*256 Decisions will be entered under Rule 50.
Petitioner, as part of one transaction, irrevocably conveyed real estate for cash and a mortgage and bond to secure payment of the deferred purchase price, and took back a lease on the property for a term of 20 years without renewal privileges. Held, under the circumstances, that there was a bona fide sale of the property within the meaning of the statute, section 23 (f) of the Internal Revenue Code.
*548 These cases were consolidated for hearing and involve, in the case of Kaufmann Department Stores, Inc., deficiencies of $ 55,068.35 in declared value excess-profits tax and $ 1,413,711.05 in excess profits tax for *257 the year 1943, and in the case of The May Department Stores Co., liability for the deficiencies as a transferee. The sole issue in the case of the transferor is whether the respondent erred in disallowing deduction of an ordinary loss of $ 2,041,617.90 sustained on the sale of a parcel of real property. The May Department Stores Co. admits transferee liability for any deficiencies. The transferor filed its returns with the collector for the twenty-third district of Pennsylvania.
FINDINGS OF FACT.
During the taxable year and thereafter until September 30, 1946, when it was consolidated with The May Department Stores Co., the surviving corporation in the consolidation, the Kaufmann Department Stores, Inc., the petitioner in Docket No. 23859, hereinafter referred to as petitioner, was a corporation with its principal office at 400 Fifth Avenue, Pittsburgh, Pennsylvania.
Petitioner was organized in 1871 and in 1943 was operating the largest department store in Pittsburgh. It occupied a large store building covering a block bounded by Fifth Avenue, Smithfield Street, Diamond Street and Cherry Way. It owned the building and since 1885 has leased the land on which it was located. Between*258 1925 and 1928, to eliminate a blighted area being occupied by undesirable tenants and to be in a position to institute negotiations for the improvement of the property by a large office building and a moving picture theater, petitioner purchased all of the real estate in a city block with dimensions of 240 feet on Diamond Street, opposite from its store building, and Lemon Way, and 100 feet on Smithfield Street and Cherry Way. A deal for the improvement of the lot as desired by petitioner was made about 1928 but was not fully consummated because of financial difficulties of the prospective purchaser.
In 1936 petitioner constructed on the lot a three deck concrete structure to park automobiles. The entrance to the first deck was on Smithfield Street, and to the second and third on Cherry Way. The lot, with improvements, hereinafter referred to as the "parking lot," was leased to an individual until 1941 and thereafter was operated by petitioner. The operation by petitioner resulted in profit of about $ 9,600 and about $ 2,000 in 1941 and 1942, respectively, and a loss of $ 20,662.13 in 1943. Petitioner very often had surveys made to determine whether the parking lot should be *259 devoted to the exclusive use of its customers. The parking lot has at all times important been operated for public use.
*549 Commencing in 1938 and thereafter until 1941 surveys were made and negotiations were conducted by petitioner for erection of an office building on the parking lot for lease in its entirety to a large corporation subject to the acquisition by petitioner of a lease on an office building located on Cherry Way opposite its store property. Petitioner was unable to conclude the transaction.
The adjusted cost of the parking lot on December 30, 1943, was $ 2,501,617.90. Prior to 1943 petitioner considered the sale of the property and during the summer of 1943 members of the executive committee and board of directors discussed the matter. By that time there had been a large decrease in the value of property in the area where the parking lot was located; however, petitioner was still carrying the parking lot on its books at its cost, less depreciation. Discussion of these facts by Edgar J. Kaufmann with E. R. Clarkson, president and secretary-treasurer of petitioner, respectively, resulted in a decision by Kaufmann, after consulting petitioner's auditor and obtaining*260 legal advice, that petitioner should sell the property and take the loss.
