J.H. Baird Publ'g Co. v. Comm'r of Internal Revenue

• Decision Date: 28 December 1962
• Docket Number: Docket Nos. 88428,89711.
• Citation: 39 T.C. 608
• Parties: J. H. BAIRD PUBLISHING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

39 T.C. 608

J. H. BAIRD PUBLISHING COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 88428

89711.

Tax Court of the United States.

Filed December 28, 1962.

William Waller, Esq., for the petitioner.

Michael P. MacLeod, Esq., for the respondent.

1. The petitioner deeded real property used in its business to a real estate agent in 1956, but retained the use of the property rent free until the real estate agent should acquire a lot and construct a new building thereon and transfer it to the petitioner. The real estate agent then deeded the property to a purchaser subject to the petitioner's use and with a part of the proceeds acquired a lot and constructed a new building. The real estate agent completed the new building and transferred it to the petitioner together with cash in 1957, whereupon petitioner relinquished the use of the old property. Held, that petitioner, in 1957, exchanged its property for property of like kind plus money and that the gain upon the transaction is recognizable but in an amount not in excess of the money received. Sec. 1031, I.R.C. 1954.

2. Held, further, that the petitioner has not shown that its basis for certain realty and stock acquired in 1946 from its two stockholders was greater than the amount realized by it in 1952 upon the sale of such properties and that hence it has not shown that it had, in 1952, a net capital loss for purposes of carryover to the taxable year 1957.

ATKINS, Judge:

The respondent determined deficiencies in income tax of the petitioner in the years and amounts as follows:

+--------------------------+
                ¦Docket No.¦Year¦Amount    ¦
                +----------+----+----------¦
                ¦88428     ¦1956¦$13,687.66¦
                +----------+----+----------¦
                ¦89711     ¦1957¦13,816.19 ¦
                +--------------------------+
                

The issues for decision are: (1) Whether petitioner exchanged business property for property of a like kind plus cash, within the meaning of section 1031 of the Internal Revenue Code of 1954, with the result that the gain is recognizable only to the extent of the cash received, or whether, as determined by the respondent, petitioner sold its property, with the result that the full amount of gain is taxable to the petitioner; (2) if there was a sale, whether it was consummated in 1956 or 1957; and (3) whether petitioner sustained losses upon the disposition of certain real estate and stock in 1952 resulting in a capital loss carryover to either 1956 or 1957.

FINDINGS OF FACT.

Some of the facts have been stipulated and the stipulations are incorporated herein by this reference.

The petitioner, a Tennessee corporation, filed its income tax returns for the taxable years 1952, 1956, and 1957 with the district director of internal revenue, Nashville, Tenn. During all of such years it was in the business of publishing a trade paper, the Southern Lumberman, in Nashville.

Since 1917 petitioner's stock has been owned equally by J. H. Whaley, who was its president and treasurer, and by Stanley F. Horn, Sr., who was its vice president and secretary. Whaley, who handled the business affairs of petitioner, and Horn, who was the editor of the paper, were aged 77 and 72, respectively, at the time of trial.

For several years petitioner had conducted its business in a building which it owned on Berryhill Street in Nashville, Tenn. In October of 1956 the land had a basis in the hands of petitioner of $2,000. The buildings thereon had been fully depreciated except for recent improvements of $899.34.

For some time prior to 1956 the Baptist Sunday-school board in Nashville had been acquiring property in the area in which petitioner's building was situated and by 1956 owned property in the same block. In their prior acquisitions of property, such board had been represented by Murphree Realty Co. (sometimes referred to hereinafter as the Realty Co.), whose president was John W. Murphree. The Sunday-school board was desirous of rounding out its holdings in such block and on several occasions prior to 1956 it had approached the petitioner about purchasing petitioner's property. In each instance the petitioner refused to sell, despite attractive offers, because it was satisfied with its location and because it did not wish to incur the tax on the capital gains which would result from such a sale.

In 1956 the Sunday-school board, now acting through the Murphree Realty Co., again offered to purchase petitioner's Berryhill Street property, but the petitioner again refused to sell for the same reasons. Thereupon Murphree conceived a plan of having the Sunday-school board construct a building and exchange it for the petitioner's building. Whaley in refusing, on behalf of the petitioner, to sell the property had indicated that the only type of deal petitioner would be interested in would be an exchange of its building for a suitable building. The Sunday-school board considered Murphree's proposal that they construct a building for purposes of exchange, but rejected it.

