Roos
v.
Comm'r of Internal Revenue (In re Estate of Resler)

Tax Court of the United States.Jan 2, 1952
17 T.C. 1085 (U.S.T.C. 1952)

Docket Nos. 27983 27984.

1952-01-2

ESTATE OF JACOB RESLER, DECEASED, CAMIL ROOS, LENORE R. ROOS AND FAY LIEBERMAN RESLER, EXECUTOR AND EXECUTRICES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FAY RESLER, ALSO KNOWN AS FAY LIEBERMAN RESLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Donald Lobree, Esq., for the petitioner. T. M. Mather, Esq., for the respondent.


1. Property belonging to a partnership of which Jacob Resler was a member was taken in 1946 by condemnation, at which time an amount in excess of the cost of such property to the partnership was paid into court and distributed to the partnership without restriction. The partnership was claiming an amount in excess of the payment which had been made. This claim for an added amount was litigated and upon conclusion of the litigation in 1948, an additional amount was received. Held, that as to the payment made and received in 1946, the transaction was a closed transaction and that the gain resulting therefrom should be accounted for in partnership income.

2. Property belonging to another partnership of which Jacob Resler was a member was under lease to the United States Veterans Administration at a fixed monthly rental. Condemnation proceedings were instituted on July 1, 1946, and the property was actually taken on October 2, 1946. The Government offered $1,500,000 for the property. The partnership claimed that a rent at the monthly rate was owing for the use and occupancy of the property by the Veterans Administration for the period from July 1 to October 2. The Government denied any liability, under the lease, for the period as rent. The Government representative reported the claim of the partnership to the Attorney General and, at the same time, advised that a total of $1,500,000 and the amount claimed as rent was less than would be shown by any usable appraisal as the value of the property and recommended acceptance of the total as the amount to be paid. The parties entered into a stipulation for judgment fixing $1,553.189.46 as the full, adequate and just compensation for the taking of the property, and all damages resulting therefrom. Final judgment was entered for that amount and in the same terms. Held, that the full amount paid by the Government and received by the partnership for the property represented consideration for the property taken and that no part was rent.

3. After conversion of the above-described properties, Resler put forth considerable effort with an apparent view to the purchase of similar property with the money received by reason of the conversions. Numerous properties were available on the market, which, so far as appears, were regarded by him as being reasonably comparable for his purposes to the properties converted. Offers were made on certain of the properties but his bids were not accepted by the owners. Resler died on July 13, 1949, and up to the date of his death, only one purchase of similar property had been made in which the proceeds from the conversion of the two properties above described, to the extent of $50,000, were expended. Held, that the requirements of section 112(f) of the Internal Revenue Code for the nonrecognition of the gain realized on the properties converted have not been met and the petitioners are liable upon the said gain for the years when realized. Donald Lobree, Esq., for the petitioner. T. M. Mather, Esq., for the respondent.

These proceedings involve deficiencies in income tax as follows:

+------------------------+ ¦ ¦Docket ¦Docket ¦ +----+---------+---------¦ ¦Year¦No. 27983¦No. 27984¦ +----+---------+---------¦ ¦1945¦$870.00 ¦$870.01 ¦ +----+---------+---------¦ ¦1946¦4,643.09 ¦4,643.09 ¦ +----+---------+---------¦ ¦1947¦15,950.46¦15,950.46¦ +------------------------+

As to 1947, each of the petitioners claims an overpayment of income tax of $2,014.13 and on March 7, 1949, filed a claim for the refund thereof.

The issues to be decided are (1) whether the petitioners realized taxable gain in 1946 on the portion of a condemnation award received in that year, the final payment on the award not having been determined or made until 1948; (2) whether the award in another condemnation proceeding included rental income; and (3) whether the gain realized by the involuntary conversion is not to be recognized under section 112(f) of the Internal Revenue Code where the taxpayer put forth some considerable effort to reinvest the proceeds in similar property but did not so reinvest such proceeds prior to his death. Other issues raised by the pleadings have been agreed to by the parties.

FINDINGS OF FACT.

The facts have been stipulated in part and are found as stipulated.

Jacob Resler died testate in San Francisco, California, on July 13, 1949, and Camil Roos, Lenore R. Roos, and Fay Lieberman Resler are executor and executrices of his estate. The office of the estate is in San Francisco.

