Appellants Arthur R. Ivey, Robert C. Barnum, and Edwin J. O'Mara and their wives appeal from a decision of the Tax Court permitting the Commissioner of Internal Revenue to assess deficiencies against each of the taxpayers for the year 1963. This appeal raises a single question: is property distributed pursuant to a section 3331 tax-free corporate dissolution considered as a "purchase" for the purpose of Treasury Regulation 1.165-3(a), which disallows loss deductions for buildings purchased with the intent to demolish them?2

The facts are fully set forth in the opinion of Judge Mulroney for the Tax Court,3 and need be recounted only briefly. Taxpayers and one Nickerson,4 all law partners, in 1959 formed the Greenwich Title Company, Inc., to purchase the land and the building at 170-172 Mason Street, Greenwich, Connecticut. They bought the building in 1959, and operated it through 1963 as a source of rental income. Beginning as early as 1960, however, plans were developed for construction of a new building on the 170-172 Mason Street plot and on adjoining plots owned by the taxpayers. In 1961 an architect prepared plans for a new building to replace 170-172 Mason Street; but before the demolition, taxpayers in 1963 dissolved the Greenwich Title Company, Inc., in a liquidation that satisfied section 333 of the Internal Revenue Code of 1954, and distributed its assets — principally 170-172 Mason Street — to the four partners.

The value of the building at the time of demolition was stipulated to be $31,617.73; each partner included one-fourth the loss ($7,904.43) in computing his distributable partnership loss for 1963. The Commissioner's contention, succinctly stated, is that by receiving the distributed assets of the Greenwich Title Corporation in 1963 taxpayers "purchased" or "acquired" them for the purpose of Treas.Reg. § 1.165-3(a). Since the taxpayers had clearly formed the intent to demolish the building by 1963, if the Commissioner is correct in treating the section 333 distribution of that date as a purchase, then he would also be correct in assessing the deficiency.

Taxpayers respond that they did not "purchase" the building in 1963; they acquired it in a tax-free distribution which permits them to receive property without recognition of loss. They further contend that to deprive them of the opportunity to claim the demolition loss would contravene section 333, since it would impose an additional burden on a distribution pursuant to a liquidation the section was designed to encourage.5 In addition, they claim that since the holding period under section 333 for the purpose of determining gain or loss is the same for these taxpayers as it was for the corporation, it would be anomalous to give them loss recognition treatment different from that the corporation would have received.

While the question is not without difficulty, we agree with the Tax Court that the Commissioner's position is on sounder ground. The regulations promulgated under the 1939 Code, Treas. Reg. 118, § 39.23(e)-2 declared the policy that when "a taxpayer buys * * * a building, which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible loss * * * the value of the real estate * * being presumably equal to the purchase price of the land * * *." The rationale is that if the taxpayer buys the land intending to demolish the building, the building can have no value to him, and its demolition occasions no loss. The determining factor is his intent at the time of purchase. See Int.Rev.Code of 1954, Treas.Reg. § 1.165-3(a); Lynchburg National Bank & Trust Co., 20 T.C. 670, affirmed 208 F.2d 757 (4th Cir. 1953). Here the individual taxpayers acquired 170-172 Mason Street in 1963, in exchange for their cancelled shares of Greenwich stock. In fact, the basis they acquired was not that of the corporation, as they seem to argue, but their basis in the cancelled shares at the time of the exchange. See Int.Rev.Code of 1954, § 334(c). The basis and holding period of the corporation in the distributed property is not carried over; rather the new owner's basis and holding period in his stock are "substituted" for the corporation's basis and holding period in the property.6 Hence we regard the distribution as equivalent to a purchase under Treas.Reg. § 1.165-3(a). Since we agree with the Tax Court that at the time of this transaction in 1963 the taxpayers had formed the intent to demolish 170-172 Mason Street, the Tax Court properly sustained the Commissioner's disallowance of the deductions and assessment of deficiencies.

The judgment of the Tax Court is affirmed.