James River Apartments, Inc.
v.
Comm'r of Internal Revenue

United States Tax CourtMar 25, 1970
54 T.C. 618 (U.S.T.C. 1970)

Docket No. 4917-67.

1970-03-25

JAMES RIVER APARTMENTS, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Edwin T. Steffy and Phillip Heller Sachs, for the petitioner. Thomas C. Morrison, for the respondent.


Edwin T. Steffy and Phillip Heller Sachs, for the petitioner. Thomas C. Morrison, for the respondent.

Petitioner leased from the United States for a term of 75 years a tract of land at Fort Eustis, Va., and built thereon buildings containing over 400 apartments which were completed in 1954 at a cost of over $3,300,000. In its fiscal year ended Apr. 30, 1958, the United States brought proceedings to condemn this property in a Federal District Court which authorized its taking; the United States assumed a mortgage placed upon the property by petitioner which in 1958 had an unpaid balance in excess of petitioner's depreciated cost; and the United States paid into court an additional sum of $182,000 as its estimate of just compensation which petitioner withdrew subject to a requirement that if the ultimate award determined by the court should be less than this amount an appropriate refund would be made. Petitioner intended to replace the condemned property at the conclusion of all phases of the condemnation proceeding. Petitioner erroneously failed to make any specific election under sec. 1033, I.R.C. 1954, did not include in its income reported in its returns for 1958 through 1963 any amounts representing any gain resulting from an involuntary conversion of this property, but did include in the balance sheet as ‘other liabilities' items identified as ‘net credit in condemnation’ relating to ‘leasehold condemned by U.S. Government subject to mortgage.’ No real estate was shown as an asset on its balance sheet but an item under ‘surplus reserves' was identified as ‘interest accrued on condemnation award deposit refundable to U.S. Government.’ In its fiscal year ended Apr. 30, 1964, the condemnation was finally settled by the parties, an additional $425,500 was paid to petitioner as compensation, and the entire amount of the gain was reported by petitioner in its return for that year which also included an elaborate ‘Statement Pursuant to Regulations 1.1033(a)-2(c) (2)‘ reporting the transaction in detail and electing to have the ‘condemnation treated as an involuntary conversion of property under I.R.C. section 1033.’ In April 1965, petitioner applied for an extension of time for the replacement of its condemned property. This request was denied on the ground that it was not ‘filed prior to or within a reasonable time after the expiration of one year after the close of the first taxable year in which any part of the gain from the involuntary conversion is realized’ as required by sec. 1.1033(a)-2(c) (3) of the regulations. The parties are now in agreement that petitioner realized a part of such gain in fiscal 1958. Held, (1) petitioner's failure to report such gain in its return for fiscal 1958 constituted a constructive election under sec. 1033, I.R.C. 1954, and (2) respondent is not barred from assessing a deficiency for petitioner's fiscal 1958 since none of petitioner's returns prior to that for fiscal 1964 constituted a notification to respondent ‘of the replacement of the converted property or of an intention not to replace’ as required by sec. 1033(a)(3)(C)(i), I.R.C. 1954.

Respondent determined the following deficiencies in petitioner's income tax:

+--------------------------------+ ¦Fiscal year ended ¦Deficiency ¦ +-------------------+------------¦ ¦Apr. 30, 1958 ¦$59,703.25 ¦ +-------------------+------------¦ ¦Apr. 30, 1964 ¦131,020.10 ¦ +--------------------------------+

Other issues having been resolved by agreement of the parties, the only question remaining for our decision is whether, on the facts of this case, an assessment based upon a notice of deficiency dated July 3, 1967, in which respondent determined that petitioner had realized long-term capital gains arising from a condemnation of petitioner's property during its fiscal year ended April 30, 1958, is permitted under the statute of limitations contained in section 1033(a)(3)(C) of the Internal Revenue Code of 1954 and the regulation thereunder prescribed by respondent.

Hereafter all statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.

FINDINGS OF FACT

Most of the facts have been stipulated by the parties. The stipulations, together with the exhibits attached thereto, are hereby incorporated by this reference.

On the date of filing of its petition, petitioner was a corporation doing business and maintaining its principal office in Baltimore, Md. Petitioner, an accrual basis taxpayer, reported its income taxes on the basis of a fiscal year ended April 30 and filed its income tax returns with the district director of internal revenue, Baltimore, Md.

