*108 Decision will be entered under Rule 50.
Petitioner acquired property, herein referred to as the "old property," intending promptly to erect thereon a plant suitable for its business. There were improvements on the property when acquired. An architect was employed who prepared plans for the new plant, and recommended clearing the land of existing improvements, which was done. Before construction work was begun upon the new plant, and while the land remained cleared, the City of Mt. Vernon acquired the old property under its power of condemnation. Petitioner used the proceeds received from the City of Mt. Vernon to purchase all of the stock of a corporation, the sole assets of which consisted of property which petitioner intended to use, in place of the old property taken over as above stated, for the erection of its new plant. The new property had some improvements on it when the stock was purchased, part of them usable in the contemplated construction of the new plant, but a substantial part of them had to be torn down. Held, the use, purpose, and function for which the new property was acquired (through the medium of purchase of stock of the owner corporation) was identical*109 with that of the old property and petitioner is entitled to nonrecognition of gain within the meaning of section 112 (f) of the Internal Revenue Code of 1939.
*1173 The statutory notice determines a deficiency for the taxable year ended December 31, 1949, in the amount of $ 10,058.84. Of the several adjustments referred to therein, only one is contested by petitioner. The sole question before us is whether, upon the facts, petitioner is entitled to the benefits of section 112 (f) of the Internal Revenue Code of 1939 providing for nonrecognition of gain where there is an involuntary conversion of property and the proceeds are expended in the acquisition of control of a corporation owning property similar or related in service or use to the property converted.
FINDINGS OF FACT.
Some of the facts are stipulated, and to the extent so stipulated are included herein by reference.
The petitioner, Gaynor News Company, Inc., is a corporation organized and existing under and by virtue of the laws of the State of New York, and presently has its principal place of business*110 at 225 Fourth Avenue, Mt. Vernon, New York. Petitioner's corporation income tax return for the period here involved was filed in the fourteenth district of New York.
In 1948, the petitioner was engaged in the business of distributing newspapers in Westchester County, New York, and for its office and facilities, it rented two buildings on South Fifth Avenue, Mt. Vernon, New York.
The petitioner's place of business at that time proved inadequate as it uses motor trucks in connection with its business operations and requires a large garage to repair and service the same and to make up orders for customers.
On August 31, 1948, the petitioner purchased certain real property at a cost of $ 45,648.52, covering an area of 200 feet by 100 feet, known as No. 40-50 South Fifth Avenue, Mt. Vernon, New York.
*1174 The Common Council of the City of Mt. Vernon, on May 12, 1949, enacted a city ordinance directing the Corporation Counsel to acquire said real property.
On June 30, 1949, the aforementioned property was acquired by the City of Mt. Vernon, from the petitioner, for a total consideration of $ 80,000.
On the same day, June 30, 1949, the petitioner purchased all of the capital stock*111 of the 217 South Fourth Avenue Corporation for a consideration of $ 87,254.54.
The sole asset of the 217 South Fourth Avenue Corporation was certain real property covering an area of 199 feet by 105 feet.
The 217 South Fourth Avenue Corporation originally owned real property covering an area of 125 feet by 105 feet, upon which a building was located. This property had been acquired by the 217 South Fourth Avenue Corporation on December 19, 1939, for a consideration of $ 47,000. Adjacent to this property was a parcel of vacant real property, 74 feet by 105 feet. Petitioner insisted that the 217 South Fourth Avenue Corporation acquire this latter parcel, which it did at a cost of $ 8,722.58. The foregoing two parcels comprised the property held by the 217 South Fourth Avenue Corporation at the time petitioner purchased its stock.
During the years 1946, 1947, 1948, and 1949 the Fourth Avenue property had been rented for the following gross amounts:
| 1946 | $ 4,800 |
| 1947 | 5,400 |
| 1948 | 5,400 |
| 1949 (January through June) | 3,000 |
During the years 1948 and 1949 the Fifth Avenue property had been rented for the following gross amounts:
| 1948 (September through December) | $ 1,200 |
| 1949 (January through May) | 675 |
*112 During the period involved herein, the City of Mt. Vernon, New York, assessed the Fifth Avenue and Fourth Avenue properties, for tax purposes, as follows:
| 40-50 South | 217 South | |
| Fifth Avenue | Fourth Avenue | |
| Land | $ 18,800 | |
| Building | 36,200 | |
| Total | $ 53,000 | $ 55,000 |
Hereinafter, the property 40-50 South Fifth Avenue will be referred to as the "old property" and the property 217 South Fourth Avenue will be referred to as the "new property."
At the time the old property was acquired, there were improvements upon it, consisting of a gasoline station and a number of metal *1175 garages, used for repair and storage of automobiles. Petitioner, however, bought the old property with the intention of removing the existing improvements and constructing on it a plant suitable for petitioner's own business purposes. The property so purchased was adequate for such purposes.
