32 T.C. 1127">*1127 The Commissioner determined a deficiency in the income tax of petitioners, Anton L. Trunk and Clara P. Trunk, for the taxable year 1950 in the amount of $ 47,431.46. This deficiency insofar as it is herein contested results from respondent's determination that the receipt during 1950 of $ 80,000 by petitioner Clara P. Trunk from a lessee constituted ordinary taxable income. No part of this sum was reported as income by petitioners in their return for the taxable year.

The principal issue for decision in this case is whether a payment by S. S. Kresge Company to petitioner Clara P. Trunk in 1950 was a payment by a lessee to a lessor for modification of a lease which constituted ordinary taxable income, or represented proceeds from the sale of a capital asset, proceeds from the involuntary conversion of real property, or compensation for damage to a capital asset, to be treated as a capital transaction for tax purposes.

32 T.C. 1127">*1128 FINDINGS OF FACT.

Most of the relevant facts herein were stipulated by the parties. All facts so stipulated and the exhibits attached to the stipulation are made a part of our findings by this reference.

Petitioners, Anton1959 U.S. Tax Ct. LEXIS 100">*103 L. Trunk and Clara P. Trunk, are husband and wife, residing at New Rochelle, New York. Petitioner Anton is a real estate broker with an office at 25 West 43d Street, New York 18, New York, and conducted all negotiations and made all business decisions concerning the real property owned by his wife which is involved herein. Petitioners filed a joint Federal income tax return for the taxable year ended December 31, 1950, with the then collector of internal revenue for the third district of New York.

Petitioner Clara acquired title to the land and buildings at 85-65 to 85-71 164th Street, Borough of Queens, City of New York, hereinafter sometimes referred to as the property, on August 5, 1943. The cost basis of the property was $ 135,000 at the time of its acquisition. The property consisted of a tract of land on the easterly side of 164th Street, 80 feet in depth and 85 feet in width, beginning at a point 115 feet north of the corner formed by the intersection of Jamaica Avenue and 164th Street, and containing a building known as the Clinton Building which was built up to the street line in existence at the time of acquisition in 1943. Petitioners' deduction1959 U.S. Tax Ct. LEXIS 100">*104 for depreciation on this building in their 1950 return indicated a cost basis with regard to the building of $ 70,000.

By lease dated January 23, 1946, the property was rented by S. S. Kresge Company, hereinafter sometimes referred to as Kresge, for an initial term commencing September 1, 1946, and expiring April 30, 1965, at an annual net rental of $ 20,000. Paragraph 6 of the lease agreement set out the terms whereby the lessee might demolish the building on the property and erect a new one thereon. This paragraph was in pertinent parts as follows:

6. During the initial term of this lease the LESSEE, subject to the conditions hereinafter set forth, may demolish the existing building covering the demised premises, provided that at its sole cost and expense it shall proceed forthwith to erect a new building on the demised premises, free of all liens and encumbrances of any nature whatsoever and which shall fully and completely comply with all laws, ordinances and statutes of state, federal or municipal government and of the rules and regulations of the Board of Fire Underwriters applicable thereto. Said building shall consist of three (3) stories and basement and be of fireproof1959 U.S. Tax Ct. LEXIS 100">*105 construction throughout. * * * The building so erected upon the demised premises shall be the absolute property of the OWNER. The LESSEE covenants and agrees throughout the term of this lease, at its sole cost and expense, to make all repairs, interior and exterior, structural and otherwise, in and about the demised premises, whenever required or necessary to maintain them in good working order and condition. The OWNER agrees to cooperate with the LESSEE for the purpose of securing any consents, authorizations and permits as may be necessary to enable the LESSEE to comply with its obligations 32 T.C. 1127">*1129 under this lease concerning demolition, construction, alteration or repair. Prior to or simultaneous with the execution of this lease by the OWNER, the LESSEE will present to the owner for her written approval, which approval is to be endorsed thereon, a blueprint of a preliminary plan (dated and otherwise identified as being the one referred to herein) showing in particular the area to be built on and the general scheme with regard to the location and arrangement of the ground or street floor elevation of the contemplated new building on the westerly side thereof. When and if1959 U.S. Tax Ct. LEXIS 100">*106 the LESSEE erects a new building on the demised premises, said plan, approved as aforesaid, shall be adhered to provided, however, that the LESSEE shall have the right to change or modify said plan so long as such change or modification does not decrease the floor area, reduce the height of the building to less than three (3) stories and basement or less than the overall width of the windows and display space as shown on said preliminary plan.

