Iske v. Commissioner

• Decision Date: 05 March 1980
• Docket Number: Docket No. 4311-77.
• Citation: 39 TCM (CCH) 1161,1980 TC Memo 61
• Parties: James Iske v. Commissioner.
• Court: U.S. Tax Court

39 TCM (CCH) 1161

1980 TC Memo 61

T.C. Memo. 1980-61.

James Iske v. Commissioner.

Docket No. 4311-77.

United States Tax Court.

Filed March 5, 1980.

James Iske, Rural Route 3, Omaha, Neb., pro se. J. Anthony Hoefer, for the respondent.

Memorandum Findings of Fact and Opinion

HALL, Judge:

Respondent determined the following deficiences in petitioner's income tax:

                   Year           Deficiency
                   1970 ........  $8,753.83
                   1971 ........   4,037.14
                   1972 ........   1,250.91
                

Due to concessions by petitioner, the issues remaining for decision are:

1. Whether petitioner realized taxable gain in 1970 or 1971 from the grant of easements pursuant to condemnation proceedings.

2. Whether unreimbursed legal, appraisal or witness fees incurred by petitioner in connection with the condemnation of easements across his land are deductible in 1970 and 1971 as ordinary and necessary business expenses.

3. Whether interest income received by petitioner in 1970 and 1971 as part of condemnation awards is tax exempt.

4. Whether petitioner's sales of dirt, sand and gravel in 1970, 1971 and 1972 generated ordinary income or capital gains.

5. Whether petitioner is entitled to percentage depletion for 1970, 1971 and 1972 in excess of amounts allowed by respondent.

6. Whether petitioner is entitled to depreciation deductions as claimed on his 1970, 1971 and 1972 income tax returns.

7. Whether petitioner is entitled to business expense deductions for 1971 and 1972 in excess of amounts allowed by respondent.

Findings of Fact

All of the facts have been stipulated and are found accordingly.

At the time of filing his petition, James Iske was a resident of Omaha, Nebraska.

Condemnation Awards On August 9, 1967, the Omaha Public Power District ("OPPD")¹ instituted eminent domain proceedings in the County Court of Sarpy County, Nebraska. OPPD sought to acquire a right-of-way easement across land owned by petitioner in Sarpy County. The easement was sought for the purpose of constructing, operating and maintaining electrical transmission lines. The Sarpy County Court granted OPPD the easement and awarded petitioner $94,870 in damages. This amount was deposited with the court on September 13, 1967. On May 17, 1968, $25,000 of the award was released to petitioner by the court.

On October 16, 1967, petitioner appealed the Sarpy County Court decision to the District Court of Sarpy County. The District Court judgment held that OPPD was liable to petitioner as follows (plus interest until paid):

                   Damages to land by the easement
                   condemned .....................  $135,000
                   Attorney's fees ...............    13,500
                   Expert witness fees ...........     1,5002
                                                    ________
                    Total ........................  $150,000
                                                    ========
                

The District Court judgment was affirmed by the Nebraska Supreme Court on July 20, 1970.³ On August 14, 1970, petitioner received a check for $145,268.49 in full satisfaction of the District Court's judgment of $150,000 plus interest of $20,268.49 to August 13, 1970, taking into consideration the $25,000 previously released to petitioner.

Petitioner's land in Sarpy County from which OPPD's easement was taken included the following:

The Southeast Quarter (SE ¼) of the Southeast Quarter (SE ¼) of Section Twenty (20) and the East One-half (E ½) of the Northeast Quarter (NE ¼); Tax Lots 6A, 6C and 6C1 of Section Twenty-nine (29), Township thirteen (13) North, Range thirteen (13) east of the 6th P.M., in Sarpy County, Nebraska.

The easement area condemned was 38.3 acres described as follows:

A strip of land 400 feet in width, 325 feet East of and parallel to and 75 feet West of and parallel to the following described reference line: Beginning at a point on the South line of said Section twenty-nine (29), 975 feet West of the Southeast corner thereof; thence in a Northwesterly direction to a point of turning located 1,227 feet West of and 4,420 feet South of the Northeast corner thereof, also —

A strip of land 300 feet in width, 225 feet East of and parallel to and 75 feet West of and parallel to the following described reference line: Beginning at the above stated point of turning and continuing in a Northerly direction to a point of turning located 1,252 feet West of and 753 feet South of the aforesaid Northeast corner; thence in a Northwesterly direction to a point of leaving located on the North line of the South One-half (S ½) of the Southeast Quarter (SE ¼) of said Section twenty (20), 1,363 feet West of the Northeast corner thereof.

