Docket No. 559-68.
Louis Vaira, for the petitioners. Joseph M. Abele, for the respondent.
Louis Vaira, for the petitioners. Joseph M. Abele, for the respondent.
The father of petitioner Peter Vaira devised land to him on condition that he support his mother for life and pay one of his brothers $2,000 over a period of years. Peter accepted the devise and paid out a total of $24,200 in discharge of these obligations. He also added certain improvements to the property. In 1958, a portion of the property was condemned and in 1959 a payment was received. He elected to replace the improvements on the condemned portion under sec. 1033, I.R.C. 1954. After a subsequent hearing, an additional amount was awarded, which was received in 1962.
1. Held, since the value of the land devised to Peter was substantially equal to the value of the obligations he assumed, he acquired the land entirely by purchase, with no element of inheritance, and his basis in the land is determined solely under sec. 1012, I.R.C. 1954. The amount of such basis, including adjustments thereto because of the improvements, is also determined.
2. Held, no part of the condemnation award is attributable to damage to Peter's remaining land.
3. Held, petitioners' replacement period under sec. 1033, I.R.C. 1954, expired on Dec. 31, 1960. By this date the total amount of expenditures in replacement of the condemned property did not exceed the adjusted basis of the condemned property. No part of their gain is insulated from recognition by that section.
4. Held, as cash basis taxpayers, petitioners cannot offset against the 1962 payment the amount of a witness fee for services performed in 1962, but which was not paid until 1963.
5. Held, assessment of the deficiency for 1959 is not barred. Sec. 1033(a) (3)(C), I.R.C. 1954.
6. Held, additions to tax under sec. 6653(a), I.R.C. 1954, for 1959 and 1962 are proper.
7. Held, an unsigned return form does not constitute a return for purposes of sec. 6651, I.R.C. 1954, and the addition to tax under that section is proper.
Respondent determined the following deficiencies and additions to tax in petitioners' income taxes:
+--------------------------------------------------+ ¦Calendar year¦Deficiency¦Sec. 66511 ¦Sec. 6653(a)¦ +-------------+----------+------------+------------¦ ¦ ¦ ¦addition ¦addition ¦ +-------------+----------+------------+------------¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+------------+------------¦ ¦1959 ¦$13,201.23¦ ¦$660.06 ¦ +-------------+----------+------------+------------¦ ¦1962 ¦17,494.33 ¦$4,373.58 ¦933.15 ¦ +-------------+----------+------------+------------¦ ¦1963 ¦120.00 ¦ ¦6.00 ¦ +-------------+----------+------------+------------¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------------------------+
In 1958, the Commonwealth of Pennsylvania condemned certain improved land belonging to petitioner Peter Vaira. The issues are: (1) The basis of the land taken, including adjustments; (2) whether any of the amount realized is attributable to the remaining land; (3) whether any of the gain realized in 1959 is insulated from recognition by section 1033; (4) whether a witness fee paid in 1963 may be used to offset gain realized in 1962; (5) whether assessment of the deficiency for the taxable year 1959 is barred by the statute of limitations; (6) the additions to tax under section 6653(a); and (7) the additions to tax for 1962 under section 6651. Neither the deficiency nor the addition to tax for the taxable year 1963 was put in issue by petitioners and these items are therefore deemed conceded.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioners are husband and wife and had their legal residence in Elizabeth Township, Allegheny County, Pa., at the time of the filing of the petition herein. They filed a joint income tax return on a cash basis for the calendar year 1959 with the district director of internal revenue at Pittsburgh, Pa.
On or before April 15, 1963, petitioners mailed a filled out Form 1040 on a cash basis, for 1962, to the district director of internal revenue at Pittsburgh, Pa. Neither petitioner signed this form but it was accompanied by a signed check for $1,168.67 representing the balance of the tax shown to be due. Respondent accepted the check. Petitioner Mary Vaira is a party herein solely because of her joint tax liability with her husband. Petitioner Peter Vaira shall hereinafter be referred to as Peter.
Frank Vaira, Peter's father, died testate on September 26, 1940. His will devised certain land to Peter as follow :
Item II. I give, devise and bequeath unto my son Pete Vaira, all the real estate with the improvements thereon, which I own on the west side of ‘new’ Route #51, together with a piece of land on the east side of ‘new’ Route #51 upon which my said son, Pete Vaira, has constructed a brick house. This piece of land also to comprise a strip of land extending in front of said house, and of the width thereof, to ‘new’ Route #51 and extending in rear of said house, and of the width thereof, to ‘old’ Route #51, together with strips of land 200 feet on each side of said house, running between said ‘new’ Route #51, and ‘old’ Route #51. My said son Pete Vaira, to have also the right-of-ways for electric wires or cable, for water, for gas, along or about ‘old’ Route #51 from said brick house to Route #31. The entire above bequest, however, to be subject to the provision that he pay unto my son, Robert Vaira, the sum of $12.50 on the 1st day of each month, until he has paid unto him the sum of $2,000 dollars. And provided also that he, along with my son Steve Vaira, may keep, provide, maintain and support my wife Angelina Vaira, as long as she may live. This bequest not to include that which is mentioned in Item VII.
Item V. I give, devise and bequeath unto my beloved wife Angelina Vaira, my money which I have in Italy in Account known as Casse Di Risparmio Postali, Book #01626, together with the right to live in, dwell in, occupy and use, with family maintaining family relationship, our home as long as she may live.
Peter accepted this devise, thereby assuming the obligations it imposed.
The tract of land owned by Frank (hereinafter sometimes referred to as the original Vaira property) had an area of 196 acres and was located on the four corners of traffic Route 51, which ran roughly north and south, and traffic Route 31, which ran roughly east and west. The parties have stipulated that the fair market value of the entire tract as of Frank's death was $9,800 and it was so reported for purposes of State inheritance tax. The value of the acreage with frontage and of the acreage adjacent to the four corners of the intersection was at least equal to the value of the more remote acreage.
