Opinion
Docket No. 83591.
1962-04-3
City Investing Company and Subsidiaries, petitioners V. Commissioner of Internal Revenue, Respondent.
D. Nelson Adams, Esq., and Richard R. Dailey, Esq., for the petitioners. Dean P. Kimball, Esq., for the respondent.
D. Nelson Adams, Esq., and Richard R. Dailey, Esq., for the petitioners. Dean P. Kimball, Esq., for the respondent.
Pursuant to a policy of liquidating its property holdings in Lower Manhattan, T corporation in 1950 transferred its fee simple interest in land under certain commercial property to Conn. corporation for $4 million. The fair market value of such land on the date of transfer was not in excess of $4 million. Simultaneously, Conn. leased back the land to T for an original term of 21 years, subject to specified renewals, at an annual net rental of $180,000 which was at least equal to the fair annual net rental for the land at the time. Held that the sale of the land was bona fide and the loss thereon sustained by T was recognizable; the transaction did not constitute an exchange of property for property of like kind plus boot under sections 112(b)(1) and 112(e) of the 1939 Code.
Respondent determined deficiencies in income tax for the taxable years ending April 30, 1950, 1951, and 1952, in the respective amounts of $197,306.17, $553,786.68, and $270,905.32.
The only issue is whether a purported sale and leaseback of certain land in Lower Manhattan was in fact a sale for tax purposes resulting in a deductible loss or whether it constituted an exchange of property for property of like kind (plus cash) with the result that no loss is deductible on the transaction because of the nonrecognition provisions contained in sections 112(b)(1) and 112(e) of the 1939 Code. Two other related adjustments have been settled by stipulation of the parties.
FINDINGS OF FACT.
The facts stipulated by the parties are incorporated herein by this reference.
City Investing Company, hereinafter referred to as City, is a New York corporation with its principal office at 980 Madison Avenue, New York, New York. During the years ending April 30, 1950 through 1953, City's principal office was at 25 Broad Street, New York, New York.
During the years ending April 30, 1950 through 1953, City was the common parent corporation of an affiliated group of corporations for which consolidated Federal income tax returns were filed by City with the collector of internal revenue for the second district of New York. These returns were prepared and the books and records of the affiliated group were kept under an accrual method of accounting for a taxable year ending April 30.
During 1943 City acquired by purchase all of the outstanding capital stock of a New York corporation, Thirty Broad Street Corporation, hereinafter referred to as Thirty. Thirty remained a wholly owned subsidiary of City after that date throughout the taxable years here involved. For the taxable years ending April 30, 1950 through 1953, Thirty joined in filing consolidated Federal income tax returns as a member of the affiliated group of which City was the common parent corporation.
During the years here involved and for some years prior and subsequent thereto, Thirty was engaged in the business of holding title to and renting or leasing and subleasing various office buildings in the downtown or financial district as well as in other parts of New York City.
Prior to 1950 in the course of its regular business Thirty acquired by purchase title to two contiguous parcels of land located at 30 and 38-40 Broad Street in New York City. The land at 30 Broad Street was acquired by Thirty in 1930, and the land at 38-40 Broad Street was acquired by Thirty in 1945. On November 9, 1950, Thirty held the land at 30 and 38-40 Broad Street at an adjusted basis of $7,825,000.
The building on the land at 30 Broad Street, a 47-story office building, was constructed by Thirty in the years 1931 through 1934, and it was held by Thirty on November 9, 1950, at an adjusted basis of $2,292,155.20. In November of 1950 this building was one of the newer buildings in its immediate area, and it had an occupancy rate at that time of about 99 percent. The building on the land at 39-40 Broad Street was constructed in 1919 by Western Union Telegraph Company as a leasehold improvement under a long-term net lease which was still in effect on June 5, 1952. The building at 38-40 Broad Street is now and has remained since June 5, 1952, occupied and rented.
Prior to November 9, 1950, the officers of Thirty determined as a policy matter that Thirty should no longer own property in Lower Manhattan (the portion of Manhattan from Fulton Street to the Battery). This decision was reached on the basis of what the officers of Thirty considered to be disturbing trends in the real estate market in that area.
