*743 In the condemnation for public use of a portion of each of two adjoining lots owned by it, the petitioner was awarded a sum for the land taken, together with improvements thereon, and severance damages to the remaining portion of the lots. Special assessments were levied against the portions of the lots not taken and other lots of the petitioner in the assessment district, which were paid by offsets against the awards. The gain realized by the petitioner in the transaction is the difference between the awards made for the land and improvements and the cost basis of such property.
*127 OPINION.
SEAWELL: This proceeding concerns a deficiency of $9,980.69 in income tax of the petitioner for 1929. The facts were stipulated and briefly stated are as follows:
The petitioner, a california corporation, owned four lots in the city of Los Angeles, two of which, known as lots B and C, fronted on Grand Avenue, and the remaining lots, known as lots D and E, which were adjoining and considered as*744 one lot, had a frontage on Washington Street and adjoined the rear of lots B and C.
In 1926, pursuant to ordinances adopted by it, the city of Los Angeles instituted court proceedings under the "Street Opening Act of 1903," California Statutes, 1903, p. 376, to condemn a strip 79.86 feet wide, on the east side of lot D and the west side of lot E. including improvements thereon, as part of a street extension project. In 1927 the court rendered an interlocutory judgment in which it awarded damages to the petitioner in the amount of $206,280.13, of which $148,864.54 was for land, $32,663 for buildings, and $24,752.59 for severance damages. As part of the condemnation proceedings and under authority of the same state statute, the city of Los Angeles levied assessments totaling $75,413.93 against the four lots, as follows:
| Lot D | $10,149.30 |
| Lot E | 41,075.62 |
| Lots B and C | 24,189.01 |
| 75,413.93 |
The assessments were made entirely for the payment of the property condemned and became a lien upon the petitioner's property. The petitioner satisfied the assessments in 1928 by giving the city of Los Angeles receipts for payments on the awards equal to the amount of the*745 assessments. In January 1929 the petitioner received the remainder of $130,866.20 of the awards from the city of Los Angeles.
In its income tax return for 1929 the petitioner reported taxable gain of $31.147.99 from the condemnation by deducting from the net award of $130,866.20 (gross awards, less special assessments) a basis of $88,318.21 for the land and $11,400 for the buildings. In his determination of the deficiency the respondent increased the gain to $127,823.24. He reached the amount by deducting from the awards, aggregating $181,527.54 for the land and buildings, a basis of $53,704.30, $42,304.30 for the land and $11,400 for the buildings.
The parties are agreed that both used an erroneous cost basis for the land. It is stipulated that the correct combined cost basis of lots D and E is $118,767.86, of which 51.1923 percent, or $60,800, *128 is the basis of the portion taken. The buildings condemned had a cost basis of $11,400.
The tax of $4,295.93 shown to be due in the petitioner's return for 1929 was paid within three years prior to the filing of the petition with the Board.
On brief the parties insist that their respective methods for determining*746 the taxable gain, with an adjustment for the correct cost basis of the land, are correct. None of the cases decided by this Board or the courts appear to approve the computation used by the petitioner. The method employed by the respondent is in accordance with his rulings, which have been indirectly approved by this Board.
The methods proposed by the respective parties and the results they produce are shown in the following tabulation:
| Petitioner | ||
| Portion condemned | Portion remaining | |
| Awards: | ||
| Land | $148,864.54 | |
| Buildings | 32,663.00 | |
| Severance damages | 24,752.59 | |
| 206,280.13 | ||
| Special assessments: | ||
| Lot D | $10,149.30 | |
| Lot E | 41,075.62 | |
| Lots B & C | 1 24,189.01 | |
| 75,413.93 | ||
| 130,866.20 | ||
| Basis of property | ||
| condemned: | ||
| Land | $60,800.00 | |
| Buildings | 11,400.00 | |
| 72,200.00 | ||
| Gain | 58,666.20 | |
| Severance damages | ||
| New basis | ||
| Commissioner | ||
| Portion condemned | Portion remaining | |
| Awards: | ||
| Land | $148,864.54 | |
| Buildings | 32,663.00 | |
| Severance damages | $24,752.59 | |
| 181,527.5424,752.59 | ||
| Special assessments: | ||
| Lot D | 10,149.30 | |
| Lot E | 41,075.62 | |
| Lots B & C | ||
| Basis of property | ||
| condemned: | ||
| Land | $57,967.86 | 57,967.86 |
| Buildings | ||
| 72,200.00 | ||
| Gain | 109,327.54 | |
| 109,192.78 | ||
| Severance damages | 24,752.59 | |
| New basis | 57,967.86 | 84,440.19 |
It will be observed that under the petitioner's computation the special assessments levied against all of its property in the assessment district is recovered by deducting it from the awards. The same result would have been reached by adding the amount to the cost of the land taken. It also treats the severance damages as an amount realized from a disposition of the property condemned. The respondent does not take into the reckoning the special assessments or the severance damages. He regards the former as an additional investment in the land remaining and the latter as a partial recovery of the basis of the portion of lots D and E not condemned.