Fay Resler is an individual residing in San Francisco, California, where she and her husband had resided prior to his death. They filed separate returns for the taxable years involved with the collector of internal revenue for the first district of California. Their income was community income and their returns were filed on the community property basis.

Jacob Resler was one of six equal partners in the Hotel Oakland Holding Company, a partnership, organized July 30, 1945, for the purpose of acquiring the Hotel Oakland, at Oakland, California. The hotel was purchased August 1, 1945. The partnership's books and records were kept and its returns of income were prepared on an accrual basis.

Under date of July 15, 1946, possession and title to the hotel were taken by the United States Government under condemnation proceedings instituted June 15, 1946. An award of $750,000 was paid to the partnership as estimated just compensation at the time possession and title were taken. This was not considered as the fair market value of the property by the partners and judicial proceedings were instituted for the purpose of obtaining an award commensurate with what the partnership considered to be its fair value. Final judgment in the action was entered April 27, 1948, under which the total award to the partnership was $800,000, and interest. Neither the partnership nor the decedent as a member thereof could determine until the final judgment what amount, if any, would be received in excess of the $750,000 awarded July 15, 1946, or what the expenses would be or what expenses would be incurred in connection with said judicial proceedings, including attorneys' fees.

The adjusted cost of the property to the partnership on July 15, 1946, was $712,892.38:

+------------------------------------------+ ¦Original purchase price ¦$705,000.00¦ +------------------------------+-----------¦ ¦Title insurance ¦1,564.50 ¦ +------------------------------+-----------¦ ¦Recording fees ¦6.20 ¦ +------------------------------+-----------¦ ¦Pro rata city and county taxes¦22,062.31 ¦ +------------------------------+-----------¦ ¦Total cost ¦$728,633.01¦ +------------------------------+-----------¦ ¦Depreciation ¦(15,740.63)¦ +------------------------------+-----------¦ ¦Adjusted cost ¦$712,892.38¦ +------------------------------------------+

Jacob Resler was one of four equal partners in49 Fourth Street Building Company, a partnership organized on November 1, 1945, for the purpose of acquiring and operating a loft building at 49-4th Street, San Francisco, California, formerly known as the Apparel Building. To acquire the property it was necessary to purchase a small building at 768 Mission Street, around the corner from 49-4th Street. The two properties were acquired on November 23, 1945, at a net cost of $1,206,247.72. On or about March 1, 1946, the partnership entered into a 5-year lease with the United States Veterans Administration providing for a monthly rental of the building of $17,729.82, which rental was paid by the United States Veterans Administration until June 30, 1946.

On July 1, 1946, the United States Government instituted condemnation proceedings against the property and upon a declaration of taking and judgment entered thereon on October 2, 1946, title to the property was transferred to the Government.

While the condemnation proceedings were pending, the Government offered to settle the matter by payment to the partnership of $1,500,000 as just compensation for the taking of the property.

In the district court proceeding, the attorneys for the partnership made a pre-trail statement of certain preliminary issues to be determined, one of which was the right of the partnership to receive from the Government rental for the period July 1, 1946, to October 2, 1946, pursuant to the leases between the partnership, as lessor, and the Government as lessee.

The court was requested to enter its pre-trial order that the partners were entitled to the rental for the period July 1, 1946, to and including October 1, 1946, at the rate of $17,729.82 per month, or in the alternative, that the issue be submitted to the jury which shall return a special verdict fixing the reasonable value of the use and occupancy of the premises for such period by the Government.

The representative for the Government submitted a pre-trial memorandum in opposition to the partners' contention, claiming that interest at the rate of 6 per cent on the value of the property has universally been allowed to represent the value of the use of the property between the filing of the complaint and the deposit in court on the declaration of taking and requested the court to follow the rule adhered to by that and other courts and limit the allowance for the use to the interest at 6 per cent on the award.