The lease dated January 23, 1946, also provided for renewal upon notice for 2 successive terms of 21 years each at an annual rental of 6 per cent of the appraised value of the land but not less than $ 20,000. Prior to entering the lease Kresge operated a retail store adjacent to the property on the 115-foot plot of land extending to Jamaica Avenue. Kresge's purpose in entering into the lease was to obtain land space for expansion of its business premises by constructing a new and enlarged retail store extending over both lots and necessitating the removal of the Clinton Building. This purpose was understood by petitioners at the time the lease agreement was signed.

On April 4, 1946, the president of the Borough of Queens, City of New York, 1959 U.S. Tax Ct. LEXIS 100">*107 submitted for approval to the Board of Estimate of the City of New York proposed changes in the city map which included a modification of the lines of 164th Street between 89th Avenue and Jamaica Avenue by extending the easterly line of that street for a distance of 9 feet. This proposal was approved by the City Planning Commission, City of New York, on August 14, 1946, and on March 13, 1947, the Board of Estimate of the City of New York adopted the proposed change in the city map, pursuant to sections 26 and 29 of the General City Law of New York.

The effect of this change in the city map was to extend the existing street line 9 feet into the property. Upon adoption of the change by the board of estimate, Kresge was prohibited by section 35 of the New York General City Law from constructing such a building on the property as was described in a preliminary plan of a new building on the property approved by petitioners and attached to the lease signed by Clara P. Trunk in accordance with paragraph 6 thereof. The preliminary plan called for the contemplated new building to be situated in part in the bed of the newly mapped street.

On June 16, 1947, Kresge applied for a building permit1959 U.S. Tax Ct. LEXIS 100">*108 from the Department of Housing and Buildings of the Borough of Queens requesting permission to erect on the property a new building which 32 T.C. 1127">*1130 would be 80 feet in depth and 85 feet in width. This department refused to approve the application on the basis that 9 feet of the proposed new building would stand in the bed of the mapped street in violation of section 35 of the General City Law of New York State, which provides in part:

For the purpose of preserving the integrity of such official map or plan no permit shall hereafter be issued for any building in the bed of any street or highway shown or laid out on such map or plan, * * *

On January 6, 1949, Kresge amended its application for a building permit by filing a revised building plan incorporating the 9-foot reduction in size required by the city. This application was approved by the Department of Housing and Buildings on February 1, 1949. It was in part as follows:

It is requested that an approval be issued covering the erection of a new building at the above location in view of the fact that with the amendment indicated on the revised plans the building is now in complete compliance with all building requirements. 1959 U.S. Tax Ct. LEXIS 100">*109 The changes made to the plans -- indicate loading space for merchandise shipments and the omission of the 9'-0" setback required by the city.

Kresge by letter proposed to petitioners the construction of a new building of reduced dimensions so as to comply with the law, but this proposal was rejected on behalf of Clara P. Trunk, the owner of the property. The proposal was repeated in a letter to her from Kresge dated September 16, 1949, which expressed the lessee's intention to demolish the existing building and construct a new one with a depth of 71 feet and which in substance was as follows:

It is our intention to demolish the existing building and erect a new building on premises leased from you by lease dated January 23, 1946. The new building will be 71 feet in depth to comply with the Resolution and map change which was adopted by the City of New York on March 13, 1947.

