65 T.C. 473">*473 Respondent determined the following deficiencies in the petitioners' Federal income taxes:

The sole issue remaining to be decided is whether a partnership1975 U.S. Tax Ct. LEXIS 17">*19 in which petitioners ¹ were partners is entitled to use the 150 65 T.C. 473">*474 percent of declining balance method in computing depreciation with respect to an office building it owns, notwithstanding section 167(j)(4). ² Resolution of that issue depends upon whether the building was acquired pursuant to a written contract which was binding on July 24, 1969, and at all times thereafter, within the meaning of section 167(j)(6)(C).

FINDINGS OF FACT

Most of the facts are stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Matthew V. Byrne and Elvira C. Byrne are husband and wife, as are Gordon P. Schopfer and Rhonda F. Schopfer. At the time the petitions were filed, 1975 U.S. Tax Ct. LEXIS 17">*20 petitioners and their spouses resided in Syracuse, N.Y. Their income tax returns for 1970, 1971, and 1972 were filed with the District Director of Internal Revenue, Buffalo, N.Y.

During the years in issue, each petitioner held a 25-percent interest in a partnership known as Warron Properties Co. (hereinafter Warron). Two other persons, John J. Costello and Ralph E. Schopfer, were also equal partners. Warron was created on December 31, 1969. On that date, Warron acquired from Warron Properties, Ltd. (hereinafter Limited), an eight-story office building in Syracuse, which it owned and operated throughout the period in question. Limited was a New York corporation whose stock was owned equally by the four partners. During 1969, its officers were: Matthew V. Byrne, president, and John J. Costello, secretary and treasurer.

The transfer of the building was preceded by these events: On June 6, 1969, Byrne and Costello met with the corporation's accountants to discuss a liquidation of the corporation and the transfer of its assets to the shareholders. On that date, Byrne prepared and forwarded a letter to the Schopfers which stated:

Enclosed please find copy of the events that will take1975 U.S. Tax Ct. LEXIS 17">*21 place as we liquidate the Corporation as of June 30th and carry the property in the form of a partnership through 1973.

In 1969, we will share a $ 14,500.00 tax loss; in 1970, $ 23,506.00; in 1971, $ 17,376.00; in 1972, $ 11,171.00; and in 1973, $ 809.00. Thereafter, the partnership will show a profit and, depending upon our situation at that time, we can then transfer the property to a corporation.

65 T.C. 473">*475 We think this is the thing to do and we would hope that you both would approve of it as soon as possible.

A schedule showing the anticipated tax benefits due to accelerated depreciation following the liquidation accompanied the letter. On June 23, 1969, Byrne, Costello, and the two Schopfers met. A memorandum of that meeting on the stationery of Byrne, Costello & O'Brien, attorneys at law, dated June 24, 1969, reads, in its entirety, as follows:

MEMORANDUM OF CONFERENCE WITH GORDON SCHOPFER, RALPH SCHOPFER, JOHN COSTELLO AND MATTHEW V. BYRNE, JR.

Under date of June 23rd, John Costello, Gordon Schopfer and Ralph Schopfer met to discuss the liquidation. All items were satisfactory with all parties except for the insurance coverage. Mr. Farrington met with us and fully explained1975 U.S. Tax Ct. LEXIS 17">*22 the coverage and thereafter we went to lunch, at which time the four men agreed that we should proceed promptly with the liquidation.

Matthew V. Byrne, Jr.

Consummation of the transaction by June 30, 1969, as planned, proved impractical. The liquidation of Limited and the transfer of its assets to Warron did not occur until December 31, 1969.

OPINION

Under section 167, a taxpayer is permitted to compute depreciation on tangible property by the declining balance method, using a rate not exceeding twice the straight line rate. For used section 1250 property acquired after July 24, 1969, however, this privilege is rescinded by section 167(j)(4). ³ Petitioners do not deny that the building in question was used 65 T.C. 473">*476 section 1250 property acquired after July 24, 1969. They claim relief under section 167(j)(6)(C), which provides:

Paragraphs (4) and (5) shall not apply in the case of section 1250 property acquired after July 24, 1969, pursuant to a written contract for the acquisition of such property * * *, which was, on July 24, 1969, and at all times thereafter, binding on the taxpayer.

Their position is that the June 6, 1969, letter from Byrne to the Schopfers, together with1975 U.S. Tax Ct. LEXIS 17">*23 the record of the June 23, 1969, meeting, constitutes a binding written contract within the meaning of the statute.

