Appleby v. Commissioner , 41 B.T.A. 18 ( 1940 )

ESTATE OF EDGAR S. APPLEBY, DECEASED, EDGAR T. APPLEBY AND FRANCIS S. APPLEBY, CO-EXECUTORS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JOHN S. APPLEBY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Appleby v. Commissioner

Docket Nos. 93886, 94080.

United States Board of Tax Appeals

41 B.T.A. 18; 1940 BTA LEXIS 1248;

January 5, 1940, Promulgated

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">*1248 1. Tenants in common of inherited real property which they improved and rented held not within the term partnership under section 801, Revenue Act of 1934, and each of them may offset the income from such property by his individual capital losses.

2. The basis for gain from a condemnation award in respect of inherited property held to include the cost of improvements and the basis of structures demolished for the purpose of new construction.

3. An amount added to a condemnation award because of a delay in payment held part of the award taxable as capital gain and not interest.

John B. Coman, Esq., for the petitioner in Docket No. 93886.

Banton Moore, Esq., for the petitioner in Docket No. 94080.

Allen T. Akin, Esq., for the respondent.

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STERNHAGEN

">*18 The Commissioner determined deficiencies in the 1934 income tax of $37,116.57 of Edgar S. Appleby, deceased, and $40,074.31 of John S. Appleby. They contest the determination (1) that they are taxable as partners with the consequent limitation of their deductions of capital losses; (2) that the basis for gain from a condemnation award may not include the basis of demolished">*1249 structures and the cost of improvements; (3) that the part of a condemnation award which is attributable to the period between condemnation and payment is interest taxable as ordinary income; (4) that a part of the award attributable to severance damages is included in the capital gain; and (5) that $150 interest belonging to his wife is included in the income of John S. Appleby. Other issues were settled.

FINDINGS OF FACT.

1. John S. Appleby and Edgar S. Appleby (now deceased) of New York, New York, were brothers. They were coexecutors under the will of their father, Charles E. Appleby, who died testate on December 15, 1913, leaving to them in equal shares all his property, real and personal. They promptly divided and distributed the personal property and the proceeds of some realty converted into cash, but have never agreed with each other about the division of forty remaining parcels of land, held as tenants in common. Most of these parcels were under long lease. There has never been a final accounting of the Charles E. Appleby estate. The brothers have divided the net income currently.

">*19 In all business matters in respect of the property each brother has">*1250 acted individually. Agents for prospective lessees have consulted each separately, and have not always found them in agreement. Leases were signed by each; applications for insurance have been made by them as "individuals" and the policies have been made payable to and have been paid to each "as their interests may appear"; the consent of each has been separately sought in the adjustment of disputes under or the assignment of leases by lessees. Income from the properties has been deposited in a bank account kept in the name of the Charles E. Appleby estate, and checks received from tenants, insurers, and others have been payable to "Edgar S. Appleby and John S. Appleby" or to "Charles E. Appleby Estate." Bills connected with the properties have been sent to one brother or the other or the estate, and paid by checks on the estate bank account and signed by one or the other as executor. Two or three times a year each has drawn in his own favor a check which the other signed as executor, thereby dividing accumulations equally between themselves. They have had no office, stationery, or telephone in common; have never had a partnership agreement, held themselves out as partners, or">*1251 been so treated by persons with whom they had business relations. In 1932 they refused to execute and file a partnership income tax return, as requested by a revenue agent.

2. Among the parcels of real estate passing under the will of Charles E. Appleby was one of 39,850.25 square feet, situate on the southeast corner of Fifty-seventh Street and Twelfth Avenue, New York City. On it was a building, the value of which was $14,000. In 1917 petitioners had this building demolished for the purpose of erecting a garage, primarily to yield enough to pay the taxes, and also to produce more income. The garage was completed February 18, 1918, at the suggestion of two automobile dealers who became the first tenants. It cost $143,331.60, paid from funds in the estate bank account. In 1925 it was improved by the construction of an inside mezzanine floor at a cost of $8,449, paid by checks against the bank account signed by "Edgar S. Appleby, Exr." This construction was an improvement and not a repair, and no income tax deduction was taken because of it. The probable useful life of the garage is 50 years from the date of completion.

