Hudock v. Comm'r of Internal Revenue , Docket No. 7417-73.
| Decision Date | 19 November 1975 |
| Docket Number | Docket No. 7417-73. |
| Citation | 65 T.C. 351 |
| Parties | FRANK HUDOCK AND MARY HUDOCK, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Robert P. Hudock and Philip F. Hudock, for the petitioners.
An apartment building on petitioners' property was destroyed by fire in February 1968. The balance of the property was condemned later in 1968. Petitioners received a partial condemnation award in 1969, but the fire loss and condemnation claims were not finally settled until 1971 and 1972, respectively. Held, petitioners realized a recognizable gain upon receipt of the partial condemnation award in 1969. Held, further, condemnation award allocated between rental and personal portions of property. Held, further, respondent not barred from assessing deficiency for 1969 by either sec. 7121, I.R.C. 1954, or equitable estoppel.
Respondent determined a deficiency of $1,364.35 in the joint Federal individual income tax of petitioners Frank Hudock and Mary Hudock for the taxable year ended December 31, 1969. The issues presented are:
(1) Whether petitioners realized a gain or loss upon receipt in 1969 of an estimated condemnation award for real estate and improvements thereon. A subsidiary but related question is whether petitioners may deduct in 1969 a loss on an apartment building on the land condemned which was destroyed by fire before the condemnation. A claim for insurance on the fire loss was not settled until 1971.
(2) Whether petitioners properly allocated the condemnation award between the rental and personal portions of the property remaining after the fire; and
(3) Whether, by virtue of either section 7121, I.R.C. 1954,1 or the application of the doctrine of equitable estoppel, the Commissioner is barred from assessing a deficiency in respect of the taxable year 1969.
This case was submitted fully stipulated under Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts with the exhibits attached are incorporated herein by this reference. The pertinent facts are as follows:
Frank and Mary Hudock (hereinafter jointly referred to as petitioners) are husband and wife who, at the time of filing their joint Federal individual income tax return for 1969 and the petition herein, resided in Hazleton, Pa. Their return was prepared on the cash receipts and disbursements method of accounting and filed with the District Director, Internal Revenue Service, Philadelphia, Pa.
In 1968 petitioners owned a lot approximately 30 feet by 190 feet located at the corner of Wyoming and Walnut Streets in Hazleton, Pa., which was improved by the following structures: A four-unit apartment house of which one unit was used by petitioners as their residence and the remainder was rented; a double home used as rental property; and a multiple-car garage used as rental property.
The apartment house was destroyed by fire on February 14, 1968, at which time the property was insured by petitioners for a total amount of $50,000. 2 On October 4, 1968, a Declaration of Taking was filed by the Redevelopment Authority of the City of Hazleton (hereinafter referred to as the Redevelopment Authority) condemning petitioners' land and structures.
In 1968, litigation was instituted by petitioners against the insurance companies and the Redevelopment Authority, relating to claims for the fire loss and the condemnation, respectively. Neither the fire loss nor the condemnation was reflected in petitioners' income tax return for 1968 as no payment in respect of either the fire claim or the condemnation claim was received by petitioners in 1968.
The Redevelopment Authority took physical possession of the condemned property in mid-1969, at which time petitioners received $20,000 as estimated compensation therefor. Petitioners continued to litigate the condemnation claim against the Redevelopment. Authority until 1972, in which year they received an additional $15,000 in full and final settlement of said claim.
As to the fire loss claim against the insurance companies, petitioners continued that litigation throughout 1969 and 1970 during which period they received no payments in respect thereof. In 1971, petitioners received $48,000 from the insurance companies in full settlement of the fire claim.
On their return for 1969, petitioners reflected receipt of the $20,000 condemnation payment awarded in 1969 by claiming a Schedule D loss, part III, ‘Property Other Than Capital Assets,‘ in the amount of $1,917.78. Petitioners also deducted in the 1969 return rental expenses of $4,262.90 which were in fact condemnation expenses related to the aforementioned award.
