*185 Decision will be entered under Rule 50.
Gain or Loss -- Sale -- Year. -- A loss is deductible in the year when right-of-way lands leased to an electric railway operator were the subject of a bona fide sale which definitely fixed the loss of the seller and the amount of it.
*400 The Commissioner determined deficiencies in excess profits tax against the petitioner for the years 1942, 1943, and 1944 in the amounts of $ 534,404.40, $ 330,752.32, and $ 93,216.86. The only issue for decision is whether a loss of $ 376,001.32 was sustained by the petitioner in 1942 when it executed conveyances of lands embracing rights of way.
FINDINGS OF FACT.
The petitioner filed its returns for the taxable years with the collector of internal revenue for the district of Wisconsin.
*401 The petitioner is a public service corporation which has been engaged at times in furnishing light, power, heat, and transportation.
The petitioner, in connection with a 1938 reorganization, transferred substantially all of its transportation properties*186 and transportation business, exclusive of lands embraced in rights of way, to a newly organized, wholly owned subsidiary, herein called Railway, and leased the rights of way to Railway. The lands were encumbered by a mortgage placed on the petitioner's properties at that time.
The operation of the electric lines had resulted in losses for many years and continued to result in losses through 1942. Abandonment in the near future was then inevitable. Railway tried to abandon its line between Racine and Kenosha, Wisconsin, in 1942, but its application was denied in December 1942 by the Wisconsin Public Service Commission without prejudice to renew after six months if any material change in conditions occurred. Railway transferred the line and its rights as lessee to Kenosha Motor Coach Lines, Inc. in December 1943.
The petitioner executed a conveyance on December 24, 1942, to Alois S. Memmel of the land in Racine County embraced in the rights of way, and executed a similar conveyance on December 29, 1942, to Henry W. Marx Company of the land in Kenosha County embraced in the rights of way. The purchasers were not connected with the petitioner or with Railway.
Each instrument recited*187 that abandonment of the railway in the not remote future appeared inevitable at which time the grantor would have to salvage its investment in the lands which had limited use and were not required by the grantor and this was an opportunity to dispose of a portion of them.
The grantor conveyed the lands in Racine County to Memmel for $ 16,000 of which $ 1,000 was a down payment and the remainder was to be paid without interest within one year after abandonment of the railway or earlier if Memmel sold any part of the lands conveyed. The lands were described as Tracts A, B, and C and a separate price was stated for each. The grantor reserved a purchase money lien for the unpaid purchase price from which each tract could be discharged separately. The conveyance was made subject to the lease to Railway and the grantor was to continue to receive all rental from that lease. The grantor retained an easement to permit its transmission line to remain on Tract B. The instrument also provided that the County of Racine should have the option to purchase Tracts A and B within one year after abandonment of the railway for $ 14,500, and Tract C, if it had not been sold, for $ 3,500, plus, in*188 each case, taxes paid by Memmel.
The conveyance to Henry W. Marx Company was similar to the one to Memmel in all respects except that it gave no option.
*402 Tracts A and B were the lands forming the right of way for the railway. The transmission lines of the petitioner were on Tracts B. Tracts C were not used either as right of way or for the transmission lines but were irregular shaped parcels adjoining the right-of-way lands and acquired with them. Tract C lands were not affected by the lease to Railway.
The price of $ 32,000 was the best ever obtained by the petitioner for right-of-way lands.
The lands conveyed to Memmel and Henry W. Marx Company were released from the lien of the mortgage in 1944 after the purchasers had sold the Tract C lands and the title search revealed the lien. The failure to release all of the lands from the mortgage when they were sold in 1942 was due entirely to an oversight.
Kenosha Motor Coach Lines, Inc. continued to operate the railway until permitted to abandon it in 1947.
The petitioner, on its 1942 return, deducted a loss from the sale of the lands sold to Memmel and Henry W. Marx Company. The Commissioner disallowed the deduction. The*189 amount of the loss now claimed is $ 376,001.32 and is not in dispute.
The stipulation of facts and all exhibits are incorporated herein by this reference.
OPINION.
The Commissioner concedes that the petitioner eventually realized a loss on the disposition of its right-of-way lands through the chain of events which started with the "transaction" in 1942 and he does not question the amount of the loss. His contention is that there was no sale in 1942 and the "transaction * * * was not such a definite and conclusive event as to give rise to a deductible loss in 1942."
The two sales made by the petitioner in 1942 were, perhaps, unusual in some respect but they were bona fide sales made at arm's length between unrelated parties. Title passed permanently from the petitioner for a stated fixed price in those sales. Neither party could retract. There was no hedge or equivocation attached. The purchasers were required to pay the price of $ 32,000. The time of payment was somewhat uncertain but not the amount. Complete payment was required not later than one year after the railway line should be abandoned. Abandonment was inevitable and was only delayed temporarily by the war. The *190 fact and the amount of the loss were definitely and unchangeably fixed by the sales in 1942. Thereafter a change in the value of the property could not affect the petitioner or change the amount of its loss. The petitioner properly claimed its loss in 1942 when it accrued the unpaid but adequately secured portions of the purchase price and charged off as a loss the excess *403 of its remaining basis over the purchase price. It could not properly postpone its deduction until the balance of the purchase price was due or was paid. The sales were the events identifying the loss. Cf. Commissioner v. Dashiell, 100 F. 2d 625, affirming 36 B. T. A. 313.