We desire to proceed with this work as soon as the property has been vacated by the present tenants which is expected on October 31, 1949. In order that we will be prepared to so proceed, we request that you consent to the demolition of the existing building and the erection of a building 71 feet in depth, and1959 U.S. Tax Ct. LEXIS 100">*110 that you authorize us to secure the necessary permits for these purposes.

At some time shortly after June 21, 1949, petitioners, with reference to the proposed condemnation, sought legal advice and obtained various valuations of the property from an attorney experienced in condemnation proceedings and from an expert building appraiser. They were informed by the attorney that should the city acquire a part of the property by condemnation as contemplated the owner thereof would be entitled, at the time title vested in the city, to an award representing: (a) The reproduction cost of the part of the building condemned less depreciation; (b) the cost of restoring to economic use the remaining part of the building; and (c) the loss resulting from the reduction in size of the remaining part of the building. 32 T.C. 1127">*1131 They were informed by the appraisal expert that the reproduction costs less depreciation of the part of the building subject to the proposed condemnation (the front 9 feet) was $ 35,000, and the cost of reconstructing the remaining part of the building in order to make it tenantable would be $ 54,000. The appraisal expert also estimated that "the cost of the total destruction1959 U.S. Tax Ct. LEXIS 100">*111 effected by the 9 foot widening" was $ 135,000. ¹ None of these figures included an amount representing the value of the land.

Petitioners consulted their attorney upon receiving Kresge's letter of September 16, 1949, and were advised that if they agreed to Kresge's request and permitted demolition of the existing structure prior to condemnation and construction of the 71-foot building in its place, whatever right to an award petitioner Clara P. Trunk would have for damages and reconstruction costs with regard to the old building would be forfeited. They were advised they would only be entitled to an award for the land. Petitioners asked Kresge to postpone demolition until the condemnation. Kresge refused. Petitioners in a letter addressed to Kresge, signed by petitioners' attorney, 1959 U.S. Tax Ct. LEXIS 100">*112 and dated September 19, 1949, set forth their position in opposition to Kresge's intended demolition. The body of that letter is as follows:

As the attorney for Mrs. Clara P. Trunk, receipt is acknowledged of your letter of September 16, 1949 which was received this morning. The owner declines to accede to the request made in the second paragraph for the following reasons among others:

1. She has already approved a set of plans as required by the lease, a copy of which is attached to that document, initialed and made a part thereof;

2. The City of New York is about to condemn the nine-foot frontage of the property, the matter appeared on the calendar of the Board of Estimate in June last and the necessary proceedings have been initiated to bring this matter to a conclusion;

3. Under condemnation, the owner is entitled to a substantial award for that part of the building that will be taken, the reconstruction of the remaining part, to put it again in a usual rentable condition, the value of the land so taken and consequential damages to the land and building;

4. As under street widening proceeding (March 13, 1947) no award is payable to an owner, this loss to the owner in complying1959 U.S. Tax Ct. LEXIS 100">*113 with your request would be not only considerable but very substantial in the absence of condemnation.

Please be advised therefore that the owner adheres to the position taken by her in the letter sent to you on her behalf under date of July 13, 1949 and expects that you shall comply strictly with it.

At the time of the execution of the lease agreement of January 23, 1946, the existing building on the property was occupied by tenants. At some time prior to October 13, 1949, Kresge evicted the tenants in possession under terms provided in that lease agreement.

32 T.C. 1127">*1132 On October 13, 1949, petitioner Clara P. Trunk filed a petition in the Supreme Court of the State of New York, County of Queens, for an injunction against Kresge's demolishing the existing building on the property. On November 14, 1949, she moved for an injunction pendente lite in a special term of that court. This motion was in part as follows:

Plaintiff's written approval of the building plan having been obtained pursuant to the terms of the agreement, the plan could be changed or modified only provided that the floor area was not decreased or the height reduced as shown by such preliminary plan. Defendant now1959 U.S. Tax Ct. LEXIS 100">*114 threatens demolition and the erection of a new building pursuant to a changed plan which is at variance with the preliminary plan as to the floor area to which plaintiff has not consented. Furthermore, under the terms of the lease defendant is not obligated to demolish the building. Since such contemplated action by the defendant is contrary to the expressed agreement of the parties and which, if carried out, may cause irreparable injury, defendant should be restrained pending the trial. Settle order providing for a sufficient undertaking.

