On November 24, 1969, petitioner, as tenant, entered into a lease agreement with Country Club Estates, Inc. This lease agreement covered real estate located in Philadelphia, Pa. (hereinafter referred to as the Philadelphia property), and had a duration of 35 years. ³ The lease agreement required an annual rent of $ 64,000, required the tenant, 1977 U.S. Tax Ct. LEXIS 113">*120 without cost to the landlord, to complete a building that would be used for hotel or motel purposes, absolved the landlord of any liability to pay for the construction or maintenance of the building, required the tenant to keep the building in good repair, to pay 68 T.C. 154">*158 taxes, assessments, and utility bills, and required prior approval by the landlord before the tenant could sublet the premises.

Country Club Estates, Inc., the landlord of the leased premises, was wholly owned by Atlantic City Ambassador Hotel Corp., which in turn was 95-percent owned by petitioner.

In March 1970, petitioner sold his leasehold interest in the Philadelphia property and the improvements constructed thereon. Gain from this sale was reported on the installment method under section 453. Upon audit of petitioners' 1970 Federal income tax return, respondent determined that petitioner had failed to adjust the basis of the Philadelphia property1977 U.S. Tax Ct. LEXIS 113">*121 and the improvements thereon as required by section 1033(c). Consequently an improper basis was used for the computation of depreciation in calendar years 1969 and 1970, and for the computation of gain in 1970. Respondent further determined that, as a result of petitioners' election of nonrecognition under section 1033, and the concomitant basis adjustment under section 1033(c), petitioners were not entitled to report gain from the sale of the Philadelphia property on the installment method. Income tax deficiencies determined by respondent were $ 52,706.03 for 1969 and $ 1,685,711.49 for 1970.

Upon advice of counsel, petitioners, on July 25, 1975, sought to revoke their prior election under section 1033. In McShain v. Commissioner, 65 T.C. 686">65 T.C. 686, 65 T.C. 686">693 (1976), we held that petitioners' attempt to revoke their section 1033(a)(3) election was untimely. We specifically noted, however, that an issue not presented at that time was whether the Philadelphia leasehold qualified as "property similar or related in service or use" to the condemned property. Still desiring to avoid the effect of the basis adjustment under section 1033(c), petitioners now contend1977 U.S. Tax Ct. LEXIS 113">*122 that the Philadelphia property was not a valid replacement for the condemned Washington property, and therefore, petitioners' section 1033 election was ineffective.

68 T.C. 154">*159 OPINION

The issue we must decide is whether petitioner made an effective election under section 1033⁴ and thereby deferred recognition of gain realized upon the condemnation of the Washington property. Petitioner has been advised by counsel that it will be to his tax benefit if the section 1033 election, made in 1967, is invalid, thereby requiring petitioner to recognize gain from the condemnation sale in 1967 rather than in a subsequent year. In an attempt to show the election was invalid, petitioner makes several arguments. We have considered each of these arguments and conclude that petitioner's section 1033 election was valid, and effectively deferred the recognition of gain realized upon the condemnation of the Washington property.

1977 U.S. Tax Ct. LEXIS 113">*123 Petitioner initially argues that he was not eligible to elect nonrecognition under section 1033 because he was not the entity that received the condemnation proceeds. As authority, petitioner cites Demirjian v. Commissioner, 457 F.2d 1">457 F.2d 1 (3d Cir. 1972), affg. 54 T.C. 1691">54 T.C. 1691 (1970).

Demirjian indicates that if a partnership has property condemned, the partnership, not the individual partners, must reinvest the proceeds in order to take advantage of 68 T.C. 154">*160 section 1033. Petitioner contends that he and Hagner were acting as a partnership while they owned the Washington property, and since petitioner acted in his individual capacity when he reinvested the condemnation proceeds, he was not eligible to elect nonrecognition under section 1033. Petitioner's argument is premised on a finding that he and Hagner were partners in a partnership that owned the Washington property. We cannot make such a finding.

Section 7701(a)(2) defines a partnership as an unincorporated organization which is neither an estate nor trust "through or by means of which any business, financial operation or venture is carried on." (Emphasis added.) 1977 U.S. Tax Ct. LEXIS 113">*124 Section 301.7701-3, Proced. & Admin. Regs., makes it clear that --

mere co-ownership of property which is maintained, kept in repair, and rented or leased does not constitute a partnership. * * * Tenants in common * * * may be partners if they actively carry on a trade or business * * *. For example, a partnership exists if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent. [Emphasis added.]