The Commissioner reasons that the transaction should be considered as a whole and he calls attention to several circumstances related in one way or another to the sales which, he contends, show that the petitioner did not change its position with respect to the land in 1942 and prevent the loss from being actually realized for income tax purposes in that year. The petitioner could not give clear title to the property sold until it was released from the mortgage, as the*191 Commissioner points out. Of course, property can be sold subject to a mortgage, but these parties intended that the lands should be released from the mortgage and only omitted that act through inadvertance. The error was promptly corrected when brought to the attention of the petitioner. That error did not nullify the sale or prevent realization of the loss in 1942. Cf. Commissioner v. Dashiell, supra.Obviously, the loss did not occur when the error was corrected in 1944. The purchasers had had a taxable transaction of their own by that time from their subsequent sale of the same lands.
The denial of Railway's application to abandon its line in no way prevented the petitioner from selling its interest in the land subject to the lease. The Commissioner is in error in thinking that the petitioner could not sell the land, subject to the lease, to outside parties without first obtaining permission from the Wisconsin Public Service Commission. The sale was valid and effective in all respects under the laws of Wisconsin.
The petitioner and Memmel knew in 1942 that Racine County might like to buy the A and B tracts in that County after the line *192 was abandoned and they, as contracting parties, provided that the County should have an option to purchase those lands at that time, at a price which would give Memmel a profit. He was satisfied, as his purchase shows. However, the fact that the County might purchase from Memmel in no way affected or postponed the petitioner's realization of loss on its sale to Memmel. The sale by the petitioner was not held open by and the amount of the purchase price was not dependent upon the option. The Commissioner refers to the option as if it had some significance but he fails to demonstrate how it would delay realization of loss by the petitioner or when and under what circumstances it would lead to the deduction. Neither the exercise nor the lapsing of that option would be an identifiable event fixing the loss of the petitioner on its sale made years before.
There was no option with respect to the lands sold to Henry W. Marx Company.
*404 The Commissioner says that possession is important in deciding when a sale is consummated for tax purposes. It would be where the property was not under lease but not in this case which does not differ in that respect from the usual case in which*193 property is sold subject to a continuing lease. The purchasers bought with full knowledge that the lease would continue until abandonment of the line was permitted. There is no rule that gain or loss upon a sale of leased property can not be realized and reported until the lease terminates. The seller might be out of existence by that time.
The Commissioner mentions that the petitioner retained the right to the rentals until the lease was terminated by abandonment and that Railway was to pay the taxes, but he does not show how those facts would affect the right to the deduction claimed. Both parties seem to agree that the petitioner would have to report the rentals as income and the Commissioner does not argue that they decreased the petitioner's loss from the sales of the leased property. Taxes are assessed in the name of the company operating a public utility in Wisconsin, Wisconsin Statutes, chapter 76, section 76.03. Furthermore, the petitioner, after the sale, was no longer owner of the lands.
The Commissioner waited until his reply brief to say when he thought the admitted loss would be deductible. He there states: "Under the procedure adopted by the petitioner, the loss*194 was not realized in 1942; it was put off until the indefinite future when the road should be abandoned, an event which actually occurred in 1947." The purchasers from the petitioner had sold all of the Tract C lands and had paid all of the purchase price due the petitioner for those lands long before that, yet the Commissioner argues that the petitioner's sale of those lands was not a closed transaction for income tax purposes until another taxpayer was permitted in 1947 to abandon an electric railway line on other lands sold by the petitioner in 1942. That argument is not convincing. The balance of the purchase price for the A and B tracts did not become due upon abandonment of the transportation line and that event did not "identify" the petitioner's loss from the prior sale of those lands. A temporary restriction as to the use of lands does not prevent their sale subject to the restriction. The Wisconsin Board of Tax Appeals allowed the petitioner a deduction for 1942 representing its loss on all of the land sold in that year. The cases which the Commissioner cites involved sales with an offsetting hedge, Shoenberg v. Commissioner, 77 F. 2d 446,*195 affirming 30 B. T. A. 659, certiorari denied 296 U.S. 586">296 U.S. 586, or sales which were still conditional, incomplete, or subject to some vital uncertainty in the early year and for some such reason were held not closed transactions establishing loss in that year, Lucas v. North Texas Lumber Co., 281 U.S. 11">281 U.S. 11. Those cases are not contra to the holding here.
Decision will be entered under Rule 50.