Ramey Inv. Corp. v. C.I.R., 011167 FEDTAX, 1414-65

Docket Nº:1414-65.
Opinion Judge:DAWSON, Judge:
Party Name:RAMEY INVESTMENT CORPORATION (Formerly Ramey Air Base Homes, Inc.), Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:George E. Grimball, Jr., and J. C. Long, for the petitioner. Winfield A. Gartner and J. Larry Broyles, for the respondent.
Case Date:January 11, 1967
Court:United States Tax Court
 
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26 T.C.M. (CCH) 17 (1967)

T.C. Memo. 1967-4

RAMEY INVESTMENT CORPORATION (Formerly Ramey Air Base Homes, Inc.), Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 1414-65.

United States Tax Court.

January 11, 1967

George E. Grimball, Jr., and J. C. Long, for the petitioner.

Winfield A. Gartner and J. Larry Broyles, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:

Respondent determined a deficiency of $485,963.13 in petitioner's income tax for its taxable year ended October 31, 1958.

The issues presented for our decision are:

1. Did petitioner's gain on the sale, under threat of condemnation, of its rental housing project in Puerto Rico in the taxable year ended October 31, 1958, constitute gross income within the meaning of section 931 of the Internal Revenue Code of 1954?

2. Did the petitioner reinvest the proceeds from such sale in ‘ like kind’ property within the meaning of section 1033(g) of the Internal Revenue Code of 1954?

If we find that petitioner properly reinvested in like kind property, then we must determine the following questions:

3. What was the fair market value of the property in which petitioner reinvested?

4. What was the amount realized (within the meaning of section 1033(a)(3)(A)) by petitioner upon the sale of its Puerto Rican property and how much, if any, is taxable to the petitioner?

If we find that petitioner did not invest in like kind property, we must answer the following question:

5. What was the amount of taxable gain realized by petitioner on the sale of its Puerto Rican property and what was the amount of deductible expenses with respect to that sale?

FINDINGS OF FACT

Some of the facts have been stipulated and the stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

Ramey Investment Corporation, formerly Ramey Air Base Homes, Inc. (hereinafter referred to as petitioner) was incorporated under the laws of the State of South Carolina on November 8, 1951. Petitioner's principal office was located in Charleston, South Carolina. Leonard D. Long owned all of petitioner's capital stock and was its president for all but the first 2 years of its existence.

Petitioner filed accrual basis income tax returns in Puerto Rico on a fiscal year ending October 31. Petitioner also filed accrual basis Federal income tax returns on a fiscal year ending October 31. The Federal returns, including the returns for its fiscal year ended October 31, 1958, were filed with the district director of internal revenue at Columbia, South Carolina.

Petitioner was organized to own and operate a so-called ‘ Wherry Housing Project’ in Puerto Rico. Petitioner then leased a parcel of land in Puerto Rico from the United States Government for a period of 75 years. A sister corporation, Long Construction Company (all of whose capital stock was owned by Leonard D. Long) constructed on the leased land, for petitioner, a Wherry Housing Project consisting of 575 reinforced concrete rental apartments. From the date of its incorporation until the latter part of 1957 the petitioner's primary source of income was from the leasing of this housing.

In late 1957, petitioner and the United States Air Force (under the authority of the ‘ Capehart Act’ ) began negotiations for the purchase of petitioner's housing project. As a result of these negotiations, the project was purchased by the United States under a contract negotiated and consummated in the State of Virginia. Under the contract the United States paid $1,560,000 in cash and assumed all outstanding mortgages on the property. The cash plus mortgages assumed totaled $5,952,508.06. Respondent concedes that the sale of the Puerto Rican property was made under threat or imminence of condemnation.

The Purchase Agreement reads, in part, as follows:

THIS AGREEMENT made this December 18, 1957, by and between the United States of America, acting by and through the SECRETARY OF THE AIR FORCE (hereinafter called ‘ Department’ ) and RAMEY AIR BASE HOMES, INC., a corporation existing under the laws of the State of South Carolina, with its principal office in Charleston, Charleston County, South Carolina (hereinafter called ‘ Lessee’ ),

WITNESSETH:

WHEREAS, Section 512 of Public Law 1020, 84th Congress (70 Stat. 1111) amending Section 404 of the Housing Amendments of 1955 (69 Stat. 652), as amended, and Section 312 of Public Law 814, 84th Congress authorize the Department to acquire Wherry Act Housing and to assume outstanding mortgages upon such housing; and