On August 10, 1967, OPPD instituted a second eminent domain proceeding in the County Court of Cass County to acquire a right-of-way easement across land owned by petitioner in Cass County. Again, OPPD wished to acquire the easement for the purpose of constructing, operating and maintaining electrical transmission lines. The Cass County Court awarded petitioner $35,000 damages plus interest of $8,716. The award was paid in 1971. Petitioner incurred $15,128.85 of unreimbursed legal, appraisal and witness expenses in connection with this eminent domain proceeding.

Petitioner's land in Cass County from which OPPD's easement was taken is described as follows:

The Northeast Quarter (NE ¼) of the Northeast Quarter (NE ¼) of Section Thirty-two (32), Township thirteen (13) North, Range thirteen (13) east of the 6th P.M., in Cass County, Nebraska.

The specific easement that OPPD acquired from petitioner during this proceeding is described as follows:

A strip of land 400 feet in width, 325 feet East of and parallel to and 75 feet West of and parallel to the following described reference line: Beginning at a point 365 feet West of the East line of said Section thirty-two (32) and 3,260 feet North of the South line thereof, thence in a Northwesterly direction to a point of leaving located on the North line thereof, 975 feet West of the Northeast corner thereof.

On his 1970 return, petitioner reported the $20,268.49 interest income received as part of the Sarpy County easement award. On his 1971 return, petitioner reported the $8,716 interest income received as part of the Cass County easement award. Petitioner did not recognize any capital gain income in either 1970 or 1971 from the transfers of the easements to OPPD.

In his statutory notice, respondent determined that petitioner realized the following long term capital gain in 1970 on the transfer of the Sarpy County land to OPPD:

                Award for land .................            $135,000
                Less: Basis (38.3 acres at $191)   $ 7,315
                      Unreimbursed expenses4   35,000   (42,315)
                                                   _______  ________
                Long term capital gain .........            $ 92,685
                                                            ========
                

Respondent determined that petitioner realized the following long term capital gain in 1971 on the transfer of the Cass County land to OPPD:

                Award for land ..........................   $35,000.00
                Less
                 Basis ................  $   600.00
                 Unreimbursed legal
                  witness and appraisal
                  expenses ............   15,128.855   (15,728.85)
                                          _________         __________
                Long term capital gain ..................   $19,271.15
                                                            ==========
                

No part of the awards were for severance damages.

Sales of Dirt, Sand and Gravel

On March 24, 1970, petitioner entered into a contract to sell dirt, sand and gravel to Hartford Sand and Gravel Co. ("Hartford"). Pursuant to this contract, petitioner agreed to sell Hartford a specified amount of dirt, sand and gravel from a portion of his Sarpy County land. Pertinent parts of the contract provided:

4. Seller hereby grants to Buyer the option to buy during 1970 and the first five months of 1971 as much as, but not more than 100,000 tons of sand and gravel at a price of eight cents per ton. Fully warranted title to such sand and gravel material shall be deemed to pass to Buyer upon removal of the material from the above-described real estate.

* * *

7. Buyer shall have no right to sell, remove or cause to be removed any dirt or waste sand from the premises, except that Buyer may purchase as much as, but not more than 100,000 tons of dirt or waste sand at five cents per ton.

* * *

19. This agreement for the purchase of dirt, sand, gravel and sand and gravel, if not terminated earlier shall terminate on June 1, 1971. After termination, Buyer shall have an additional period of six months during which Buyer may complete the purchase of materials already processed, but remaining on the premises, on the same terms as hereinabove specified, provided that in no event shall the total number of tons of material removed exceed the amounts specified in paragraphs 4 and 7 above. Buyer or its successors may also, during said six month period, and so long as not in default as to payments due under this contract, remove any and all equipment, including both temporary and permanent structures, from the above premises. After December 1, 1971, all ownership in equipment, structures and material, both processed and unprocessed remaining on the premises described above, shall be considered as abandoned to the Seller by the Buyer and its successors, and rights conferred on Buyer or its successors under this Contract of Sale shall be considered as terminated.

The contract did not require Hartford to extract a minimum amount of minerals. The following table reflects the amount of dirt, sand and gravel income reported by petitioner as ordinary income and the amount actually received for material sold to Hartford during the years in issue:

                                    Amount      Actual
                  Year             Reported      Sales
                  1970 .........  $ 3,747.00   $ 4,346.92
                  1971 .........    3,769.00     3,450.00
                  1972 .........   19,309.00    18,982.86
                

Petitioner did not claim any depletion deductions with respect to his sales of minerals during the years in issue. Responde...