*735 1. The taking of property by condemnation and the payment of just compensation therefor is a sale or exchange within the meaning of section 117(a) of the Revenue Act of 1936 and profit from that transaction is capital gain.
2. The amount added to the condemnation award by reason of the lapse of time between the taking of the property and payment therefor, designated as interest, is a part of the amount realized from the disposition of the property in the condemnation, and taxable as capital gain and not as ordinary income. Commissioner v. Appleby Estate, 123 Fed.(2d) 700, affirming 41 B.T.A. 18">41 B.T.A. 18; Seaside Improvement Co. v. Commissioner, 105 Fed.(2d) 990; certiorari denied, 308 U.S. 618">308 U.S. 618; Hawaiian Gas Products, Ltd.,43 B.T.A. 655">43 B.T.A. 655. Kieselbach v. Commissioner, 127 Fed.(2d) 359, reversing 44 B.T.A. 279">44 B.T.A. 279, on this point, contra.
3. In the computation of the taxable gain on condemnation of a property in New York City, New York, the basis of petitioner for the improvements so taken does not include the depreciated basis of structural additions made after the acquisition*736 of the property by the petitioner, and demolished subsequently to make way for the building on the property when condemned, since no basis for those additions is established by the record.
4. Petitioner has failed to establish error in the rate of depreciation used by respondent.
*140 Respondent determined a deficiency in income taxes against the petitioner for the taxable year 1936 in the amount of $1,101.96. Petitioner not only contests this determination, but claims an overpayment of income taxes for that year in the amount of $1,647.21. Respondent asks for an increased deficiency in an amended answer.
The issues raised by the original and amended pleadings are: (1) Was the profit realized by petitioner upon the condemnation of property by the city of New York taxable as ordinary income or as capital gain? (2) Is the amount added to the condemnation award by reason of the lapse of time between the taking of the property and payment therefor, denominated as interest, to be considered as capital gain or normal income? (3) Does the cost basis*737 of the improvements taken in that condemnation include the depreciated basis of structural additions made after the acquisition of the property by the petitioner and demolished subsequently to make way for the building on the property when condemned? and (4) What was the proper rate of depreciation to use in computing the value of that structure when demolished?
The return for the period here involved was filed with the collector for the third district of New York.
FINDINGS OF FACT.
Except for the testimony of one witness, the facts were stipulated and are so found. The pertinent parts of the stipulation follow:
I. On August 15th, 1915, the petitioner acquired title to an undivided one-eighth interest in a parcel of real estate in the Borough of Manhattan, New York City, under the will of his grandfather, David S. Brown.II. The property consisted of a lot on the east side of 12th Avenue between 51st and 52nd Streets, having a frontage on said Avenue of 200 feet 10 inches and a depth on each street of 225 feet, upon which there was at that time a brich factory building covering the entire plot, the greater part of which was five stories in heighth and the remaining, *738 one story in heighth.
III. At the time the property was acquired by petitioner, the fair market value of the petitioner's undivided one-eighth interest therein was $41,250. IV. Of said last mentioned sum, $28,750 represented the value of the land, and the remaining $12,500 represented the value of the building erected thereon. V. In the spring of 1919, the one story building on the rear 50 feet of said plot on the 51st Street side and having a depth on each side of 138 feet was altered by the erection of three additional stories making said building four stories in height. It was completed on or about May 14th, 1919. Said additional three stories were of brick. No profit was ever reported by the petitioner on this transaction. VI. At the time the petitioner acquired his undivided one-eighth interest in said premises, the same were leased for the term expiring October 1st, 1930 at an annual net rental of $22,000., which was subsequently increased by an agreement to an annual net rental of $26,000. for the last seven years of said term.VII. On August 27th, 1930, said premises were leased to 710 12th Avenue Corporation for the term of twenty-one years, commencing*739 on October 1st, 1930 at an annual net rental of $30,000. All expenses in connection with the operation *141 and maintenance of said premises, including all taxes, assessments and water charges were under the terms of said lease payable by the tenant. Said lease also required the tenant to remove the existing buildings and at its own cost and expense to erect a new fireproof garage building of concrete and steel at an estimated cost of $600,000. Said lease also provided that in order to defray part of the estimated cost of the removal of the existing building and the erection of said new building, the tenant might secure a mortgage upon the fee title to said premises in a sum not exceeding $400,000., and such mortgage was secured by the tenant in said sum of $400,000. from the Prudence Company of the City of New York, and subsequently and prior to September 17th, 1931, said new garage building was erected by the tenant and the principal of said mortgage was fully advanced to the tenant by the Prudence Company. Said old building was torn down in October and November 1930.
VIII. Under the provisions of said lease, said building was at all times the property of the owners*740 of the land, including the petitioner, and not of the tenant. Also under the provisions of said lease, if the property should at any time during the term thereof be taken by any governmental authority in condemnation proceedings, the owners should be entitled to any award made for the land and the tenant should be entitled to receive any award for the buildings and improvements on said premises, subject, however, to the payment from such latter award of the amount then due on said mortgage for $400,000.