Respondent has promulgated regulations which elaborate1975 U.S. Tax Ct. LEXIS 17">*24 on the statutory language. With respect to the binding written contract requirement for used section 1250 property, sec. 1.167(j)-7(c), Income Tax Regs., incorporates the requirements imposed on contracts for the construction of new property by section 1.167(j)-4(b). With interpolations appropriate to this case, the pertinent part of those requirements is as follows:

(2) Type of contract. (i) A contract for the [acquisition] of property will qualify under this paragraph only if --

(a) The [acquisition] of such property is the subject matter of the contract,

(b) The contract provides that the property is to be [acquired] by or for the taxpayer * * *,

* * *

(d) The parties to the contract are the taxpayer * * *, and the person who is to [transfer property to] the taxpayer, or

(e) The parties to the contract are the taxpayer * * *, and the person with whom or for whom the taxpayer agrees to [acquire] property.

* * *

(3) Legal formality. (i) An agreement shall be considered as a contract binding on the taxpayer, for purposes of this paragraph, only if such agreement is in writing, constitutes a contract under applicable State or local law, and is enforceable1975 U.S. Tax Ct. LEXIS 17">*25 against the taxpayer under such law. A contract which does not represent a bona fide agreement negotiated at arm's length shall not be considered a binding contract under this paragraph. * * *

Initially, we reject respondent's argument that, because Warron was not in existence on July 24, 1969, there could have been no written contract which was binding on the "taxpayer" on that date. Aside from the question whether the partnership or the partner is the taxpayer, section 1.167(j)-7(a)(3)(ii)(f) of the regulations provides that property (or rights in property) which is transferred in exchange for partnership interests and which would have qualified in the hands of the partners qualifies in the hands of the partnership. That section is applicable here. The 65 T.C. 473">*477 written partnership agreement provides both for the allocation of partnership interests and the transfer of the building to the partnership; the conclusion is inescapable that those interests were acquired in exchange for the interests of the partners in the building. Thus, we are only required to determine whether the building would have qualified for accelerated depreciation in the hands of the shareholders of1975 U.S. Tax Ct. LEXIS 17">*26 Limited if they had continued to hold it after the liquidation.

We therefore turn to an analysis of the instant situation in light of the applicable statute and regulations. Petitioners make a highly legalistic argument asserting that the written documentation, consisting of the June 6, 1969, letter and the memorandum of the meeting held on June 24, 1969 (which petitioners contend constitute minutes of a stockholders meeting), satisfies the requirements of an "agreement in writing" which "constitutes a contract under applicable State or local law and is enforceable against the taxpayer under such law." See sec. 1.167(j)-4(b)(3), Income Tax Regs., supra.

There are several flaws in petitioners' position. First, it is debatable whether the memorandum of June 24 constitutes minutes of a stockholders meeting. The document is on the stationery of a law office, it is not signed by anyone, the name of the person who prepared the memorandum is Matthew V. Byrne, Jr., who was the president and not the secretary of the corporation (the latter usually being the officer of a corporation charged with the preparation of minutes and the custody of the minutes book), ⁴ and neither Byrne's designation1975 U.S. Tax Ct. LEXIS 17">*27 as president nor the status of the other individuals as stockholders is reflected on the document. However, we need not rest our decision on this equally technical ground. Even if we assume that the memorandum can be characterized as stockholders' minutes, we do not believe that it constitutes a written agreement. Thus it has been observed, in connection with the application of the parol evidence rule: "minutes of a meeting are not a written instrument. Their function is merely to act as a written record of what took place at the meeting." (Emphasis supplied.) See Lawrence v. Premier 65 T.C. 473">*478 ., 180 Cal. 688">180 Cal. 688, 182 P. 431">182 P. 431, 182 P. 431">435 (1919). Or to put it another way:

The parties may manifest their intention in any of the usual ways, that is, by formal contract, by resolution or simply by their actions. When they do so by resolution, the resolution is not itself a contract but only evidence of it. [Emphasis supplied.]