On November 29, 1949, the court granted that motion in an order which --

Ordered, that pending the trial and determination of the above entitled action, the defendant and its agents, servants and employees and any and all persons acting in aid of or in conjunction with them be and hereby are enjoined and restrained during the pendency of this action and until the entry of final judgment herein from commencing or undertaking demolition, in whole or in part, of the building located on the premises known as and by the street number 89-71 164th Street, Jamaica, County of Queens, City and State of New York, or the construction of a new building 1959 U.S. Tax Ct. LEXIS 100">*115 to be located on the aforesaid premises as described in the Complaint herein.

The basis of this order was fundamentally that "commission of said acts [of demolition] during the pendency of this action would produce irreparable injury and harm" to petitioner Clara P. Trunk. The court did not determine whether demolition and construction of a building of smaller size than that described in paragraph 6 of the lease agreement would be in violation of that agreement.

Following the issuance of that order of the Supreme Court of the State of New York, business negotiations were commenced between petitioners and Kresge which resulted in petitioners' accepting an offer of Kresge to pay a sum of money in return for the assignment by Clara P. Trunk of whatever right she might have to receive an award from the city upon condemnation of the property with the understanding that the lease should immediately be modified to permit Kresge to proceed with demolition and construction. The sum agreed to was $ 80,000. The agreement dated January 10, 1950, and signed by Clara P. Trunk described as "Owner" and a vice president of Kresge described as "Lessee," is in material parts as follows:

Whereas, 1959 U.S. Tax Ct. LEXIS 100">*116 the Owner by a certain indenture of lease bearing date the 23rd day of January, 1946, did lease to the Lessee the premises therein described, 32 T.C. 1127">*1133 commonly known as No. 89-65 to 71 164th Street, Jamaica, Queens County, New York, for an initial term commencing on the 1st day of September, 1946 and expiring on the 30th day of April, 1965, on the terms and conditions therein set forth; and

Whereas, subsequent to the execution of said lease, the City of New York modified the lines and grades of 164th Street as shown on Map No. 3083, adopted by Resolution of the Board of Estimate of the City of New York on March 13, 1947; and

Whereas, the City of New York has instituted proceedings for authorization to acquire title to a strip approximately nine feet along the westerly line of said demised premises; and

Whereas, the Owner has a valuable property right in and to any award to be made to Owner on the condemnation of said premises, and Lessee is desirous of obtaining said award, and it is to Lessee's best interest to do so,

Now, Therefore, in consideration of the premises and of the covenants and agreements herein contained and the sum of One Dollar ($ 1.00) by each of the parties to1959 U.S. Tax Ct. LEXIS 100">*117 the other in hand paid, the receipt of which is hereby acknowledged, the parties covenant and agree as follows:

1. The Owner hereby assigns to the Lessee, its successors or assigns, free and clear of all liens and encumbrances, all her right, title and interest in and to any and all condemnation awards for the land and building demised by said lease, hereafter made to the present or subsequent owners by reason of the modifications of the lines and grades of 164th Street as shown on Map No. 3083 adopted by Resolution of the Board of Estimate of the City of New York on March 13, 1947. The Owner grants to the Lessee full power and authority for its own use and benefit but at its own cost and expense, to ask, demand, claim, collect, receive and give acquittances for such award or awards or any part thereof in the Owner's name or otherwise and to prosecute all claims or proceedings therefor and the Owner agrees to furnish the Lessee any and all pertinent papers and documents and to fully cooperate with the Lessee in all matters and things connected with such proceedings and awards.

