S. H. Kress & Co. v. Comm'r of Internal Revenue, Docket No. 86965.
| Decision Date | 25 April 1963 |
| Docket Number | Docket No. 86965. |
| Citation | 40 T.C. 142 |
| Parties | S. H. KRESS AND COMPANY, Petitioner,v.COMMISIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Sale of petitioner's store site to private garage operator under threat of condemnation, proceeds of which were invested in sites for other stores to be used by petitioner, held, on facts, an ‘involuntary conversion’ under section 1033, I.R.C. 1954, entitling petitioner to non-recognition of gain. A. Chauncey Newlin, Charles C. Humpstone, and Guy B. Maxfield, for the petitioner.
Colin C. Macdonald, Jr., and Joseph Wilkes, for the respondent.
Respondent determined a deficiency in income tax for 1956 in the amount of $123,979.33. The issues remaining for decision are (1) whether property sold in 1956 was involuntarily converted within the meaning of section 1033 of the Internal Revenue Code of 1954 and, if so, (2) whether the proceeds of such conversion were used to purchase property similar or related in service or use for the purpose of replacing the property converted. Some of the facts are stipulated.
The stipulated facts are hereby found accordingly.
Petitioner is a New York corporation with its principal office at 114 Fifth Avenue, New York, 11, N.Y. Petitioner's Federal income tax return for the taxable year ended December 31, 1956, was filed with the district director of internal revenue for the Lower Manhattan district, New York, N.Y. The return was prepared in accordance with an accrual method of accounting.
Petitioner operates a chain of retail variety stores in the United States, including Hawaii. In 1956 it operated 260 stores, located in 29 States. The stores were located principally in the South and Southwest and in the Far West and Northwest. There was a high concentration of stores on the Pacific coast, ranging from San Diego, Calif., in the south, to Bellingham, Wash., in the north. About one-third of all the stores were located on the Pacific coast. In 1956 about 60 percent of the stores were owned by petitioner, in whole or in major part, and about 40 percent were on leased ground, improved mostly by petitioner. The stores carry an assortment of soft goods, home furnishings, and variety lines. Each store carries the same type of merchandise and is furnished with the same type of fixtures. Gross annual sales from 1950 to 1957 ranged from approximately $161 million to approximately $173 million. Rentals received during this period from renting excess space in large store buildings and the temporary leasing of locations that were pending future construction ranged from $400,000 to $600,000.
Stockroom space is a requirement for the operation of each store. Preferably, stockroom space is maintained in the building where the selling is done. If that is not possible, it is maintained close by. Where it is necessary to operate outside stockroom facilities, the costs and operations are charged to the store which such facilities serve and the stockroom operation is integrated with the store.
Petitioner's comparative store statistics as shown by Moody's Industrial Manual from December 31, 1954, to December 31, 1958, are as follows:
+----------------------------------------------------------------------+
¦ ¦1954 ¦1955 ¦1956 ¦1957 ¦1958 ¦
+-------------------------+--------+--------+--------+--------+--------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------------------------+--------+--------+--------+--------+--------¦
¦Number of stores ¦264 ¦262 ¦260 ¦261 ¦262 ¦
+-------------------------+--------+--------+--------+--------+--------¦
¦Average sales per store ¦$641,730¦$640,826¦$644,752¦$607,551¦$608,234¦
+-------------------------+--------+--------+--------+--------+--------¦
¦Average profit per store ¦64,880 ¦65,869 ¦63,577 ¦53,822 ¦34,672 ¦
+-------------------------+--------+--------+--------+--------+--------¦
¦Average capital per store¦183,306 ¦189,281 ¦190,737 ¦183,673 ¦189,254 ¦
+-------------------------+--------+--------+--------+--------+--------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦
+----------------------------------------------------------------------+
Article Third of the certificate of incorporation of petitioner as in effect from 1941 to May 22, 1958, contained the following limitation on the purposes and powers of petitioner: ‘Nothing in this certificate contained shall, however, authorize the Company to conduct any business other than a mercantile or a manufacturing business.’ Petitioner had a fixed company policy not to purchase or lease land for any purpose other than for store use.
Prior to 1949 the purchasing or leasing of properties for store locations was first considered by petitioner's management committee, which made recommendations to the board of directors for final consideration. In the latter part of 1949, the management committee was discontinued and its functions were taken over by a ‘properties committee.’