On October 28, 1947, the representative for the Government sent a telegram to the Attorney General of the United States in which it was stated that an offer of settlement had been made in the amounts of $1,500,000 plus $54,000 representing 3 months' rental under the existing lease from date of suit to filing of declaration of taking and that the figure, $1,554,000, ‘is lower than any usable appraisal,‘ and immediate acceptance was recommended. The Attorney General approved the settlement and on October 30, 1947, the date the proceeding was set for trial, the attorneys for the parties entered into and filed a stipulation on which judgment was entered. The ‘Stipulation for Judgment‘ states that the partnership ‘agrees to accept the sum of One Million Five Hundred Fifty-three Thousand, One Hundred Eighty-nine and 46/100 Dollars ($1,553,189.46) as full, adequate and just compensation for the taking of said property, and all damages resulting therefrom.‘ The order states that pursuant to the stipulation the partnership is ‘hereby awarded the sum of * * * ($1,553,189.46), as full, adequate and just compensation for the taking of the property subject of this action and all damages resulting therefrom; and it appearing that the sum of * * * ($1,200,000.00) has heretofore by order of this Court been paid to said defendant, the Clerk is hereby directed to pay the sum of * * * ($353,189.46) to defendant, forthwith upon the deposit of the sum in the Registry of this Court.‘ The partnership received final payment on the award in December of 1947.

The ordinary net income of the 49 Fourth Street Building Company for 1947 was $76,176.01 or $22,986.55, dependent upon whether the sum of $53,189.46 constitutes rental or part of the sales price of the property, of which Jacob Resler's distributive share was 25 per cent. The capital gain resulting from the condemnation proceedings is $407,030.64, if $53,189.46 is treated as a capital asset, and $353,841.18, if treated as ordinary income computed as follows:

+------------------------------------------------------------+ ¦Gross sales price, 49 4th Street¦$1,553,189.46¦$1,500,000.00¦ +--------------------------------+-------------+-------------¦ ¦768 Mission Street ¦85,000.00 ¦85,000.00 ¦ +--------------------------------+-------------+-------------¦ ¦Total Sales Price ¦$1,638,189.46¦$1,585,000.00¦ +--------------------------------+-------------+-------------¦ ¦Cost of sale ¦48,071.86 ¦48,071.86 ¦ +--------------------------------+-------------+-------------¦ ¦Net sales price ¦$1,590,117.60¦$1,536,928.14¦ +--------------------------------+-------------+-------------¦ ¦Cost of properties ¦1,183,086.96 ¦1,183,086.96 ¦ +--------------------------------+-------------+-------------¦ ¦Capital gain ¦$407,030.64 ¦$353,841.18 ¦ +------------------------------------------------------------+

On or about June 10, 1949, the petitioners forwarded to the respondent two applications to establish replacement funds with the proceeds received from the condemnation of the Hotel Oakland and the 49-4th Street properties. The applications were rejected by the respondent by letters dated October 2, 1949, and December 21, 1949.

The proceeds of said condemnations were deposited by Jacob Resler and Fay Resler in savings accounts, as follows:

This statement though taken from the stipulation of the parties exactly as it appears is not reconcilable with other stipulated facts. The total of the deposits made in the said savings account as stipulated was $325,000. The total award on the 49-4th Street property was $1,553,189.46. The award on 768 Mission Street was $85,000. Costs of the sale of the two properties were $48,071.86. Even though the entire $48,071.86 be treated as the costs of the sale of the 49-4th Street property only, the net amount received by the partnership for the 49-4th Street property would be $1,505,117.60 and Resler's one-fourth interest would be $376,279.40. On the Oakland property the total award was $800,000. The costs to the partnership of the sale are not shown of record. The parties have stipulated that the adjusted cost of the Oakland Hotel property to the partnership was $712,892.38. In making application for permission to set up a replacement fund the petitioners showed the cost of that property ‘(net)‘ as $727,938.68. Assuming that the difference between the adjusted cost of $712,892.38 and $727,938.68 as the costs to the partnership of the sale the net proceeds to the partnership from the Oakland Hotel property were $784,953.70. Resler's one-sixth interest therein would have been $130,825.91 and the total proceeds coming to him from the Oakland Hotel and the 49-4th Street property would accordingly have been $507,104.31. It is thus apparent that only a portion of the proceeds of the above condemnation was deposited in separate and segregated savings accounts by Jacob and Faye Resler.