The petitioner was incorporated under the laws of the State of Maryland on April 30, 1952. Its principal purpose was to construct and operate a housing project located on the Fort Eustis Military Reservation, Va. On November 17, 1952, petitioner entered into a 75-year lease with the United States of America for a 44.3-acre tract of land at Fort Eustis, Va. (hereinafter referred to as petitioner's leasehold interest), for a yearly rental of $100. Under the terms of the lease petitioner was required to, and ultimately did, construct 68 buildings consisting of 412 apartment units on this tract.

In order to finance the construction of these apartment units, the petitioner obtained a loan of $3,337,200, secured by a mortgage on its leasehold interest, from the Riggs National Bank of Washington, D.C., on January 1, 1953. Petitioner's loan was fully insured by the United States of America through the Federal Housing Commission under the provisions of title VIII of the National Housing Act. Under the terms of the loan, interest was payable monthly at the rate of 4 percent per annum on the unpaid balance beginning February 1953; principal was payable monthly in the amount of $15,295.50 beginning July 1, 1954; and the balance of any unpaid principal and interest was finally payable in fully on January 1, 1987.

The apartment units were actually built by the Charles Construction Co., Inc., under contract with the petitioner. Both the petitioner and the Charles Construction Co., Inc., were corporations then wholly owned by Joseph F. Hughes and his now deceased wife, Ethelyn Hughes. Petitioner's original cost of constructing the apartment units was $3,349,020.00. Construction was completed in June 1954.

On October 1, 1957, the United States of America, pursuant to acts of Congress permitting the acquisition of land for military purposes, filed a complaint and declaration of taking and deposited $1 with the U.S. District Court for the Eastern District of Virginia to commence an action for the taking and and condemnation of petitioner's leasehold interest. The $1 deposit was the amount of just compensation then estimated by the Department of Army due the petitioner for the equitable value of its leasehold interest. On the same date the Department of Army, by contract with the Federal Housing Commission and the Federal National Mortgage Association, fully assumed petitioner's then-remaining loan and mortgage in the amount of $3,163,771.33 held by the Riggs National Bank of Washington, D.C. The same day, the District Court ordered that the United States of America be given the right of possession as of October 15, 1957.

On the date of the taking (October 1, 1957), petitioner's final adjusted basis in said leasehold interest was $2,912,998.01 which was the difference between its original cost of $3,349,020 and all allowable and allowed depreciation in the total sum of $436,021.99. As of the close of petitioner's taxable year ended April 30, 1958, petitioner incurred $11,960.31 in condemnation expenses with respect to its leasehold interest. Thus petitioner's gain with respect to the amount realized from the above-mentioned mortgage assumption (after deducting condemnation expenses) was $238,813.01 (hereinafter referred to as petitioner's mortgage gain).

On October 9, 1957, petitioner filed a motion to dismiss the condemnation proceedings for failure to pay just compensation or, in the alternative, to require the payment of just compensation for its leasehold interest. On October 15, 1957, the District Court vacated its earlier order of October 1, 1957, and ordered that the United States of America be given the right of possession as of November 1, 1957. Then on October 23, 1957, the United States of America amended its declaration of taking and increased its estimate of just compensation due the petitioner to an estimate of $182,000. On November 8, 1957, the United States of America deposited an additional $181,999 with the District Court.

On January 7, 1958, petitioner drew the $182,000 out of court. Thereafter, under the applicable law, the petitioner had full use of this sum subject only to the requirement that, in the event the ultimate award in the condemnation proceeding should be less than this sum, it refund the difference between the amount of the award and the $182,000 to the United States of America with 6-percent interest thereon. The $182,000 is hereinafter referred to as petitioner's deposit gain. After receiving the $182,000, petitioner invested it in Government securities and reported the interest therefrom as its income during the years here in question. From November 8, 1957, until at least July 14, 1965, petitioner intended to replace the condemned property at some time after the conclusion of all phases of the condemnation proceedings.

A contingency most unlikely to occur in view of the fact that the $182,000 represented an estimate of just compensation made by the condemnor itself, the United States.

