*153 Decision will be entered for the respondent in each docket.
Petitioners, stockholders in a corporation, acquired improved realty in a sec. 333 liquidation with intent to demolish the improvement (a multiple-dwelling house) and erect an office building. The building was demolished within a month after petitioners acquired title. Held, the partnership petitioners had formed to handle the property could not take a demolition deduction. It was the intention of petitioners to demolish at the time they acquired the property that precludes taking the deduction. The intention of the corporation when it bought the property some years before is immaterial.
*76 Respondent determined deficiencies in these consolidated cases in the petitioners' income tax for 1963 as follows: *77
| Docket | Addition to | ||
| Petitioner | number | Deficiency | tax, sec. 6653(a), |
| I.R.C. 1954 | |||
| Arthur R. Ivey and Karen L. Ivey | 198-67 | $ 2,380.14 | $ 119.01 |
| Rober C. Barnum, Jr., and Marion M. | |||
| Barnum | 199-67 | 3,991.51 | |
| Edwin J. O'Mara, Jr., and Helen E. | |||
| O'Mara | 200-67 | 3,118.11 |
*155 The deficiencies are in issue only with respect to a demolition deduction of $ 31,617.73 taken in 1963 by a partnership, the Mason Co., of which the petitioners were partners. The amount of distributable partnership loss or income was affected by this deduction.
FINDINGS OF FACT
Some of the facts have been stipulated and they are found accordingly.
At the time the petitions in these proceedings were filed petitioners Arthur R. Ivey and Karen L. Ivey, husband and wife, lived in Greenwich, Conn.; Robert C. Barnum, Jr., and Marion M. Barnum, husband and wife, lived in Greenwich, Conn.; and Edwin J. O'Mara, Jr., and Helen E. O'Mara, husband and wife, lived in Old Greenwich, Conn. All of the petitioners filed joint income tax returns for 1963 with the district director of internal revenue, Hartford, Conn. Hereinafter the word "petitioners" will refer only to the husbands since the wives are parties only by reason of the filing of joint income tax returns.
The 168 Mason Corp. was organized in 1952 under the laws of the State of Connecticut. It owned real estate located at 168 Mason Street, Greenwich, Conn., which was purchased and remodeled into a law office prior to 1959. Its total*156 outstanding and issued 100 shares of stock were owned by petitioners and another person, Robert E. Nickerson, who is not involved in these proceedings. Each stockholder owned 25 shares of stock. The petitioners and Nickerson were lawyers and partners in the practice of law and the law partnership rented office space at 168 Mason Street from 168 Mason Corp.
The Greenwich Title Co. Inc. was organized January 21, 1959, under the laws of the State of Connecticut for the purpose of purchasing and taking title to Greenwich property. Throughout the entire existence of this corporation, its 3,000 outstanding and issued shares of stock were owned by petitioners and Nickerson. Each stockholder owned 750 shares. On March 16, 1959, it purchased and took title to improved real property at 170-172 Mason Street for a purchase price of $ 55,000, and it was stipulated that $ 36,300 was allocated by Greenwich Title Co. Inc. to the improvements. This is the only real property owned by Greenwich and it is adjacent to the above described property of 168 Mason Corp. The improvements on this property consisted of a multifamily residence and a garage. At the time the property was purchased it was*157 zoned for business use.
*78 The purchase of the property at 170-172 Mason Street was financed by a mortgage taken out on the property at 168 Mason Street which was owned by 168 Mason Corp. The mortgage payments relating to the 168 Mason Street mortgage were made jointly by separate checks in unequal amounts drawn by Greenwich Title Co. Inc. and 168 Mason Corp.
From the date of purchase until sometime in May 1963 the property at 170-172 Mason Street was used for rental purposes.
On July 14, 1959, the 168 Mason Corp. acquired the real property located at 174 Mason Street with a frame building on it for the purchase price of $ 40,000. The building was rented out by 168 Mason Corp. as a two-family residence.
On June 10, 1960, Joseph Weir, architect, completed a plan at the request of petitioners and Nickerson that was captioned "Proposed Addition to Building -- The 168 Mason Corporation -- June 10, 1960." That plan showed a three-floor building which ran from the northern boundary of the property at 168 Mason Street to the southern boundary line of the property located at 170-172 Mason Street.
Petitioners, prior to May 16, 1961, contacted Robert Felson, an architect, whose office*158 was in New York, and requested that he submit a proposal for a new construction which would cover the property at 170-172 Mason Street. That proposal was made in a letter dated May 16, 1961. In a letter dated June 13, 1961, signed by one of the petitioners as president of 168 Mason Corp., Felson's services were retained. In July of 1962 Felson was authorized to prepare working drawings and specifications for new construction on property which included 170-172 Mason Street.
On December 3, 1962, Felson completed the plans for the new construction on the property that included 170-172 Mason Street. On March 25, 1963, George L. O'Brien, Inc., submitted the successful construction bid. In March of 1963 these site plans were filed with the chief building inspector, Greenwich, Conn., and on April 26, 1963, the Department of Public Works of Greenwich, Conn., recommended to the inspector that the plan be approved. A building permit was issued on July 2, 1963.