In the case before us, petitioner and Hagner purchased the Washington property as coowners, and leased it to Capitol Court on a net lease agreement. Under this agreement, the lessors were required to fulfill only passive obligations. They were not required to maintain or repair the leased property, nor were they required to provide any additional services to the lessee. Under these facts, petitioner and Hagner were coowners, not partners in a partnership. Consequently, we find Demirjian inapplicable. ⁵

1977 U.S. Tax Ct. LEXIS 113">*125 Petitioner next argues that section 1033(a)(3)(A), standing alone, cannot apply since the replacement property was not "similar or related in service or use" to the condemned property. Respondent does not contest this point. Rather, 68 T.C. 154">*161 respondent asserts that nonrecognition was authorized by section 1033(g) which, under limited conditions, permits the replacement property to be "like kind" rather than "similar or related in service or use."

Petitioner contends that the special provisions of section 1033(g) cannot apply since section 1033(g) is limited to condemned real property that is replaced by real property, and neither the majority of the Washington property nor the Philadelphia property owned by petitioner was real property. Further, petitioner argues that even if the condemned property and replacement property are real property, they are not "like kind."

The majority of the condemnation award received for the Washington property was attributable to the condemned building located on the Washington land. Petitionr argues that his interest in the building was a future interest rather than a present possessory interest, and therefore does not qualify as real 1977 U.S. Tax Ct. LEXIS 113">*126 property for purposes of section 1033(g). ⁶ This argument ignores the facts and the chronology of events. On January 20, 1967, the United States filed a complaint in condemnation and declaration of taking. The lease agreement between petitioner and Capitol Court expired on February 1, 1967, at which time, pursuant to the lease agreement, petitioner and Hagner became the sole owners of the building. Resolution of the lawsuit brought by the United States was not final until May 22, 1967, at which time petitioner and Hagner were the sole owners of both the Washington land and building. As sole owners of the Washington property, Hagner and petitioner received the entire proceeds of the condemnation suit and divided them according to their proportionate ownership interests. Had they owned merely a future interest in the building, the owner of the present possessory interest would have received a portion of the condemnation award. Since this did not occur, and since the condemnation suit was not settled until after the expiration of the lease, we find no merit in petitioner's contention that his interest in the Washington building was only a future interest.

1977 U.S. Tax Ct. LEXIS 113">*127 68 T.C. 154">*162 Petitioner's final argument is that he failed to replace the condemned property with like kind property, as required by section 1033(g). In support of this argument, petitioner notes that his ownership interest in the Washington property was an 85-percent undivided interest in a fee, whereas his ownership interest in the Philadelphia property was merely a leasehold interest. Petitioner further distinguishes his interest in the properties by noting that the Washington property was a passive investment in which petitioner had no major obligations or duties. In contrast, the Philadelphia property was the site of an ongoing business that petitioner actively managed and directly operated. Although petitioner vigorously argues that the Washington property was not replaced with like kind property, we disagree.

Initially, we note that petitioner carefully selected the Philadelphia property so that it could qualify for nonrecognition under section 1033. In a letter to the District Director of Internal Revenue, petitioner noted, "The like kind replacement property is currently under construction as a motor inn (Holiday Inn, City Avenue, Philadelphia, Pennsylvania)." Attached 1977 U.S. Tax Ct. LEXIS 113">*128 to petitioners' 1970 Federal income tax return was a notation entitled "Replacement Investment in 1969," followed by a description of the Philadelphia property and an itemized accounting of expenditures therefor. Despite his care in selecting the replacement property, petitioner now contends that the replacement property was not like kind. We need only turn to the Internal Revenue Code and the regulations thereunder to refute petitioner's contention.

Generally section 1033(g) provides for nonrecognition of gain on condemned property if it is replaced by "like kind" property. For principles in determining whether property is like kind, sec. 1.1033(g)-1(a), Income Tax Regs., refer to section 1.1031(a)-1(c), Income Tax Regs. This latter regulation, which has "acquired the force of law," Century Electric Co. v. Commissioner, 192 F.2d 155">192 F.2d 155, 192 F.2d 155">160 (8th Cir. 1951), affg. 15 T.C. 581">15 T.C. 581 (1950), cert. denied 342 U.S. 954">342 U.S. 954 (1951), specifically notes that "no gain or loss is recognized if * * * a taxpayer who is not a dealer in real estate * * * exchanges a leasehold of a fee with 30 years or more to run for real1977 U.S. Tax Ct. LEXIS 113">*129 estate." Under this regulation a leasehold of 30 years is considered of like kind to a fee simple interest in real estate. Consequently, 68 T.C. 154">*163 petitioner's argument that the Philadelphia property, a 35-year leasehold, was not a like kind replacement because it was a leasehold interest rather than a fee, is without merit.

Similarly, petitioner's contention that an investment property was exchanged for an actively operated business property is also without merit. As noted by section 1.1031(a)-1(a), Income Tax Regs., "property held for productive use in trade or business may be exchanged for property held for investment. Similarly, property held for investment may be exchanged for property held for productive use in trade or business."

We have considered each of petitioner's arguments and find them unpersuasive. Since the facts before us indicate that petitioner replaced the Washington property with like kind property as he originally intended, petitioner's motion for summary judgment will be denied.

Appropriate orders will be entered.