On March 26, 1925, petitioner leased a portion of a building, as set forth in the lease, at 939–43 Market Street, San Francisco, Calif. (hereinafter called Market), for use as one of its stores. This building, located in the downtown commercial district, is 90 by 165 feet. The building is basically a five-story building, the front portion being six stories. Until about 1955, petitioner used the basement and first floor for sales and a few upper floors for stockrooms and service rooms. The balance of the building was rented by the owner to other tenants, there being a separate entrance servicing such space. Market was very popular, and to have lost its successful operation in San Francisco, a city offering a highly concentrated market of above-average consumers, would have been damaging to petitioner's prestige and Pacific coast business and would have resulted in the diversion of petitioner's following in the Market Street area to petitioner's competitors.
The lease on Market was for a term ending December 31, 1951, with an option to petitioner, expiring December 31, 1950, to extend it for any term up to 10 years, at a rental to be agreed upon or arbitrated. One of the provisions of this lease was as follows:
Lessee agrees with Lessor that for and in consideration of the granting of this lease, Lessee will not open a second store within a radius of fifteen hundred (1500) feet of any exterior boundary of the ‘Leased Area.’
Market was located approximately 550 feet southwest of the ‘hundred percent location in downtown San Francisco.’ During the period 1950 through 1953, the prime retail area was moving easterly on Market Street and northerly on Powell and Stockton Streets towards recently improved property of F. W. Woolworth, R. H. Macy & Co., and J. C. Penney.
Beginning not later than 1949, studies were undertaken of the possibility of building a new store on a nearby vacant property within 1,500 feet to the north and east of Market, between Ellis and O'Farrell Streets and Powell and Stockton Streets (hereinafter called Ellis and O'Farrell). A series of analyses was made to determine the cost of construction and the probable sales and profits to be expected from a store built on this site.
These studies indicated that Ellis and O'Farrell afforded a store site superior to Market. It was considered to be the prime location for a variety store in downtown San Francisco and it was the only available site of such large size in a good location. It was near Woolworth, Macy, and Penney, and a store on this site could serve, in effect, as an arcade between other similar stores, thus affording great selling potential. It was estimated that a store on Ellis and O'Farrell would produce annual sales of about $2,500,000, which was more than could be expected from a store on the Market Street property, a smaller site in a less desirable location.
On January 23, 1950, petitioner's properties committee recommended that the land at Ellis and O'Farrell be leased from the owner, and on January 31, 1950, and February 1, 1950, additional estimates of cost of construction and expected sales of a variety store on Ellis and O'Farrell were prepared.
On February 21, 1950, the properties committee recommended the purchase of Ellis and O'Farrell at a cost of $925,000 and also recommended a 10-year renewal of the lease on Market. These recommendations were approved by the board of directors on February 21, 1950. On March 1, 1950, the properties committee recommended the purchase of Ellis and O'Farrell at a price of $1,107,500. The recommendation was approved by the board of directors on March 7, 1950.
On April 26, 1950, petitioner purchased Ellis and O'Farrell for $1,124,082.64, with the intention of building and operating a variety store on it. At the time Ellis and O'Farrell was purchased by petitioner, the property was leased to an operator of a commercial parking lot. After purchasing the property, petitioner, on June 26, 1951, leased it, for a period ending August 31, 1961, to parking lot operators, the leases providing for termination by petitioner at any time upon 90 days' notice. The annual rent was $27,500 plus all taxes as computed by the 1950–51 real estate tax rate, charges, and assessments. Thereafter the lessees operated the property as a parking lot.
Petitioner had purchased the property as a store site and did not anticipate use of the property as a real estate investment or for permanent use as a parking lot. Leasing it as a parking lot was a temporary expedient to obtain some income from the property, awaiting the time when a store could be built there. The 90-day termination clause in the parking lot leases was to enable petitioner to get possession as soon as it was ready to start building its new store. Because of a backlog of work in petitioner's architectural division, it was anticipated that preliminary decisions and completion...
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...(where it was held that the taxpayer's choice to destroy his building was not an involuntary conversion). In S.H. Kress & Co. v. Commissioner, 40 T.C. 142, 153, 1963 WL 391 (1963), we held that condemnation of the taxpayer's property was imminent and unavoidable, and that the only realistic......
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