BANKS AND ACCOUNTS

+------------------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦ ¦ ¦Wells ¦ ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦Anglo ¦Fargo &¦ ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦ ¦San ¦Crocker ¦Amer. ¦Bank of¦Cal. ¦Union ¦Totals ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦Date of ¦Francisco¦1st Natl.¦Trust Co.¦Calif. ¦National¦Trust ¦ ¦ ¦Deposit ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦ ¦#783216 ¦#218859 ¦#4828 ¦#25765 ¦#24900 ¦#26969 ¦ ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦April 1, 1947 ¦ ¦ ¦ ¦ ¦$50,000 ¦ ¦$50,000 ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦April 28, 1947¦ ¦ ¦$10,000 ¦$20,000¦ ¦$10,000¦40,000 ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦May 1, 1947 ¦ ¦$10,000 ¦ ¦ ¦ ¦ ¦10,000 ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦Jan. 6, 1948 ¦ ¦25,000 ¦ ¦15,000 ¦ ¦25,000 ¦65,000 ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦Feb. 28, 1948 ¦$35,000 ¦ ¦25,000 ¦ ¦ ¦ ¦60,000 ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦May 28, 1948 ¦ ¦ ¦ ¦ ¦50,000 ¦ ¦50,000 ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦Jan. 7, 1949 ¦ ¦ ¦ ¦ ¦40,000 ¦ ¦40,000 ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦Feb. 25, 1949 ¦ ¦ ¦ ¦ ¦10,000 ¦ ¦10,000 ¦ +--------------+---------+---------+---------+-------+--------+-------+--------¦ ¦Totals ¦$35,000 ¦$35,000 ¦$35,000 ¦$35,000¦$150,000¦$35,000¦$325,000¦ +----------------------------------+---------+-------+--------+-------+--------¦ ¦Withdrawn Dec. 28, 1948, for ¦ ¦ ¦ ¦ ¦ ¦ +----------------------------------+---------+-------+--------+-------+--------¦ ¦Modesto property ¦ ¦ ¦ ¦50,000 ¦ ¦50,000 ¦ +----------------------------------+---------+-------+--------+-------+--------¦ ¦Balances at death of Jacob ¦ ¦ ¦ ¦ ¦ ¦ +----------------------------------+---------+-------+--------+-------+--------¦ ¦Resler ¦$35,000 ¦$35,000 ¦$35,000 ¦$35,000¦$100.000¦$35,000¦$275,000¦ +------------------------------------------------------------------------------+

The moneys, except as set out below, remained in the respective savings accounts and were at hand in the accounts at Jacob Resler's death and thereafter came into the hands of his executors. The administration proceedings are still pending.

Jacob and Fay Resler, on December 28, 1948, withdrew $50,000 from the Anglo California National Bank Account #24,900 and therewith purchased property similar or related in service and use to the converted properties involved herein, as follows:

+-------------------------------------------------------------------+ ¦Total purchase price of property purchased ¦ ¦$132,528.90¦ +--------------------------------------------+----------+-----------¦ ¦Money from account #24,900, Anglo California¦ ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦National Bank ¦$50,000.00¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Other funds of Jacob and Fay Resler ¦2,528.90 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Mortgage, New England Mutual Life Insurance ¦ ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦Company ¦80,000.00 ¦ ¦ +--------------------------------------------+----------+-----------¦ ¦ ¦ ¦132,528.90 ¦ +-------------------------------------------------------------------+

Jacob Resler, between the taking of the properties and his death, investigated various pieces of property in San Francisco and other localities, seeking real estate investments, similar to the properties that had been involuntarily converted. He had difficulty in finding what he considered would be good investments. On several occasions, however, he considered certain properties as satisfactory for investments and made offers to purchase, in some instances putting up deposits, but no purchase other than that of the Modesto property was effected. Except for the Modesto property purchase, neither Jacob Resler, nor his wife, petitioner Fay Resler, reinvested the proceeds received from the properties taken by the Government in condemnation proceedings.

OPINION.

TURNER, Judge:

Three questions remain for decision: (1) Whether in the case of the Hotel Oakland property, the petitioner realized taxable gain in 1946, by reason of the receipt of his proportionate share of the $750,000 paid to the partnership at the time possession and title to the property was taken, or whether, by reason of litigation covering the partnership's claim for a greater amount, which litigation was terminated on April 27, 1948, by entry of a final judgment fixing the total amount of the award at $800,000, the entire amount of the gain is taxable in the latter year; (2) whether the $1,553,189.46 received in settlement of the condemnation litigation involving the 49 Fourth Street Building Company property was made up of $1,500,000, representing the price received for the property taken, and $53,189.46, representing rents covering the occupancy of the property by the Veterans Administration for the period from July 1, 1946, to October 2, 1946, or whether the full amount represented the price received for the property; and (3) whether the gain realized by the petitioners as a result of the condemnation and taking of the above properties is non-recognizable gain, within the meaning of section 112(f) of the Internal Revenue Code.