WHEREAS, the Assistant Secretary of Defense (Properties and Installations) has deemed it necessary and has approved the acquisition of the Lessee's equity in the Wherry housing project located at Ramey Air Force Base, Ward of Malezes Atlas, Municipality of Aguadilla, Commonwealth of Puerto Rico; and

WHEREAS, a purchase price for the acquisition of the Lessee's equity in this housing project has been negotiated pursuant to the provisions of Section 404 of the Housing Amendments of 1955, as amended, and the Department of Defense Instructions 4165.31, dated November 26, 1956, as amended;

THEREFORE, the parties hereto agree as follows:

1. In consideration of ONE MILLION FIVE HUNDRED SIXTY THOUSAND DOLLARS ($1,560,000.00), the Lessee agrees to assign, surrender, bargain, sell, convey, and release to the Department all of its right, title and interest in the following described propertes and contracts:

(a) A leasehold estate as set forth in Contract No. AF 66 (600) 8-3 executed by the Department to the Lessee, on December 13, 1951, and recorded in the Registry of Property of Aguadilla, Ward of Malezes Atlas, Commonwealth of Puerto Rico, at Folio 226 of Book 83 of Aguadilla;

(b) An Administration building, exclusive of personal property therein, located on land covered by the leasehold estate referred to in (a) above, said building being approximately two hundred (200) feet East of the center lines of the intersection of Cliff and Northeast Roads, approximately thirty-five (35) feet South of the center line of Cliff Road;

(c) All of the real and personal properties, including any easements and rights-of-way, included under the provisions of a mortgage executed by the Lessee on February 4, 1952, to Manufacturers Trust Company, recorded in Book 104 of Aguadilla, at Folio 120 in the Registry of Property of Aguadilla, Ward of Malezes Atlas, Commonwealth of Puerto Rico, said mortgage securing payment of a note, dated February 4, 1952, in the original principal amount of FOUR MILLION SEVEN HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($4,725,000.00), executed by Lessee payable to Manufacturers Trust Company or order, which mortgage and note was assigned to Dollar Savings Bank on September 30, 1953.

(d) All the personal property included under a Chattel Mortgage executed by the Lessee to Manufacturers Trust Company on September 28, 1953, and filed for record in the Office of Chattel Mortgage Registry of Aguadilla, Ward of Malezes Atlas, Commonwealth of Puerto Rico, in Book 20, Folio 54, said chattel mortgage also securing the payment of said note referred to in paragraph 1(c) above, which chattel mortgage was assigned to Dollar Savings Bank, said assignment being recorded on October 10, 1953, in Book 20, Folio 55 of the aforesaid records;

(e) A purchase contract designated as Contract No. AF 66 (600) S-4 between the United States of America, represented by the Contracting Officer of Ramey Air Force Base, and the Lessee, dated December 13, 1951.

(Hereinafter sometimes where the word ‘ Properties' is used in this Agreement, it refers to those property interests identified in subparagrsphs (a), (b), (c), (d) and (e), above.)

2. The Department agrees to accept the surrender of the leasehold, the sale of the properties and the release of the interests and rights described above, and hereby releases the Lessee of all its obligations which might arise with respect to the aforesaid property interests and contracts on or after the date that title to the aforesaid properties passes to the Department as provided in paragraph 4, below.

3. The consideration for this contract shall be due and payable by the Department in a lump sum for cash on the day the title to the properties under this contract shall pass, but not before the Department has had reasonable time to secure title approval from the Attorney General of the United States, but this initial payment shall be made on or before March 1, 1958.

Included within the consideration mentioned above is an amount of SEVEN THOUSAND FIFTY-THREE DOLLARS SEVENTY-THREE CENTS ($7,053.73) which the Lessee will pay on behalf of the Department as the principal payment due on the aforesaid mortgage note on the date that title passes to the properties.

Pursuant to the provisions of the Assignment of Claims Act of 1940, as amended, claims for moneys due or to become due the Lessee from the United States of America under this contract may be assigned to a bank, trust company, or other financing institutions, including any Federal lending agency, and may thereafter be further assigned and reassigned to any such institution. Any such assignment or reassignment shall cover all amounts payable under this contract and not already paid, and shall not be made to more than one party, except that any such assignment or reassignment may be made to one party as agent or trustee for two or more parties participating in such financing. Notwithstanding any other provision of this contract, payments to an assignee of any moneys due or to become due under this contract shall...

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