Peter received all the land west of Route 51, amounting to 73 acres, including the improvements thereon, consisting of two gasoline service stations, one on the northwest and one on the southwest corner of the intersection. Peter also received 2 acres of land, fronting on the eastern side of Route 51, on which a house, which Peter had built prior to his father's death, was located. The remainder of the 196 acres, including a house in which Frank and his wife, Angelina Vaira, had lived, went to Steve Vaira. The land Peter received had more road frontage than that inherited by Steve.
Angelina, Peter's mother, was 69 years old when her husband died. She requested that Peter pay her $100 each month to discharge his obligation under the will to support her. Peter paid her $100 per month from October 1940 through March 1959, a total of $22,200. In 1940, the present value of an annuity of $100 per month for Angelina's life was $8,080.04. During the period 1941 to 1944, at Angelina's request, Peter also expended $9,953.51 in financing the operation of a farm for her. In addition, he expended an undeterminable amount for certain improvements to the house she lived in, which Frank had bequeathed to his brother Steve.
Peter paid his brother Robert a total of $2,000, pursuant to the terms upon which he accepted his devise. In 1940, the present value of the term annuity in favor of Robert was $1,560.53.
In 1954, Peter changed over the service station at the southwest corner of the intersection from Sunoco to a ‘private brand.’ In this connection, he purchased and installed six tanks and six pumps and remodeled a cabin which had been moved to the site, at a cost of $1,500. In 1954, the useful life of the physical properties of the private-brand service station was 25 years.
In 1956 or 1957, the frame building of the service station at the northwest corner of the intersection (hereinafter referred to as the old Gulf station) burned down. Peter replaced it in 1957 with a one-story concrete-block building at a cost of $7,750. The Gulf Oil Co. owned the pumps and tanks at this service station. In 1957, the useful life of the concrete-block building was 25 years.
On September 19, 1958, the Commonwealth of Pennsylvania condemned part of Peter's land in order to reconstruct Route 51 as a four-lane divided highway. The new highway did not follow the road-bed of the old. Instead it ran alongside and immediately to the west of the old right-of-way. 11.92 acres were taken for the right-of-way and 2.64 acres for slope areas. The strip of land taken was nowhere less than 85 feet wide, and at most points was substantially wider.
The eastern edge of the new right-of-way overlapped the western edge of the old right-of-way for most of the length of the new highway through Peter's land. But, starting about 950 feet from the northern border of Peter's land, the new right-of-way diverged enough from the old so that Peter was left with a narrow strip of land (hereinafter referred to as area E). Area E was bordered on the west by the new Route 51 and on the east by the old Route 51. The southernmost 300 feet of this strip tapered off to a point, but over the other 650 feet of its length it was 75 to 80 feet wide from the paved surface of the new highway to the paved surface of the old highway. Peter actually owned only about 35 feet of this width, however, since the right-of-way included shoulders as well as the pavement.
References herein to ‘old’ and ‘new’ Route 51 refer to the situation after the 1958 taking and are to be distinguished from the ‘old’ and ‘new’ Route 51 designations in Frank Vaira's will. Area E also appears to be in the same area as has sometimes been referred to as area A.
The western edge of the new right-of-way was (except at a few isolated points) well below the level of the adjacent land. The southernmost 700 feet of the right-of-way (this area is hereinafter referred to as Area D) was 6 feet or less below the level of the adjacent land, so that no slope area was required. Over the remaining approximately 2,700 feet, the difference in levels was great enough to require slope areas of varying extent, again except at a few isolated points. Where these slope areas existed, it was impracticable to use Peter's land as commercial frontage. Consequently, of all petitioner's land fronting on the western side of the new Route 51, only area D was commercially usable as frontage, and then only with significant grading.
The western edge of area E averaged about 7 feet above the level of the new highway, not enough to require significant slope areas. The southernmost approximately 150 feet of area E was impracticable to use because it bordered on an access ramp. Area E thus had about 800 feet of commercially usable frontage on the east side of the new highway, again only with significant grading.
The intersection of the old Route 51 with Route 31 had been a grade intersection. An overpass was constructed to carry Route 31 over the new Route 51, together with access ramps. Between the land taken for Route 51 itself and the land taken for the access ramps, all the land upon which the private-brand station and the old Gulf station had been situated was condemned. The land adjacent to the new overpass was much less valuable commercially than the land at the corners of the old intersection had been. Constructing the access ramps on the eastern side of the overpass required the demolition of part of the old highway. After the construction was complete, the old highway, which bordered area E on the east, dead-ended about where the access ramp began.
The construction, when completed, left a substantial depression at an angle between Route 31 and the southwestern access ramp (hereinafter referred to area C). At an undetermined time and cost, Peter removed some of the earth from areas D and E and used it to fill this depression.
After the condemnation, Peter continued to operate both the private-brand station and the old Gulf station until the end of March 1959. At that time, he moved the cabin, pumps, and tanks from the private-brand station to other stations. The concrete-block building at the old Gulf station was demolished; the tanks and pumps were salvaged by the oil company. He also purchased for $800 the used tanks from an Esso station at the northeast corner of the intersection (on Steve's land).
In April 1959, Peter started the construction of a new service station on land he leased from his mother. This land fronted on the old Route 51 across from area D and is hereinafter referred to as area B. To prepare the site, he leveled and graveled about three-quarters of an acre. He installed the four tanks he had acquired from the Esso station and the six pumps from the private-brand station. He also moved the cabin from the private-brand station to area B. By December 31, 1960, Peter had expended a total of $3,500 for these purposes. Peter commenced business operations at this new service station in 1959. During construction of the new highway, traffic was maintained on old Route 51 past area B.