With reference to the Hotel Oakland, our first question is whether or not any part of the gain realized by the partnership from its condemnation was realized in 1946. The condemnation proceeding was instituted on June 15, 1946, and possession and title to the property were taken by the United States Government under date of July 15, 1946, at which time $750,000 was deposited by the Government as just compensation for the property, and that amount was paid to the partnership. As to that amount, there was no dispute, but the partnership took the position that the fair market value of the property so taken, at the time of the taking, was greater than the $750,000 paid to and received by it, and instituted proceedings for the purpose of obtaining an added amount over and above the said $750,000. The cost of the property to the partnership, adjusted for depreciation, recording fees and the like, was $712,892.38. Final judgment was entered in the proceedings on April 27, 1948, under which the total award to the partnership was fixed at $800,000, plus interest. The interest and the amount of the award over and above the $750,000 paid by the Government and received by the partnership in 1946, was paid to and received by the partnership in 1948.

The petitioners, citing and relying on Lucas v. American Code Co., 280 U.S. 244; United States v. Safety Car Heating & Lighting Co., 297 U.S. 88; North American Oil Consolidated v. Burnet, 286 U.S. 417; and more particularly on McGuirl v. Commissioner, 74 F.2d 729, take the position that since the amount of the award over and above the $750,000 was being litigated until April 27, 1948, the date of entry of final judgment, there was no closed transaction in 1946, and that the partnership realized no gain on the said property in that year, even though the amount received by the partnership was in excess of its cost basis.

It is the claim of the respondent, on the other hand, that as to the $750,000 received by the partnership in 1946, there was no dispute, and since the amount received for the property in 1946 exceeded the cost basis of which excess Resler's distributive share was $3,092.30, the fact that litigation was pending whereby additional payments might be received and expenses incurred does not postpone recognition of the gain which was actually realized until a later year, when the litigation over the added claim was concluded.

The position of the respondent is, in our opinion, sound. As to the $750,000, there was no dispute. The Government not only admitted liability for that amount, but actually paid that amount into the court for the property and it was thereupon paid to the partnership. The partners received the money as their own and under a claim of right, and as to that payment the transaction was concluded. To the extent that it represented gain, it was taxable in 1946, when received. North American Oil Consolidated v. Burnet, supra. Although the exact question here was not decided in Logan v. Burnet, 283 U.S. 404, cited and relied on by the respondent, the treatment of the $750,000 contended for by him is in harmony with the rationale of the opinion of the Supreme Court of the United States in that case. The same is true of Winter Realty & Construction Co. v. Commissioner 149 F.2d 567. Any costs relating to the taking of the property and the payment of the $750,000 should, of course, be applied as an offsetting expense in determining the amount of the 1946 gain. The facts show that the litigation had to do with an amount over and above the $750,000 paid and received in 1946. The litigation was directed to that added claim. The costs of the litigation would accordingly be chargeable against the results thereof. McGuirl v. Commissioner, supra, and Vim Securities Corporation, 43 B.T.A. 759, cited with the McGuirl case, are not the same case. There no agreed amounts were paid by the condemning authority and received by the owners of the property taken until the litigation was finally culminated. Similarly, Luckenbach Steamship Co., 9 T.C. 662, and Henry Hess Co., 16 T.C. 1363, are not in point.

It is the claim of the respondent that $53,189.46 of the amount paid by the Government in respect of the 49 Fourth Street property was for the use and occupancy of the premises by the Veterans Administration for the period from July 1, 1946, when the condemnation proceedings were instituted, to October 2, 1946, when title was transferred to the Government under a declaration of taking, and was, therefore, ordinary income and not a part of the capital gain realized from the sale of the property. In support of his contention, the respondent points to the claim made by the partnership for rent for the period mentioned, which claim, if allowed, would have brought the total to be paid by the Government, on the basis of its offer of $1,500,000 for the property itself, up to the amount actually paid. He cites and relies on Raytheon Production Corporation v. Commissioner, 144 F.2d 110, affirming 1 T.C. 952, and Nicholas W. Mathey, 10 T.C. 1099, affd. 177 F.2d 59.

The petitioners, on the other hand, contend that the entire amount received by the partnership was consideration for the property taken; that this contention is borne out by the settlement agreement presented to the court and the court order entered; and that the actual settlement, not the preliminary claims of the parties, is controlling. In support of their contention that the award, as shown by the final order of the court, may not be broken down and a portion thereof allocated as rent, the petitioners cite and rely on Lapham v. United States, 178 F.2d 994, and Marshall C. Allaben, 35 B.T.A. 327.