*129 It has been held that, where special assessments are offset against an award for land taken under condemnation proceedings, the whole award should be regarded as having been received by the property owner.
Special assessments of the kind involved here are levied against property in a district upon the theory that the property charged is enhanced in value, "the enhancement of value being the consideration for the charge, * * *."
In the*749 Carrano case, supra, there was an award for severance damages, but the record did not disclose the amount thereof. No figures were available from which the basis for the whole tract could be apportioned between the part taken and the part remaining. The special assessment levied against the remaining part of the parcel condemned was offset against the awards, as here, and the difference was paid to the landowner. The court regarded the special assessment as having been paid before the awards, and computed the gain by deducting the original basis for the whole parcel, increased by the amount of the special assessment, from the awards, including the one made for severance damages. This left no basis for the remaining portion of the lot, with the result that if the property were ever sold, the entire selling price would represent taxable gain. Under the prevailing facts no other course was open to the court.
In
Several obstacles stand in the way of accepting the petitioner's method of computing the profit. It completely ignores the rule that the whole of the amount awarded for property seized under condemnation proceedings is to be considered as received even though a lesser amount is actually received because of an offset for an assessment levied*751 to pay the cost of the property condemned. The just compensation which the petitioner was entitled to receive under the eminent domain proceedings was the value of the land and improvements taken, plus damage to the land not taken. City of Los Angelesv. Oliver, 102 cal.App. 299;
While not contesting the receipt of benefits equal in value to the amount of the assessments, the petitioner determines the gain without regard to enhancement of value of the property assessed. In the absence of any evidence on the point we are justified in assuming that the petitioner received a consideration for the assessments equal in value to the amount of the charges. The computation also treats the severance damages as recovery for the land taken. Such award has no*752 direct relation to the one made for the portion of the lot taken. It constitutes damages sustained by reason of the taking of another part of the lot, for which just compensation was allowed. Inclusion of the severance damages in the reckoning increases the gain and indirectly results in a tax on property not disposed of.
The parties are in agreement that only the basis for the land actually taken should be recovered. With this we agree. We have frequently held that where a large tract is acquired to divide into lots and is subsequently divided, the basis for the land should be allocated to the several parcels on an equitable basis.
The case of
The respondent's method of computing the gain is approved and will be followed in this proceeding. In his computation of the gain the respondent made an allowance of $5,941.68 for expenditures to replace the buildings condemned. A like allowance will be reflected in the recomputation to be made under Rule 50.
The petitioner contends that the portion of the award used to pay the assessments of $75,413.93 was expended in the acquisition of property similar or related in service and use to the property taken and no gain should be recognized to that extent.
Section 112(f) of the Revenue Act of 1928 provides, in part:
If property (as a result of * * * an exercise of the power of requisition*755 or condemnation, * * *) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or *132 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, * * * no gain or loss shall be recognized.
Here the property was involuntarily converted into money by condemnation proceedings and the second clause of the section governs the question.
The petitioner also contends that the gain derived from the proceedings was taxable in 1927, and if not in that year, the sum of $75,413.93, an amount equal to the benefit assessments offset against the awards, was taxable in 1928. The respondent argues that no such issues are raised by the pleadings. With this we agree.
The petitioner relies upon its allegation in the petition that "In determining the net income for the year 1929, the Commissioner erroneously included in the computation of said net income the sum of $75,413.93, which said sum did not represent net income and should not be included in the computation thereof" as raising the questions. The facts alleged as a basis for the error complained of are confined to the ownership of lots*757 D and E; the condemnation of a part thereof; the awards and special assessments made respecting petitioner's property; and that "The offset to the award of $75,413.93 was not an assessment for improvements * * * to defray the cost of actual improvements, such as sidewalks, curbs, * * *, but was a sum arbitrarily assessed against petitioner to defray the cost of the condemned property taken by the City."
We see nothing in the allegation of error relied upon directly or indirectly raising the issue of whether the whole or any part of the award is taxable in a year other than the taxable year 1929. The allegation seems to raise the question of whether any actual benefit resulted from the assessments.
"Always a taxpayer is entitled to know with fair certainty the basis of the claim against him. Stipulations concerning facts and any other evidence properly are accommodated to issues adequately *133 raised."
Reviewed by the Board.
Decision will be entered under Rule 50.
MATTHEWS, LEECH, and ARNOLD dissent.
Footnotes
1. Commissioner added to basis of lots B and C. ↩