In May 1960, Peter started another service station on land he leased from his brother Louis (this station is hereinafter referred to as the Roberts Hollow station). This land was on Route 51 about 3 miles from Peter's property. A building was already located on the land. Peter used the tanks from the private-brand station and purchased new pumps. He installed a furnace and tiled rest rooms in the building. The station was opened for business in June 1960. Peter then remodeled the building, finishing the remodeling in 1961. By December 31, 1960, Peter had expended $5,000 for these purposes.
During 1959, Peter engaged in negotiations looking toward the leasing of that part of his remaining property described as area D. While engaging in these negotiations, Peter excavated and graded this area so as to make it commercially usable. A total of 32,400 cubic yards of earth was moved, with Peter doing some of the work himself. Peter expended $8,100 for such excavating and grading. Nothing came of these negotiations; in 1965, Peter installed a service station at this location, at an undeterminable cost.
In April 1960, Peter leveled off area E down to the level of the new highway (except for the part abutting the access ramp). This required removing 6,352 cubic yards of earth. Peter hired casual labor, rented and borrowed machinery, and did some of the actual work himself. Peter expended $1,588 for this purpose in 1960. In June 1960, he began the construction of a new service station (hereinafter referred to as the new Gulf station) at area E, but only put up the bare frame of the building, without even a roof, in that year. This new Gulf station was not worked upon again until 1962 and was not finished until 1963. By December 31, 1960, Peter had expended $1,200 on the construction of this station (in addition to grading).
On April 8, 1959, Angelina executed an instrument releasing her ‘life interest’ in all parts of the original Vaira property (both the part devised to Peter and the part devised to Steve) to the Commonwealth of Pennsylvania.
In May 1959, Peter received $90,750 from the Commonwealth of Pennsylvania as partial payment for the condemned land.
On May 27, 1959, Peter petitioned the local Quarter Sessions Court to appoint viewers for the assessment of damages. The board of viewers held a hearing in 1962. At this hearing, the parties informally stipulated that the value of Peter's 2-acre parcel of land east of old Route 51 had not been significantly affected by the condemnation and need not be considered in the proceeding. The board of viewers used as the measure of damages the difference between the fair market value of the land and improvements before the taking, and unaffected by a threat of condemnation, and the fair market value of the land remaining after condemnation. The testimony at the hearing points out that Peter had much less commercially usable frontage after the condemnation than before and the fact that the remaining property adjacent to the overpass was much less valuable than the property at the grade intersection had been. On May 11, 1962, the board of viewers awarded Peter damages in the lump sum of.$174,522.88, as follows:
That having considered the quantity, quality and value of the land so taken, in consequence of said appropriation and from the construction of said highway through and along his said lands, the Viewers do now estimate and determine that the said PETER F. VAIRA has sustained damages as follows:
+------------------------------------------------------------+ ¦Total award ¦$174,522.88¦ +------------------------------------------------+-----------¦ ¦Less payment made on account by the Commonwealth¦ ¦ +------------------------------------------------+-----------¦ ¦of Pennsylvania ¦90,750.00 ¦ +------------------------------------------------+-----------¦ ¦Net amount due and payable ¦83,772.88 ¦ +------------------------------------------------------------+
On August 2, 1962, Peter received a check in the amount of $83,772.88.
On March 15, 1963, Peter paid $1,350 to a realtor who had testified for him at the hearing before the board of viewers.
In his income tax return for 1959, Peter elected under section 1033 not to recognize a part of the gain realized in that year from the condemnation. He indicated that he intended to replace the two condemned stations with two new stations. He and his accountant together estimated that the cost would be $78,667, with the cost of the land stated to be $2,798.50, or a total of $81,465.50. The difference between this amount and the $90,750 received by Peter from the Commonwealth of Pennsylvania, to wit, $9,284.50, was reported as long-term capital gain. The return recited an estimated completion date of June 30, 1960.
Peter failed to include the $83,772.88 received in 1962 as a result of the condemnation on the income tax return form he submitted for 1962.
Peter did not notify respondent of the amount actually expended upon replacement properties.
Peter failed to keep any records of the sums expended by him for the replacement of the property condemned or for the excavation and grading of the land not condemned.
ULTIMATE FINDINGS OF FACT
Peter's cost basis of the land devised to him by his father was $24,200, of which $12,100 is allocable to the land condemned by the Commonwealth of Pennsylvania.
Peter's unadjusted cost basis for the improvements made by him on the inherited land and destroyed by the condemnation was $9,250, consisting of $7,750 for the concrete-block building known as the old Gulf station plus $1,500 for the physical properties of the private-brand service station. Depreciation allowable prior to the condemnation amounted to $620 on the former and $300 on the latter, resulting in a total adjusted cost basis in the improvements of $8,330.
Peter's total adjusted cost basis in the property condemned by the Commonwealth of Pennsylvania was $20,430.
The entire aggregate award of.$174,522.88 received by Peter from the Commonwealth of Pennsylvania represented payment for the property taken and no part thereof represented damages to Peter's remaining property.
Petitioners failed to comply with the requirements of section 1033, with the result that they realized long-term capital gain of $70,320 in the taxable year 1959 and of $83,772.88 in 1962.
Petitioners' underpayments of tax for the taxable years 1959 and 1962 were due to negligence.
Petitioners failed to file a timely return for the taxable year 1962. They had no reasonable cause for failing so to do, although their failure was not due to willful neglect.
Most of the issues in this case rest upon factual determinations which have been difficult to make on the basis of the record. The evidence presented on petitioners' behalf was disjointed and often confusing. In substantial measure, this was directly attributable to the fact that petitioners, due to their failure to keep records, were not able to produce any significant probative proof. The situation was compounded by the further element that petitioners' principal witness, Peter Vaira, was a difficult and largely unconvincing witness. The problems thus created are accentuated by the rule that the burden of proof is on petitioners. Rule 32, Tax Court Rules of Practice. It is against this background that we proceed to a discussion of each issue.