The Owner represents to the Lessee that the sole existing mortgage affecting said premises is held by the1959 U.S. Tax Ct. LEXIS 100">*118 Bowery Savings Bank or assigns and that there are no judgments or other liens against said property and simultaneously with the execution of this agreement the Owner will deliver to the Lessee a written consent and agreement to the foregoing assignment and waiver of any and all claims to such awards or any part therof, duly executed and acknowledged by said Bowery Savings Bank or assigns, or a satisfaction of such mortgage.

The Owner further agrees that any mortgage hereafter placed upon said premises prior to the date of the completion of said condemnation proceeding and payment of the award therefor shall be subject to the foregoing assignment.

2. Upon the execution of this agreement the Lessee will pay by check to the Owner the sum of Eighty Thousand ($ 80,000.00) Dollars.

3. This agreement may not be changed orally but only by a written agreement signed by the party to be charged thereby.

At the same time the Bowery Savings Bank, as the mortgagee of the property, waived whatever right it might have in a condemnation award from the city.

On January 23, 1950, Kresge recorded the assignment to it of the prospective right to an award in the Liber of Conveyances, Register of Queens1959 U.S. Tax Ct. LEXIS 100">*119 County.

32 T.C. 1127">*1134 Simultaneously, with the execution of the agreement of January 10, 1950, petitioners and Kresge executed an agreement modifying certain provisions of the lease of January 23, 1946. The pertinent provisions of this agreement are as follows:

1. The Owner consents to the demolition by the Lessee of the existing building and the erection of a new building in conformance with the plan annexed hereto insofar as the same applies to the demised premises, which plan is approved by the Owner simultaneously with the execution of this agreement subject to the provisions of paragraph "6" of said lease except as hereby modified. The Lessee shall have the right, subject to the provisions of said paragraph "6", to modify or change such plan except that such modification or change shall not reduce the heighth [sic] of such building on the demised premises to less than three stories and basement or reduce the overall width of the windows and display space of the building on the demised premises as shown thereon, said windows to be used actively for display purposes or maintained so that interior of demised premises is readily visible from sidewalk until February 1, 1960, provided1959 U.S. Tax Ct. LEXIS 100">*120 always that the Lessee shall have the right to decrease the area to be built upon as shown on said plan to comply with all laws, statutes, ordinances, resolutions of Federal, State and Municipal governments and with the lawful orders, rules, regulations of any of the bureaus, departments or subdivisions thereof, and with the orders, rules and regulations of the Board of Fire Underwriters.

* * * *

3. Subject to the provisions of paragraph "6" hereof and the provisions of paragraph "17" of said lease agreement, the first sentence of paragraph "3" of said lease is hereby amended to read as follows, said amendment to be effective beginning February 1, 1950:

"Throughout the balance of demised term the Lessee covenants and agrees to pay annually Twenty Three Thousand ($ 23,000.00) Dollars (hereinafter referred to as 'fixed rent') absolutely net to Owner."

4. Under the provisions of paragraph "14" the lease is hereby extended and renewed for the additional term of twenty-one years commencing May 1, 1965 and ending April 30, 1986 at an annual fixed rent (subject to the provisions of paragraph "6" hereof) of TWENTY-FIVE THOUSAND ($ 25,000.00) DOLLARS net for the said renewal term of twenty-one1959 U.S. Tax Ct. LEXIS 100">*121 years.

5. The last paragraph of Paragraph "14" of said lease is hereby modified to read as follows:

"At the end of such renewal term, provided and upon condition that the LESSEE shall then not be in default and also shall have served upon the OWNER at least one year before the end of the renewed term a notice in writing by registered mail, stating that the LESSEE desires a further renewal, the LESSEE shall be entitled to a second and final renewal hereof, for a further term of twenty-one years (21), the annual fixed rent for such renewal term to be determined in the same manner as above provided for the first renewal, except that the minimum annual fixed rent during the term of such second renewal shall not be less than Twenty-Five Thousand ($ 25,000.00) Dollars net. All other terms, conditions and covenants including, but in no manner limited to, additional rent to be and remain in full force and effect in such second renewal period as during the first renewal period, but the LESSEE shall not be entitled to any other or further renewal."