Petitioner timely filed its 1958 U.S. Corporation Income Tax Return for the fiscal year ended April 30, 1958 (hereinafter petitioner's income tax returns will sometimes be referred to by the calendar year in which petitioner's fiscal year ends). On petitioner's 1958 return, petitioner did not include in its gross income the $238,813.01 mortgage gain or the $182,000 deposit gain. Petitioner's 1958 return did not include a Schedule D and showed no capital gains or losses. As required on Schedule L (a balance sheet) of the return, the petitioner showed its assets, liabilities, and capital account. On line 19 of said Schedule L, petitioner showed ‘other liabilities' in its ‘End of Taxable Year’ balance sheet in the amount of $420,813.01 and, as required, petitioner attached a statement in explanation of this item. This explanation read as follows:

+--------------------------------------------------------------------+ ¦SCHEDULE L-OTHER LIABILITIES ¦ +--------------------------------------------------------------------¦ ¦Leasehold condemned by U.S. Government subject to mortgage:¦ ¦ +--------------------------------------------------------------------+

Credits Mortgage $3,163,771.33 Deposit in condemnation 182,000.00 $3,345,771.33

Debits Property account 3,349,020.00 Less reserve for depreciation 436,021.99 2,912,998.01 Condemnation expenses 11,960.31 2,924,958.32 Net credit in condemnation 420,813.01

On petitioner's income tax returns for its fiscal years ended April 30, 1959, 1960, 1961, 1962, and 1963, petitioner stated that its principal business was ‘rental of apartments.’ Petitioner showed on its Schedule L balance sheets that it held no real estate and on line 19 of Schedule L, petitioner showed ‘other liabilities' in the amount of $420,813.01 on its 1959, 1960, and 1961 returns, and in the amount of $415,912.53 on its 1962 and 1963 returns. On petitioner's 1959 return and also on its returns for 1960, 1961, 1962, and 1963, petitioner attached a statement in explanation of its ‘other liabilities,‘ substantially the same as the statement which petitioner included in its 1958 return. On its returns from 1959 through 1963, petitioner also showed varying amounts on line 22 of Schedule L as ‘surplus reserves' and, as required, petitioner attached a statement in explanation of this item. The attached statement in petitioner's 1959 tax return showed the following:

The difference between the amounts which petitioner reported as ‘other liabilities' on its 1962 and 1963 returns and as ‘other liabilities on its earlier returns is due to the fact that petitioner reported as ‘Debts-Condemnation Expenses' the amount of $16,860.79 in its 1962 and 1963 returns, rather than the amount of $11,960.31 which it reported on its earlier returns.

+-----------------------------------------------------------------------------+ ¦SCHEDULE L-SURPLUS RESERVES ¦ +-----------------------------------------------------------------------------¦ ¦Interest accrued on condemnation award deposit refundable to U.S. Government:¦ +-----------------------------------------------------------------------------¦ ¦Year ended Apr. 30, 1959 ¦$10,920 ¦ ¦ +--------------------------------------------+------------+-------------------¦ ¦Year ended Apr. 30, 1958 ¦3,458 ¦ ¦ +--------------------------------------------+------------+-------------------¦ ¦Total ¦ ¦ $14,378 ¦ +-----------------------------------------------------------------------------+

The amount reported as ‘surplus reserve’ in petitioner's earlier returns reflected the greater amount of ‘interest accrued’ at the end of the later taxable years. The ‘surplus reserve’ presumably represented amounts that petitioner might have to pay as interest if it were ordered by a final court decree to refund its entire $182,000 deposit gain to the United States of America.

The only gross income reported by petitioner on its tax returns from 1959 through 1963 was income from interest on obligations of the United States.

In November 1962 an agent of the Internal Revenue Service inspected either the 1959 or the 1960 tax return of petitioner in the course of an examination of a return of another corporation owned by Joseph F. Hughes. Irwin Hartlove, a certified public accountant whose firm had prepared petitioner's income tax returns from 1959 until the time of the trial of this case and who had personally prepared petitioner's income tax returns since 1962, was questioned by the agent on the item reported as ‘other liabilities' in the Schedule L balance sheets on petitioner's income tax return for the year being inspected (either 1959 or 1960). In response Hartlove told the agent that the item represented an amount being held in abeyance as a result of the condemnation proceedings described above and that the reason the item was reported in that manner on the return was because the final amount of the condemnation award was still in dispute in court. The agent asked no further questions and concluded his inspection of petitioner's income tax return.

In November 1963 petitioner and the United States of America agreed to settle the pending condemnation case for the sum of $607,500, consisting of the $182,000 which petitioner had previously ‘drawn out of Court’ (the language of the stipulation) and an additional payment of $425,500. Pursuant to this settlement, on January 24, 1964, judgment was entered by the District Court, by stipulation of the parties, setting the ‘equitable value’ (again the language of the stipulation) of petitioner's leasehold interest at $607,500. The addition $425,500 was received by the petitioner on March 6, 1964.