From November 9, 1950, through June 5, 1952, the following sales were made by Thirty on the dates indicated:
+---------------------------------------------------------------------------+ ¦Property sold ¦Date of sale ¦ +------------------------------------------------------------+--------------¦ ¦30 and 38-40 Broad Street (land only) ¦Nov. 9, 1950 ¦ +------------------------------------------------------------+--------------¦ ¦52 Broadway ¦Nov. 30, 1950 ¦ +------------------------------------------------------------+--------------¦ ¦49 Broadway ¦July 16, 1951 ¦ +------------------------------------------------------------+--------------¦ ¦55 Broadway ¦Aug. 6, 1951 ¦ +------------------------------------------------------------+--------------¦ ¦51 Broadway ¦Aug. 23, 1951 ¦ +------------------------------------------------------------+--------------¦ ¦53 Broadway ¦Aug. 23, 1951 ¦ +------------------------------------------------------------+--------------¦ ¦25 Broad Street ¦June 1, 1952 ¦ +------------------------------------------------------------+--------------¦ ¦30 and 38-40 Broad Street (building and leasehold interests)¦June 5, 1952 ¦ +---------------------------------------------------------------------------+
Except for the property at 30 and 38-40 Broad Street, each of the above sales included land and building, involved no leaseback or retention of any other interest by Thirty apart from a security interest, and in most cases these sales were made at a profit by Thirty.
After 1952 neither City nor any of its subsidiaries (including Thirty) owned or thereafter acquired any property in Lower Manhattan.
In the case of the property at 30 and 38-40 Broad Street, the officers of Thirty decided to dispose of the land separately for two reasons. First, they were of the opinion that a higher overall price could be obtained for the property by so doing; second, they wanted to set off the large loss which Thirty would incur from the sale of the land along against profits realized or to be realized from the sales of other properties.
Thirty negotiated with several different insurance companies for the sale of the land at 30 and 38-40 Broad Street. At all times Thirty intended to couple any such sale with a leaseback of the land in order to protect its retained interest in the improvements thereon.
On September 7, 1950, Thirty signed a contract for the sale of the land at 30 and 38-40 Broad Street with Connecticut General Life Insurance Company, hereinafter referred to as Connecticut, a corporation unrelated to both City and Thirty. This contract stated that Thirty ‘agrees to sell and convey, and the Purchaser agrees to purchase’ the land and that the ‘purchase price of the land only is Four Million and 00/100 Dollars.’ The purchase price of $4 million was arrived at through negotiations with Connecticut and represented the highest price that Thirty was able to obtain.
The contract of September 7, 1950, provided that simultaneously with the delivery of the deed of the land Connecticut would execute and deliver to Thirty a lease of the land for an ‘original term’ of 21 years with ‘three options of renewals' in favor of Thirty as tenant for 21 years each and a further ‘option of renewal’ for 15 years. The rent for the ‘original term’ was set at $180,000 per annum. The rent for the renewal terms was to be determined by arbitration or appraisal at 4 1/2 percent of the arbitrated or appraised value less certain specified amounts, but in no event was the net rent per annum during any renewal term to be less than $180,000. In addition, the contract provided as follows:
Should said lease not be agreed upon within thirty (30) days from the date hereof, then either party shall have the right to terminate this contract by giving written notice to such effect to the other party not later than twenty (20) days from the date of said notice. Upon the giving of such notice this contract shall become null and void from its inception and neither party shall have any claim against the other excepting that the Seller shall be obligated to return to the Purchaser the down payment made hereunder.
Prior to entering into the September 7, 1950, contract with Thirty for the purchase of the land at 30 and 38-40 Broad Street, Connecticut requested that Thirty obtain an independent appraisal of the land for Connecticut's use. Such appraisal, dated August 14, 1950, was made by Cruikshank Company and estimated the value of the land subject to a net lease similar to that provided for in the contract of September 7, 1950, to be $4 million and estimated the value of the land without any net lease to be $2,600,000.
On November 9, 1950, pursuant to the contract of September 7, 1950, Thirty conveyed the land at 30 and 38-40 Broad Street to Connecticut subject to the specified leaseback for $4 million. On the same day, also pursuant to the contract of September 7, 1950, Connecticut leased the land at 30 and 38-40 Broad Street to Thirty for an original term of 21 years at a net annual rental of $180,000. The lease contained provision for nine renewal terms extending for an aggregate of 204 years. The renewal provisions covered eight pages of the printed lease and were the result of the extensive negotiation between Thirty and Connecticut. The renewal terms were not automatic extensions of the lease, but rather each such renewal required an affirmative election by the lessee, Thirty. At no time during the first four renewal terms of the lease, extending through the year 2049, could the annual net rental to be paid by Thirty to Connecticut be less than $180,000 per year. Depending upon the future market value of the land, the net annual rental during the renewal terms could be more than $180,000. Under the terms of the lease Thirty had no right to reacquire the land at any time by purchase or otherwise.