6. As the Lessee plans to erect a new building on the demised premises and as there is some doubt as to whether the Emergency Business Space Rent1959 U.S. Tax Ct. LEXIS 100">*122 Control 32 T.C. 1127">*1135 Law does or does not apply, the parties hereby agree to submit to arbitration the fixation of the reasonable rent for the demised premises based on the fair rental value of Lessee's business space for the term expiring April 30, 1965, and for the renewal term (option for which is being presently exercised by Lessee) and which runs for a term of twenty-one (21) years commencing on the first day of May, 1965. It is agreed to conduct the arbitration by submitting the same to two named arbitrators, one being selected by the Owner and one being selected by the Lessee. Except as herein provided, the respective parties agree that the particular provisions of paragraphs "3" and "4" hereof specifying the annual rents for the respective terms are not binding nor controlling upon either of the parties. When such reasonable rent is fixed by the award of said arbitrators, the same shall be substituted for the aforesaid rentals specified by the parties in paragraphs "3" and "4" hereof and become the rents payable during the said terms unless the rents so awarded are less than the aforesaid rentals specified by the parties in which event such lesser rents shall be paid only1959 U.S. Tax Ct. LEXIS 100">*123 until the State Emergency Business Space Rent Control Law expires or becomes or is inapplicable to the demised premises or said lease of January 23, 1946, after which time (anything hereinabove to the contrary notwithstanding) Lessee covenants and agrees to pay the said annual rents set forth in paragraphs "3" and "4" hereof. If the award of said arbitrators shall be less than the annual emergency rent of $ 21,210, said Lessee covenants and agrees to pay said emergency rent until the aforesaid State rent law expires or becomes or is inapplicable to the demised premises or said lease of January 23, 1946, after which time (anything hereinabove to the contrary notwithstanding) Lessee covenants and agrees to pay the said annual rents set forth in paragraphs "3" and "4" and "4" [sic] hereof, and in the event that the award of rents of said arbitrators is in excess of the rents specified for the respective terms by the parties themselves as aforesaid, Owner covenants and agrees to be bound by said specified rents and to waive so much of the award of the arbitrators as exceeds the same. In the event that said arbitration, the award rendered in connection therewith or any order of confirmation1959 U.S. Tax Ct. LEXIS 100">*124 is set aside or declared a nullity or invalid for any reason whatsoever, the same shall in no wise affect or be construed to affect the validity of the said agreement of lease of January 23, 1946 but said lease shall continue in full force and in effect and binding upon the parties subject only to the fixation of said reasonable rent in excess of the emergency rent by further arbitration in accordance with the terms, conditions and procedure hereinabove set forth.

* * * *

8. Except as herein provided the terms, provisions and conditions of said agreement of lease of January 23, 1946 shall continue in full force and effect.

The city of New York instituted proceedings in the Supreme Court of the State of New York, County of Queens, on October 4, 1951, to acquire title to the 9-foot area of the property. Title was subsequently acquired by the city on June 24, 1955, after a judicial hearing. Incident to that proceeding Kresge, by its vice president, filed an affidavit with the court which stated that Kresge was "the holder of an assignment of the award made or to be made for" the area therein involved. Also as part of that proceeding Kresge by its attorneys filed an affidavit to show1959 U.S. Tax Ct. LEXIS 100">*125 a claim for the condemnation award. This affidavit is in part as follows:

32 T.C. 1127">*1136 II. As to said Lot 20, Block 9794 also identified as Damage Parcel No. 7, Block 12397 of Land Map, the owner Clara P. Trunk by agreement in writing bearing date the 10th day of January, 1950 and recorded on January 23, 1950 in the New York City Register's Office, County of Queens, in Liber 5887, page 35 of Conveyances, Sec. 50, Block 12397, for good and valuable consideration duly assigned to S. S. Kresge Company, lessee of said property and claimant herein, all her right, title and interest in and to any and all condemnation awards for the land and building by reason of the taking of said property by the City of New York.