On petitioner's 1964 return petitioner reported the entire gain realized from the condemnation of its leasehold interest by including said gain in Schedule D thereof as follows:

+-----------------------------------------------------------------------------+ ¦PART II.-SALE OR EXCHANGE OF PROPERTY UNDER SECTION 1231 ¦ +-----------------------------------------------------------------------------¦ ¦ ¦ ¦ ¦ ¦e. ¦f. Cost or ¦ ¦ ¦ ¦ ¦ ¦ ¦Depreciation¦other basis,¦ ¦ ¦ ¦ ¦ ¦ ¦allowed ¦ ¦ ¦ +------------+--------+-----+------------+------------+------------+----------¦ ¦ ¦ ¦ ¦ ¦(or ¦cost of ¦ ¦ ¦ ¦ ¦ ¦ ¦allowable) ¦subsequent ¦ ¦ ¦ ¦ ¦ ¦ ¦since ¦ ¦ ¦ +------------+--------+-----+------------+------------+------------+----------¦ ¦a. Kind of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦property (if¦b. Date ¦c. ¦d. Gross ¦acquisition ¦improvements¦g. Gain or¦ ¦necessary, ¦acquired¦Date ¦sales price ¦or ¦(if not ¦loss ¦ ¦attach ¦ ¦sold ¦ ¦ ¦ ¦ ¦ ¦statement ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+--------+-----+------------+------------+------------+----------¦ ¦of ¦(mo., ¦(mo.,¦ ¦ ¦ ¦ ¦ ¦descriptive ¦day, ¦day, ¦ ¦Mar. 1, 1913¦purchased ¦(d plus e ¦ ¦details not ¦yr.) ¦yr.) ¦ ¦ ¦attach ¦less f) ¦ ¦shown below)¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+--------+-----+------------+------------+------------+----------¦ ¦ ¦ ¦ ¦ ¦(attach ¦explanation)¦ ¦ ¦ ¦ ¦ ¦ ¦schedule) ¦and ¦ ¦ +------------+--------+-----+------------+------------+------------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦expense of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦sale ¦ ¦ +------------+--------+-----+------------+------------+------------+----------¦ ¦4. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Involuntary ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦conversion ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦of property ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statement ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+--------+-----+------------+------------+------------+----------¦ ¦attached: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Apartment ¦Pr. 1957¦1964 ¦3,771,271.33¦436,021.99 ¦3,444,983.63¦762,309.69¦ ¦Buildings ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+

5. Total (If gain, enter on line 9; if loss, enter on line 11. Identify as gain or loss from Part II.) PART III.-CAPITAL ASSETS Short-Term Capital Gains and Losses-Assets Held for Not More than 6 Months 6. 7. Unused capital loss carryover from five preceding taxable years (attach statement)

8. Total of short-term capital gains or losses or difference between short-term capital gains and losses Long-Term Capital Gains and Losses-Assets Held for More Than 6 Months 9. Gain from Part II 762,309.69

10.Total of long-term capital gains or losses or differences between long-term capital gains and losses Stm. Att

A schedule attached to petitioner's Schedule L balance sheets and referring to lines 12 and 19 thereof reflects the following:

+---------------------------------------------------------------+ ¦BALANCE SHEETS ¦ +---------------------------------------------------------------¦ ¦ ¦5/1/63 ¦4/30/64 ¦ +-----------------------------------------+----------+----------¦ ¦Other assets: ¦ ¦ ¦ +-----------------------------------------+----------+----------¦ ¦Deposits ¦ ¦$12,250.00¦ +-----------------------------------------+----------+----------¦ ¦Prepaid insurance ¦$818.49 ¦1,205.25 ¦ +-----------------------------------------+----------+----------¦ ¦Mortgage financing ¦18,202.95 ¦18,202.95 ¦ +-----------------------------------------+----------+----------¦ ¦Prepaid taxes ¦ ¦11,963.35 ¦ +-----------------------------------------+----------+----------¦ ¦Prepaid rents ¦ ¦1,010.37 ¦ +-----------------------------------------+----------+----------¦ ¦Sample apartment deferred expenses ¦ ¦2,222.27 ¦ +-----------------------------------------+----------+----------¦ ¦Total ¦19,021.44 ¦46,854.19 ¦ +-----------------------------------------+----------+----------¦ ¦Other liabilities: ¦ ¦ ¦ +-----------------------------------------+----------+----------¦ ¦Payroll taxes ¦ ¦71.66 ¦ +-----------------------------------------+----------+----------¦ ¦Real estate taxes ¦ ¦2,153.53 ¦ +-----------------------------------------+----------+----------¦ ¦Gain on condemnation (statement attached)¦415,912.53¦762,309.69¦ +-----------------------------------------+----------+----------¦ ¦Security deposits ¦ ¦15,701.00 ¦ +-----------------------------------------+----------+----------¦ ¦Total ¦415,912.53¦780,235.88¦ +---------------------------------------------------------------+