Petitioners computed the $1,917.78 claimed condemnation loss as follows:
+-----------------------------------------------------------------------+
¦ ¦Rental ¦Personal ¦Total ¦
+------------------------------------+-----------+----------+-----------¦
¦ ¦ ¦ ¦ ¦
+------------------------------------+-----------+----------+-----------¦
¦Adjusted basis before casualty ¦ ¦ ¦ ¦
+------------------------------------+-----------+----------+-----------¦
¦of 4-unit apartment building ¦$17,786.27 ¦$15,000 ¦$32,786.27 ¦
+------------------------------------+-----------+----------+-----------¦
¦(Decrease by estimated insurance ¦ ¦ ¦ ¦
+------------------------------------+-----------+----------+-----------¦
¦recovery) ¦(13,500.00)¦(11,500) ¦(25,000.00)¦
+------------------------------------+-----------+----------+-----------¦
¦Unrecovered basis ¦4,286.27 ¦3,500 ¦7,786.27 ¦
+------------------------------------+-----------+----------+-----------¦
¦Basis of land and other improvements¦ ¦ ¦ ¦
+------------------------------------+-----------+----------+-----------¦
¦less depreciation ¦13,131.51 ¦1,000 ¦14,131.51 ¦
+------------------------------------+-----------+----------+-----------¦
¦Total ¦17,417.78 ¦4,500 ¦21,917.78 ¦
+------------------------------------+-----------+----------+-----------¦
¦(Condemnation award received) ¦(16,000.00)¦(4,000) ¦(20,000.00)¦
+------------------------------------+-----------+----------+-----------¦
¦Condemnation loss ¦1,417.78 ¦500 ¦1,917.78 ¦
+-----------------------------------------------------------------------+
Petitioners in computing their taxable year 1969 condemnation loss in the above computation estimated insurance recovery of $25,000 on the fire loss claim which was still in litigation, and reduced the adjusted basis of the four-unit apartment building by the estimated insurance recovery. The unrecovered basis in the four-unit apartment building reflected in the computation represented a loss in the taxable year 1969. Petitioners assumed that they were entitled to reflect a reasonable amount of insurance recovery to so determine the loss.3
Thereafter, on April 5, 1972, incident to an audit of petitioners' 1969 return, petitioners and an agent of respondent executed Form 4549, captioned ‘Income Tax Audit Changes,‘ which reflected the following adjustments: Disallowance of the $4,262.90 deduction claimed for rental expenses and recharacterization of said amount as expenses incurred in connection with securing the reported condemnation award; an increase in the amount of loss claimed ($1,917.78) which resulted from the application of the $4,262.90 condemnation expenses to the recomputation of the condemnation loss;4 and a disallowance of the condemnation loss to the extent allocable to the personal portion of the property. The net effect of these adjustments was to produce an additional liability in respect of petitioners' income tax for 1969 in the amount of $210.06 (plus interest). On April 5, 1972, petitioners paid to respondent by check the sum of $216.36 which represented $210.06 tax liability and $6.30 interest. Respondent cashed said check on April 7, 1972, and credited it to petitioners' account.5
In signing the Form 4549 agreement and paying the $216.36, petitioners believed they were signing a closing agreement which would terminate their tax liability. Form 4549, after providing that the subscribing taxpayer consents—
to either (1) the immediate assessment and collection of the deficiency shown on line 14, plus any interest due on this tax, and also any penalties shown on line 15 or (2) the overassessment shown on line 14, plus any interest and adjusted by any penalties shown on line 15.
specifically states that ‘It is understood that this report is subject to acceptance by the District Director.’ The Form 4549 herein was never ‘accepted’ by the District Director of respondent although, as indicated above, the $216.36 payment was accepted.
On July 10, 1973, respondent mailed to petitioners a statutory notice of the $1,364.35 deficiency in their income tax for 1969 at issue herein. Respondent's determination was based on the disallowance of (1) the claimed condemnation loss and (2) associated rental expenses on the grounds that, as to the former, no deductible loss was incurred during 1969 and that, in respect of the latter, the claimed rental expenses were, in fact, condemnation expenses applicable to the reduction of the condemnation award.
In the context of the specific computation of the gain or loss resulting from the condemnation award, respondent's position is that there is no loss in 1969 attributable to the apartment building since any loss would be covered by insurance; therefore, respondent takes exception to petitioners' estimated insurance recovery in 1969. Moreover, in opposition to petitioners' allocation of 80 percent of the condemnation award to the rental portion and 20 percent to the personal, resp...
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