* * * *

Dated: New York, N.Y. November 27, 1951.

Kresge, by settlement agreement with the City of New York, received $ 25,000 as a result of the city's acquiring the 9 feet of the property. This award was for vacant land since by the time title vested in the city on June 24, 1955, Kresge had demolished the Clinton1959 U.S. Tax Ct. LEXIS 100">*126 Building and constructed a building with a depth of 71 feet leaving the 9 feet of land empty.

OPINION.

Petitioner Clara P. Trunk, who was owner and lessor of the real estate described in our findings, received $ 80,000 from her lessee simultaneously with her assignment to the lessee of whatever right she might have to a condemnation award and the execution of a modified lease which permitted the lessee to proceed at its option with the construction of a new building of lawful dimensions and which set forth the rental upon renewal in terms of a sum certain. The primary question presented by the facts here present is whether petitioners realized ordinary taxable income upon receipt of the $ 80,000 or realized proceeds from a capital transaction in the nature of a sale, conversion, or recovery of damages.

In substance petitioners' argument is as follows: The right to a condemnation award, even though not vested in a determined amount, is a capital asset. Petitioner Clara sold such a right to Kresge for $ 80,000 and this sum is taxable to her as a capital gain to the extent that it exceeds the basis to her of such right. In the alternative, the $ 80,000 received from Kresge represents1959 U.S. Tax Ct. LEXIS 100">*127 compensation for damages to a capital asset and is taxable as a capital gain only to the extent that this amount exceeds the basis to Clara of the asset damaged. In the instant case it is impossible or impractical to find the basis of the separate property sold or damaged and therefore the $ 80,000 should go to reduce Clara's cost of the entire property before any part can represent taxable income.

In substance the respondent argues as follows: The conditional "right" of Clara to compensation if and when a part of her property 32 T.C. 1127">*1137 should be taken by condemnation proceedings was not "property" nor was there any "sale or exchange" thereof in 1950 within the meaning of any provision of the Internal Revenue Code so as to qualify the transaction here in question for capital gains treatment. To the contrary, the substance of the transaction as distinguished from its form was the modification of the terms of the lease in return for $ 80,000, and therefore this sum represented ordinary income.

In our opinion the right of an owner of property to compensation in the form of a condemnation award upon the taking by the sovereign of such property or a part thereof, even though conditional, 1959 U.S. Tax Ct. LEXIS 100">*128 is a property right incident to ownership. Respondent recognizes on brief that the assignment of such a right "is recognized as creating an equity in the assignee enforceable against the subject matter of the assignment when, and if, it comes into existence," i.e., when as a result of condemnation proceedings the sovereign has taken title to the property condemned. That such a right did in substance exist and that an effective sale thereof was made are indicated by the fact that Kresge collected $ 25,000 from the city for the sole reason that it had purchased this right from Clara.

Respondent's argument to the effect that the substance of the transaction between Clara and Kresge was the modification of the lease in return for $ 80,000, and consequently that that sum constituted ordinary income requires an analysis and interpretation of the facts.

