinion Judge:TANNENWALD, Judge:
Party Name:ORRIN W. FOX AND EBBA FOX, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT RICHARD L. FOX AND KATHRYN S. FOX, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Attorney:J. Patrick Whaley and Stuart T. Peeler, for the petitioners. Marion Malone, for the respondent.
Case Date:September 09, 1968
Court:United States Tax Court
 
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Page 813

50 T.C. 813 (1968)

ORRIN W. FOX AND EBBA FOX, PETITIONERS

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

RICHARD L. FOX AND KATHRYN S. FOX, PETITIONERS

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Nos. 1867-66, 1868-66.

United States Tax Court.

September 9, 1968

Page 814

J. Patrick Whaley and Stuart T. Peeler, for the petitioners.

Marion Malone, for the respondent.

Petitioners, through a partnership, sold certain property under a contract in which they retained the right to remove or salvage the improvements. They subsequently discovered that, with minor exceptions, they could not utilize the improvements and they thereupon sold them as salvage. Held, petitioners failed to prove that their intent to utilize the improvements was fixed and a sufficiently significant force to support an abandonment loss to the partnership. Held, further, petitioners failed to prove that certain business bad debts became worthless during the taxable year.

TANNENWALD, Judge:

Respondent determined deficiencies in petitioners' income taxes for their taxable years ending December 31, 1962, as follows:

Petitioner Docket No.- Deficiency
Orrin W. Fox and Ebba Fox 1867-66 $36,560.14
Richard L. Fox and Kathryn S. Fox 1868-66 36,816.87

All matters in issue involve the affairs of the Fox investment Co., a partnership, in which petitioners Orrin W. Fox and Richard L. Fox were sole and equal partners. Consequently, both dockets were consolidated for trial and decision. Petitioners' concessions leave two issues for our consideration:

(1) Whether petitioners are entitled to an abandonment loss deduction for the unrecovered basis of improvements on certain property they sold, and, if not, what the proper treatment of the unrecovered basis should be. (2) Whether petitioners are entitled to business bad debt deductions in the amount of $98,355.90.

FINDINGS OF FACT GENERAL Some of the facts are stipulated and are found accordingly. Petitioners Orrin W. Fox and Ebba Fox are husband and wife, as are petitioners Richard L. Fox and Kathryn S. Fox. Petitioners all resided in Pasedena, Calif., at the time of the filing of the petitions herein. Each couple filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue, Los Angeles, Calif. Richard Fox is the son of Orrin Fox. All subsequent references to petitioners shall be deemed to mean Orrin and Richard. Petitioners, through the vehicle of corporations, sold, leased, and serviced trucks and construction equipment. They had considerable familiarity with the construction industry. Petitioners also were equal partners in Fox Investment Co. which during 1962 maintained its books and records on a cash basis with the exception of certain receivables. ISSUE 1. THE ABANDONMENT LOSS In 1961, the partnership owned improved land on the 2300 block of East Colorado Boulevard in Pasedena. Petitioners' corporations conducted business on this property. In the summer of 1961, the partnership entered into negotiations with Safeway Stores, Inc. (hereinafter referred to as Safeway), for the sale Page 815 of the East Colorado Boulevard property. The partnership did not instigate these negotiations. Safeway was only interested in the property as a site for a new grocery store; it did not want the existing improvements. It would have paid the same for the land with or without the improvements. Throughout the negotiations, Safeway did not investigate and did not consider the cost of clearing the site. It expected that most of the improvements would be removed. After discovering, during the negotiations, that Safeway had no use for the buildings, petitioners decided that, if Safeway purchased the property, they would attempt to move and to continue to use the buildings to the extent economically feasible. They did not, at that time, investigate the feasibility of moving the improvements. Nor did they inquire into the availability of another business site. On November 3, 1961, the partnership executed an agreement giving Safeway an option until May 1, 1962, to buy the property for $900,000, with credit for the $10,000 option price. Under the terms of the agreement, if the option was exercised, the partnership could continue to occupy the premises for 6 months after the sales escrow was closed, at a rental rate of $1,250 per month. At the partnership's request, the following sentence was inserted in the rider to the agreement, which was prepared by Safeway and generally followed its form of contract:

Prior to the date Seller delivers exclusive possession of the property to Buyer, Seller may remove any or all improvements or salvage from the property. * * * The clause in Safeway's form contract relating to damage to improvements was struck, but the following form clause was left intact: Seller hereby grants unto the Buyer the exclusive right and option to purchase * * * that certain property, together with all the improvements and appurtenances thereon. The emphasized portion above was permitted to remain on the theory that the matter was adequately taken care of by the rider. The partnership was motivated to make the sale by the attractiveness of the price offered and the opportunity for petitioners to modernize their facilities through a change of location.

On May 1, 1962, Safeway exercised its option and on June 19, 1962, the sales escrow was closed. In May, petitioners began looking for a new business location. They experienced some difficulty because of the fact that no one property owner had the necessary 4 or 5 acres at any of the locations they considered. Eventually, they secured an acceptable property on the 3400 block of East Colorado Boulevard. The escrows were closed with respect to this property on November 2, 1962. In early October 1962, petitioners engaged architects to make a Page 816 study for a new plant layout at the new location, including the feasibility of utilizing the old improvements. They had not done this before because they had not known where the business would...

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