The following statement (hereinafter petitioner's 1033 statement) is included in petitioner's 1964 return:

JAMES RIVER APARTMENTS, INC.

Baltimore, Maryland

April 30, 1964

Statement Pursuant to Regulations 1.1033(a)-2(c)(2):

In October 1957, the U.S. Government, pursuant to condemnation proceedings, took over the Fort Eustis Apartments (a Wherry Housing project) located in Fort Eustis, Virginia, which apartments were owned and operated by taxpayer. The U.S. Government tendered a refundable deposit of $182,000.00 in settlement of the condemnation; taxpayer refused to accept this settlement and, accordingly, brought suit against the U.S. Government. This suit was finally settled on March 9, 1964, and taxpayer received an award of $607,500.00 (including the refundable deposit) in full settlement. The details of the award are as follows:

+-----------------------------------------------------+ ¦FHA mortgage ¦ ¦$3,163,771.33¦ +--------------------------+------------+-------------¦ ¦Cash ¦$607,500.00 ¦ ¦ +--------------------------+------------+-------------¦ ¦Condemnation expenses ¦95,963.63 ¦511,536.37 ¦ +--------------------------+------------+-------------¦ ¦Amount to be reinvested ¦ ¦3,675,307.70 ¦ +--------------------------+------------+-------------¦ ¦Cost of property condemned¦3,349,020.00¦ ¦ +--------------------------+------------+-------------¦ ¦Depreciation reserves ¦436,021.99 ¦2,912,998.01 ¦ +--------------------------+------------+-------------¦ ¦ ¦ ¦762,309.69 ¦ +-----------------------------------------------------+

Taxpayer hereby elects to have this condemnation treated as an involuntary conversion of property under I.R.C. section 1033.

Taxpayer to date has invested $1,151,177.27 in similar property known as Mount Pleasant Heights Apartments located on McClean Boulevard near Northern Parkway, Baltimore, Maryland, and expects to invest the balance of the amount required to be reinvested in other similar property within the time prescribed under section 1033 of the Internal Revenue Code and related Regulations.

The parties have stipulated that petitioner is entitled to reduce its 1964 condemnation gain only by $83,419.62 in condemnation expenses and not by $95,963.63 as shown on its 1964 return. Thus, petitioner's receipt of said $425,500 resulted in an additional $342,080.38 realizable long-term capital gain ($425,500 less $83,419.62) which is hereinafter sometimes referred to as petitioner's ‘final award gain.’

As referred to in petitioner's ‘1033 statement,‘ petitioner constructed an apartment project known as Mount Pleasant Heights Apartments on McClean Boulevard, Baltimore, Md., on land in which it had previously acquired a leasehold interest. The total cost of construction was $1,151,177.27.

Pursuant to Income Tax Regulations section 1.1033(a)-2(c)(3), on April 22, 1965, by letter to the district director, Baltimore, Md., the petitioner applied for an extension of time for the replacement of its condemned leasehold interest from April 30, 1965, until June 30, 1966. Petitioner alleged in this letter that the entire condemnation gain was realized in 1964 because the final condemnation award had not been determined by the court until March 9, 1964, and that the resulting statutory replacement deadline of April 30, 1965, provided insufficient time to complete negotiations for the anticipated construction of a $2 1/2-million apartment complex and have it completed by April 30, 1965. In its letter, the petitioner further alleged that its $1,151,177.27 Mount Pleasant Heights Apartments plus its $2,566,000 anticipated construction would total $3,717,177.27, an amount sufficient to meet its required $3,675,307.70 replacement. The anticipated construction was to take place on a 16-acre tract adjacent to Fort Eustis on a road leading into Fort Eustis.