The principal and motivating concern of Clara in her transactions with Kresge subsequent to April 4, 1946, and March 13, 1947, was to realize as much money as possible from the threatened condemnation of a part of her property. It was apparent to her (or to her advisers) that if the condemnation occurred while the building still stood 1959 U.S. Tax Ct. LEXIS 100">*129 upon her property and covered the entire area the condemnation award would amount to a handsome figure, but, conversely, if the building was wrecked by Kresge before the award was granted (pursuant to Kresge's design to erect another building on her premises), the amount of the award would be much less. The prospects of receiving a large condemnation award from the City of New York in compensation for damages to a building which was shortly to be wrecked anyway would be fascinating to most property owners whose civic virtue was not equal to that of Cato the Censor. Kresge, however, was anxious to proceed with the wrecking of the old building and the erection of the new building adapted to its use of the leased premises without regard to the effect of its proposed actions on the amount of the condemnation award which Clara might receive from the city. Under these circumstances and for the purpose of delaying ²32 T.C. 1127">*1138 Kresge in its proposed wrecking of the building which had suddenly become valuable to her as a potential subject of damage, Clara advanced the somewhat technical argument that since Kresge after March 13, 1947, could not erect on the premises a building with the1959 U.S. Tax Ct. LEXIS 100">*130 dimensions originally agreed upon, it could not erect any building, and obtained a temporary restraining order enjoining Kresge from demolishing the old building. Thus Kresge could not proceed with its plans to erect a new building until after protracted litigation, unless it provided some satisfactory compensation to Clara for her inability to collect the full amount of the potential award which she hoped to receive upon the condemnation of the 9-foot strip of this property while it was covered by the old building. Therefore and after bargaining and negotiations, an agreement was worked out whereby Kresge paid Clara $ 80,000 for "all her right, title and interest in and to any and all condemnation awards for the land and building" here in question. Clara, being satisfied that she had thereby realized all that was then possible from her conditional right to a condemnation award, immediately consented to a modification of the lease which, inter alia, permitted Kresge to proceed with its plan to wreck the old building and construct a new one of smaller dimensions, and also provided for slightly higher rentals to Clara.

1959 U.S. Tax Ct. LEXIS 100">*131 As we interpret the transaction, what Kresge bought and paid for was Clara's conditional right to a condemnation award. The reason it paid the price it did may have been to induce Clara to accept a modification of the lease which would permit Kresge to proceed with its building plans without waiting for the end of protracted litigation. What Clara sold and received payment for was her conditional right to a condemnation award. She sold this right for the price paid because she thereby avoided the risk of an unfavorable result in the litigation, because the price paid represented a reasonably discounted equivalent of all she could hope for from the condemnation award, even on the assumption that the city would proceed with its taking of the property and that Kresge could be prevented from wrecking the building pending such taking, and because this solution gave her the reasonable equivalent of an award against the city for damages to the old building and at the same time provided for the erection of a new building on her property at the expense of Kresge. The reason she was able to get the price she did from Kresge without waiting for the institution and termination of condemnation1959 U.S. Tax Ct. LEXIS 100">*132 proceedings was that she had Kresge "over a barrel" because of clause 6 of the lease and the temporary restraining order. Regardless of their reasons, what the parties to the transaction did was to buy and sell a conditional right to a condemnation award for $ 80,000.

No element in the transaction related to matters customarily connected with income. No part of the payment could be considered as 32 T.C. 1127">*1139 representing anticipated income or as in lieu of income. No modification of the lease occurred which affected income items adversely to the interests of petitioner so as to warrant a conclusion that any part of the $ 80,000 paid to Clara related to such items.

We conclude that this sum constituted payment for the effective transfer to Kresge of a property right of Clara. Respondent has argued that this right was not property and there was no sale or exchange thereof. He has made no alternative contention that even though the right was property and was sold by Clara it was not a capital asset within the meaning of the Internal Revenue Code. We see no reason why it is not a capital asset.

Since we hold that the $ 80,000 was received by Clara from Kresge as payment for the transfer1959 U.S. Tax Ct. LEXIS 100">*133 of a capital asset, it constitutes a capital gain to the extent that it exceeds Clara's basis with regard to the property sold. However, it is impossible or impractical to ascertain the cost basis to Clara of this property right sold which was derived from her right of ownership to the entire property. ³ Her cost basis to the entire property was in excess of $ 80,000. We conclude that this latter sum was a return of capital and should be applied in reduction of Clara's cost basis to the entire property. See Inaja Land Co., Ltd., 9 T.C. 727">9 T.C. 727.

1959 U.S. Tax Ct. LEXIS 100">*134 Decision will be entered under Rule 50.