Issue 1(a). The Unadjusted Cost Basis of the Inherited Property
Peter's father, Frank Vaira, devised improved land to him on condition that he, together with his brother Steve, support their mother, Angelina, for life and on the further condition that he pay his brother Robert $2,000. Petitioners contend that Peter's unadjusted cost basis is the fair market value of the property at Frank's death plus the amounts expended by him in compliance with those conditions. Respondent contends that the actuarial value of the annuity to Angelina and the discounted value of the payments to Robert were in excess of the fair market value of the land at the time of Frank's death. He also asserts that, as a highly cost-conscious businessman, Peter would be unwilling to pay more for the property than it was worth. From this, respondent concludes that the payments to Peter's relatives were gifts to the extent that they exceeded such fair market value and that consequently Peter was a purchaser of the land from his father's estate with a cost basis under section 1012 equal to such fair market value. Cf. Donald McDonald, Jr., Administrator, 28 B.T.A. 64 (1933).
Initially, we will consider respondent's argument that part of Peter's payments to Angelina or for her benefit constituted gifts. The will merely provided that Peter ‘keep, provide, maintain, and support’ his mother. As far as the gross amounts expended during 1941 to 1944 to finance the operation of a farm by Angelina are concerned, we have no way of determining, on the record before us, how much the farm contributed to Angelina's support. In any event, the most that it might have so contributed is the net profit from the operations and not the gross cost thereof. Similarly, capital expenditures by Peter for improvements to the house in which Angelina lived (even if we were able to determine the amount thereof) cannot be considered as being for Angelina's support particularly since they were made to property owned by his brother, Steve. Without categorizing the foregoing expenditures as gifts, loans, or otherwise, it is enough for us to hold that they were not made in discharge of the obligations imposed upon Peter by his father's will.
We note also that petitioners did not plead any of these expenditures in their petition, nor have they moved to amend the pleadings in this regard.
The obligation to pay Angelina $100 per month for life clearly falls in the support category and respondent does not contend that such expenditures were unreasonable. In 1940, the present value of a life annuity to Angelina was $8,080.04. Sec. 86.19(g), Regs. 108. Also in 1940, the present value of Robert's annuity due ($12.50 at the beginning ofeach of 160 months) was $1,560.53. Thus, by accepting the devise, Peter undertook obligations imposing an anticipated burden of $9,640.57 upon him. Respondent argues that when this is contrasted with the fair market value of what Peter received, which respondent calculates at $3,750, it is obvious that Peter obligated himself to pay far more than he obtained from his father and that, since Peter was a cost-conscious businessman, the difference must be regarded as a gift and not as a part of Peter's cost.
Respondent arrives at this figure by taking the $9,800 valuation for the original Vaira tract at Frank's death and allocating 75/196 to Peter.
Respondent valued the original Vaira tract by allocating the $9,000 according to acreage; yet Peter received an equal share of the intersection and actually received more road frontage, both on old Route 51 and on other roads, then Steve did. We therefore consider respondent's valuation unrealistic. Fairfield Plaza, Inc., 39 T.C. 706, 712 (1963); Biscayne Bay Islands Co., 23 B.T.A. 731, 735 (1931). Moreover, the $9,800, which the parties stipulated as the fair market value of the original Vaira tract, did not include the value of improvements. Yet, the land devised to Peter contained two service stations and a two-story brick residence, which Peter had built and in which he and his family lived.
Taking all of the various factors into consideration, we think that there was a substantial equivalence between the fair market value of what Peter received and the anticipated payments he undertook to make and that no part of those payments should be treated as gifts.
We now turn to the question whether Peter should be deemed to have acquired his share of the original Vaira tract from his father by devise or purchase or a combination thereof. Section 1012 provides in pertinent part that ‘The basis of property shall be the cost of such property, except as otherwise provided in this subchapter.’ One of the exceptions is contained in section 1014, which provides in pertinent part that ‘the basis of property acquired from a decedent shall * * * be the fair market value of the property at the date of decedent's death.’ Subsection (b)(1) of section 1014 specifies that property considered to have been acquired from a decedent shall include ‘Property acquired by devise, bequest, or inheritance.’
Petitioners in effect contend that we should view Peter as a devisee of the entire property to the extent of its fair market value at the date of Frank's death and as a purchaser to the extent of the amounts expended by him to fulfill the conditions of the devise. We disagree.
It is clear that, under Pennsylvania law, Peter, by accepting the devise, obligated himself to make the required payments to Angelina and Robert. Logan v. Glass, 136 Pa.Super. 221, 7 A.2d 116 (1939), affirmed per curiam 338 Pa. 489, 14 A.2d 306 (1940); In Re Pollock's Estate, 306 Pa. 301, 159 Atl. 555 (1932); Renner v. Headley, 129 Pa. 542, 18 Atl. 549 (1889). And, in all probability, the obligations also constituted a charge upon the land. In Re Wise's Estate, 188 Pa. 258, 41 Atl. 526 (1898). But whether there was merely a personal obligation or a charge upon the land or both is immaterial as far as this case is concerned. The fact is that, from Peter's point of view, the land was effectively encumbered in his hands.
The distinction between a personal obligation and a charge might be material in determining the basis of property in the hands of the decedent's estate, but this situation is not before us and we therefore express no opinion with respect thereto.
In Crane v. Commissioner, 331 U.S. 1 (1947), the Supreme Court considered at length the proper treatment of an encumbrance in determining the basis of property acquired by devise. In that case, the property involved was subject to a mortgage, the unpaid principal amount of which was not in excess of the date of death value of the property. The Supreme Court held that the basis of the property was its fair market value at the date of death unreduced by the amount of the encumbrance. In a tax sense, the amount of the encumbrance was already included in the basis. See Columbus & Greenville Railway Co., 42 T.C. 834, 847 (1964), affd. 358 F.2d 294 (C.A. 5, 1966). This conclusion accorded with the legislative purpose underlying section 1014 and its predecessor— a purpose to prevent the imposition of an income tax on that part of an inheritance which represented appreciation in value while the property was in the hands of the decedent but to expose to income tax any increment in value represented by post-death appreciation. It clearly requires rejection of petitioners' contention. The use of a combined basis of date-of-death value plus the amount of the obligations imposed upon Peter would insulate part of the subsequent appreciation in the value of the property from taxation, a result beyond the legislative intent.