The 21-year original term of the lease was determined by Thirty to be the maximum period during which it was willing to obligate itself to pay the net rental demanded by the lease in view of the risks involved in such a real estate investment. Prior to November 9, 1950, no negotiations had been conducted by Thirty for the disposition of its interest, exclusive of the land, in the property at 30 and 38-40 Broad Street.
The deed which conveyed title to the land at 30 and 38-40 Broad Street from Thirty to Connecticut on November 9, 1950, was expressly made ‘subject to the terms, covenants, conditions, limitations, agreements and provisions' contained in the lease of November 9, 1950, between Connecticut as lessor and Thirty as lessee.
Thirty incurred expenses in the amount of $122,801.10 in connection with the transfer of the land at 30 and 38-40 Broad Street to Connecticut.
On its consolidated Federal income tax return for the taxable year ending April 30, 1951, City claimed that a deductible loss in the amount of $3,947,801.10 had been sustained by Thirty as a result of the transfer of the land at 30 and 38-40 Broad Street to Connecticut. Of such claimed loss, $1,294,136.81 was applied by City to reduce gains realized by Thirty during the year ending April 30, 1951, under section 117(j) of the 1939 Code and $591,044.43 was applied by City to reduce ordinary income realized by Thirty during such year. Of the remainder of the claimed loss, $558,129.70 was claimed by City on Form 1139 as a net operating loss carryback to be applied against ordinary income realized by Thirty during the year ending April 30, 1950, and $528,835.68 was claimed by City as a net operating loss carryover and was applied against ordinary income realized by Thirty during the year ending April 30, 1952.
In a statutory notice of deficiency, dated July 13, 1959, respondent disallowed the loss deductions claimed for the taxable years ending April 30, 1950 through 1952. The notice contained the following explanation of the disallowance:
The transfer on or about November 9, 1950 by the Thirty Broad Street Corporation of land located at 30 and 38-40 Broad Street, New York, New York, in consideration for $4,000,000.00 and a leasehold, is held to constitute an exchange of like property under which no deductible loss is recognizable under Sections 112(b)(1) and 112(e) of the Internal Revenue Code of 1939.
The denial of this loss is the only matter presently in controversy between the parties.
On June 5, 1952, Thirty sold the building at 30 Broad Street and its leasehold interests as lessee of the land at 30 and 38-40 Broad Street and as sublessor of the land at 38-40 Broad Street to Thirty Associates, a corporation unrelated to both City and Thirty, for $7,100,000. Thirty reported a gain on the sale of $4,358,331.52 for Federal income tax purposes. In connection with this sale, also on June 5, 1952, Thirty and Connecticut signed an agreement of modification of the lease on the land at 30 and 38-40 Broad Street.
The gross rentals and net income derived by Thirty from the buildings at 30 and 38-40 Broad Street in each of the years ending April 30, 1944 through 1952, were as follows:
+--------------------------------+ ¦Year¦Gross rentals ¦Net income ¦ +----+--------------+------------¦ ¦ ¦ ¦(or loss) ¦ +----+--------------+------------¦ ¦1944¦$571,062.41 ¦($14,226.50)¦ +----+--------------+------------¦ ¦1945¦701,635.02 ¦97,848.44 ¦ +----+--------------+------------¦ ¦1946¦777,924.78 ¦205,584.74 ¦ +----+--------------+------------¦ ¦1947¦866,040.29 ¦262,700.20 ¦ +----+--------------+------------¦ ¦1948¦1,008,238.57 ¦371,057.15 ¦ +----+--------------+------------¦ ¦1949¦1,091,527.39 ¦399,309.60 ¦ +----+--------------+------------¦ ¦1950¦1,141,291.46 ¦421,516.75 ¦ +----+--------------+------------¦ ¦1951¦1,185,515.48 ¦433,606.26 ¦ +----+--------------+------------¦ ¦1952¦1,179,286.71 ¦281,703.70 ¦ +--------------------------------+
The above figures for the years 1951 and 1952 take into account ground rent paid by Thirty of $85,000 and $180,000, respectively. Repairs and other expenses of operation increased significantly during the year 1952 and account for the decline in net income during that year in excess of the decline attributable to the ground rent.