IX. On September 17th, 1931, the City of New York acquired title to said entire premises in condemnation proceedings. X. Subsequently in such proceedings awards were made for the land, amounting to $551,650., and awards were made for the building of $352,075., all of these awards being subject to the amount unpaid on said mortgage for $400,000., held by the Prudence Company, namely, the full principal sum of $400,000., with interest thereon. XI. Payment of these awards was not made to the petitioner until April 8th, 1936.XII. The amount actually received by the petitioner was $77,026.22. The following is a statement how this amount was arrived at:
| Total awards for land | $551,650. | ||
| Interest thereon from September 17, 1931 | 149,647.32 | ||
| $701,297.32 | |||
| Principal unpaid on mortgage held by Prudence Company | $400,000. | ||
| Unpaid interest thereon | 114,133.34 | ||
| $514,133.34 | |||
| Total awards for building | $352,075. | ||
| Interest thereon | 95,940.44 | 448,015.44 | |
| Deficit paid out of awards for land with interest thereon | 66,117.90 | ||
| $635,179.42 | |||
| Petitioner's one-eighth interest therein | $79,397.42 | ||
| Rent paid to City of New York | $1,082.18 | ||
| Legal expenses chargeable to principal of awards | 1,069.11 | ||
| Legal expenses chargeable to interest on awards | 219.91 | 2,371.20 | |
| $77,026.22 |
*741 *142 XIII. The tenant, 710 12th Avenue Corporation, was insolvent and without assets at the time said awards were paid, and as said mortgage held by the Prudence Company was a lien upon the awards made for the land as well as for the building, before payment of said awards could be received from the City of New York, the amount of said mortgage, together with the accrued interest thereon, had to be paid, and the petitioner and other owners of said property were compelled to pay out of the awards for the land and the interest thereon, the deficit of $66,117.90 shown by the above statement.
XIV. Under the charter of the City of New York, any rent collected from said premises subsequent to September 17th, 1931, the date when title vested in the City of New York, was deductible from the awards and the interest thereon, and the amount of such rent actually collected after September 17th, 1913 [sic ] was $8,657.40, which amount was paid to the City of New York by the owners at the time the awards were paid. The petitioner's share thereof was $1,082.18.
XV. Under the contract between the petitioner and the attorneys who represented him in the condemnation proceedings, *742 such attorneys were entitled to receive interest from September 17th, 1931 on their fee of $6,456.25, and such interest amounted to $1,759.33, of which the petitioner's share was $219.91.
* * *
XVII. The taxes in controversy are income taxes for the calendar year 1936. The deficiency asserted in the deficiency notice is $1,101.96, and the petitioner claims that he is entitled to a refund of $1,647.21. Application was made by the petitioner for this refund on October 2nd, 1939, to the Collector of Internal Revenue, Third District, New York.OPINION.
First Issue.
LEECH: Respondent contends that the taking of property by condemnation and the payment of just compensation therefor is not a sale or exchange within the meaning of section 117(a) of the Revenue Act of 1936, and gain thus realized is accordingly taxable as ordinary income, and not as capital gain. This position is without merit. Commissioner v. Appleby Estate, 123 Fed.(2d) 700, affirming 41 B.T.A. 18">41 B.T.A. 18; Seaside Improvement Co. v. Commissioner, 105 Fed.(2d) 990; certiorari denied, *743 308 U.S. 618">308 U.S. 618; Henry A. Kieselbach,44 B.T.A. 279">44 B.T.A. 279; affirmed on this issue, 127 Fed.(2d) 359; Hawaiian Gas Products, Ltd.,43 B.T.A. 655">43 B.T.A. 655. See also Helvering v. Hammel,311 U.S. 504">311 U.S. 504.
Second Issue.
At all events, respondent argues that the amount added to the condemnation award because of the lapse of time between the taking of the condemned property and payment therefor, designated as interest, is taxable as ordinary income and not as capital gain. The Second Circuit Court of Appeals in two cases, Seaside Improvement Co. v. Commissioner, supra, and Commissioner v. Appleby Estate, supra, and the Board in Henry A. Kieselbach, supra, and Hawaiian Gas Products, Ltd., supra, decided against that view. Despite the reversal *143 of the Kieselbach case on this point by the Third Circuit Court of Appeals in Commissioner v. Kieselbach, supra, we feel constrained to maintain our position. Respondent is therefore reversed. *744 Commissioner v. Appleby Estate, supra;Seaside Improvement Co. v. Commissioner, supra;Hawaiian Gas Products, Ltd., supra.
Third Issue.
Petitioner urges that the cost basis of the improvements taken in the condemnation include his depreciated basis for structural additions made to the premises in 1919 after the acquisition of the property by the petitioner, and demolished subsequently to make way for the building on the property when condemned.
Granting that the petitioner would be entitled to prevail if any basis to him for these additions made to the building in 1919, which were demolished in 1930, was established by the record (see Commissioner v. Appleby Estate, supra;Seaside Improvement Co. v. Commissioner, supra;Helvering v. Hammel, supra ), that premise of fact is wholly wanting here. The only witness called had never seen the building except cursorily in passing it occasionally and had never been inside of it. His "estimate" of the cost of the 1919 additions and their value, as well as all his other testimony, was based wholly upon records*745 in an office in the municipal government in the city of New York. Under any circumstances, this testimony, we think, is wholly insufficient to establish the basis required. Respondent is affirmed on this issue. Burnet v. Houston,283 U.S. 223">283 U.S. 223.
Fourth Issue.
In computing the gain realized by petitioner, respondent deducted from the value of the building on the premises when acquired on June 16, 1913, depreciation at the rate of 5 percent from that date to September 17, 1931, when it was demolished for the purpose of erecting the new garage thereon. Petitioner claims that the proper rate to have been used was 3 percent per annum. The only witness on this point was the witness called by the petitioner, whose testimony has just been discussed. We think the testimony of that witness was not sufficient to establish error in the rate used by the respondent. Respondent is therefore affirmed.
Decision will be entered under Rule 50.