This is a valid conclusion at least where the amount of the encumbrance is not in excess of the date-of-death value of the property. The Supreme Court left open the question as to what the rule would be if the amount of the encumbrance were greater. See 331 U.S.at 12. Compare Parker v. Delaney, 186 F.2d 455, 458 (C.A. 1, 1950).
This legislative history can be gleaned from the following sequence of pertinent sections of the statute, regulations, and committee reports. Revenue Act of 1918, sec. 213(b)(3), 40 Stat. 1057, 1065; art. 4, Regs. 33; art. 1562, Regs. 45; Revenue Act of 1921, sec. 202(a)(3), 42 Stat. 227, 229; H. Rept. No. 350, 67th Cong., 1st Sess., pp. 9-11 (1921); S. Rept. No. 275, 67th Cong., 1st Sess., pp. 10-11 (1921).
The thesis that an obligation is merged in the basis to the extent of the date-of-death value is complicated where, as is the case herein, the obligation consists of annuities. In the usual case, the obligation is a fixed amount and the extent of the merger can be precisely measured at the date of death. In the case of an annuity, the measurement can be made only in terms of the actuarial value of the annuity, whereas the amount of the basis in the property, in situations such as are involved herein, depends upon the payments actually made. See Rev. Rul. 55-119, 1955-1 C.B. 352, approved in John C. W. Dix, 46 T.C. 796 (1966), affirmed on another issue 392 F.2d 313 (C.A. 4, 1968). But the fact that the nature of the beast, i.e., an annuity, is unusual does not preclude the application of the merger rationale.
We have determined that the value of what Peter received from his father was substantially the same as the amount of Peter's obligations, i.e., the anticipated payments to Angelina and Robert. See p. 995, supra. In effect, Peter was called upon to pay an amount equal to the value of what he got and by accepting the devise he agreed to make the required payments. In light of such equivalence, Peter in a very real sense purchased the property, with the result that under the particular circumstances of this case section 1012 controls to the exclusion of section 1014. This conclusion finds support in the cases which have synthesized the status of a devisee or legatee with that of a purchaser in the area of Federal income taxation. See Commissioner v. Moore, 207 F.2d 265, 257 (C.A. 9, 1953), reversing 15 T.C. 906 (1950); Moffett v. Commissioner, 191 F.2d 149, 150 (C.A. 2, 1951), reversing in part 14 T.C. 445 (1950). See also Opper, J., dissenting in Rosalie M. Shubert, 33 T.C. 1048, 1057 (1960), affd. 286 F.2d 573 (C.A. 4, 1961). Compare In Re Wise's Estate, supra. Whether, in the absence of substantial equivalence between the date of death value and the amount of the encumbrance, we would apply a split-level concept to an acquirer of property from a decedent (devisee or legatee in part and purchaser in part) is a question which we need not now decide. A somewhat similar question has presented difficulties in the area of acquisitions by gift, where, however, a specific regulation was involved, there was a statutory provision providing for an additive to basis of a portion of the gift tax paid, and there was evidence presented as to the presence or absence of donative intent. Sec. 1015(a); sec. 1.1015-4, Income Tax Regs. E.g., Richard H. Turner, 49 T.C. 356 (1968), affirmed per curiam 410 F.2d 752 (C.A. 6, 1969), and the cases discussed therein, where respondent urged the adoption of a part-sale, part-gift concept; Kaufman's, Inc., 28 T.C. 1179, 1187 (1957). See Winthrop M. Crane III, 45 T.C. 397, 405, fn. 1 (1966), and affirmance 368 F.2d 800, 801 (C.A. 1, 1966); Wurzel, ‘The Tax Basis for Assorted Bargain Purchases or: The Inordinate Cost ‘Ersatz’ Legislation,‘ 20 Tax L.Rev. 165, 177 et seq. (1964).
This reversal was accepted and followed in Albert L. Rowan, 22 T.C. 865, 874 (1954).
See Jules S. Bache Trust, 24 T.C. 960, 965 (1955), affirmed per curiam 239 F.2d 385 (C.A. 2, 1956), in which our decision in Moffett was ‘confined to the specified facts therein.’
Compare fn. 6, supra; compare also respondent's recognition of a dual status where a legatee or devisee receives an option from a decedent to acquire property at less than its date-of-death value. Rev. Rul. 67-96, 1967-1 C.B. 196. But compare the decided cases discussed in that ruling and Valleskey v. Nelson, 168 F.Supp. 636 (E.D. Wis. 1958), affd. 271 F.2d 6 (C.A. 7, 1959).
We turn now to a determination of Peter's cost. Basically what happened is that Peter acquired the land upon the death of his father in exchange for an agreement to pay a life annuity to Angelina and a term annuity to Robert. Both annuities were fully paid by the time of Peter's receipt in 1959 of the first portion of the proceeds of his involuntary disposition by way of the condemnation. Under these circumstances, his basis can be determined in the same manner as that of a person who purchases property against a commitment to pay an annuity to the seller where the annuitant dies before that person has disposed of the property— namely, the amount actually paid in satisfaction of the commitment. D. Bruce Forrester, 4 T.C. 907 (1945); Rev. Rul. 55-119, supra.
Angelina released her interest to the Commonwealth of Pennsylvania in April 1959 and there is no evidence of any payments to her after that date.
