Gen. Baking Co. v. Comm'r of Internal Revenue

• Citation: 48 T.C. 201
• Decision Date: 23 May 1967
• Docket Number: Docket No. 1466-65.
• Parties: GENERAL BAKING COMPANY, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

48 T.C. 201

GENERAL BAKING COMPANY, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1466-65.

Tax Court of the United States.

Filed May 23, 1967.

David G. Sacks and Donald P. Wefer, for the petitioner.

Eugene L. Wilpon and Jay Hamelburg, for the respondent.

Condemnation proceeding against petitioner's land and structures was commenced in December 1960 and an estimated amount deposited with the court at that time. Petitioner appealed the amount of the prospective award in 1961 and an increased amount was agreed upon so that vesting under Ohio law occurred on Apr. 1, 1961. Petitioner retained physical possession of property throughout 1960. Held, under Ohio law, there was no actual or constructive receipt of any part of the award, nor was it subject to any claim of right by petitioner until 1961, so that gain on the property was taxable to this calendar year basis petitioner in that year.

FORRESTER, Judge:

Respondent has determined deficiencies in the income taxes of petitioner in the amounts of $212,871.88 and $23,240.42 for the taxable years 1958 and 1959, respectively. Concessions have been made, and the only issue now remaining is whether a long-term capital gain realized from a condemnation proceeding is to be taxed completely or in part in 1960 when the condemnation proceedings commenced or in 1961 when the proceedings ended and the award was received. ¹

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The petitioner is a corporation whose principal business is the preparation and sale of bread and bakery products. It was organized under the laws of the State of New York City. The petitioner uses an accrual method of accounting and a calendar year basis for keeping its own books and for reporting income for income tax purposes. For the calendar years 1958 through 1961 petitioner filed its income tax returns with the district director of internal revenue in the Upper Manhattan District of New York.

On December 22, 1960, after several months of negotiation, the Director of Highways of the State of Ohio instituted a proceeding in the Court of Common Pleas of Franklin County, Ohio, to appropriate a bakery plant owned by petitioner in Columbus, Ohio. The amount of $312,000 was deposited in that court by the director as compensation for the land and the bakery plant located on the land. Amounts of $56,000 and $256,000 were respectively designated as compensation for the land and the plant.

In 1961, the petitioner filed an appeal with such court with respect to the amount of compensation to be received for the Columbus property. The State's right to condemn the property was not challenged.

On February 8, 1961, the county prosecutor and the petitioner agreed to the payment of $375,000 as the total compensation and damages to the petitioner. The court then entered a ‘Journal Entry Settlement’ approving such agreement. The settlement provided that $375,000 was to be paid by the court upon application of the landowners. It further provided that a perpetual easement over the land was to vest in the State of Ohio on April 1, 1961. Prior to such journal entry (which is reproduced below) physical possession of the property remained in the petitioner.

IN THE COURT OF COMMON PLEASE, FRANKLIN COUNTY, OHIO

No. 209708 JOURNAL ENTRY SETTLEMENT

IN THE MATTER OF THE APPROPRIATION BY THE STATE OF OHIO OF EASEMENTS FOR HIGHWAY PURPOSES OVER THE PROPERTY OF THE GENERAL BAKING COMPANY, ET AL., ON STATE ROUTE NO. 3, SECTION 16.91, FRANKLIN COUNTY, OHIO.

It appears to the Court that the owners of the property, over which easements were appropriated in this action, have agreed with the Director of Highways of the State of Ohio, upon the amount of compensation and damages due said owners by reason of said appropriation and have agreed to accept and withdraw the amount of THREE HUNDRED SEVENTY FIVE THOUSAND AND NO/100 DOLLARS ($375,000.00), in full payment thereof, and do hereby release all claims for further compensation or damages, including interest to April 1, 1961 and limitation of access, resulting from the construction and improvement of State Route No. 3, Section 16.91, or from the appropriation of said easements.

In conformity with said agreement, it is hereby ordered, adjudged and decreed that the said Director of Highways shall deposit with the Clerk of this Court, a sum sufficient to-wit SIXTY THREE THOUSAND AND NO/100 ($63,000.00), which when added to the original deposit herein of THREE HUNDRED TWELVE THOUSAND AND NO/100 ($312,000.00), equals the total amount of the agreed settlement of THREE HUNDRED SEVENTY FIVE THOUSAND AND NO/100 DOLLARS ($375,000.00), which shall be paid to the landowners hereinafter named, upon application to this Court as their interests may appear.

