Loco Realty Company v. CIR

• Decision Date: 01 August 1962
• Docket Number: No. 16867.,16867.
• Citation: 306 F.2d 207
• Parties: LOCO REALTY COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

306 F.2d 207 (1962)

LOCO REALTY COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16867.

United States Court of Appeals Eighth Circuit.

August 1, 1962.

Urban C. Bergbauer, Jr., St. Louis, Mo., for petitioner.

Harry Marselli, Atty., Tax Div., Dept. of Justice, Washington, D. C., for respondent and Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D. C., Lee A. Jackson and Harold M. Seidel, Attys., Dept. of Justice, Washington, D. C., on the brief.

Before VAN OOSTERHOUT and BLACKMUN, Circuit Judges, and HENLEY, District Judge.

BLACKMUN, Circuit Judge.

This corporate taxpayer appeals from a decision of the Tax Court, 35 T.C. 1059, sustaining the Commissioner's determination of an income tax deficiency for the calendar year 1955.

The deficiency was occasioned by the Commissioner's inclusion in the taxpayer's gross income of gain realized upon the condemnation of a building owned by the taxpayer at 17th and Pine Streets in the City of St. Louis. This gain was described in the taxpayer's 1955 return but it was there claimed that the gain was "unrecognized" inasmuch as it was "used in the purchase of building of same nature".

The governing statute is § 1033(a) (3) (A) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 1033(a) (3) (A).¹ Two questions are presented:

1. When did this taxpayer acquire the replacement property?

2. At the time of that acquisition was the replacement property, as the statute requires, "similar or related in service or use to the property" condemned?

The Tax Court determined that November 8, 1955, was the date of acquisition. It answered the second question in the negative. We reverse on the latter issue and remand.

The basic facts are in part stipulated and are not in controversy. The taxpayer, incorporated in 1932, was in the business "of owning buildings for investment purposes". Except for a small royalty, its 1955 income, as shown in its return for that year, consisted only of rents. This rental income flowed from the Pine Street building, from its replacement property, and from a third building.

The Pine Street building was acquired by the taxpayer in 1939. It was then seven years old and had two stories, a service basement, and about 28,500 square feet of floor space. It received power, light, and gas. It had a freight elevator and a small office space on each floor. There were store fronts on the first floor. It was condemned by a duly constituted governmental authority. The award was paid to the taxpayer on June 8, 1955. At the time of condemnation the property was leased to a tenant which manufactured shoes. This tenant in turn subleased the first floor to another company engaged in combining leather for shoes.

The replacement property was on Forest Park Avenue in St. Louis. On May 1, 1955, it stood improved with two old adjoining factory buildings having partial second floors and a total area of about 60,000 square feet. The buildings had an open areaway between them. The first floors were obstructed by supported columns. There was a large concrete vault on the premises. A tool and die room was in the middle of one of the buildings.

The Pine Street property was located in the area described in the St. Louis zoning ordinance as the Central Business District. The ordinance permitted premises in that district to be used for any purpose other than a number of named activities. The replacement property was in the area described in the ordinance as the Industrial District. The use restrictions for property in the Industrial District were identical with those for property in the Central Business District.

About May 1, 1955, the Forest Park property was conveyed to David Burdeau, a shareholder and director of the taxpayer. The purchase price was $84,000. Payment was effected by David's giving the grantor a $59,000 first deed of trust and $22,500 in cash borrowed from a bank. (The record is silent as to the remaining $2,500). The bank loan was made against a note of Burdeau Real Estate Company. This company, as did the taxpayer, held property for rental purposes. Its officers and shareholders and those of the taxpayer were the same. David, accordingly, was one of its shareholders. His brother, John G. Burdeau, was president of both companies.

The Stocker-Hausmann Company was engaged in the wholesale grocery business. On June 23, 1955, David, as lessor, and Stocker Hausmann, as lessee, executed a lease of the Forest Park property for a 15 year term beginning October 1, 1955. The property in its then condition, however, was not suitable for the lessee's operations. David therefore signed, and the lessee accepted, a letter, incorporated in the lease, whereby David agreed to make extensive alterations in the premises. The lease itself recited that the property leased was a "one-story building (after remodelling)" and that it was to be used and occupied "as Office and Warehouse for wholesale grocery business and for no other purpose whatsoever". The instrument called for a base rental and an additional sum, both payable monthly, "to amortize the cost of remodelling the demised premises". The lessor agreed to remove the second floor and to effect the alterations outlined in the letter-agreement.

