Fortee Props., Inc. v. Comm'r of Internal Revenue
| Decision Date | 28 October 1952 |
| Docket Number | Docket No. 33973. |
| Citation | 19 T.C. 99 |
| Parties | FORTEE PROPERTIES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
RECOGNITION OF GAIN— INVOLUNTARY CONVERSION— MONEY EXPENDED FOR SIMILAR PROPERTY— MORTGAGES— SECTION 112(f). The gain of a taxpayer whose property is taken by eminent domain is not recognized to extent of an amount paid by government to a mortgagee to discharge a mortgage on property for which the taxpayer was not liable. Irwin D. Shapiro, Esq., for the petitioner.
Robert J. McDonough, Esq., for the respondent.
The Commissioner determined a deficiency of $7,242.50 in the income tax of the petitioner for its fiscal year ended May 31, 1948. The stipulated facts and two exhibits are adopted as the findings of fact. The only issue for decision is whether the petitioner has failed to comply with the provisions of section 112(f) so that $28,970 of its gain from the involuntary conversion of its property must be recognized. Section 112(f) provides that if property, as a result of an exercise of the power of condemnation, is 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 establishment of a replacement fund, no gain shall be recognized, but if any part of the money is not so expended, the gain shall be recognized to the extent of the money which is not so expended.
The petitioner is a New York corporation which filed its return for the taxable year with the collector of internal revenue for the third district of New York.
The petitioner purchased two adjoining pieces of real property in New York City on June 5, 1942. The properties were then subject to two past due mortgages, one on each property in the amount of $18,000, which had been placed on the properties in 1910 by a prior owner. Central Savings Bank, mortgagee, held the two mortgages. The petitioner paid $4,000 in cash for the properties and took them subject to the mortgages but never assumed payment of or legal liability for the principal debt or interest covered by the mortgages. The petitioner also paid an additional amount of $397.01 in acquiring the properties.
‘Depreciation on the buildings on said land to August 14, 1947 aggregated $2,116.63.‘
The Port of New York Authority took the two properties for public use on August 14, 1947, under its power of eminent domain by condemnation proceedings. Thereafter, the petitioner and the Port of New York Authority agreed that the total value of the properties on August 14, 1947, was $74,000. The amount then due on the two mortgages was $28,970. The final decree of the Court in the condemnation proceeding approved, in connection with the two properties here in question, the award of $74,000 as set forth as follows in ‘the tabular abstract of awards‘ annexed to the decree:
+-----------------------------------------------------------------------+
¦Damage¦ ¦Estimated ¦ ¦
+------+------------------------------------------+----------+----------¦
¦parcel¦Owners ¦loss or ¦Final ¦
+------+------------------------------------------+----------+----------¦
¦Nos. ¦ ¦damage ¦awards ¦
+------+------------------------------------------+----------+----------¦
¦* * * ¦* * * ¦* * * ¦* * * ¦
+------+------------------------------------------+----------+----------¦
¦31 ¦UNENCUMBERED FEE ¦$74,000 AA¦$74,000 AA¦
+------+------------------------------------------+----------+----------¦
¦ ¦Fee owner: The Port of New York Authority ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦as assignee of Fortee Properties, Inc. ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦Mortgagee: The Port of New York Authority ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦as assignee of Central Savings Bank in ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦the City of New York; proved claim for ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦separate award in the amount of ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦$14,748.08. ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦Mortgagee: The Port of New York Authority,¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦as assignee of Central Savings Bank in ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦the City of New York; proved claim for ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦separate award in the amount of ¦ ¦ ¦
+------+------------------------------------------+----------+----------¦
¦ ¦$14,748.08. ¦ ¦ ¦
+-----------------------------------------------------------------------+
The Port of New York Authority paid to the petitioner $45,030 in cash on December 17, 1947. The Port of New York Authority paid $28,970 to the Central Savings Bank in satisfaction of the mortgages. The petitioner had no control over the payment or disposition of the $28,970.
The cost to the petitioner of the disposition of the property was $933.33.
The petitioner applied to the Commissioner of Internal Revenue about March 1948 for and the Commissioner on June 21, 1948, granted permission to establish a replacement fund for the net amount of $44,096.67 received by the petitioner as a result of the involuntary taking of its two properties. The petitioner filed a bond approved by the Commissioner in connection with the replacement fund.
The petitioner, in 1949, reinvested the entire Replacement Fund in two other properties. Its total investment in one was $12,418.76 and it took that property subject to a mortgage of $48,000. Its total investment in the other was $33,904 and it took that property subject to a mortgage of $118,650. It thus invested in the two properties $2,226.09 in excess of the replacement fund.
The Commissioner, in determining the deficiency for the fiscal year ended May 31, 1948, added to the income reported $28,970 described as ‘Gain on involuntary conversion,‘ and explained that the long term gain realized on the involuntary conversion of the two properties is taxable in the amount of $28,970.
The petitioner does not deny that it realized a gain of at least $28,970. Its actual gain, determined under section 111, was, apparently, $34,786.29. The Commissioner does not question that there was an involuntary conversion and a ‘forthwith‘ expenditure of the $44,096.67 for similar property pursuant to the regulations. His only reason for recognizing $28,970 of the gain is that the $28,970 was paid to the mortgagee in connection with the condemnation and was not expended by the petitioner for the acquisition of similar property within the meaning of section 112(f).
The question is whether the petitioner has failed to comply with section 112(f) by not investing in his new properties the $28,970 paid under a separate award to the mortgagee of the...
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