In response to the petitioner's application for extension, the district director requested additional information which was then provided by the petitioner. On July 14, 1965, the acting district director declined to grant petitioner's requested extension of the period for replacement for the following reasons:

In view of the foregoing, and on the basis of the information contained in your letters of April 22 and July 6, it is our conclusion that a part of the gain from this involuntary conversion was realized during your taxable year ended April 30, 1958.

Section 1.1033(a)-2(c)(3) of the regulations provides, in part and in effect, that an application for extension of the period within which to replace involuntarily converted property shall be filed prior to or within a reasonable time after the expiration of one year after the close of the first taxable year in which any part of the gain from the involuntary conversion is realized.

Therefore, inasmuch as your application for extension of the period for replacement was not filed prior to April 30, 1959, and was not filed within a reasonable time after that date, we decline to grant any extension of the period within which you may replace the involuntarily converted property.

On July 3, 1967, respondent issued his statutory notice of deficiency, in which he determined that the $238,813.01 mortgage gain was a recognizable long-term capital gain to be included in petitioner's income for 1958, and that both the $182,000 deposit gain and the $342,080.38 final award gain were recognizable long-term capital gains to be included in petitioner's income for 1964.

In its petition, the petitioner alleged that respondent erred in failing to determine that its replacement period with respect to its involuntarily converted leasehold interest was still open. The petitioner also alleges that the respondent erred in his statutory notice of deficiency by including the $182,000 deposit gain in 1964 instead of 1958. Petitioner further alleged that the period of limitations on the making of assessments bars the assessment of any deficiency arising with respect to 1958.

In response to petitioner's allegations, respondent in his ‘Amendment to Answer,‘ has asked the Court to make the following alternative redeterminations of deficiencies:

a) If 1958 is not barred because of the provisions of section 1033 and the $182,000 deposit gain should be taxed as such to petitioner in 1958, then the deficiencies should be redetermined to be as follows:

+-----------------------------------+ ¦Taxable year ended ¦Deficiencies ¦ +--------------------+--------------¦ ¦Apr. 30, 1958 ¦$105,203.25 ¦ +--------------------+--------------¦ ¦Apr. 30, 1964 ¦85,520.10 ¦ +-----------------------------------+

b) If 1958 is not barred because of the provisions of section 1311 through 1315, then the deficiencies should be redetermined to be as follows:

+-----------------------------------+ ¦Taxable year ended ¦Deficiencies ¦ +--------------------+--------------¦ ¦Apr. 30, 1958 ¦$45,500.00 ¦ +--------------------+--------------¦ ¦Apr. 30, 1964 ¦85,520.10 ¦ +-----------------------------------+

As of the trial of this case petitioner had not invested any of its condemnation proceeds in any project other than the Mount Pleasant Heights Apartments. In a ‘Second Supplemental Stipulation of Facts' filed after the trial of this case, the parties agreed as follows:

Although petitioner still maintains that its legal position is correct as to its entitlement to a further extension of time for replacement, the petitioner at this time no longer desires to acquire further replacement property. Accordingly, petitioner concedes that even if the Court should sustain its legal positions with respect to its entitlement for an extension of time for replacement, the legal issue raised by said position has become moot since petitioner now abandons its intention to make the required replacement under section 1033.

OPINION

KERN, Judge:

As a result of certain stipulations and concessions by the parties in the instant case most of the facts, and even most of the tax consequences arising from these facts, are no longer in dispute. The parties now agree that the final award gain is recognizable and taxable as capital gain in petitioner's 1964 tax year, and that the mortgage gain and the deposit gain are to be treated as capital gains realized and recognizable in petitioner's 1958 tax year. The parties also agree that any issues with respect to sections 1311 through 1315, raised by respondent in his amended answer, are not now subject to disposition for lack of the prerequisite ‘determination’ as defined in section 1313, though respondent asserts that he is not precluded from relying upon sections 1311 through 1315 issue in subsequent litigation if it should become necessary.

One issue remains for our decision. It arises from the fact that respondent's statutory notice of deficiency with respect to the 1958 gains was mailed to petitioner almost 9 years after petitioner's timely filed 1958 income tax return was due. Thus, we must decide permit the assessment of any deficiency with respect to petitioner's 1958 condemnation gains.

The portions of section 1033 pertinent to the instant controversy are as follows:

SEC. 1033. INVOLUNTARY CONVERSIONS.

(a) GENERAL RULE.- If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted

(1) CONVERSION INTO SIMILAR PROPERTY.- INTO property similar or

related in service or use to the property so converted, no gain shall be recognized.