Robert was paid $2,000, but there is some dispute as to how much Peter paid Angelina. The only material evidence in the record is Peter's testimony that he ‘paid it up until 1959.’ Respondent argues that this be read as ‘until December 31, 1958.’ But Angelina did not release her interest to the Commonwealth of Pennsylvania until April of 1959. We conclude, from the evidence before us, that the payments did not cease until that time. We have therefore found that Peter paid his mother $100 per month from October of 1940 through March of 1959, for a total of $22,200. As a result, we hold that Peter's unadjusted cost basis in his share of the original Vaira tract was $24,200.
Issue 1(b). Allocation of Unadjusted Basis to Condemned Property
Of the 75 acres, only 14.56 were condemned; the $24,200 basis must be equitably apportioned between the part condemned and the part remaining. Sec. 1.61-6(a), Income Tax Regs. Here, too, respondent would allocate purely according to acreage. Again we disagree. A considerable part of the value of Peter's land appears to have inhered in the property at the intersection and in the other frontage along the old Route 51. It was precisely this portion of the land that was condemned. We therefore think it more realistic to allocate half of the basis to the condemned land than to allocate according to acreage. We, hold that Peter's unadjusted basis in the condemned land (not including improvements) was $12,100.
Issue 1(c). Adjustments to Basis for Improvements
In 1954, Peter made expenditures to establish the private-brand service station. However, after the land was condemned, he successfully moved the tanks, pumps, and building to other service stations. Consequently, only the installation cost of the tanks and pumps can be considered for the purpose of decision herein. The record does not specifically reveal what that cost was; however, doing the best we can with the evidence submitted, we are satisfied that it was $1,500, and we have so found.
Peter has never taken depreciation deductions on his income tax returns. But the amount allowable as depreciation deductions must nonetheless be subtracted from his basis. Sec. 1016(a)(2); sec. 1.1016-3(a)(2), Income Tax Regs. We are satisfied that the useful life of the improvement was 25 years. See Bulletin F. Peter's basis in the installation costs must therefore be decreased by $300, representing 5 years of straight-line depreciation, leaving him an adjusted basis of $1,200 in the installation costs.
In 1957, Peter constructed a concrete-block building at the old Gulf station to replace a building which had burned down. This building was destroyed as a result of the condemnation. Proof of cost and useful life is also not completely satisfactory. Again, doing the best we can with the evidence at hand, we have found a cost of $7,75nd a 25-year life. This amount must be decreased by $620 for 2 years of straight-line depreciation, leaving an adjusted basis of $7,130.
We hold that Peter's adjusted basis in the condemned land and improvements was $20,430, consisting of $12,100 unadjusted cost of the condemned land, $1,200 in the unrecovered cost of the private-brand service station improvements, and $7,130 in the unrecovered cost of the old Gulf station improvements.
Issue 2. Severance Damages
Petitioners contend that the $83,772.88 received in 1962 represented payment for damage to the remaining land rather than compensation for the land taken and that such payments are nontaxable. We disagree.
Payments attributable to the land remaining after a condemnation are applied in reduction of the basis of that land; to the extent the payments exceed the basis, they are realized gain, despite the absence of a ‘disposition’ of the property. Sec. 1.1001-1(c), Income Tax Regs.; G.C.M. 23698, 1943 C.B. 1940, modified by Rev. Rul. 68-37, 1968-1 C.B. 359. Such gain may technically not be recognized under section 1002, but it is nonetheless includable in gross income under sections 61 and 1231.
We will assume for the purposes of decision that under Pennsylvania law, as it existed during the taxable years 1959 and 1962, a condemnation award could be made only in a lump sum representing the value of the land actually taken and that it could not recite any amount as severance damages. E.g., Brown v. Commissioner, 399 Pa. 156, 159 A.2d 881 (1960). But it does not follow that a Pennsylvania condemnation award necessarily cannot reflect an element of severance damages. Arch B. Johnston, 42 T.C. 880 (1964). The test to be applied is whether the condemnation proceedings, including negotiations by way of settlement, clearly show that compensation for damage to the remaining land was in fact included. Compare Arch B. Johnston, supra, L. A. Beeghly, 36 T.C. 154 (1961), and Pioneer Real Estate Co., 47 B.T.A. 886 (1942), modified on another ground by a Supplemental Memorandum Opinion, see 1 T.C.M. 527, with Lapham v. United States, 178 F.2d 994, 996 (C.A. 2, 1950), Marshall C. Allaben, 35 B.T.A. 327 (1937), and Estate of Edgar S. Appleby, 41 B.T.A. 18, 22 (1940), affirmed on another issue 123 F.2d 700 (C.A. 2, 1941); see 3 Mertens, Law of Federal Income Taxation, sec. 20.174 (Zimet & Weiss rev.). The facts herein simply do not meet the standard laid down by the decided cases.
Since 1964, Pennsylvania has permitted an express allowance of severance damages. See Pa. Stat. Ann. tit. 26 sec. 1-511(6) (1964).
While there was some testimony that the presence of cuts and fills required extensive excavation and grading in order to provide Peter's remaining land with usable frontage, there is no indication of the monetary measure of such damage in the transcript of the proceedings before the board of viewers, and the report of the viewers merely states that, in determining the damages sustained by Peter, consideration was given to ‘the quantity, quality and value of the land so taken.’ Nor can we accept petitioners' argument that Peter's loss of frontage, which was the subject of testimony at the condemnation hearing, should be treated as constituting the basis for determining that a portion of the award constituted severance damage. If the Commonwealth had built the new highway on the roadbed of the old, cutting below the level of Peter's land, petitioners could with reason complain that the frontage had been made unusable by the condemnation and that it had therefore decreased in value. But this was not what happened. The Commonwealth took a broad swath of land, nowhere less than 85 feet, immediately to the west of the old highway and built the new highway on it. The value of Peter's frontage on the old Route 51 inhered in the land that was taken (except for that part which inhered, and still inheres, in area E, which acquired new frontage at least as valuable as the old). The land behind lost no value as frontage, since it never was frontage. The frontage that existed before the condemnation was not made unusable; it was condemned. Compare Lapham v. United States, 178 F.2d 994, 996 (C.A. 2, 1950). By a parity of reasoning, Peter's loss of corner property at a grade intersection is not damage to property which never was at an intersection.