This issue, we think, must be decided for the petitioners. The settlement actually made by the parties and effectuated by the court's order is controlling, and the cases cited and relied on by both parties so hold. See also Kieselbach v. Commissioner, 317 U.S. 100, and Max Thomas Davis, 46 B.T.A. 663. It is true that in the cases cited by the respondent, as well as in Kieselbach v. Commissioner, supra, it was concluded that a part of the award or settlement in each case was found to have been in the nature of earnings or profits and not of a capital nature, while in the cases cited by the petitioners, it was held that the transaction was capital in character, that the gain realized was capital gain and that no part was ordinary income. But in all of the cases cited, the conclusions were based on what was actually done in making the particular settlement or award.

In the instant case, the condemnation suit was instituted on July 1, 1946, but the property was not actually taken by the Government until it acquired title on October 2, 1946, upon a declaration of taking. In the meantime, an agency of the Government, the United States Veterans Administration, had continued to use and occupy the premises. It had previously entered into the occupancy of the property on or about March 1, 1946, under a lease which fixed the rental at $17,729.82 a month. At or after the taking of the property on October 2, 1946, the Government representative made an offer of $1,500,000 to the partnership for the property. The owners refused the offer and claimed an additional amount to cover the rent which would have come to them under the lease for the period from July 1, 1946, to October 2, 1946. The Government representative denied any obligation on the part of the Government to pay any amount as rent for the use and occupancy of the premises for the period mentioned and countered with the proposition that the established and only allowance to cover value of the use of the property between the filing of the complaint and the deposit in court on the declaration of taking was an allowance of 6 per cent on the amount of the award. While the Government representative, reporting by wire to his superior, the Attorney General of the United States, did state that he had a firm offer to settle for $1,500,000 plus $54,000 representing 3 months' rental, total $1,554,000, and recommended immediate acceptance, the basis of the recommendation was that the figure of $1,554,000 was lower than any usable appraisal for the property. At no time did the Government admit or agree that any amount was owing as rent for the period mentioned. Counsel for the partnership and, under authority from the Attorney General, the Government representative thereafter entered into and filed with the court a ‘Stipulation for Judgment,‘ to the effect that the partnership agreed to accept $1,553,189.46 ‘as full, adequate and just compensation for the taking of said property, and all damages resulting therefrom,‘ and that final judgment might be entered in accordance with the terms of the agreement. The order of the court, in the same words, was entered on the 30th day of 1947. Neither the stipulation of the parties nor the order of the court contained any provision making any allowance for rent or for 6 per cent on the award to cover the value of the use of the property from the date of the filing of the complaint to the date of the declaration of taking. Such being the facts, we think it plain and clear that regardless of the preliminary claims and contentions of the parties prior to the reaching of the settlement agreement, the settlement as made and carried out contained no allowance of any amount for rent or to cover the value of the use and occupancy of the property by the Veterans Administration during the 3 months' period, above mentioned. We accordingly find no basis in fact or in law for concluding that any part of the amount received by the owners of the property was other than consideration paid for the property taken. This conclusion, in our opinion, is in complete harmony with the cases above cited.

With respect to the gain realized on conversion of the above properties, the petitioners next claim that section 112(f) of the Internal Revenue Code is applicable and, by reason thereof, the said gain is not taxable. Briefly, section 112(f) provides that in case property is compulsorily or involuntarily converted into money, the gain realized by reason of such conversion is not to be recognized for tax purposes, if the money is ‘forthwith in good faith, under regulations prescribed by the Commissioner * * * , expended in the acquisition of other property similar or related in service or use to the property so converted * * * , or in the establishment of a replacement fund.‘

SEC. 112. RECOGNITION OF GAIN OR LOSS.(f) INVOLUNTARY CONVERSIONS.— If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain shall be recognized, but loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized to the extent of the money which is not so expended (regardless of whether such money is received in one or more taxable years and regardless of whether or not the money which is not so expended constitutes gain).

The presence in this case of any issue as to the establishment of a replacement fund within the meaning of the statute was specifically disavowed by the petitioners at the time of the trial, their claim being that Resler at all times up to the date of his death ‘was proceeding forthwith in good faith ‘ to reinvest the money in question in other property similar or related in service or use to the property converted, and having so ‘proceeded,‘ the requirements of section 112(f) were complied with.