(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, and the disposition of the converted property (as defined in paragraph (2)) occurred after December 31, 1950, the gain (if any) shall be recognized except to the extent hereinafter provided in this paragraph:

(A) NONRECOGNITION OF GAIN.- If the taxpayer during the period specified in subparagraph (B), 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 (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property * * * . Such election shall be made at such time and in such manner as the Secretary or his delegate may by regulations prescribe. * * *

(B) PERIOD WITHIN WHICH PROPERTY MUST BE REPLACED.- THE period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, * * * and ending

(i) 2 years after the close of the first taxable year in which any part of the gain upon the conversion is realized, or

(ii) subject to such terms and conditions as may be specified by the Secretary or his delegate, at the close of such later date as the Secretary or his delegate may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary or his delegate may by regulations prescribe.

(C) TIME FOR ASSESSMENT OF DEFICIENCY ATTRIBUTABLE TO GAIN UPON CONVERSION.-If a taxpayer has made the election provided in subparagraph (A), then

(i) the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain on such conversion is realized, attributable to such gain shall not expire prior to the expiration of 3 years from the date the Secretary or his delegate is notified by the taxpayer (in such manner as the Secretary or his delegate may by regulations prescribe) of the replacement of the converted property or of an intention not to replace, and

(ii) such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of section 6212(c) or the provisions of any other law or rule of law which would otherwise prevent such assessment.

Pursuant to authority expressly delegated to respondent by Congress by virtue of section 1033(a)(3)(A) and 1033(a)(3)(C), respondent has published Income Tax Regulations sections 1.1033(a)-2(c)(2) and 1.1033(a)-2(c)(5) relating to the manner in which a taxpayer may elect to defer recognition of gain on an involuntary conversion. These regulations provide as follows:

Sec. 1.1033(a)-2. Involuntary conversion where disposition of the converted property occurred after December 31, 1950.

(c) Conversion into money or into dissimilar property

(2) All of the details in connection with an involuntary conversion of property at a gain (including those relating to the replacement of the converted property, or a decision not to replace, or the expiration of the period for replacement) shall be reported in the return for the taxable year or years in which any of such gain is realized. * * * If, at the time of filing such a return, the period within which the converted property must be replaced has expired, or if such an election is not desired, the gain should be included in gross income for such year or years in the regular manner. A failure to so include such gain in gross income in the regular manner shall be deemed to be an election by the taxpayer * * * even though the details in connection with the conversion are not reported in such return. If, after having made an election under section 1033(a)(3), the converted property is not replaced within the required period of time, or replacement is made at a cost lower than was anticipated at the time of the election, or a decision is made not to replace, the tax liability for the year or years for which the election was made shall be recomputed. Such recomputation should be in the form of an ‘amended return.’ * * *

(5) If a taxpayer makes an election under section 1033(a)(3), any deficiency * * * attributable to such gain may be assessed at any time before the expiration of three years from the date the district director with whom the return for such year has been filed is notified by the taxpayer of the replacement of the converted property or of an intention not to replace, or of a failure to replace, within the required period, notwithstanding the provisions of section 6212(c) or the provisions of any other law or rule of law which would otherwise prevent such assessment. * * * Such notification should be made in the return for the taxable year or years in which the replacement occurs, or the intention not to replace is formed, or the period for replacement expires * * *

Although petitioner failed to make an affirmative explicit election under section 1033 on its 1958 return and although its failure to report in that return any gain from the condemnation of its leasehold interest was due to what it now contends was a mistake, respondent contends and petitioner does not seriously deny that petitioner nevertheless made a constructive election to have section 1033 apply to its 1958 condemnation gains by failing to include any part of these gains in gross income in its 1958 return ‘in the regular manner’ as described in regulations section 1.1033(a)-2(c)(2) set out above. We agree. Feinberg v. Commissioner, 377 F.2d 21, 24 (fn. 2) (C.A. 8, 1967), affirming 45 T.C. 635 (1966). See also H. Rept. No. 798, to accompany H.R. 3590 (Pub. L. No. 251, ch. 661) 82d Cong., 1st Sess., p. 4 (1951), providing for the enactment of the predecessor of section 1033(a)(3), which contained the following paragraph:

The Bill also provides specifically that the benefits of section 112(f)(3) are elective. Such election is to be made at such time and in such manner as the Secretary may prescribe by regulations. Such regulations could provide, for example, that a failure to report the gain on the return for the taxable year in which the gain is realized shall constitute an election to take the benefits of section 112(f)(3).