Thereafter Murphree suggested to Whaley that he, Murphree, should construct a building and trade it for the petitioner's building. Whaley advised Murphree he was willing to proceed on that basis because on the basis of a trade there would be a saving in taxes.

In anticipation of constructing such a building, Murphree Realty Co. on June 12, 1956, paid $50 to Suburban Industrial Development Co., referred to as Sidco, for an option to purchase its lot No. 74.

Murphree's attorneys prepared a contract, which was executed on June 18, 1956, by petitioner, by its president Whaley, and by Murphree Realty Co., by its president Murphree. Therein, after reciting that the petitioner owned the Berryhill Street property and that it desired to trade such property for a suitable building, it was provided:

NOW, THEREFORE, it is agreed that MURPHREE will have the right to execute an option giving to a prospective purchaser the absolute right to buy from MURPHREE the above property, provided, however, that BAIRD (the petitioner) will have the right to occupy the property rent free until MURPHREE has provided BAIRD with another building as hereinafter set out.

For and in consideration of the agreement of BAIRD, MURPHREE agrees within a reasonable time to build a building and if the building is built, then BAIRD is to approve the plans and specifications and said building and lot is to be accepted by BAIRD on a basis of a value of $35,000.00 and MURPHREE, in addition to the building to be provided, agrees to pay to BAIRD the sum of $22,700.00. If the cost of the building and lot to be built by MURPHREE exceeds the fixed value hereinabove set out, then the cash payment to be made by MURPHREE shall be reduced to (by) the amount of said excess and if the cost of the building and lot is less than the amount set out above, then the cash payment payable by MURPHREE shall be increased by the difference between the actual cost and the sum set out herein.

BAIRD agrees to deed his property on Berryhill Street to MURPHREE on MURPHREE'S order and it is understood that MURPHREE may execute options wherein MURPHREE agrees to sell the Berryhill property subject to the conditions hereinabove set out as to continued occupancy by BAIRD.

It is also understood that MURPHREE will within a reasonable time submit plans to BAIRD for the building of a new building and it is contemplated that MURPHREE will erect said building on Lot No. 74 of the Suburban Industrial Development Company Plan * * *. It is further agreed that this contract, if entered into by BAIRD, will be approved by two-thirds' vote of the stockholders of BAIRD and the stockholders and directors will authorize J. H. Whaley, the president, to execute this contract and any and all deeds necessary to convey the Berryhill property. * * *

On October 15, 1956, the Realty Co. purchased lot No. 76, which was an unimproved lot in the Sidco subdivision (which was substituted for lot No. 74) for $6,900.

On October 31, 1956, the petitioner executed a deed of the Berryhill property to the Realty Co.

On the same date the Realty Co. executed a deed of the Berryhill property to the Sunday-school board for a consideration of $60,000, payment of which was made by check of the Sunday-school board to the Realty Co.

Of the $60,000 the Murphree Realty Co. deposited $50,096.89 in the Third National Bank in Nashville, Tenn., under the name of ‘Murphree Realty Co., Escrow Agent for J. H. Baird Publishing Co.’ The amount deposited was the sale price, less the cost of the Sidco lot of $6,900, taxes and fees aggregating. $745.61, an amount of $2,350, which was retained by the Realty Co., and plus an amount of $92.50 representing the tax and fee for recording the deed of the Berryhill property which was reimbursed to the Realty Co. by the Sunday-school board.

The money in the escrow account was used, to the extent required, for construction of the building on the Sidco property to the specifications of the petitioner. Construction was promptly begun.

Withdrawals from the escrow account were by checks signed by Murphree Realty Co., by John W. Murphree, president, in payment for invoices approved by the petitioner.

At some time in 1957, after completion of the new building, the petitioner and Murphree Realty Co. executed another contract which was intended to supersede the prior contract executed on June 18, 1956. The new contract shows an execution date of June 18, 1957, but such date was inserted in error, the parties having intended to show the same execution date as the first contract. Such second contract contains the following provisions:

BAIRD (the petitioner) is to occupy 917 Berryhill free of rent until April 1, 1957, after which time BAIRD will be responsible to any new owner of the property. BAIRD is to approve any contractor, plans and specifications and any change or agreements after the original selection will be between BAIRD and the Contractor to erect the building.

MURPHREE agrees to give BAIRD...