The short answer to the contentions of the petitioners is that the money in question, except as to $50,000 has at no time been ‘expended,‘ as prescribed by the statute, for other property similar or related inservice or use to that which had been converted. Paul Haberland, 25 B.T.A. 1317, and August Buckhardt, 32 B.T.A. 1272, cited and relied on by the petitioners, are not in point. In those cases, the money resulting from the involuntary conversion of the property in question had, in fact, been expended for property similar or related in service or use, and the question there was whether or not, in view of the extended period of time elapsing between the conversion and the replacement, the facts and circumstances were such that the replacement expenditures had been made ‘forthwith,‘ within the meaning of the statute. In no sense do they stand for the proposition that the requirements of the statute are met by efforts to expend the money, rather than actual expenditure thereof, in replacement of the property converted, however sincere the efforts may have been. Not only must the money actually be expended for similar property but the expenditure must be made by the taxpayer whose property was converted and it is not even enough that purchases be made later by the taxpayer's estate, legatees or distributees. Estate of Isaac Goodman, 17 T.C. 1017. See also Herder v. Helvering, 106 F.2d 153, affirming 36 B.T.A. 934. Compare New Colonial Ice Co. v. Helvering, 292 U.S. 435.

Here, the petitioners not only agree that the money was not and has not been expended ‘forthwith‘ or otherwise in the acquisition of similar property, but point out that, under California law, it may not now be so expended but must be held by Resler's executors for distribution. They seemingly think that in this situation they have successfully by-passed the statutory requirement that the money actually be expended for similar property. If we follow their reasoning, it is that Resler, up to the date of his death, ‘was proceeding forthwith‘ in an effort to expend the money for similar property and having so ‘proceeded‘ the gain realized upon the conversion was under section 113(a)(9) frozen, so to speak, in a non-recognized state, since after Resler's death and by reason of the provisions of section 113(a)(5) the basis of the property in his estate to the distributees thereof was its fair market value at the date of his death and such being the case non-recognized gain to Resler or unrealized appreciation at the date of his death would not when realized by the distributees be taxable to them in any event.

SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR Loss.(a) BASIS (UNADJUSTED) OF PROPERTY.— The basis of property shall be the cost of such property; except that—(9) INVOLUNTARY CONVERSION.— If the property was acquired, after February 28, 1913, as the result of a compulsory or involuntary conversion described in section 112(f), the basis shall be the same as in the case of the property as converted, decreased in the amount of any money received by received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made.

The proposition, in our opinion, is so patently without merit or substance that we would be justified in merely saying that to state it is answer enough. In passing, however, it may be noted that the question here is whether gain realized by the petitioners in years prior to Resler's death is to be recognized and taxed to them in the years realized or is non-recognizable under section 112(f), which section states its own conditions for nonrecognition. As for section 113(a)(9), it comes into play only after the effect and operation of the nonrecognition provisions of section 112(f) have been determined and is in no way a causal force in bringing about nonrecognition. As for section 113(a)(5), it has no relation to section 112(f) by specific reference or implication and the conditions of nonrecognition prescribed by section 112(f) have no bearing whatever upon the statutory basis of the property of a decedent in the hands of his transferees or distributees or whether his said transferees or distributees are or are not taxable upon gain which they may thereafter realize on or from such property. Those likewise are matters which the statute has made provision for.

Furthermore, on the record here, we would be unable to say that Resler, even had he lived and at or about the time of his death had expended the money in question for similar property, would, under section 112(f), have escaped recognition of the gain here in question. It is true he did do considerable shopping about with an apparent view to the purchase of rental property, but he actually made no purchase other than that in which the $50,000 mentioned above was involved. There seems to have been any number of properties on the market which were regarded by him as being reasonably comparable for his purposes to the properties converted and, so far as we are able to determine, the only reason one or more purchases were not made was that he was seeking a more favorable price than any of the owners were willing to accept. As to the subsequent fate of most of the properties considered by him, we are not advised, but as to several, it does appear that the prices sought by the owners were more in line with the market than were Resler's offers. Accordingly, we are even unable to say that within the spirit of the statute, Resler, at the time of his death, had proceeded ‘forthwith in good faith‘ in his efforts to acquire similar property as against a preference in the absence of a bargain to retain his money as such, even though such action did mean recognition of the realized gain.

Decisions will be entered under Rule 50.