Camp Wolters Enters., Inc. v. Comm'r of Internal Revenue
| Citation | 22 T.C. 737 |
| Decision Date | 30 June 1954 |
| Docket Number | Docket No. 35561. |
| Parties | CAMP WOLTERS ENTERPRISES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
The Dennis Group purchased the Camp Wolters land (then under lease to the United States) along with restoration rights applicable to that land. It also concluded a ‘contract’ with the United States to purchase the Camp Wolters buildings and improvements in return for $412,500 in cash and release of the restoration rights. The group then formed petitioner, conveyed the land to petitioner for $151,336.88 in land notes, and assigned the ‘contract’ and restoration rights to petitioner for $1,424 in cash and $411,080.20 in building notes. Petitioner paid the United States the $412,500, released the restoration rights, and expended an unidentified $2,350 to acquire the Camp Wolters buildings and improvements. Petitioner claims a cost basis of $827,354.20 for those buildings and improvements. Held:
1. The transfer of the building notes and $1,424 cash for the ‘contract’ and restoration rights was a section 112(b)(5)–112(c)(1) exchange. The Dennis Group's basis for those assets was $50,000 and petitioner's basis therefor (under section 113(a)(8)) was $51,424. Petitioner's basis for the Camp Wolters buildings and improvements was that $51,424, plus the $412,500 paid in cash and the unidentified $2,350–a total of $466,274.
2. Useful depreciable life for Camp Wolters improvements (other than the buildings) was as determined by respondent. All of the Camp Wolters buildings, except those actually rented, were held for sale; therefore depreciation deductions are allowable, based on 10-year useful life, only on those buildings actually rented. Petitioner failed to properly raise the issue of respondent's disallowance of capital gains treatment for some of the buildings sold.
3. Interest paid on the building and land notes is properly deductible. R. B. Cannon, Esq., for the petitioner.
J. Marvin Kelley, Esq., for the respondent.
Respondent determined deficiencies in income taxes for the taxable years ended March 31, 1948, and March 31, 1949, of $95,851.70 and $31,240.17, respectively.
Respondent made adjustments for the year ended March 31, 1948, as follows:1
Respondent also disallowed capital gains treatment in the computation of tax on income derived from petitioner's sale of any of its buildings. Except for the disallowance and for adjustment (d), petitioner assigns error to the foregoing.
For the year ended March 31, 1949, respondent made adjustments as follows:
Respondent also disallowed capital gains treatment in the computation of tax on income derived from petitioner's sale of any of its buildings. Except for that disallowance, petitioner assigns error to the foregoing.
By amended answer filed at the hearing, respondent asserted that the deficiencies for the 1948 and 1949 fiscal years should be increased by $1,258.75 and $5,684.16, respectively, giving as his reasons therefor the following:
(a) Respondent alleges that he erred in allowing as a deduction in the income tax return of the petitioner for the year ended March 31, 1948, interest claimed on land notes in the amount of $3,312.49.
(b) Respondent alleges that he erred in allowing as a deduction in the income tax return of petitioner for the year ended March 31, 1949, interest claimed on building notes in the amount of $14,958.31.
Petitioner filed an appropriate reply denying respondent's allegations.
Petitioner is a corporation chartered under the laws of Texas and located at Mineral Wells, Texas. The tax returns for the periods in question were filed with the collector for the second district of Texas.
Prior to the outbreak of World War II, as a step in the preparedness program then being initiated by the United States, the United States Army became interested in acquiring possession of several thousand acres of land in Palo Pinto County, Texas, in the vicinity of the city of Mineral Wells, Texas, to be used as an induction and training center. It was not desired to purchase such lands, but rather to lease them. The lands in question were owned by a number of different landowners. The War Department wanted to deal with only one lessor and refused to lease the lands piecemeal. In order to obtain the economic benefits of having a large Army camp located nearby, the city of Mineral Wells, sometimes called the city herein, undertook to secure assignable leases to all of the acreage designated by the War Department and to sublease all such lands to the United States under one master lease.
Accordingly, the city proceeded to acquire leases on the desired acreage, under which the city became primarily liable for all of the burdens imposed on the lessee under such leases. Each lease, among other things, contained the following provisions:
4. The City shall have the right to assign this lease to the United States of America (hereinafter called Government,) and to sublet the demised premises for a similar purpose, but will not permit the use of said premises by anyone other than the Government.
* * * * * * *
7. The City shall have the right, during the existence of this lease, to permit the Government to make alterations, clear brush, fell trees, attach fixtures, and erect additions, structures, or signs, in or upon the premises hereby leased, which fixtures, additions, or structures so placed in or upon or attached to the said premises shall be and remain the property of the Government and may be removed therefrom by the Government prior to the termination of this lease, and the City shall require the Government, before the expiration of this lease or the expiration of any renewal thereof, to restore the premises to the same condition as that existing at the time of entering upon the same under this lease, reasonable and ordinary wear and tear and damages by the elements or by circumstances over which the Government has no control, excepted. [Emphasis added.]
8. As a part of the consideration herefor, the City is given the option, at any time during the term of this lease or of any renewal thereof, to purchase the...
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