Net rental payments received by Thirty from Western Union Telegraph Company for 38-40 Broad Street amounted to $33,750 during the years 1944 through 1948 and to $38,750 during the years 1949 through 1952.
The properties at 30 and 38-40 Broad Street were assessed for purposes of real property taxes at the following values for the periods indicated:
+------------------------------+ ¦30 BROAD STREET ¦ +------------------------------¦ ¦Tax Year¦Land ¦Total ¦ +--------+----------+----------¦ ¦1942-43 ¦$2,200,000¦$5,075,000¦ +--------+----------+----------¦ ¦1943-44 ¦2,200,000 ¦5,075,000 ¦ +--------+----------+----------¦ ¦1944-45 ¦2,100,000 ¦4,950,000 ¦ +--------+----------+----------¦ ¦1945-46 ¦2,100,000 ¦4,950,000 ¦ +--------+----------+----------¦ ¦1946-47 ¦2,000,000 ¦4,850,000 ¦ +--------+----------+----------¦ ¦1947-48 ¦2,000,000 ¦5,000,000 ¦ +--------+----------+----------¦ ¦1948-49 ¦2,000,000 ¦5,100,000 ¦ +--------+----------+----------¦ ¦1949-50 ¦2,000,000 ¦5,200,000 ¦ +--------+----------+----------¦ ¦1950-51 ¦1,800,000 ¦5,150,000 ¦ +--------+----------+----------¦ ¦1951-52 ¦1,900,000 ¦5,150,000 ¦ +------------------------------+
38-40 BROAD STREET 1942-43 800,000 925,000 1943-44 740,000 860,000 1944-45 740,000 835,000 1945-46 695,000 815,000 1946-47 680,000 800,000 1947-48 680,000 800,000 1948-49 680,000 820,000 1949-50 680,000 820,000 1950-51 680,000 820,000 1951-52 700,000 840,000
Real property in New York City is required by law to be assessed at its full value for purposes of real property taxes.
The fair market value of the land at 30 and 38-40 Broad Street on November 9, 1950, was not in excess of $4 million. On the same day the fair market value of such land subject to the leaseback signed on that day was not in excess of $4 million.
A fair annual net rental payment for the land at 30 and 38-40 Broad Street on November 9, 1940, was not in excess of $180,000.
OPINION.
RAUM, Judge:
On November 9, 1950, Thirty purportedly conveyed a fee simple interest in the land at 30 and 38-40 Broad Street in New York City to Connecticut General Life Insurance Company for a cash consideration of $4 million. On the same day Connecticut leased back the same land to Thirty for an original term of 21 years for an annual net rental of $180,000. The true nature of these two transactions, which the parties agree were closely linked in form as well as in substance, is the issue to be decided.
Respondent has determined that Thirty's formal sale and immediate leaseback of the land did not constitute a bona fide sale and separate leasing for tax purposes, but rather that it was an exchange of ‘property * * * for property of a like kind’ plus boot (cash in the amount of $4 million) pursuant to sections 112(b)(1) and 112(e) of the 1939 Code
with the result that the loss which Thirty claimed
SEC. 112. RECOGNITION OF GAIN OR LOSS.(b) EXCHANGES SOLELY IN KIND.—(1) PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.— No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.(e) LOSS FROM EXCHANGES NOT SOLELY IN KIND.— If an exchange would be within the provisions of subsection (b)(1) * * * of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.
as a consequence of the purported sale was not deductible under the statute. Petitioner's primary position is that there was a genuine sale of the land, not an exchange of property interests. As proof that the transaction constituted a true sale, petitioner has presented evidence that the fair market value of the subject land at the time of the transfer was not in excess of the $4 million which Connecticut paid to Thirty. However, if we should hold that there was an exchange and not a sale for tax purposes, petitioner makes the secondary argument that such exchange was not of property of ‘like kind’ as required for nonrecognition of the loss under the statute.
Neither the amount of the loss which Thirty sustained if the sale was bona fide nor the manner in which such loss was carried back as a net operating loss and deducted in the taxable year ending April 30, 1950, deducted as a net operating loss for the taxable year ending April 30, 1951, and carried forward as a net operating loss and deducted in the taxable year ending April 30, 1952, is presently in issue.