In July Burdeau Real Estate Company arranged for the remodeling of the Forest Park property and acted on behalf of the taxpayer in so doing. The contractor submitted its bills on various dates from September 1955 to January 1956. These were paid by the taxpayer. The taxpayer, at the end of 1955, also paid for the installation of a sprinkler system on the property. After the alterations, the Forest Park property, with the second floor and supporting columns removed, had about 38,000 square feet of floor space.

By a warranty deed dated November 8, 1955, which recited consideration of "One Hundred Dollars and other valuable considerations" but bore no revenue stamps, David Burdeau conveyed the Forest Park property to the taxpayer. The taxpayer acquired it for rental and investment purposes.

It is the Tax Court's finding that the taxpayer acquired the Forest Park property only on November 8, 1955, and its finding and conclusion that that replacement property was not "similar or related in service or use", within the scope of § 1033(a), which are under attack by the taxpayer on this appeal. The Commissioner does not contend that the condemnation award was not invested by the taxpayer in the Forest Park property.

It is settled, of course, that decisions of the Tax Court are reviewed "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury". § 7482(a) of the 1954 Code. Accordingly, the court's findings of fact are not to be set aside unless clearly erroneous. Rule 52 (a), F.R.Civ.P. 28 U.S.C.A.; Commissioner v. Duberstein, 1960, 363 U.S. 278, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218; Sachs v. Commissioner, 8 Cir., 1960, 277 F.2d 879, 881, cert. den. 364 U.S. 833, 81 S.Ct. 63, 5 L.Ed.2d 59; Schoenberg v. Commissioner, 8 Cir., 1962, 302 F.2d 416, 419.

The issue as to the date of acquisition. The taxpayer contends that David's acquisition of the Forest Park property in May 1955 was on behalf of the taxpayer. If so, this was important, for the Tax Court stated flatly, p. 1063 of 35 T.C., "If we were able to hold that on May 1, 1955, David Burdeau took title as a strawman for petitioner as the beneficial owner of the Forest Park property, we might be able to hold that at that time the two properties were similar or related in service or use". The court felt, however, that such a finding was not possible and that the weight of the evidence was to the effect that David's May 1955 acquisition was not for the taxpayer but was for Burdeau Real Estate Company.

We appreciate the taxpayer's argument that David was a director and officer of the taxpayer and could be said to have occupied a fiduciary relationship to it; that both he and John testified that David was acting for the taxpayer; that, in spite of the deed's recital, his conveyance to the taxpayer was without consideration; that the court did find that Burdeau Real Estate Company was acting on behalf of the taxpayer in contracting for the alterations; that it must follow that the taxpayer became the beneficial owner of the property at least by July when the alterations arrangements were made; that the taxpayer certainly would not have agreed to commit itself so substantially to alter the building unless it had actual or beneficial ownership; that it was the taxpayer which paid for the alterations; that it was not David who negotiated the lease; and that the taxpayer was the beneficial owner as of the date of the lease or as of the date of the contract for the alterations, both of which dates preceded the renovation of the property.

Wholly aside from what we might have found, had this court been the trier of fact, we cannot say that the Tax Court's finding that the taxpayer acquired the Forest Park property only on November 8, 1955, was clearly erroneous. David's posture with respect to Burdeau Real Estate Company was no different than his posture with respect to the taxpayer. He conceded on cross-examination that when he acquired the property he did not know to which of the two companies the property was going. Although John testified that the taxpayer assumed and paid the note to the bank, he also stated that Burdeau Real Estate Company paid that obligation and took a deed of trust from the taxpayer. This evidence and the inferences which flow from it provide a proper basis for the Tax Court's finding as to the date of acquisition. This issue, therefore, must be decided against the taxpayer.

The issue as to similarity or relationship in service or use. Here the Commissioner emphasizes that the use of the Pine Street building was for light manufacturing; that the use of the Forest Park building was very different because the lease restricted its use to that...