3. On january 27, 1933, the city of New York acquired">*1252 title by condemnation to 36,227.50 square feet of the property on the corner of Fifty-seventh Street and Twelfth Avenue, and later made an award of $683,555.50 for it. On October 2, 1934, the city paid to the petitioners $751,129.45, of which $67,573.95 was an increase in the original condemnation award because of the lapse of time between condemnation and payment. In connection with the condemnation, petitioners incurred expenses of $40,026.47, which were paid out of the ">*20 proceeds of the award. Of these expenses $3,378.70 are applicable to the increment added to the award. The portion of the land so acquired by the city had a value of $235,478.75, or $6.50 a square foot, on December 15, 1913.

4. In determining the income of John S. Appleby for 1934, the Commissioner included interest of $150 which belonged to Appleby's wife.

OPINION.

STERNHAGEN: 1. The Commissioner held that the "operation of a garage by the [two brothers] should be classified as a partnership within the meaning of section 801 of the Revenue Act of 1934. ¹

">*1253 The evidence shows that the garage was not operated by the taxpayers, and the postulate of the Commissioner's determination is not correct. They built it at the suggestion of two automobile dealers, for the purpose of leasing it to them, and the lessees operated it. Petitioners were merely the owners of the property, which was improved and rented primarily to defray the taxes.

The respondent argues that the petitioners, tenants in common of the property inherited from their father, and conceded to be not partners under New York law, were operating the property as a business enterprise and were therefore within the statutory category of partnership. He concedes that petitioners were not a syndicate or a pool; but says that they "constitute a group", that "by the decision to erect and operate the garage * * * they became engaged in a joint venture", and that "the all-inclusive 'other unincorporated organization'" is sufficiently broad to include them. The statutory term partnership, he says, "is all embracing of any business or financial operation carried on by two or more individuals other than as a trust, corporation or estate."

">*1254 The ownership of real property by tenancy in common is an estate so old and well known that it is impossible to believe that it was intended to be included in the statutory catalog of partnerships by such a general term as "group", "joint venture", or "other organization." Never, so far as we are advised, has it been regarded taxable as a unit, although its existence has always been recognized. Cf. I.T. 1604, II-1 C.B. 1 (1923); I.T. 2082, III-2 C.B. 176 (1924). If it were now to be held a statutory partnership because of the close relations of the tenants and their common interest in property it would be difficult to ">*21 exclude from the statutory term other relations having similar attributes, such as marital communities or tenancies by the entirety, cf. Poe v. Seaborn,282 U.S. 101">282 U.S. 101; Tyler v. United States,281 U.S. 497">281 U.S. 497; Champlin v. Commissioner, 71 Fed.(2d) 23. This the Commissioner does not expressly suggest, and there should be some fairly clear authoritative support for such an important and far reaching innovation, even though on the other hand the statutory term is not to be narrowly or rigidly construed. ">*1255 Cf. Morrissey v. Commissioner,296 U.S. 344">296 U.S. 344; Pinellas Ice & Cold Storage Co. v. Commissioner,287 U.S. 462">287 U.S. 462.

Although it will probably continue to be difficult to classify many of the imaginable varieties of businesses and interests in which more than one person share, there is aid in the report of the Senate Finance Committee proposing the 1932 statute. ² This clearly indicates that the new statute was intended primarily to provide a more definite category for syndicates, and for organizations similar to them, to pools, and to joint ventures, the taxation of the income of which had been troublesome. This is not said as to the income derived by tenants in common from simple ownership. Whether it could be said as to income from the operation of a trade or business by an organized group of tenants in common is not to be decided until the question arises in such a case. Cf. I.T. 2749, XIII-1 C.B. 99 (1934).

">*1256 The determination that the petitioners are members of a "partnership" under section 801(a)(3) is reversed. They are not limited in their deductions for capital losses by the ordinary income received from other sources, cf. Johnston v. Commissioner, 86 Fed.(2d) 732; certiorari denied, 301 U.S. 683">301 U.S. 683; Winmill v. Commissioner, 93 Fed.(2d) 494; reversed other point, 305 U.S. 79">305 U.S. 79, but each may offset the income derived by him from property held by them in common by his individual capital losses.

">*22 2. The Commissioner determined that the basis of gain to the petitioners from the condemnation award on the garage property must exclude the $14,000 value in 1913 of the structures which were demolished in 1917 and must also exclude the $8,449 cost of the mezzanine in 1925. He now concedes that the $8,449 is properly to be included within the basis.

