Waggoner v. Comm'r of Internal Revenue, Docket Nos. 25074
| Decision Date | 16 October 1950 |
| Docket Number | Docket Nos. 25074,25077.,25075,25076 |
| Citation | 15 T.C. 496 |
| Parties | GUY L. WAGGONER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.DOROTHY WAGGONER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.E. P. WAGGONER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HELEN WAGGONER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Gain realized by petitioners upon receipt of cash compensation from the United States for property damaged, destroyed or converted while in possession of the United States under lease entered into under threat of condemnation proceedings, held, taxable to them as long term capital gain under section 117(j)(2), I.R.C. R. B. Cannon, Esq., for the petitioners.
J. Marvin Kelley, Esq., for the respondent.
These proceedings, consolidated for hearing, involve deficiencies in income tax as follows:
+-------------------------------------------+
¦ ¦ ¦Deficiency ¦
+----------------+------+-------------------¦
¦Petitioner ¦Docket¦ ¦ ¦
+----------------+------+---------+---------¦
¦ ¦Number¦1943 ¦1944 ¦
+----------------+------+---------+---------¦
¦Guy L. Waggoner ¦25074 ¦ ¦$2,404.80¦
+----------------+------+---------+---------¦
¦Dorothy Waggoner¦25075 ¦$2,005.94¦5,125.72 ¦
+----------------+------+---------+---------¦
¦E. P. Waggoner ¦25076 ¦ ¦4,787.93 ¦
+----------------+------+---------+---------¦
¦Helen Waggoner ¦25077 ¦ ¦4,787.93 ¦
+-------------------------------------------+
The sole question in issue is whether a gain which the petitioners realized from the receipt of compensation from the United States Government in 1944 for damage to, destruction of, or conversion of property which the Government had occupied as lessee is taxable to the petitioners as ordinary income or as long term capital gain. Adjustments made by respondent of the 1943 tax liability of petitioner Dorothy Waggoner have been agreed upon and will be given effect under Rule 50.
The facts are set out in a written stipulation which, together with documents attached thereto, we adopt as our findings. The material facts are as follows:
The income involved in the proceedings bearing Docket Nos. 25074 and 25075 is the community income of petitioners Guy L. Waggoner and Dorothy Waggoner, who are husband and wife residing in Fort Worth, Texas. The income involved in Docket Nos. 25076 and 25077 is the community income of petitioners E. P. Waggoner and Helen Waggoner, who are husband and wife residing in Fort Worth, Texas. All of the petitioners filed their individual income tax returns for 1944 with the collector of internal revenue for the second district of Texas.
Throughout 1944 petitioners Guy L. Waggoner and E. P. Waggoner were equal partners in a partnership organized on December 11, 1934, known as Three D's Stock Farm owned, among other properties a tract of land near Arlington, Texas. Part of the tract, known as Arlington Downs, was improved with grandstands, a club house, a secretary's office building, and other facilities suitable for holding race meets. Prior to 1937 Arlington Downs was rented to the Texas Jockey Club for the purpose of holding race meets. After 1937 the premises were no longer rented for that purpose and the partnership abandoned the improvements used in holding race meets and charged off as a loss on its income tax return the undepreciated cost thereof, less the salvage value. Some of the improvements were actually wrecked, and the salvage sold. Other improvements including the grandstands, club house, and office building, were not wrecked because the cost of wrecking would exceed the value of the salvage at that time. From 1937 until about July 17, 1942, the premises were rented to a group of horseman for training purposes.
In 1942 the War Department sought to lease the Arlington Downs property for use as a motor vehicle storage pool. The petitioners declined to lease the property to the War Department because of their belief that other properties which were available were more suitable to the purpose and could be more economically operated. War Department representatives, however, insisted on obtaining the use of this particular property and threatened to institute condemnation proceedings to obtain it. Moved by the threat of condemnation and by the desire to avoid any appearance of unwillingness to cooperate with the war effort, the petitioners entered into a lease agreement with the United States on July 17, 1942. The agreement provided in part as follows:
2. The Lessor hereby leases to the Government the following described premises, viz:
Tract 1. Consisting of 68 acres * * * ; and
Tract 2. Consisting of 1.6 acres * * *; Together with the improvements now on said land, consisting of a railroad switch tract, fencing, concrete work and buildings, which are designated as the main grandstand, paddocks, small grandstand, club house, and secretary's office.
3. TO HAVE AND TO HOLD the said premises with their appurtenances for the term beginning August 1, 1942 and ending with June 30, 1943.
4. The Government shall not assign this lease in any event, and shall not sublet the demised premises except to a desirable tenant, and for a similar purpose, and will not permit the use of said premises by anyone other than the Government, such sublessee, and the agents and servants of the Government or of such sublessee.
5. This lease may, at the option of the Government, be renewed from year to year at a rental of Seven Thousand Five Hundred ($7,500.00) Dollars per annum, and otherwise upon the terms and conditions herein specified, provided notice be given in writing to the Lessor at least thirty days before this lease or any renewal thereof would otherwise expire: Provided that no renewal thereof shall extend the period of occupancy of the premises beyond the duration of the war and six months thereafter.
8. The Government shall have the right during the existence of this lease to make alterations, attach fixtures and erect additions, structures or signs in or upon the premises hereby leased (provided such alterations, additions structures, or signs shall not be detrimental to or inconsistent with the rights granted to other tenants on the property or in the building in which said premises are located; provided further that no alterations or additions shall be made in or to the buildings or structures now located on said leased premises without having first secured the approval of the lessor or its agent in writing) which fixtures, additions, or structures so placed in or upon or attached to the said premises shall be and remain the property of the Government and may be removed therefrom by the Government and may be removed therefrom by the Government prior to the termination of this lease, and the Government, if required by the Lessor, shall, before the expiration of this lease or renewal thereof, restore the premises (which term shall be construed to include the buildings, grounds, fences and all appurtenances to said leased premises in their entirety;) to the same condition as that existing at the time of entering upon the same under this lease, reasonable and ordinary wear and tear and damages by the elements or by circumstances over which the Government has no control, excepted; Provided, however, that if the Lessor requires such restoration, the Lessor shall give written notice thereof to the Government 30 days before the termination of the lease.
12(a) The Government is hereby granted the right to cancel this lease, or any renewal thereof, by giving lessor thirty days notice in writing.
The lease was terminated November 4, 1943, after proper notice by the United States. During the occupancy of the premises by the lessee improvements thereon, with respect to which the petitioners had a basis for gain or loss of $3,675, were damaged, destroyed, or converted. The petitioners promptly advised the lessee of the restoration requirement under the lease agreement, and on November 3, 1943, a settlement agreement was reached, providing in part as follows:
THIS SUPPLEMENTAL AGREEMENT, made and entered into this 3rd day of November, 1943, by and between the THREE D'S STOCK FARM, a partnership composed of E. P. Waggoner and G. L. Waggoner, * * * and THE UNITED STATES OF AMERICA, hereinafter called the Government;
WITNESSETH, that:
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