After careful consideration of all the evidence, we agree with petitioner that there was a bona fide sale of the land by Thirty. Cf. Standard Envelope Mfg. Co., 15 T.C. 41; May Department Stores Co., 16 T.C. 547. Therefore, we do not pass upon the question whether the exchange of the particular leasehold interest here involved for an interest in fee in the same land could be considered an exchange of ‘like’ properties. Cf.sec. 29.112(b)(1)-1, Regs. 111; Century Electric Co., 15 T.C. 581, affirmed 192 F.2d 155 (C.A. 8) certiorari denied 342 U.S. 954.
The record shows that the transfer in question was made pursuant to Thirty's adopted policy of liquidating its property holdings in Lower Manhattan. It is this factor which in the main sets the instant case apart from prior sale and leaseback transactions considered by this Court. In particular it makes the present case distinguishable from both Century Electric Co., supra, upon which respondent chiefly relies, and Jordan Marsh Company v. Commissioner, 269 F.2d 453 (C.A. 2), reversing a Memorandum Opinion of this Court, which petitioner argues is controlling. We conclude, therefore, that it is not necessary for purposes of decision in the present case to decide whether the decision of the Court of Appeals for the Second Circuit in Jordan March is inconsistent with the result in the earlier Century Electric Co. case. Cf. Rev. Rul. 60-43, 1960-1 C.B. 687.
There is no dispute that Thirty had adopted a policy of liquidating its property interests in Lower Manhattan prior to the transactions here involved. It was stipulated that Thirty sold its interest in six Lower Manhattan properties, in addition to the subject property, between November 9, 1950, and June 5, 1952. After the latter date, Thirty no longer owned nor thereafter acquired any property in Lower Manhattan. In disposing of its interest in the property at 30 and 38-40 Broad Street, Thirty decided to sell its interest in the land and its interest in the improvements thereon separately. An officer of Thirty testified that this was done not only because the officers of Thirty believed that they could thereby obtain a higher overall price for the whole property, but also because they wanted to register a tax loss on the land to offset profits on other sales by the corporation. As a result only the land was transferred to Connecticut on November 9, 1950. Although it appears that Thirty had not yet negotiated the sale of the improvements on the land together with the leasehold interest that it obtained back from Connecticut, it is apparent that at the time of the sale to Connecticut Thirty intended also to liquidate these remaining interests in the property. The record reveals that it did in fact sell these interests in the 30 and 38-40 Broad Street property to an unrelated corporation, Thirty Associates, within 2 years, on June 5, 1952.
In these circumstances we think that the transfer of the land alone on November 9, 1950, was a bona fide sale. Thirty conveyed its fee interest in the property without reserving any right of repurchase. We have made a finding that the fair market value of the land on the date of transfer was not in excess of the $4 million which Connecticut paid to Thirty. In addition, we have made a finding that a fair annual net rental for this land on November 9, 1950, was not in excess of the $180,000 which Thirty agreed to pay Connecticut. Thus, it does not appear that the leaseback arrangement which Thirty and Connecticut signed as a part of the total transaction had any separate value which can properly be viewed as a portion of the consideration paid or exchanged.
The fact that Thirty was willing to sell the land in question only with some kind of leaseback arrangement included does not of itself detract from the reality of the sale. Nor does the fact that tax considerations in part motivated the particular transaction. Both of these factors were also present in Standard Envelope Mfg. Co., supra, and May Department Stores Co., supra, where it was held that bona fide sales had taken place. In those cases, as here, the sale was the result of extended arm's-length negotiation, the price paid was at least equal to the property's then fair market value, and the only interest retained by the seller was that of lessee for a definite term. While those cases did not involve a segregated sale of only land apart from the improvements thereon, we think that the presence of this factor in the instant case should not change the result. Since, as already noted, the conveyance here involved was made pursuant to a policy of liquidating Thirty's property holdings in the immediate area, in many respects the instant case presents an even stronger set of facts in support of the reality of the sale.
After November 9, 1950, we think that Thirty's rights as lessee of the land at 30 and 38-40 Broad Street were in no sense a ‘continuation of the old investment (in the land) still unliquidated.’ Commissioner v. P. G. Lake, Inc., 356 U.S. 260, 268; sec. 29.112(a)-1, Regs. 111. We are satisfied that Thirty yielded substantial economic and property rights by transferring its ownership in fee to Connecticut and that it succeeded for purposes of this transaction in liquidating its invested capital in the land. As such there was a true sale, and petitioner is entitled under the statute to recognize the loss that was thereby sustained.
Decision will be entered for the petitioner.