The property was inherited in 1913 and the old structures were then upon it. They remained there yielding an inadequate return until 1917, when they were demolished to give place to the new garage. The petitioners contend that the original basis continued to be part">*1257 of the cost of the new structure, and the respondent says that the demolition in 1917 was the occasion for a deduction for loss at that time, with the resulting reduction of basis. The evidence shows that the demolition was necessary in order to construct the new building and that it was done for that purpose. The cost of demolition was therefore in fact one of the incidents of the cost of the new building, and had the petitioners taken deductions for losses in 1917 by reason of the voluntary destruction of the buildings, such deductions would have been disallowed and the basis of the property would have been carried on undiminished except by depreciation of the new structure. Arthur H. Ingle,1 B.T.A. 595">1 B.T.A. 595; Robert B. Griffin,17 B.T.A. 255">17 B.T.A. 255; Liberty Baking Co. v. Heiner, 37 Fed.(2d) 703; Spinks Realty Co. v. Burnet, 62 Fed.(2d) 860. In prior cases the purpose when the property was originally acquired to raze the existing structure was not the single controlling factor; the important question was whether the demolition of the old structure was part of the new project so that the cost of the demolished building">*1258 was reasonably to be regarded as part of the investment in the new capital asset. The rationale of the prior decisions is no less applicable to property acquired by inheritance than to property purchased.

The basis therefore of the garage property should not be reduced by reason of the destruction of the old buildings in 1917.

3. The $67,573.95 which was added by the city to the original award because of the delay in payment is taxed by the Commissioner as interest, and the petitioners contend that it is part of the award and therefore within their capital gain. It is part of the award and not interest. Seaside Improvement Co. v. Commissioner, 105 Fed.(2d) 990; certiorari denied, 308 U.S. 618">308 U.S. 618; cf. Baltimore & Ohio Railroad Co. v. Commissioner, 78 Fed.(2d) 460, 464; Commissioner v. Meyer, 104 Fed.(2d) 155.

4. Petitioner John S. Appleby would have the gain from the condemnation award reduced by a percentage regarded as allocable to severance or consequential damages applicable to the small part of the land which remained. The amount of the alleged severance damages is arrived at by a mathematical">*1259 computation of a real estate ">*23 dealer who was familiar with the condemnation proceeding and purported to analyze the evidence in that proceeding and impute the result of his analysis to the award. It does not appear, however, that the award itself contained such a separation or any classification of its parts. It apparently was a lump sum. No division of it can be made on this record. Cf. Marshall C. Allaben,35 B.T.A. 327">35 B.T.A. 327.

5. The $150 which the Commissioner added as interest to John S. Appleby's income is shown without contradiction to have belonged to another and not to him. The determination taxing it to petitioner is reversed.

Decision will be entered under Rule 50.

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Footnotes

• 1. SEC. 801. DEFINITIONS.

  (a) When used in this Act -

  * * *

  (3) The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization. ↩

• 2. Some confusion has existed over the requirements of the prior acts as to the time and manner of returning income from the operations of joint ventures, syndicates, pools, and similar organizations. If the syndicate was not an association, partnership, or trust within the meaning of the act there was no express requirement in the act or regulations for the filing of a syndicate return, and the sole responsibility of making returns of the annual gains and losses of the syndicate was placed upon the several members. Quite frequently, however, the members of such a syndicate overlooked the necessity of their making returns each year of their shares in the annual gains and losses from syndicate operations and assumed that they were required only to make returns of their shares in the ultimate gain or loss from the entire syndicate operations in the year when the syndicate was wound up or liquidated. Moreover, a strict observance of the letter of the prior acts would have required each member to determine his annual share in the syndicate gains or losses upon the basis of his own accounting period and according to his own method of accounting, irrespective of the accounting period or method of accounting upon which the books or records of the syndicate were kept.

  The bill does away with this uncertainty by placing all joint ventures, syndicates, pools, and similar organizations, which do not constitute associations or trusts, in the category of partnerships, and the members of such syndicates, pools, etc., in the category of partners. This provision will have the effect of requiring the syndicate to file a partnership return and will thus make it easier for the members to determine the distributive shares in the syndicate gains and losses which are to be included in their own returns ↩