See Wilson v. Red Bluff Daily News, 237 Cal. App. 2d 87">237 Cal. App. 2d 87, 46 Cal. Rptr. 591">46 Cal. Rptr. 591, 46 Cal. Rptr. 591">594 (3d Dist. Ct. App. 1965). Thus, reliance on section 624(g) of the New1975 U.S. Tax Ct. LEXIS 17">*28 York Business Corporation Law⁵ is misplaced. That section simply sets forth a rule of evidence and does not, by itself, equate the minutes with a written agreement. Perhaps the memorandum sets forth an arrangement which, in the proper context, could be enforced by the individuals against each other or against any of the individuals who sought to disavow the plan to liquidate Limited. But enforceability is only one element and comes into play after a "written contract" as required by the statute (see sec. 167(j)(6)(C)) is found to exist.

1975 U.S. Tax Ct. LEXIS 17">*29 Beyond the foregoing, there are additional flaws. Thus, the statute requires that the contract be "for the acquisition of such [sec. 1250] property." We think that this requirement is not satisfied. At best, the so-called "minutes" of June 24 simply call for a liquidation of Limited and not a liquidation in kind. We think that if three of the four stockholders (who held 75 percent of the voting stock) had subsequently decided to have Limited sell the property and then distribute the cash in liquidation, they could have done so despite the objection of the fourth stockholder. ⁶ In our opinion, the letter of June 6, 1969, which indicates that a liquidation in kind was contemplated cannot be said to supply the necessary ingredient to conclude that there was an enforceable agreement to liquidate Limited in kind.

1975 U.S. Tax Ct. LEXIS 17">*30 Moreover, we think it clear that petitioners have not satisfied the requirement of the regulations that a contract, to be binding for the purpose of section 167(j)(6)(C) must represent "a bona fide agreement negotiated at arm's length." See sec. 1.167(j)-4(b)(3)(i), Income Tax Regs. It cannot be denied that, on the 65 T.C. 473">*479 record before us, the only purpose for the liquidation of Limited was the perceived tax advantage of accelerated depreciation of the property in the hands of the partnership. While the presence of a tax-avoidance purpose is not, in and of itself, perfidious if the transaction involved has substance, it is clearly an element which can be taken into account. See George L. Schultz, 50 T.C. 688">50 T.C. 688, 50 T.C. 688">694 (1968), affd. per curiam 420 F.2d 490 (3d Cir. 1970). Petitioners were not obligated to pay and in fact did not pay for the property. In the foregoing context, the apparent exclusivity of tax purpose is significant, particularly when one takes into account the purpose which motivated the Congress to enact section 167(j). ⁷

1975 U.S. Tax Ct. LEXIS 17">*31 In light of such announced purpose, one is led inexorably to the conclusion that the type of arrangement involved herein, even assuming that it achieved the status of a "written contract," is not the kind of "written contract" Congress had in mind when it carved out the exception contained in section 167(j)(6)(C). We have also taken into account the fact that we are dealing herein with a special statutory exemption which has the effect of allowing a deduction and that, since deductions are a matter of legislative grace, such a provision should be narrowly construed. See Commissioner v. Nat. Alfalfa Dehydrating & Milling Co., 417 U.S. 134">417 U.S. 134, 417 U.S. 134">149 (1974). Clearly, the arrangement involved herein is not one which falls within the ordinary meaning of the quoted phrase. ⁸ Compare Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 394 U.S. 741">749-751 (1969), with Commissioner v. Brown, 380 U.S. 563">380 U.S. 563, 380 U.S. 563">570-57165 T.C. 473">*480 (1965). In Hercules Gasoline Co. v. Commissioner, 326 U.S. 425">326 U.S. 425 (1945), the Supreme Court was called upon to interpret section 26(c) of the Revenue Act of 1936, which provided a credit1975 U.S. Tax Ct. LEXIS 17">*32 against income in the computation of the undistributed profits surtax of --

An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. [Emphasis supplied.]

The Court held that the credit did not apply to a prohibition imposed by the corporate charter on the payment of dividends on common stock prior to the retirement of the outstanding preferred. It followed the holding of Helvering v. Northwest Steel Mills, 311 U.S. 46">311 U.S. 46 (1940), that Congress intended the credit to be "limited to contracts involving ordinary obligations to creditors." 326 U.S. 425">326 U.S. at 429. ⁹ The Court noted that a contrary holding would permit the corporation by self-dealing to avoid the imposition of the tax. We believe a similar rationale applies here and that an arrangement for liquidation among a corporation and its shareholders is not entitled to the benefits of the exception contained in section1975 U.S. Tax Ct. LEXIS 17">*33 167(j)(6)(C).

1975 U.S. Tax Ct. LEXIS 17">*34 To reflect the parties' agreement on other issues,

Decisions will be entered under Rule 155.