Seltzer v. Commissioner

• Decision Date: 16 November 1987
• Docket Number: Docket No. 4210-82.
• Citation: 1987 TC Memo 568,54 TCM(CCH) 1082
• Parties: Estate of Benjamin F. Seltzer, Deceased, Verna M. Seltzer, Executrix, and Verna M. Seltzer, v. Commissioner.
• Court: U.S. Tax Court

54 TCM 1082

1987 TC Memo 568

T.C. Memo. 1987-568 Estate of Benjamin F. Seltzer, Deceased, Verna M. Seltzer, Executrix, and Verna M. Seltzer, v. Commissioner.

Docket No. 4210-82.

United States Tax Court.

Filed November 16, 1987.

Joseph P. Semasek, for the petitioners.

Russell K. Stewart, for the respondent.

Memorandum Findings of Fact and Opinion

JACOBS, Judge.

Respondent determined a deficiency in the Federal income tax of Benjamin F. Seltzer and Verna M. Seltzer, husband and wife (hereinafter individually referred to as "Benjamin" and "Verna," respectively, and collectively referred to as "petitioners") for 1977 in the amount of $192,255.03¹ and an addition to tax under section 6653(a)² in the amount of $9,612.75. Benjamin died on November 15, 1983; Verna was appointed executrix of his estate on March 8, 1984. The issue for decision concerns the taxation of a condemnation award paid to Benjamin by the Commonwealth of Pennsylvania in 1977.

Findings of Fact

The facts in this case have been fully stipulated pursuant to Rule 122. With one exception, discussed infra in note 4, the stipulation of facts and accompanying exhibits are incorporated herein by this reference.

Benjamin and Verna resided in Frackville, Pennsylvania at the time the petition in this case was filed.

Benjamin and his brother, Atkin (hereinafter collectively referred to as the "Seltzer brothers"), conducted in partnership form a coal processing and sales business which operated under the name Seltzer Coal Company (hereinafter referred to as "the partnership"). On December 1, 1965, the Commonwealth of Pennsylvania, in connection with a highway construction project, condemned 27.52 acres of a 31.86 acre tract of land which the partnership used in its business. In addition to the land, the Commonwealth condemned a culm bank,³ a coal breaker, auxiliary buildings, machinery, equipment, fixtures, and other chattels that the partnership had used in its business.

In May, 1966, the Seltzer brothers were awarded and received $107,886.80 from the Commonwealth as a result of the condemnation. Dissatisfied with the amount of the award, they commenced a protracted appeals process which ultimately resulted in a jury verdict (rendered on April 11, 1977) of $834,564.96,⁴ plus $500 in statutory attorney's fees and interest from the date of relinquishment of the property to the date of payment. Subsequently, the Commonwealth deposited a check with the Court in the amount of $1,208,372.15 to cover the judgment. However, because of a dispute as to the amount of attorneys fees payable by the Seltzer brothers, each brother received $400,000 in 1977, and the balance was held in escrow.

The entire 31.86 acre tract had a cost basis of $53,170; the condemned depreciable property had an adjusted basis of zero.

Petitioners timely filed a joint return for the taxable year 1977, but they did not report any portion of the condemnation award on such return.⁵

Respondent determined that the entire $400,000 received by Benjamin in 1977 was taxable and was comprised of $240,847 in interest⁶ and $159,153 of capital gain. Respondent also determined that the underpayment of tax was due to petitioners' negligence or intentional disregard of rules and regulations; therefore, he determined an addition to tax pursuant to section 6653(a).

Almost two months after the case was submitted, and only three days prior to the due date for the filing of briefs, respondent filed a motion for leave to file an amendment to his answer. The purpose of the motion was to allege facts to support a claim for an increased deficiency in the amount of $38,114, plus an increased addition to tax under section 6653(a) in the amount of $1,905.70.⁷ The motion, being untimely, was denied. See Rule 54.

Opinion

Income includes all gains, except those exempted by statute. Section 61(a); Commissioner v. Glenshaw Glass Co. 55-1 USTC ¶ 9308, 348 U.S. 426, 430 (1955). Petitioners bear the burden of proving that the condemnation award involved herein does not constitute income. Welch v. Helvering 3 USTC ¶ 1164, 290 U.S. 111 (1933); Rule 142(a). They have failed to meet this burden, as it is well-settled that gains from condemnation awards are taxable. Hudock v. Commissioner Dec. 33,519, 65 T.C. 351 (1975); General Baking Co. v. Commissioner Dec. 28,474, 48 T.C. 201 (1967). Likewise, it is well-settled that interest received on a condemnation award is not part of the price paid for the property at the time it was taken, but is compensation for the delay in payment and is taxable as ordinary income. Kieselbach v. Commissioner 43-1 USTC ¶ 9220, 317 U.S. 399 (1943); Tiefenbrunn v. Commissioner Dec. 37,306, 74 T.C. 1566 (1980); Smith v. Commissioner Dec. 31,573, 59 T.C. 107, 111 (1972); Ferreira v. Commissioner Dec. 31,314, 57 T.C. 866, 869 (1972). Hence, we sustain respondent's determination as to the deficiency in tax.⁸

In addition to the tax deficiency, respondent determined that petitioners were liable for the addition to tax under section 6653(a), which provides that if any part of an underpayment of tax is due to negligence or intentional disregard of rules and regulations, there shall be added to the tax an amount equal to 5 percent of the underpayment. Respondent's determination is prima facie correct and the burden is upon petitioners to prove the addition erroneous. Enoch v....