The only substantial problem which remains for us to decide is whether a notification called for by section 1033(a)(3)(C)(i) as a prerequisite to the beginning of the 3-year extension of ‘the statutory period for the assessment of any deficiency’ was given by petitioner which complied with the appropriate statute and regulations. Petitioner makes no contention that the information contained in its 1959 return constituted a notification ‘of the replacement of the converted property or of an intention not to replace’ as required by section 1033(a)(3)(C)(i) since it is obvious that the converted property had not been replaced and the petitioner had no intention not to replace it. However it does contend that the 1959 return constituted a notification of ‘a failure to replace’ within the meaning of Income Tax Regulations section 1.1033(a)-2(c)(5) and therefore the 3-year period of limitation on the assessment of a deficiency arising from the realization of gain from the conversion of property on condemnation begins from the date of the filing of the 1959 return.

In our opinion petitioner's 1959 income tax return does not constitute a valid notification under section 1033(a)(3)(C)(i) even if that section is construed as if it contained the liberalizing interpolation of section 1.1033(a)-2(c)(5) of the regulations. The limited information submitted in petitioner's 1959 return identifies the condemnation by including in the liabilities on its balance sheet an item in ‘Schedule L- Other Liabilities' figures showing a ‘Net Credit in Condemnation’ of $420,813.01. The balance sheet information which appeared on petitioner's 1959 return and its other income tax returns was included therein and submitted only to meet normal filing requirements irrespective of a possible 1033 election. It appears unlikely to us that, even after a careful inspection of petitioner's 1959 return, an agent of respondent would be able to conclude that there was a condemnation during the previous taxable year with respect to which either section 1033 had been elected or a tax had not been paid. No record of petitioner's constructive 1033 election was available to respondent; indeed, in the statutory scheme of section 1033 it is envisioned that no such record be kept by respondent. The information on petitioner's balance sheet on its 1959 return, and the attachments thereto, does not even identify the existence of a condemnation gain in the prior taxable year as giving rise to the ‘Net Credit in Condemnation’ carried as a liability therein. We are unable to conclude that petitioner's 1959 income tax return provided the notification to the respondent required by law. See Angelus Milling Co. v. Commissioner, 325 U.S. 293; Commissioner v. Lane-Wells Co., 321 U.S. 219.

Even if we should assume arguendo that the petitioner's 1959 tax return constituted a proper notification to respondent under the regulations that there had been ‘a failure to replace’ property involuntarily converted in 1958, it would be our opinion that such a notification would not be the notification prescribed by section 1033(a)(3)(C)(i) as a prerequisite to the start of the period of limitation therein provided. That section provides that the statutory period for the assessment of any deficiency for a year in which a part of the gain from a conversion is realized ‘shall not expire prior to the expiration of 3 years from the date the Secretary or his delegate is notified by the taxpayer * * * of the replacement of the converted property or of an intention not to replace.’ The statute does not require a notification of ‘a failure to replace’; it obviously considers the important subjects of the notification to be replacement or ‘intention not to replace.’ Adolph K. Feinberg indicates the importance of ‘the requisite intent during the specified period of time’ (45 T.C.at 642) even though the subparagraph of section 1033 under discussion was 1033(a)(3)(A) rather than 1033(a)(3)(C)(i). The statute delegates to the Secretary or his delegate to prescribe by regulation the manner in which the notification should be made, not the subject matter of the notification. Neither section 1033(a)(C)(i) nor its legislative history indicates that ‘The Secretary or his delegate’ has the power to prescribe regulations stating that a notification of a mere ‘failure to replace,‘ not coupled with an ‘intention not to replace,‘ is sufficient to commence the running of the section 1033(a)(C)(i) statute of limitations. See Southern Maryland Agricultural Fair Association, 40 B.T.A. 549, 552, and cases cited therein.

For the reasons above stated we conclude that petitioner did not give to respondent the notification prescribed by section 1033(a)(3)(C)(i) as a beginning of the statutory period for the assessment of a deficiency for the taxable year (1958) attributable to the gain realized by petitioner in that year on the conversion here in question. Accordingly, respondent is not barred from assessing such a deficiency.

In order to reflect the concessions made by the parties and our conclusions herein,

Decision will be entered under Rule 50.