Casalina Corp. v. Comm'r of Internal Revenue
| Decision Date | 13 August 1973 |
| Docket Number | Docket No. 6158-70. |
| Citation | 60 T.C. 694 |
| Parties | CASALINA CORPORATION, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Leon Bizar, for the petitioner.
Rufus H. Leonard, Jr., for the respondent.
Three tracts of land owned by petitioner, an accrual basis taxpayer, were condemned in the 1950's and the condemnor made deposits in the Federal District Court. During the course of the condemnation proceedings petitioner withdrew portions of these deposits in excess of its bases in the tracts. In 1967 and 1968 final judgments and interest thereon were awarded. Petitioner applied for nonrecognition of the gains on the awards under sec. 1033, I.R.C. 1954, representing that no gains were realized prior to the entry of these final judgments. Respondent initially approved petitioner's applications, but later determined that these gains were taxable because petitioner's applications were filed untimely and misrepresented the facts. Petitioner incurred legal and related expenses in excess of $135,000 in the condemnation proceedings. In 1953 petitioner gave a mortgage as part of the purchase price for land it acquired. No payments or accruals of interest due on the mortgage were made until 1966. In 1966 through 1968, petitioner made payments of interest owed for the prior years. Held:
1. Petitioner is not entitled to the nonrecognition provisions of sec. 1033 on the condemnation awards, and further that respondent did not abuse his discretion in refusing to grant petitioner extensions of time to reinvest condemnation proceeds under sec. 1.1033(a)-2(c)(3), Income Tax Regs.;
2. Petitioner's gains on the condemnation awards are taxable as capital gains;
3. Petitioner is entitled to deduct the legal fees incurred in the condemnation proceedings solely as a capital expenditure in arriving at the gains resulting from the condemnation awards. No portion of those fees may be allocated to the interest received on the awards;
4. Interest on the condemnation awards is taxable only in the years it was awarded by the District Court;
5. Petitioner, as an accrual basis taxpayer, is only entitled to deduct interest accrued on the mortgage during the taxable year.
Respondent determined deficiencies in petitioner's Federal income taxes as follows:
+--------------------------+
¦Taxable year ¦Amount ¦
+---------------+----------¦
¦ ¦ ¦
+---------------+----------¦
¦1966 ¦$792.00 ¦
+---------------+----------¦
¦1967 ¦40,835.81 ¦
+---------------+----------¦
¦1968 ¦124,470.50¦
+--------------------------+
The parties have now agreed as to some issues and those remaining for our consideration are:
(1) Whether under section 1033 /1/ petitioner is entitled to nonrecognition of gains realized on condemnation awards;
(2) Whether gains realized by petitioner on condemnation awards are taxable as ordinary income or capital gains;
(3) Whether any portion of fees paid to attorneys for services in condemnation proceedings may be allocated to interest allowed on condemnation awards;
(4) Whether interest allowed on condemnation awards made in 1967 and 1968 is accruable and taxable in those years, or over the 15-year period of the condemnation proceedings;
(5) Whether petitioner, an accrual basis taxpayer, having failed to make accruals for interest owed by it on a mortgage may claim these interest deductions when it pays them in later years.
Some of the facts have been stipulated and are so found.
Petitioner Casalina Corp. (Casalina) is a South Carolina corporation engaged in the real estate business and with its principal place of business in Conway, S.C. Casalina filed its Federal income tax returns for the taxable years 1966, 1967, and 1968 on the accrual basis with the district director of internal revenue, Columbia, S.C.
In 1942 Casalina acquired three tracts of undeveloped land on the outer banks of North Carolina for a total cost of $6,600. Tract 217 contained 800 acres and ran from Pamlico Sound to the Atlantic Ocean. Tract 401 consisted of 290 acres on Bodie Island, while trace 333 contained 250 acres near Buxton and Hatteras Island. Casalina held these tracts until they were condemned by the Federal Government in the 1950's. During this period it made no improvements to the tracts and no attempts to sell them.
In 1937, the Congress of the United States had passed legislation for the establishment of Cape Hatteras National Seashore on the outer banks of North Carolina. The area proposed for the park included the three tracts of land purchased by petitioner.
No action was taken to create the park until the early 1950's. At that time highways were constructed by the State of North Carolina which made the Cape Hatteras region more accessible. The National Park Service (the Service) established boundaries and attempted to buy land for the park, including Casalina's three tracts.