Petitioners' argument for severance damages based on loss of frontage and corner property, if it proves anything, supports the conclusion that the damages were attributable to the land taken, which included the frontage and corner property, rather than to the more remote remaining land. On the record herein, we hold that petitioners have failed to show that any part of the award is properly attributable to the land remaining after the condemnation.
Respondent makes no claim that any part of the award received in 1962 should be taxed as ordinary income, and not as part of the amount realized, despite the recitation in the report that the award included some unspecified amount as damages for delay in payment. See Kieselbach v. Commissioner, 317 U.S. 399 (1943).
Issue 3. Section 1033
In their 1959 income tax return, petitioners elected under section 1033(a)(3) not to recognize the major part of the gain realized from the condemnation. Petitioners did not seek an extension, and so the period within which the property had to be replaced expired on December 31, 1960. Sec. 1033(a)(3)(B)(i).
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—
(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, or purchases stock in the acquisition of control of a corporation owning such other property, 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 or such stock. 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 or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending—
(i) one year 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.
At the outset, we again emphasize that Peter kept no records of his cost. The bulk of the testimony both as to time and amount of expenditure was based on estimates made long after the fact. This was particularly true with respect to expenditures for excavating and grading, where the only bills submitted were those of two contractors showing no payments or charges for this purpose prior to 1963. Moreover, the testimony indicates that a considerable portion of the work in connection with the claimed replacements was done by Peter himself. It is well established that the value of Peter's services may not be considered an expenditure. Cf. Marks v. Commissioner, 390 F.2d 598 (C.A. 9, 1968), affirming a Memorandum Opinion of this Court; Palmer Hutcheson, 17 T.C. 14 (1951). Under these circumstances, and bearing heavily on the petitioners (Cohan v. Commissioner, 39 F.2d 540 (C.A. 2, 1930)), we have done the best we could with the evidence before us and found, as our Findings of Fact show, that Peter expended at most an aggregate of $20,188 prior to December 31, 1960, consisting of $800 for the used Esso tanks, $3,500 for the area B service station, $5,000 for the Roberts Hollow station, $8,100 for excavating and grading area D, $1,588 for excavating and grading area E, and $1,200 for construction of the new Gulf station on the latter site.
It will be recalled that areas E and A are considered synonymous. (See fn. 2, supra.) Our Findings of Fact show that we were unable to make a determination that any expenditures were made on area C during the critical period.
Peter's adjusted basis in the condemned property has been found to be $20,430. Since the maximum expenditures on his part during the taxable years 1959 and 1960 aggregate a lesser amount, no part of the gain realized in 1959 is insulated from recognition by section 1033. See sec. 1033(a)(3)(A).
As a consequence of the foregoing, we need not reach various other issues raised herein, to wit: (1) Whether the expenditures to make area D commercially usable qualify as a ‘purchase’ for the purpose of ‘replacing’ the condemned property (compare Rev. Rul. 271, 1953-2 C.B. 36; Rev. Rul. 60-69, 1960-1 C.B. 294; Rev. Rul. 67-255, 1967-2 C.B. 270); (2) whether the construction without completion during 1959 and 1960 of the new Gulf station on area E qualified as a replacement under section 1033; (3) whether the Roberts Hollow service station similarly qualified in light of the manner in which petitioners made their election on their 1959 return (compare Adolph K. Feinberg, 45 T.C. 635, 642-643 (1966), affd. 377 F.2d 21 (C.A. 8, 1967)).
At the trial, petitioners were warned of the need to amend their pleadings if they wished to pursue this issue, but they did not make any motion in this regard and they seem to have abandoned this issue on brief.
Respondent conceded that there was no issue arising from the fact that two of the new stations were on leased property rather than on Peter's own land and that construction of a building can constitute the ‘purchase’ of property within the meaning of sec. 1033.
Issue 4. Witness Fee
In March 1963, Peter paid $1,350 to an expert witness for services rendered at the condemnation hearing in 1962. The parties agree that this fee was a capital expenditure. Isaac G. Johnson & Co. v. United States, 149 F.2d 851 (C.A. 2, 1945); see Arthur T. Galt, 19 T.C. 892, 912 (1953), modified on other issues 216 F.2d 41 (C.A. 7, 1954). But petitioners claim that it should be included in the basis of the condemned land for purposes of computing the gain realized in 1959. Respondent argues that it can only be taken as a capital loss in 1963, when it was paid. We agree with respondent.
Federal income tax is computed on the basis of an annual accounting. Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931). Petitioners reported their income on the cash basis and must accept the interaction of their method of reporting with the requirement of an annual accounting. The witness fee was paid in 1963 and can only be used by a cash basis taxpayer for tax purposes in that year, if at all. We hold that the $1,350 paid in 1963 cannot be taken as an offset to gain realized in earlier years. Cf. Roberta Pittman, 14 T.C. 449 (1950). Compare Arrowsmith v. Commissioner, 344 U.S. 6 (1952). Respondent's notice of deficiency included 1963, but petitioners failed to appeal from this portion of his determination. We therefore have no jurisdiction over that year. Sec. 6214(b); John R. Thompson Co., 10 B.T.A. 57 (1928).
Issue 5. Statute of Limitations
This issue involves the question whether section 6501(a) bars the assessment of any deficiency for 1959. Section 1033(a)(3)(C) supersedes the general limitation period of section 6501(a) by providing:
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, * * *
Petitioners made an election under section 1033(a)(3)(A), part of the gain was realized in 1959, and the entire deficiency herein is attributable to such gain. At no time did petitioners attempt to comply with the applicable regulations; they never gave any notification. See sec. 1.1033(a)-2(c)(5), Income Tax Regs. We hold that assessment of the deficiency for 1959 is not barred by any provision of the Code.
