Before McLAUGHLIN, KALODNER and HASTIE, Circuit Judges.
This petition for review of the Decision of the Tax Court of the United States*fn1 concerns the applicability of the "nonrecognition of gain" provisions of Section 112(f) of the Internal Revenue Code of 1939, as amended.*fn2
The issue presented is whether the Tax Court erred in holding that property acquired by the taxpayer with the proceeds he received from the condemnation of his parking lot property was not "similar or related in service or use" to the condemned property.
The critical facts may be stated as follows:
Thomas McCaffrey, Jr., the petitioner ("taxpayer")*fn3 has been engaged in the business of industrial realtor and appraiser in and about Pittsburgh, Pennsylvania since 1923. In 1947, he acquired, at a cost of $15,000, a co-ownership interest in a property in Pittsburgh occupied as a parking lot. The lot was 80 by 180 feet. It had on it only a small frame building adaptable for use in the operation of a parking lot. The property was filled, graded and blacktopped. It was served by the usual utilities - water, gas, electricity and telephone. It also had a railroad siding which was unused. In 1923, and for an undisclosed period thereafter prior to 1947, the property was used as a coal yard. Neighboring properties were industrial in nature.
At the time taxpayer acquired his interest in the Pittsburgh property it was under lease as a parking lot. It remained so during the entire period of his co-ownership under annual leases which provided that the property could be used only for parking purposes.
In 1952, the Commonwealth of Pennsylvania condemned the Pittsburgh property and taxpayer was awarded $57,477 - an excess of $42,477 over his $15,000 cost. Subsequently, he sought to acquire an industrial property of similar size in Pittsburgh but was unable to find any "to accommodate my [his] desires". However, he found available, in the City of New Castle, Pennsylvania, about fifty miles from Pittsburgh, a 91/3 acre tract, industrially zoned, owned by the American Can Company. It had on it a two-story 694 x 80 feet building of brick and wood construction with concrete and wood floors, equipped with elevators, sprinkler and heating systems. It also had an engine room, garages and lumber shed. A part of the tract was surfaced with blacktop and cinders and was used for parking purposes by executives, employees and customers of a corporation conducting business on an adjacent property; another part had cinder surfacing for use in parking incidental to unloading shipments by rail on two Baltimore & Ohio sidings which served the property.
Coincident with his learning of the availability of the New Castle property taxpayer also ascertained that the Federal Civil Defense Administration ("Administration") had previously considered leasing it but had not done so because of the physical condition of the buildings. He thereupon entered into negotiations with Administration to lease the property and obtained a lease commitment provided certain repairs, alterations and improvements were made. Taxpayer then negotiated the purchase of the property by the Arsenal Corporation, a Pennsylvania corporation, from the American Can Company at a price of $155,000, of which $105,000 was represented by a mortgage on the property to the American Can Company. Thereafter, in August, 1953, taxpayer purchased all of the stock of the Arsenal Corporation for $64,029. At the time the New Castle property was the Arsenal's sole asset. Subsequently, Arsenal leased the New Castle property to Administration on a year-to-year basis for use for warehouse purposes and expended approximately $100,000 in making the repairs and improvements called for by the lease commitment. The rental paid by Administration did not include any amount as a charge for its use of the property for parking purposes.
In determining the tax deficiency in issue, the Commissioner determined that taxpayer was not entitled to the benefits of the "nonrecognition of gain" provisions of Section 112(f), and, accordingly that the gain of $42,477 realized from the condemnation of taxpayer's interest in the Pittsburgh property constituted long-term capital gain taxable in 1953. The Tax Court agreed on the ground that the New Castle property, acquired by taxpayer through stock ownership of the Arsenal Corporation, was not property "similar or related in service or use" to the Pittsburgh property within the meaning of Section 112(f). This petition for review followed.
The sum of taxpayer's contention here is that he "is in the business of investing in industrial real estate for the purpose of producing income therefrom" and since "both the condemned property and the replacement property were industrial properties which served the same function, use and purpose" to him, to wit, "producing rental income therefrom" that the purchased property is "similar or related in service or use" to the one converted within the meaning of Section 112(f).
There are then two arrows in the quiver of taxpayer's contention: (1) it is the "service or use" to which he put his money for the production of rental income in the two properties involved, rather than the "service or use" which the properties were designed to afford, or their physical characteristics, which is dispositive; and (2) the two properties were in fact similar in "service or use" in that they are both "industrial properties".
The Tax Court erred, says the taxpayer, in disregarding the factors stated, and applying instead a "functional test" to establish whether the Pittsburgh and New Castle properties were "similar or related in service or use", viz., the "purpose" or nature of the properties themselves.
We do not subscribe to taxpayer's contention that the nonrecognition of gain provisions of Section 112(f) are available to him simply because both properties were used by him for the same "use" - the production of rental income. Nor do we agree with him that the two properties are "industrial" and ...