It is further ordered, adjudged and decreed that easements for highway purposes in, over and upon the premises described in the Resolution and Finding filed herein as Parcel No. 10 (HIGHWAY) located in the City of Columbus, Franklin County, Ohio, as shown on a survey made by the Department of Highways, and recorded in the records of Franklin County, Ohio, and being more fully described as follows: * * *

Together with Parcel No. 10-LA (HIGHWAY) located in the City of Columbus, Franklin County, Ohio, as shown on a survey made by the Department of Highways, and recorded in the records of Franklin County, Ohio, and being more fully described as follows: * * *

be and the same hereby are duly vested in the State of Ohio, April 1, 1961, free and clear of all claims of the owners of said land and any person or persons having an interest therein, to-wit:

The General Baking Company, C. T. Corporation System, Statutory Agent

Treasurer of Franklin County, Ohio

Union Commerce Building, Cleveland, Ohio

Court House, Columbia, Ohio It is further ordered that the Director of Highways of the State of Ohio, pay all court costs herein accrued and that a record be made of these proceedings according to law.

(S) Mark McElroy,

MARK McELROY,

Attorney General, State of Ohio.

(S) Wm. D. Henry,

WILLIAM D. HENRY, Special Counsel for Attorney General.

(S) Vorys Sater Seymour Pease,

VORYS, SATER, SEYMOUR & PEASE,

Attorneys for Landowners.

(S) HOLDEN, Judge.

The State of Ohio Franklin County,

ss I, JOSEPH M. CLIFFORD, Clerk of the Court of Common Pleas, Within for Said County,

Relations, Within and for Said County, Hereby Certify That the Above and Foregoing is Truly Taken and Copied From the Original Entry— Now on File in My Office.

Witness My Hand and Sale of Said Court

THIS 28 DAY OF FEB. A.D. 1961

JOSEPH M. CLIFFORD, Clerk.

by (S) D. CAMPBELL, Deputy.

After the ‘Journal Entry Settlement’ was made, the entire $375,000 (less $1,564.40 withheld for unpaid 1960 real estate taxes) was turned over to the petitioner in 1961. No property taxes were assessed for the year 1961. Prior to the ‘Journal Entry Settlement,‘ the petitioner did not request withdrawal of any of the deposited proceeds.

Petitioner's adjusted basis for determining gain on the sale or exchange of the appropriated land was $65,004, and the adjusted basis of the appropriated building was $90,583, an aggregate adjusted basis of $155,587. Petitioner's expenses in connection with the appropriation of the land and building were $1,375.

Petitioner's amended return for 1960 reported the entire long-term capital gain of $218,038 from the condemnation of the Columbus property. The amount of the gain is not disputed. On its return for 1961, the petitioner reported a net loss of $2,056,217.

In his deficiency notice, the Commissioner allocated the gain on the condemnation to 1961 and used that amount as an offset to the loss there reported. The Commissioner then recomputed the loss for 1961 and carried the net amount back to 1958 as an offset against the income reported in 1958.

OPINION

The sole remaining issue is whether the $218,038 long-term capital gain resulting from the condemnation of petitioner's plant is to be reported entirely in 1960, entirely in 1961, or partially in both years.

The petitioner contends primarily that the total condemnation award of $375,000 should be reported as accrued in 1960 when the $312,000 deposit was made for its Columbus property.² Petitioner contends in the alternative that the $312,000 deposited for the land and buildings was properly accrued in 1960, and as a second alternative, that the $256,000 amount deposited for the structure was constructively received under a claim of right in 1960.

The Ohio Law

In order to determine whether petitioner had income in 1960 from the condemnation proceeding, we must determine its rights under the applicable Ohio law.

The condemnation proceedings were governed by sections 5519.01, 5519.02, and 5519.03 of the Ohio Revised Code. The provisions of these statutes are as follows:

Sec. 5519.01 Appropriation of property.

If the director of highways is unable to purchase property for any purpose authorized by Chapters 5501., 5503., 5505., 5511., 5513., 5515., 5517., 5519., 5521., 5523., 5525., 5527., 5529., 5531., and 5533. of the Revised Code, he shall first enter on the journal of the department of highways a finding that it is necessary, for the public convenience and welfare, to appropriate such property as he deems needed for such purposes. Such finding shall contain a definite, accurate, and detailed description of the property, and the names and places of residence, if known or with reasonable diligence ascertainable, of the owner of the property appropriated.

The director shall, in such finding, fix what he deems the value of such property appropriated, together with damages to the residue and deposit the value thereof, together with such damages with the probate court or the court of common pleas of the county within which such property, or a part thereof, is situated, for the use and benefit of such owner, and thereupon the director may take possession of and enter upon said property,...