Thereafter in 1943 Kaufmann consulted Arthur Scully, the vice president of the Union Trust Co., Pittsburgh, Pennsylvania, in charge of its trust department, concerning the purchase of the parking lot at a fair value for trust investment. Scully was a co-trustee with Kaufmann of the estate of Kaufmann's father. Scully manifested interest in the proposition and inquired whether Kaufmann would lease the property back from the Union Trust Co. at a fair rental in order to obtain a return on any investment made, to which inquiry Kaufmann replied that he felt that petitioner would agree to a lease. The bank official suggested, in response to an inquiry of Kaufmann as to how they would arrive at the fair value of the property, that the real estate department of the Union Trust Co. make an appraisal of the property to determine its fair value. The appraisal was made by Lindsey W. Rockwell, the manager of that department with the help of one of the other appraisers of the bank. They appraised the parking lot at a value of $ 450,000 as of December 1, 1943. Rockwell did not during the course of the appraisal of the*261 property consult any person connected with petitioner or the bank official who had requested the appraisal. Thereafter the Union Trust Co. agreed to purchase the property for $ 460,000 provided, however, petitioner would lease the property from it at an annual rental of $ 32,200, an amount equal to 7 per cent of the contemplated sale price, in order to obtain a proper return on the investment, and subject to legal advice that the property was a proper investment for trusts. The question of its legal right to acquire the property was submitted to Robert J. Dodds, a partner of the law firm which was and had been, at all times material, counsel for the Union Trust Co. and petitioner. He informed the bank official that the Union Trust Co. had no legal authority *550 to purchase the property as an investment for trusts. Upon receiving the advice Scully informed petitioner that the Union Trust Co. could not enter into the deal. Petitioner did not consult counsel with respect to sale of the property to the Union Trust Co.
In 1943 the law firm had about 50 attorneys, 7 or 8 accountants, 60 or 70 secretaries and some messengers in its organization.
A short time thereafter Kaufmann*262 offered to sell the parking lot to Samuel Levinson, an industrialist in Pittsburgh with no connection with petitioner and who had been making investments in real property, for $ 500,000 cash with a lease back for a term of 20 years at an annual rental of $ 35,000. A few days later and after consulting his real estate broker, Levinson advised petitioner that he did not wish to purchase the property because the return would be insufficient on the investment. Levinson was financially able to purchase the property.
About the first of December of 1943 A. G. Wallerstedt, a certified public accountant who was and had been since 1925 an employee of the law firm, learned that the parking lot was for sale and confirmed the fact in a conversation with Dodds. Wallerstedt then communicated with Kaufmann, who advised him that the property had been appraised, that petitioner would sell it for $ 460,000, and wished to dispose of it as soon as possible. Wallerstedt did not wish to enter into a real estate transaction of that size without associates and Kaufmann granted him a few days within which to interest others to enter the deal with him. Promptly thereafter Wallerstedt communicated with *263 Thomas P. Johnson, an attorney associated with the law firm, but at that time on leave of absence to work for the Standard Steel Spring Co., and now an attorney with another firm of attorneys. Prior thereto Johnson endeavored to interest Wallerstedt in becoming a copurchaser with him of a parcel of real property in Detroit, Michigan. Johnson agreed to enter into the deal and later informed Wallerstedt that his uncle, B. D. Phillips of Butler, Pennsylvania, was interested in the transaction. Up to that time Wallerstedt had not discussed terms of sale with petitioner. After receiving this information, Wallerstedt consulted Kaufmann in regard to the terms of sale and promptly thereafter Wallerstedt and Clarkson agreed upon a sale price of $ 460,000 and other terms of sale, and the terms for a lease on the property from the buyers to petitioner, pursuant to which the transactions were consummated on December 30, 1943, as hereinafter related.
A short time thereafter Wallerstedt consulted William W. Booth, of the law firm, about taking a quarter interest in the property, which Booth agreed to do after consulting Dodds about the matter.
The sale and lease upon the terms agreed to by Clarkson*264 and Wallerstedt were authorized by the board of directors of petitioner on December *551 8, 1943. Kaufmann did not attend the meeting. At the same meeting the directors authorized the purchase for $ 19,000 of a lot, 40 by 100, in a block opposite from the parking lot. The land was then being used as a parking lot. Thereafter, but prior to the merger, petitioner acquired one or two other lots in the same block. After the merger The May Department Stores Co. acquired all of the other lots in the block. The total purchase price paid for all of the lots was $ 860,000 or $ 870,000.