Casalina refused the Service's offers to purchase its tracts, and the Service commenced condemnation proceedings in the U.S. District Court, Eastern District of North Carolina. The dates the tracts were condemned and amounts deposited by the Service as its estimate of the fair market values of the properties are as follows:
+----------------------------------------------+
¦ ¦ ¦Amounts of deposits ¦
+-------+----------------+---------------------¦
¦Tract ¦Date condemned ¦in the court ¦
+-------+----------------+---------------------¦
¦ ¦ ¦ ¦
+-------+----------------+---------------------¦
¦217 ¦6/25/53 ¦$7,500 ¦
+-------+----------------+---------------------¦
¦401 ¦5/13/58 ¦7,000 ¦
+-------+----------------+---------------------¦
¦333 ¦3/19/59 ¦13,000 ¦
+----------------------------------------------+
During the condemnation proceedings, Casalina made withdrawals from the amounts deposited with the court as follows:
+-------------------------------------+
¦Tract ¦Date of withdrawal ¦Amount ¦
+-------+--------------------+--------¦
¦ ¦ ¦ ¦
+-------+--------------------+--------¦
¦217 ¦1/15/66 ¦$6,750 ¦
+-------+--------------------+--------¦
¦401 ¦10/1/63 ¦6,750 ¦
+-------+--------------------+--------¦
¦333 ¦4/5/61 ¦11,700 ¦
+-------------------------------------+
The corporation had unrestricted use of these withdrawn funds. Casalina did not request an extension of time in which to reinvest the proceeds of condemnation awards during this period pursuant to section 1.1033(a)-2(c)(3), Income Tax Regs., because its accountant Charles J. Walheim (Walheim) advised the corporation that it was unnecessary to do so at that time.
Walheim had been an accountant since 1920 and a certified public accountant since 1935.
In 1963 the District Court judge appointed three commissioners to determine the value of Casalina's tracts. The commissioners submitted their reports to the court in 1966. The Service considered the commissioners' valuations excessive and moved that the reports not be accepted by the court. In 1967, the Service abandoned its appeals and the judgments recommended by the commissioners were finalized. The dates the U.S. District Court entered the final judgments, and the amounts thereof are as follows:
+-----------------------------------+
¦Tract ¦Judgment date ¦Amount ¦
+-------+---------------+-----------¦
¦ ¦ ¦ ¦
+-------+---------------+-----------¦
¦217 ¦1/10/68 ¦$171,900.00¦
+-------+---------------+-----------¦
¦401 ¦6/1/67 ¦55,201.00 ¦
+-------+---------------+-----------¦
¦333 ¦1/10/68 ¦94,147.20 ¦
+-----------------------------------+
On December 23, 1968, Casalina received the amounts of these judgments together with interest in the amount of $229,349.12. The total legal and related expenses incurred by Casalina in the condemnation proceedings was $135,596.20.
Casalina made applications to the proper district director for extensions of time within which to reinvest the condemnation awards on December 13, 1968, as to tract 401, and on December 15, 1969, as to tracts 217 and 333. In both requests it was misrepresented that no gain had been realized on the condemnations prior to the entry of final judgments by the District Court. These requested extensions were granted by the district director.
In 1969 Casalina made investments in real estate in the total amount of about $271,400.
On its 1967 and 1968 Federal income tax returns, Casalina did not report any gains resulting from the condemnation awards. On its 1968 return Casalina prorated the interest income received on the awards to the years 1953 through 1968. Respondent determined that Casalina did not qualify for nonrecognition of gains under section 1033 with respect to the condemnation awards, and that the interest income was taxable entirely in 1967 and 1968.
Issue 5. Interest Deduction
On August 23, 1953, Casalina purchased 53 acres of real estate near Myrtle Beach, S.C., from its three stockholders for $50,000. It made a cash payment of $7,500 down on this purchase of real estate and gave a mortgage of $42,500 for the balance of the purchase price. Casalina was to make principal payments of $500 semiannually and interest payments of 5 percent on the balance.
Casalina did not make accruals for the interest due on the mortgage, nor did it make payments of this interest until 1966. Payments of interest were made as follows:
+----------------+
¦Year ¦Amount ¦
+------+---------¦
¦ ¦ ¦
+------+---------¦
¦1966 ¦$3,600 ¦
+------+---------¦
¦1967 ¦6,100 ¦
+------+---------¦
¦1968 ¦14,400 ¦
+----------------+
On its Federal income tax returns for the taxable years 1966, 1967, and 1968, Casalina deducted...
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