Issue 6. Additions to Tax Under Section 6653(a)
Respondent determined an addition to the tax under section 6653(a) for both 1959 and 1962. The burden of proof rests upon the petitioners. David Courtney, 28 T.C. 658, 669-670 (1957).
Petitioners' return for 1959 estimated that Peter would spend $78,667 by the end of 1960 upon service stations to replace those condemned. Peter and the accountant who prepared the return worked out this estimate together. Yet Peter failed to keep any records whatever of the amounts expended upon the replacement properties. Moreover, he failed to notify respondent of his failure to complete the replacements by the end of 1960 and to file an amended return for 1959, as he was required to do by respondent's regulations. See sections 1.1033(a)-2(c)(2) and 1.1033(a)-2(c)(5), Income Tax Regs. Petitioners argue that Peter relied upon the accountant's advice. But the evidence shows that this at best applies to the return as initially filed. Petitioners do not even suggest that the accountant told Peter that it did not matter how much he actually spent or that Peter relied upon the accountant to prepare and file the necessary notification and amended return. In several respects, therefore, the situation herein is quite different from that which prevailed in Conlorez Corp., 51 T.C. 467 (1968). We hold that the addition to tax for 1959 is proper.
With respect to 1962, the petition alleges that the $83,772.88 receipt was not reported because it was ‘nontaxable severance damages.' Peter testified that the accountant knew about the receipt. But he did not testify that his accountant advised him that the money was ‘nontaxable severance damages' nor that he relied upon any such advice which might have furnished the basis for a finding of honest misunderstanding of the law. Moreover, even if the amount received in 1962 had constituted severance damages, the substantial portion thereof, which was in excess of Peter's basis in the remaining land, would have been taxable. See pp. 999-1000, supra. Under all of the circumstances, we think Peter failed to exercise reasonable care in assuring that the return included all substantial items of income and that consequently the addition to tax for 1962 is proper. Vern W. Bailey, 21 T.C. 678, 687 (1954).
Clearly, sec. 1033 was inapplicable because the replacement period had expired and because, in any event, Peter had not indicated in his 1959 return that he would so spend any portion of the award in excess of the amount received in that year.
Issue 7. Addition to Tax for Late Filing of 1962 Return
Respondent determined an addition to the tax under section 6651 for 1962, arguing that the filing of an unsigned form does not constitute the filing of a return and that inadvertent failure to sign does not constitute ‘reasonable cause.’ We agree.
SEC. 6651. FAILURE TO FILE TAX RETURN.
(a) ADDITION TO THE TAX.— In case of failure to file any return required under authority of subchapter A of chapter 61 (other than part III thereof), of subchapter A of chapter 51 (relating to distilled spirits, wines, and beer), or of subchapter A of chapter 52 (relating to tobacco, cigars, cigarettes, and cigarette papers and tubes), or of subchapter A of Chapter 53 (relating to machine guns and certain other firearms), on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.
(b) PENALTY IMPOSED ON NET AMOUNT DUE.— For purposes of subsection (a), the amount of tax required to be shown on the return shall be reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed upon the return.
Until 1942, taxpayers had to make their returns under oath. Under such a statute, a return form unsigned and unsupported by oath obviously could not constitute a valid return. Lucas v. Pilliod Lumber Co., 281 U.S. 245 (1930); Theodore R. Plunkett, 41 B.T.A. 700, 710-711 (1940), affd. 118 F.2d 644 (C.A. 1, 1941). The 1942 Revenue Act did away with the oath requirement so far as individuals were concerned and in its place substituted a written verification subject to the penalties of perjury. 56 Stat. 798, 836. This provision is now embodied in section 6065. Congress made this change merely to avoid inconvenience to taxpayers; there was no intention of changing the result reached in Lucas v. Pilliod Lumber Co., supra. See S. Rept. No. 1631, 77th Cong., 2d Sess., pp. 5, 107 (1942). Moreover, sections 6061, 6062, and 6063 require all returns to be signed. See also section 7206. Yet no specific penalty is provided for a failure to sign. We recognize that the unsigned return was accompanied by a signed check. But neither the signature on the check nor the acceptance of the check by respondent can be considered an imputed signature on the return itself. Cf. Roy Dixon, 28 T.C. 338, 342, 346-348 (1957); see Brafman v. United States, 384 F.2d 863, 868 (C.A. 5, 1967). It is hardly conceivable that such a procedure would be sufficient to support a perjury charge based on a false return— one of the principal sanctions available to assure that honest returns are filed. See Reaves v. Commissioner, 295 F.2d 336, 338 (C.A. 5, 1961), affirming 31 T.C. 690 (1958). We can only construe this to mean that an unsigned return is no return at all. See Roy Dixon, 28 T.C.at 347.
Respondent makes no claim that petitioners' failure to sign the return form precludes them from using the joint-return rates permitted by sec. 2.
The next question is whether petitioners' failure to sign the return was ‘due to reasonable cause and not due to willful neglect.’ We have found as a fact that petitioners' failure to sign the return was not due to willful neglect. But the absence of willful neglect is insufficient to avoid the addition; reasonable cause must be shown. Coshocton Securities Co., 26 T.C. 935, 939 (1956). Petitioners' only excuse for failing to sign the return is that they ‘overlooked’ it. This is not reasonable cause within the meaning of the statute. Cf. Theodore R. Plunkett, supra; Rogers Hornsby, 26 B.T.A. 591, 593 (1932); see Veterans Foundation, 38 T.C. 66, 75 (1962), affirmed on other issues 317 F.2d 456 (C.A. 10, 1963). We hold that an addition to the tax for 1962 under section 6651 is proper.
Decision will be entered under Rule 50.