The sale was closed on December 30, 1943, in connection with which petitioner conveyed to each of the buyers, Wallerstedt, Booth, Johnson and Phillips, in one instrument, an undivided one-fourth interest in all of its right, title and interest in the property and the buyers made a cash payment of $ 100,000 and executed and delivered to petitioner a mortgage on the property to secure payment of the unpaid purchase price of $ 360,000, with interest at the rate of 4 per cent per annum, and a bond in the amount of $ 720,000. The cash payment of $ 100,000 was paid by each buyer delivering his check to*265 petitioner in the amount of $ 25,000. The principal of the mortgage was payable at the rate of $ 10,000 annually for 20 years, commencing January 1, 1945, and the remainder of $ 160,000 on January 1, 1965, with a right to anticipate payments subject to application, first to the $ 160,000 and then in installments last to be paid. With the consummation of the sale the buyers executed an instrument, by the terms of which they leased the property to petitioner for a term of 20 years at an annual rental of $ 32,200. As additional rental, the lessee agreed to pay the taxes and other charges levied upon the property. It was given the right to raze the improvements on the property and erect on the lot a building suitable and necessary for its business and having an actual and rental value greater than the improvements then on the lot, any building thus erected to become the property of the lessors upon termination of the lease.
The deed, mortgage, bond and lease executed and delivered in the transactions were prepared by the law firm.
On December 30, 1943, the parking lot had a fair market value of $ 460,000. The fair market value of the lot increased commencing in 1944.
Petitioner has*266 regularly paid to the lessors the rental provided for in the lease, which rents the respective lessors have reported as income in their income tax returns. The purchasers have regularly paid the principal and interest required by the mortgage.
In December 1943 Wallerstedt had a net worth of about $ 700,000 and Phillips, in excess of $ 1,000,000. Prior thereto and thereafter Johnson associated himself with others in the acquisition of other property for large amounts of money. For the years 1944 to 1947, *552 inclusive, some of the income reported by the buyers was within tax brackets ranging from 69 to 94 per cent.
No agreement or understanding has ever existed between petitioner or its successor and the purchasers for the reacquisition of the parking lot by petitioner or its successor at any time or under any circumstances, or for the extension of the lease beyond the term thereof.
Petitioner operated the parking lot at a loss of about $ 45,000 in 1944 and $ 41,000 in 1945.
In 1945 the city of Pittsburgh adopted ordinances authorizing petitioner, the John Liggett Estate, and the purchasers of the parking lot to construct a bridge and tunnel extending from petitioner's store*267 building to a proposed building on the parking lot and a bridge over Lemon Way from the proposed building to the property acquired by petitioner in another city block.
The sale completed on December 30, 1943, was a bona fide transaction for income tax purposes, in connection with which petitioner sustained a loss in the amount of $ 2,041,617.90.
In its tax returns for 1943 petitioner claimed the amount of $ 2,026,384.48 as an ordinary loss sustained on the sale of the property. In his determination of the deficiencies, respondent disallowed the deduction by merely stating that the alleged loss was "unallowable."
OPINION.
The parties are in agreement that if the transaction resulted in a sale for tax purposes within the meaning of the statute, the ordinary loss sustained was in the amount of $ 2,041,617.90, instead of the amount deducted by petitioner in its return and disallowed by respondent in his determination of the deficiencies.
Section 23 (f) of the Internal Revenue Code allows as deductions from gross income "* * * losses sustained during the taxable year * * *."
The basic difference between the parties is whether the transaction completed on December 30, 1943, was a sale *268 within the meaning of the statute authorizing deductions for losses sustained through sales of property. Petitioner contends that the transaction involved an irrevocable sale of the property in an arm's length transaction, and accordingly was bona fide and real for tax purposes. Respondent disallowed the deduction without giving any reason for his action. On brief, he argues that petitioner never intended to convey any substantial interest in the property and did not part with control thereof, and that the purported consideration was inadequate for a bona fide transfer, in view of which the transaction is not recognizable as a sale giving rise to a deductible loss.
*553 Sale of the property by petitioner was discussed prior to 1943. In that year, when the fair market value of the property was considerably less than its adjusted cost basis, petitioner decided to dispose of it and take the loss. Petitioner first offered the property to the Union Trust Co. and it agreed to purchase the property as an investment for trusts for $ 460,000 an amount $ 10,000 in excess of the value of $ 450,000 placed upon the property by its real estate department, subject to a lease back to obtain*269 a return on the investment and advice of counsel that the real estate could be acquired as a trust investment. After learning that counsel had advised the Union Trust Co. that it had no power to acquire the property for the intended purpose, petitioner offered it to an individual, financially able to buy the property, for $ 500,000 cash with a lease back at an annual rental of $ 35,000 over a term of 20 years. The offer was declined on account of insufficient return on the investment. Thereafter Wallerstedt learned that the property was for sale and negotiations for its purchase led to the acquisition thereof on terms described in full in our findings of fact.