After the purchase, petitioner engaged a firm of architects, and had plans and specifications drawn for the erection of a suitable plant. Steps were taken to get bids, but before the final bids were received, or a builder selected, the architects recommended that the property be cleared of existing*113 improvements so that everything would be in readiness to proceed promptly with the erection of the new plant. Petitioner thereupon gave notice to tenants to vacate the property, and after the tenants vacated, the existing structures were removed from the property.
After the property had been cleared, and before any actual construction of the new plant was begun, the City of Mt. Vernon enacted the ordinance above referred to upon the authority of which the old property was acquired by the city on June 30, 1949, for a total consideration of $ 80,000. The old property was entirely cleared on the latter date. Petitioner acquired all of the capital stock of the 217 South Fourth Avenue Corporation on the same date.
The new property, which was the sole asset of the 217 South Fourth Avenue Corporation, was 2 1/2 or 3 blocks from the old property. From petitioner's standpoint, one location was as good as the other.
Part of the new property was vacant, but part was improved by a building with store fronts.
Petitioner's objective in acquiring the new property (through the medium of purchase of all of the stock of the owner corporation) was the same as in acquiring the old property, i. e., *114 to use it for the erection of a suitable structure or its own business purposes.
It was necessary to scrap the plans for the building on the old property, and petitioner employed the same architects to prepare plans for the structure on the new property.
The building on the new property was not suitable for petitioner's purposes, but part of the structure was usable in erecting the contemplated additions and improvements. The complete front and one side of the building were knocked out, large portions of the floor, all of the partitions, and all of the heating were removed. The floor in the existing garage had to be strengthened because of the heavy loads which would be imposed upon the floor by petitioner's trucks. The roof was repaired, and a part of the structural framing of the floor was kept. The rest, other than the north and east walls, was torn apart. The ultimate structure, including additions and a new facade, was a 1-story building of roughly 20,000 square feet.
*1176 OPINION.
The relevant provisions of the statute here involved are as follows:
SEC. 112. RECOGNITION OF GAIN OR LOSS.
(f) Involuntary Conversion. -- If property (as a result of * * * an exercise*115 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 control of a corporation owning such other property, * * * no gain 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 * * *
The question before us is limited to the single issue of whether or not the new property (owned by a corporation, all of the stock of which was acquired by taxpayer) is similar or related in service or use to the old property which had been converted. The statement accompanying respondent's statutory notice of deficiency assumes that the $ 80,000 award received from the City of Mt. Vernon was invested in the stock of said corporation.
Respondent's sole contention is that the old property was unimproved at the time it was acquired by the City of Mt. Vernon, but that the new property*116 was improved property, and therefore was not similar or related in service or use to the old property. His reliance is upon that part of Regulations 111, section 29.112 (f)-1, which reads as follows:
There is no investment in property similar in character and devoted to a similar use if --
(1) The proceeds of unimproved real estate, taken upon condemnation proceedings, are invested in improved real estate.
It is our view that a realistic appraisal of the facts in the instant case results in the conclusion that the new property was similar and related in service or use to the old property, and that this view is not inconsistent with a practical construction of the provisions of the regulations on which respondent relies.
The uncontroverted facts are that petitioner acquired the old property in 1948 as one step in a program or project to erect a suitable structure for its own business purposes. There were improvements on the property, but they were of such character that they did not fit into petitioner's plans. Naturally, as long as the tenants remained (a period of less than one year), petitioner collected rents. An architect was promptly employed to prepare plans for the new *117 structure, and the architect advised petitioner that existing structures should be removed to make way for construction work. Petitioner promptly gave *1177 notice to the tenants to vacate, and when the tenants were out, the improvements were promptly removed and the property cleared -- all according to plan. Construction work would undoubtedly have followed in due course had it not been for action on the part of the City of Mt. Vernon to take over the property.
Under the foregoing circumstances, we think it unrealistic to set up a functional classification in terms of improved or unimproved property. The old property, at the time it was taken over by the City of Mt. Vernon, was in one stage of the processing required to achieve a planned objective, namely, the preparation of the land to condition it for the erection of a plant or building to be used for the special business purposes of petitioner.
When the accomplishment of the objective was thwarted by the exercise of the power of eminent domain, petitioner took the normal steps to be expected under the circumstances. It bought another piece of property suitable to its purposes, reasonably similar in size and location. *118 The goal in each instance was identical -- the erection of a plant adapted to petitioner's business. There was no reason, either from petitioner's business viewpoint, or from any standpoint material to the underlying principles of section 112 (f), why petitioner should have been forced into the purchase of new property already bare of improvements. It bought the new property not for the sake of the existing improvements (which were more of an obstruction than a benefit), but with the immediate purpose of tearing down a substantial portion of them and proceeding to build according to its own preexisting business purposes.
The fact that petitioner was able to make some use of the skeleton of the existing structure was fortunate, but there is no corollary that its good fortune must carry with it the penalty of nonqualification under section 112 (f). We can conceive of no reason which would justify our holding that petitioner, to qualify for nonrecognition of gain, must have either sacrificed the opportunity to purchase suitable property or have required that existing improvements (which it could not have used in their then condition) be torn down or removed.
