1977 U.S. Tax Ct. LEXIS 113">*113
68 T.C. 154">*155 On December 6, 1976, pursuant to
FINDINGS OF FACT
Much of the background relevant to this case was reported in
In 1950, John McShain purchased1977 U.S. Tax Ct. LEXIS 113">*116 an undivided 85-percent interest in two parcels of unimproved real estate in Washington, D.C. (hereinafter referred to as the Washington property). The remaining undivided 15-percent interest was owned by Alexander B. Hagner. On August 15, 1950, and February 27, 1951, Hagner, as trustee, executed lease agreements leasing the Washington property to Capitol Court Corp. (hereinafter referred to as Capitol Court). These lease agreements, as modified on March 14, 1951, expired on February 1, 1967. Although the lease agreements refer to Hagner as "trustee," the parties stipulate that Capitol Court leased the Washington property from John McShain. Capitol Court was wholly owned by John McShain Charities, Inc., a private foundation 68 T.C. 154">*156 of which petitioner was president. Hagner was president of Capitol Court.
The lease agreements, executed by Hagner as trustee for the lessors and by Hagner as president of the lessee, were net lease agreements. Under the leases, the lessee was required to pay rent, all taxes, assessments, utility bills, and other charges relating to the land. The lessors were obligated to perform such passive duties as collection of rent and execution of applications1977 U.S. Tax Ct. LEXIS 113">*117 for permits and licenses. Upon termination or expiration of the lease, title to any improvements erected by the lessee was to pass free and clear to the lessors.
On January 20, 1967, the United States of America filed a complaint in condemnation and declaration of taking in the United States District Court for the District of Columbia, naming petitioner's property under lease to Capitol Court as the property to be condemned. On May 18, 1967, the Attorney General for the United States approved a settlement of the condemnation suit for $ 3,400,000. On May 22, 1967, by stipulation of agreement and entry of judgment, $ 3 million was distributed to McShain and his wife, and Hagner and his wife. The remaining $ 400,000 was distributed on June 23, 1967. Of the total amount distributed, petitioners received 85 percent, or $ 2,890,000. As a result of this condemnation award, petitioners realized a gain of $ 2,616,000 in 1967.
Attached to petitioners' 1967 Federal income tax return was a statement which read in part:
STATEMENT REQUIRED PURSUANT TO PROVISIONS OF REGS. § 1.1033(a)-2(c)(2)
Taxpayer, John McShain, acquired an 85% interest in ground located at Third and Indiana Avenues, Washington, 1977 U.S. Tax Ct. LEXIS 113">*118 D.C. in 1950 at a cost of $ 274,000. The ground was then leased to Capitol Court Corporation. Capitol Court Corporation constructed a building thereon and operated the same. At the termination of the lease, February 1, 1967, the building reverted to and became the property of the owners of the reversionary estate.
* * *
Taxpayer intends to reinvest the proceeds in the manner permitted by
No replacement of converted property has occurred as of the date of the filing of this tax return.
68 T.C. 154">*157 On December 23, 1968, petitioners wrote to the District Director of Internal Revenue, Philadelphia, Pa., and requested additional time in which to replace the condemned property. Pursuant to the District Director's subsequent request for additional information, petitioners, on March 5, 1969, responded that, "The like kind replacement property is currently under construction as a motor inn, (Holiday Inn, City Avenue, Philadelphia, Pennsylvania)." Petitioners also stated that, "As of December 31, 1968, John McShain had invested $ 3,700,000 in the Holiday Inn property, all of which 1977 U.S. Tax Ct. LEXIS 113">*119 had actually been expended for construction. Thus, the proceeds of the condemnation, amounting to a total of $ 2,890,000, were entirely applied to qualified reinvestment construction within the statutory replacement period." On April 3, 1969, the District Director granted petitioners an extension of time for replacement of the condemned property. Copies of the request and the favorable determination letter were attached to petitioners' 1969 Federal income tax return. Added to the bottom of the favorable determination letter that petitioners attached to their return was a notation dated April 3, 1970, stating: "HOLIDAY INN CITY LINE AVENUE -- PHILADELPHIA, PENNSYLVANIA"
Building cost | $ 6,365,304.81 |
Elevator cost | 377,033.93 |
Furniture, fixtures, and equipment | 1,775,774.81 |
8,518,113.55 |
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
Upon advice of counsel, petitioners, on July 25, 1975, sought to revoke their prior election under
68 T.C. 154">*159 OPINION
The issue we must decide is whether petitioner made an effective election under
1977 U.S. Tax Ct. LEXIS 113">*123 Petitioner initially argues that he was not eligible to elect nonrecognition under
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
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
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
1977 U.S. Tax Ct. LEXIS 113">*125 Petitioner next argues that
Petitioner contends that the special provisions of
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
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
Initially, we note that petitioner carefully selected the Philadelphia property so that it could qualify for nonrecognition under
Generally
Similarly, petitioner's contention that an investment property was exchanged for an actively operated business property is also without merit. As noted by
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.
1. Where appropriate the plural, "petitioners," is used in the Findings of Fact to reflect the extent of Mary McShain's activities in this case. For convenience, and since the business activities are those of John McShain, the Opinion refers only to "petitioner."↩
2. Statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years in question.↩
3. The Nov. 24, 1969, lease finalized two previous leases dated Mar. 12, 1969, and July 3, 1969.↩
4.
(a) General Rule. -- If property (as a result of * * * condemnation * * *) is compulsorily or involuntarily converted -- * * * (3) Conversion into money where disposition occurred after 1950. -- Into money or into property not similar or related in service or use to the converted property, * * * the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph: (A) Nonrecognition of gain. -- If the taxpayer * * * for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, * * * at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion * * * exceeds the cost of such other property * * * * * *
(g) Condemnation of Real Property Held for Productive Use in Trade or Business or for Investment. -- (1) Special rule. -- For purposes of subsection (a), if real property * * * held for productive use in trade or business or for investment is (as the result of * * * condemnation * * *) compulsorily or involuntarily converted, property of a like kind to be held either for productive use in trade or business or for investment shall be treated as property similar or related in service or use to the property so converted.↩
5. Additionally, we do not find that petitioner was a mere beneficiary under a trust with Hagner as trustee. Although Hagner rented the Washington property to Capitol Court and placed after his name the word "trustee," that fact is not determinative of his real status. The use of the word "trustee" appended to Hagner's name cannot be held to have the effect of making him trustee.
6. Petitioner concedes that his interest in the Washington land was a real property interest, but states that very little of the condemnation award was attributable to the land, thereby limiting the amount of the award subject to nonrecognition under