The sale was completed by the delivery of a deed conveying, without reservations, all of the seller's right, title and interest in the property to the buyers in undivided one-fourth interests and a mortgage and bond to secure payment of the deferred purchase price of $ 360,000. Concurrently with the delivery of the instruments and as an integral part of the whole transaction, the parties executed a lease on the property for a term of 20 years, without renewal privileges, at an annual rental of $ 32,200, an amount equal to*270 7 per cent of the sale price of the property. The form of the transaction as thus carried out has all of the usual earmarks of a transaction involving a bona fide sale with a lease back on the property sold. The substance as will be pointed out does not differ from form.
We agree with respondent that the entire transaction must be considered to determine whether a sale occurred for loss deduction purposes. A sale of property coupled with a lease back is not of itself sufficient to reject the sale as lacking reality for tax purposes. Standard Envelope Mfg. Co., 15 T. C. 41. Whether petitioner will ultimately sustain less loss, or realize gain, is, as respondent concedes, not decisive. That it was aware that a sale of the property would result in tax savings is not denied by petitioner's counsel. Such a purpose is not sufficient grounds for denying a deduction if in other respects the transaction resulted in an actual loss. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465. A corporation may, within the statute, so conduct its affairs as to avoid or reduce tax burdens. United States v. Cumberland Public Service Co., 338 U.S. 451">338 U.S. 451.*271
The uncontradicted testimony of each of the buyers, Kaufmann, Clarkson and Irwin D. Wolf, who executed the deed and lease on *554 behalf of petitioner, is that no agreement exists for the reconveyance of the property or extension of the lease beyond the 20-year term thereof. Under the circumstances, it would be unrealistic to regard petitioner as not having relinquished any substantial interest in the property, as respondent contends.
Notwithstanding the lack of a renewal clause in the lease agreement and in spite of the evidence disclosing lack of agreement between the interested parties outside of the instrument for an extension of the term, respondent says that the grantees-lessors were sufficiently under petitioner's control to obtain a renewal, if desired. The grantees were not, by proof here, under any contractual obligation denying them the right to dispose of the property subject, of course, to the mortgage and lease. To deny the deduction on the ground of control in the petitioner would require us to say that petitioner could exercise power over the disposition of the property by the grantees.
As evidence of control over the property, respondent refers to an alleged*272 attorney-client relationship between the grantor and the grantees and contends that in the absence of an agreement to reconvey or extend the term of the lease the courts will imply such an understanding. The basis for the argument is that the buyers were "members and associates of the law firm representing petitioner." The law firm was and had been petitioner's counsel. Respondent admits that Phillips, one of the four buyers, had no connection with the law firm and the alleged rule could not possibly apply to him. Wallerstedt's connection with the law firm was that of an employee and, therefore, petitioner could not be regarded as one of his clients. Respondent points to no evidence establishing that Booth and Johnson were actually members of the firm. The evidence in the case is no more than that Booth was "of" and that Johnson was "associated" with, the firm. Johnson is now associated with another law firm. Under the circumstances, we are unable to find that the relationship of attorney-client existed between petitioner and the buyers at the time of the transaction. So concluding, there is no need for further discussion of the question.
The other argument of respondent is*273 that the consideration was inadequate to evidence a bona fide transfer. He contends that the property had a fair market value of $ 1,300,000, the value placed upon the property by Wallerstedt in May 1948 when testifying before a Board of Reviewers of Allegheny County concerning assessments of damages incurred by the widening of Cherry Way. It is not shown by the evidence here whether the value testified to was as of the time of condemnation in 1946 or the date of the hearing. Values continued to increase from 1944 through 1948, so the $ 1,300,000 value is no *555 proof of value in December 1943. There is other evidence in the case on the value of the property at the time of sale, none of which can be disregarded in determining whether actual value was so greatly in excess of sale price as to affect the bona fides of the transaction.
