UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
decided: March 7, 1972.
MIHRAN DEMIRJIAN AND MABEL DEMIRJIAN, APPELLANTS,
COMMISSIONER OF INTERNAL REVENUE. ESTATE OF ANNE DEMIRJIAN, DECEASED, FRANK DEMIRJIAN, EXECUTOR, AND FRANK DEMIRJIAN, SURVIVING SPOUSE, APPELLANTS, V. COMMISSIONER OF INTERNAL REVENUE
Van Dusen and Hunter, Circuit Judges, and Layton, District Judge.
Author: Van Dusen
Opinion OF THE COURT
VAN DUSEN, Circuit Judge.
The petitioning taxpayers, Anne and Mabel Dermirjian,*fn1 have filed a timely petition for review of an adverse decision of the Tax Court*fn2 affirming a finding of tax deficiencies for 1962*fn3 by the Commissioner of Internal Revenue. The tax deficiencies were based on the failure to report $54,835.00 in gain for the taxable year 1962. Plaintiffs maintain that the gain in question is covered by the nonrecognition provisions of Code Section 1033.*fn4 As pointed out below, we agree with the ruling of the Tax Court that § 703 of the Internal Revenue Code requires that the nonrecognition of gain election and replacement under § 1033 be made by Kin-Bro Realty, a partnership, and that the replacements by plaintiffs individually were thus ineffective.
The facts, as stipulated in the proceedings before the Tax Court, show that Anne and Mabel Demirjian*fn5 each owned 50% of the stock of Kin-Bro Realty Corporation, which had acquired title to a three-story office building in Newark, New Jersey, in October 1944. On November 3, 1960, the corporation was dissolved and its chief asset, the office building, was conveyed by deed to "Anne Demirjian . . . and Mabel Demirjian . . . partners trading as Kin-Bro Real Estate Company." Although no formal partnership agreement was executed, Anne and Mabel did file a trade name certificate indicating that they intended to conduct a real estate investment business at the Newark office building under the name of Kin-Bro Real Estate Company. The office building, which constituted Kin-Bro's sole operating asset, was conveyed to the Newark Housing Authority on September 12, 1962, after an involuntary condemnation proceeding. In the deed of conveyance the grantors are listed as "Anne Demirjian and Mabel Demirjian, partners trading as Kin-Bro Real Estate Company." The net proceeds of the sale were distributed to Anne and Mabel in amounts equal to approximately 50% of the total sale price.*fn6 At this point, both Anne and Mabel apparently elected to replace the property with equivalent property in order to take advantage of the nonrecognition of gain provision contained in § 1033 of the Internal Revenue Code. Normally gain resulting from the sale or exchange of investment real property is taxable,*fn7 but § 1033 provides that if property is involuntarily converted and the proceeds are used to replace it with substantially equivalent property within one year, then gain is recognized only to the extent that the amount received due to the conversion exceeds the purchase price of the replacement property. The reinvestments, however, were made by Anne and Mabel as individuals and not through the partnership.*fn8 On April 15, 1963, Anne invested $40,934.05 of her share of the proceeds in property which was similar to the condemned property. Mabel was unable to find suitable replacement property within the one-year replacement period,*fn9 and, by letter of October 17, 1963, she made a written application to the District Director of Internal Revenue, Newark, New Jersey, for an extenstion of time in which to make such a replacement. In a letter dated January 16, 1964, the District Director stated:
"In a letter dated October 17, 1963 received from Mr. Ralph Niebart and subsequent correspondence, an extension of time was requested for the purpose of replacing your share of the partnership property that was owned by Kin-Bro Real Estate Company (a partnership). The property was sold to the Housing Authority of the City of Newark on September 12, 1962 under threat of condemnation.
"You have stated that although you have made a continued effort to replace the converted property, you have not been successful to date.
"Based on the information submitted, together with the data already in our file, extension is hereby granted until December 31, 1964, within which to complete the replacement of the converted property."*fn10
On February 7, 1964, Mabel invested $45,711.17 in similar real estate. Neither Anne nor Mabel reported any portion of the gain realized on the condemnation sale in their initial returns for the 1962 tax year. In 1964 Anne and Mabel filed amended 1962 joint returns with their husbands, reporting the excess of their distributive share from the condemnation sale over the cost of their respective replacement property as long-term capital gains.*fn11 The Commissioner of Internal Revenue disagreed with these computations and assessed deficiencies*fn12, reasoning that the § 1033 election for nonrecognition of gain and replacement with equivalent property could only be made by the partnership under the terms of § 703(b) of the Code.*fn13 The Tax Court affirmed the Commissioner's finding of deficiencies and plaintiffs here appeal that decision.
In reviewing a decision of the Tax Court, this court is normally limited in its scope of review by the clearly erroneous test of Rule 52(a), F.R.Civ.P.*fn14 However, in cases such as the instant action, where the facts have been fully stipulated and no testimony was taken,*fn15 the Court of Appeals may, within certain limits, substitute its factual conclusions and inferences for those of the Tax Court.*fn16
Petitioners' first contention on this appeal is that the Newark office building was owned by Anne and Mabel as tenants in common, not as partners, and that, therefore, the § 1033 nonrecognition of gain election and replacement was properly made by them in their individual capacities as co-tenants. On the basis of the record before the Tax Court, we find that the property in question was owned by Kin-Bro Realty, a partnership,*fn17 composed of Anne and Mabel Demirjian.*fn18 It is noted that several federal cases have ruled that taxpayers such as petitioners who represent, in their dealings with the Internal Revenue Service, that property is owned by a partnership are bound by such representations.*fn19
Petitioners next contend that even if the office building was owned by the partnership, the election and replacement with equivalent property under 26 U.S.C. § 1033(a) (3) were properly made by them in their capacity as individual partners. We agree with the Tax Court's determination that 26 U.S.C. § 703(b) requires that the election and replacement under § 1033 be made by the partnership and that replacement by individual partners of property owned by the partnership does not qualify for nonrecognition of the gain.*fn20 Section 703(b) provides, with exceptions not relevant here, that any election which affects the computation of taxable income derived from a partnership must be made by the partnership.*fn21 The election for nonrecognition of gain on the involuntary conversion of property would affect such computation and is the type of election contemplated by § 703(b). The partnership provisions of the Internal Revenue Code*fn22 treat a partnership as an aggregate of its members for purposes of taxing profits to the individual members and as an entity for purposes of computing and reporting income.*fn23 In light of this entity approach to reporting income, Congress included § 703(b) to avoid the possible confusion which might result if each partner were to determine partnership income separately only on his own return for his own purposes.*fn24 To avoid the possible confusion which could result from separate elections under § 1033(a), the election must be made by the partnership as an entity, and the failure of the partnership to so act results in the recognition of the gain on the sale of partnership property.
Petitioners' final contention is that the Commissioner is estopped from denying that a valid election and replacement were made under § 1033. Two separate grounds for estoppel are alleged. The first ground, that the petitioners have conformed their conduct to existing interpretations of the law and the Commissioner may not "invoke a retroactive interpretation to the taxpayer's detriment,"*fn25 is clearly without merit. The second alleged ground is that the Commissioner is estopped by the implicit approval of the individual partner's election and replacement by the District Director for Newark in his letter of January 16, 1964.*fn26 Even if we were to accept the letter as a justifiable basis for detrimental reliance, petitioners have demonstrated no such reliance*fn27 and, furthermore, the doctrine of estoppel does not prevent the Commissioner from correcting errors of law.*fn28
For the foregoing reasons, the September 1, 1970, orders of the Tax Court, in accordance with its opinion of that date, will be affirmed.