If attention is focused*119 upon all of the essential facts in the case, we think it apparent that the new property, likewise in one stage of the planned course of petitioner's action, was clearly similar and related in service and use to the old property.
We may add that we have repeatedly held that section 112 (f) is a relief measure designed to prevent inequitable incidence of taxation, and therefore to be construed liberally to effectuate its purpose. Massillon-Cleveland-Akron Sign Co., 15 T. C. 79, 83; Washington Railway & Electric Co., 40 B. T. A. 1249; Davis Regulator Co., 36 B. T. A. 437.
*1178 The regulation upon which respondent relies so heavily is a broad statement of policy intended as an aid in the construction and administration of section 112 (f). We do not think it is intended to apply to the factual situation before us. The ownership of land which is kept vacant, and held for future sale or for some indeterminate purpose such as future development, subdivision, or other use which is neither immediate nor proximate is hardly to be placed in the same classification as land which is vacant during*120 a momentary transitional stage looking to prompt use for a definite planned objective. The involuntary conversion of land held vacant for an indefinite time and purpose, and the investment of the proceeds of the conversion thereof in improved land, presents an issue differing widely from the situation of an involuntary conversion of land in the process of being fitted for use for a particular purpose and the investment of the proceeds in property consisting of land and partially usable improvements designed to be used for the identical purpose.
Respondent cites in support of his position the case of Lynchburg National Bank & Trust Co., 20 T. C. 670, affd. Lynchburg National Bank & Trust Co. v. Commissioner, (C. A. 4) 208 F. 2d 757. In that case, the petitioner, in 1940, purchased a tract of land adjacent to the bank, the land being then improved by a building which was rented to a retail shoestore and restaurant. The bank intended to demolish the improvements and erect on the land an addition to its main building in order to expand its available space for banking activities. There is nothing in the Findings of Fact*121 in that case to indicate when the bank intended to carry out its plan, but the findings do include the statement that, due to war restrictions, demolition of the existing building and construction of the bank addition were postponed. In all events, the shoe company, which occupied the front half of the ground floor, continued in occupancy until eventual demolition of the building in 1949. The restaurant, which occupied the rear of the ground floor and the second and third floors, continued to do so until April 29, 1946, when the rear half of the building was destroyed by fire. In 1949, upon lifting of building restrictions, the part of the building which had not been destroyed by fire was demolished, and construction of the addition to the bank was completed in 1950. In June of 1946, the bank received insurance money covering its fire loss, and established a replacement fund with the permission of the Commissioner, later using the proceeds in the construction of the addition. The issue was whether the bank was entitled to nonrecognition of gain under section 112 (f).
In Lynchburg National Bank & Trust Co. v. Commissioner, supra, Judge Soper, *122 speaking for the court in affirming the decision of the Tax Court, said (pp. 758, 759):
*1179 The Tax Court has held in a series of cases that the test, as to whether property acquired after a compulsory or involuntary conversion is similar or related in service or use to the property converted, is a functional one; and accordingly the test is not met by the substitution of a building used for banking purposes in place of a building used as a shoe store and a restaurant. To hold otherwise would be to say that the replacement of one commercial building by another commercial building is sufficient under the statute to avoid the recognition of gain, no matter how dissimilar or unrelated their respective purposes may be, and we do not think that the statute has that meaning.
We find nothing in Judge Soper's opinion which conflicts with the views here expressed. Our whole approach in the instant case has been on the basis of the test of function and purpose, which is inherent in the statutory language "similar or related in service or use." In the case before us, the function and purpose of the old property, from petitioner's perspective, was identical with that of the new. The*123 mere fact that the old property was bare of improvements at the precise moment of conversion, while the new property had, when acquired, improvements fortuitously usable, in part, in furtherance of petitioner's clearly planned purposes (but to a substantial extent unusable, and actually an obstruction when viewed in the light of intended use) does not alter the basic identity of function, purpose, and use for which both the old and the new property were acquired by petitioner. Moreover, it is apparent from the record that prompt implementation of its objectives was intended by petitioner.
The only similarity between the Lynchburg case and the case before us is that the bank in the Lynchburg case intended to demolish the improvements and build an addition to the bank. As already pointed out, the findings in the Lynchburg case do not affirmatively show when this intention was to be carried out. We are left to some speculation as to whether the delay was due entirely or only partially to war conditions and building restrictions. We do know, however, that after the property was acquired, it was rented for about 6 years to both a shoe company and a restaurant and, from *124 the time of the fire, was rented for another 2 to 3 years to the shoe company, before the demolition and reconstruction took place.
In all events, it is our view that the facts in the present case establish clear identity of intended function, use, and purpose of both the old and the new property and, therefore, that the statutory test of "similar or related in service or use" is here fully met.
We hold, under the circumstances, that petitioner is entitled to nonrecognition of gain under the provisions of section 112 (f) of the 1939 Code.
Decision will be entered under Rule 50.