The offer of the Union Trust Co. to purchase the property for $ 460,000 resulted from an appraisal made by the general manager of its real estate department with the help of an assistant. He testified here that the appraisal in the amount of $ 450,000 was made by him and his assistant without any discussion of the matter with the officer in charge*274 of the trust department who was handling the matter with Kaufmann, or Kaufmann. Respondent did not question the qualifications of the witness or cross-examine him. Another real estate valuation expert, whose qualifications as such were conceded by respondent, testified on behalf of petitioner that the sales price of $ 460,000 was the fair market value of the property at that time. The testimony of these witnesses and other evidence in the case concerning the value of the property convinces us that the sales price of $ 460,000 was the fair market value of the parking lot on December 30, 1943, and we have so found as a fact.
Respondent cites several cases, primarily as illustrations of the theory being argued by him here. None of them is relied upon as controlling the issue here. The question before us being factual, it would be unusual to find a decided case with parallel facts. One case, Catherine G. Armston, 12 T. C. 539, like here, involved a lease back but distinguishable facts. There, machinery being used in the business of a family corporation was purportedly sold to the corporation's chief stockholder, with a lease back. The alleged purchaser*275 did not have funds necessary for the transaction. She made a bank loan on the security of her stock and paid the alleged selling price from the proceeds of the loan. "Rent" paid and accrued on the machinery during the first five months was only a few hundred dollars less than the "sales" price. "Rent" at the same rate continued during the remainder of that year. The loan was paid out of money received as rent. The corporation would not have sold the machinery to an "outsider." We held that the alleged rentals were, in effect, distributions of corporate earnings.
In Bank of America Nat. Trust & Savings Assn., 15 T. C. 544, the petitioner there transferred to a wholly owned subsidiary of a holding company, which owned a substantial interest in it, real properties at less than their adjusted cost bases. About 30 days later the grantee conveyed, for the price it paid, title to a wholly owned subsidiary of the original grantor, which had no employees and whose only business was to hold property for lease to the taxpayer. In denying losses on *556 the purported sales, we held that the first grantee was a mere conduit for conveyance of title to *276 the second grantee, which, with its property, was under complete control of the taxpayer. No like situation prevails here.
A case having facts similar to those here is Standard Envelope Mfg. Co., supra. There the taxpayer, a corporation, held a 99-year lease on land, improved by a plant having an adjusted cost basis of about $ 65,000, at an annual rental of $ 7,500, with an option to purchase the land prior to June 1, 1947, for $ 125,000. The lease was not otherwise cancellable. The plant was not large enough for the lessee's requirements and it was advised that the rent was excessive. The lessee was unable to obtain a reduction of the rent or the option price of the land or a new location for a plant. In October 1944 the lessee elected to purchase the property and in December 1944 purchased the land at the option price of $ 125,000, after obtaining appraisals of $ 60,000 and $ 68,000 on the entire property. Later in the same month the corporation offered the property for sale for $ 75,000 with a lease back for a term of 3 years with a right of cancellation if it located a suitable place for its business. After considerable effort the property *277 was sold on December 23, 1944, for $ 70,000 with a right to continue to occupy the premises as lessee for a rental of $ 6,000 per annum and an option to enter into a lease agreement, exercisable on or before July 1, 1945, for a term of 24 years. The corporation could not obtain a desirable location elsewhere and in June 1945 exercised the option to lease the property. Tax consequences were considered in connection with the transactions. The corporation had no control over the purchaser. We held that the sale was bona fide and resulted in a deductible loss.
A similar situation prevails here. Petitioner gave up, without reservations of any kind, fee simple title in the property for consideration equal to its fair market value at the time to buyers over whom it had no dominion or control, and received from the buyers, as part of the whole transaction, a lease on the property sold for a term of 20 years, at a rental agreeable to all parties concerned, with no renewal rights. Under the circumstances prevailing here, petitioner's property and economic interests after the transaction were different from its position in that regard before the deal was consummated. Its loss was actual*278 and beyond recovery.
All other arguments of respondent have been carefully considered and found to be without controlling effect. Accordingly, we find that petitioner sustained a deductible loss of $ 2,041,617.90 on the sale of the parking lot.
Decisions will be entered under Rule 50.