On June 5, 1963, both the 168 Mason Corp. and the Greenwich Title Co. Inc. adopted resolutions for complete liquidation and dissolution. That same day the Greenwich Title Co. Inc. conveyed by deed the real property which it owned*159 at 170-172 Mason Street to petitioners and Nickerson as tenants in common, who managed the property as partners in a partnership known as the Mason Co. The 168 Mason Corp. likewise conveyed the real property which it owned at 168 and 174 Mason Street to the petitioners and Nickerson as tenants in common.
*79 Greenwich Title Co. Inc. was dissolved on June 26, 1963. The 168 Mason Corp. was also dissolved in June of 1963. The dissolution and liquidation of Greenwich Title Co. Inc. met the requirements of section 333, I.R.C. 1954.
Sometime after June 18, 1963, and before July 2, 1963, the demolition of the building located at 170-172 Mason Street was begun and within a few days after July 21, 1963, it was completely demolished. The property at 170-172 Mason Street was owned by petitioners and Nickerson as the Mason Co., a partnership, at the time demolition was started and finished. The value of the building located at 170-172 Mason Street was stipulated by the parties to be $ 31,617.73 at the time of the demolition.
As a result of the demolition of the building in 1963 the Mason Co. on its partnership return deducted $ 31,617.73 as a loss sustained on demolition of the building, *160 one-fourth of which ($ 7,904.43) was used by each petitioner in computing his partnership distributable loss of $ 6,913.65. Respondent disallowed the demolition loss of $ 31,617.73 "because it has not been established that the partnership is entitled to such a deduction." This determination by respondent is the only assigned error in the three petitions.
OPINION
Section 165, I.R.C. 1954, 2 allows "as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise." It is under this law that a taxpayer may receive what is called a demolition deduction when the improvement on his realty is demolished. The deductible loss, if he is entitled to a demolition deduction, will be that portion of his purchase price of the improved realty that is allocable to the improvement.
The rule is well established that if the intent to demolish the building exists at the time the property on which*161 it is located is purchased or acquired, no loss, in fact, occurs for which a deduction may be taken. The determining factor is the intention of the taxpayer on the date of acquisition, Liberty Baking Co. v. Heiner, 37 F.2d 703">37 F.2d 703 (C.A. 3, 1930); Lynchburg National Bank & Trust Co., 20 T.C. 670 (1953), affd. 208 F.2d 757">208 F.2d 757 (C.A. 4, 1953). Also see section 1.165-3, Income Tax Regs.3 The rationale for this rule was stated in Lynchburg National *80 , as follows:
Where, as here, there is a purchase of land with the intent to demolish a building situated thereon and erect a new one, no part of the price paid is allocable to the building, since it is deemed that the building has no value to the purchaser and it is the land which is purchased and which alone has value. The entire purchase price, therefore, represents the cost of the land and becomes the purchaser's basis. * * *
*162 Petitioners acquired title to the property at 172 Mason Street by the deed of Greenwich Title Co. Inc. dated June 5, 1963. Petitioners were stockholders of Greenwich Title Co. Inc. and the deed they received was executed and delivered to them pursuant to a section 333 liquidation of the said corporation. In general, and insofar as applicable here, the cited statute provides for the nonrecognition of gain realized by electing stockholders in certain liquidations when the "property distributed in complete liquidation" is "made in pursuance of a plan of liquidation" and "the distribution is in complete cancellation or redemption of all the stock."
Petitioners admit that at the time they acquired title to the property at 172 Mason Street in June of 1963 they intended to demolish the building. In their petitions they alleged: "In the summer of 1963, the stockholders therefore decided to demolish the apartment building at 172 Mason Street. That demolition was completed on July 31, 1963." Petitioners do not argue that they would be entitled to the demolition deduction under the statute and regulations if their intent at the time they acquired title in June of 1963 is to be the determining*163 factor. In effect petitioners argue that they are entitled to a loss deduction for the demolition of a building located on realty that they acquired with intent to demolish the building. All of the evidence clearly shows the demolition occurred pursuant to petitioners' intent formed prior to their receipt of deed to the property. As stated petitioners do not allege or argue otherwise and in fact they affirmatively allege they had the intent to demolish the building while they were still stockholders and before they received their deed.
Petitioners' position as stated on brief is as follows:
I. There was no intent or plan to demolish the building at the time the property was purchased on March 16, 1959.II. Section 334(c) of the Code prescribes the basis for the building to be allocated to the taxpayers upon the Section 333 liquidation, and a loss to that extent was incurred when the building thereafter was demolished by the taxpayers.We need not decide the corporate intent of petitioners' predecessor in title, the Greenwich Title Co. Inc., at the time it purchased the property in March of 1959. We need only consider the second part of petitioners' contention.
*81 As we understand*164 petitioners' arguments they seem to contend that when improved property is acquired by stockholders in a nontaxable section 333 liquidation, the controlling intent with respect to demolition of the improvement is not their intent at the time they surrendered their stock and took the corporation's deed but the corporation's intent with respect to demolishing the improvement when the corporation bought the property some years earlier.
Petitioners' argument is not supported by any reason or authority. It consists almost entirely of stating the conclusion that the demolition loss is available to them because this is the natural result from an acquisition in a section 333 liquidation when the corporation did not acquire the property with intent to demolish the improvement. The argument does not give any reason or explain why taxpayers who acquire property admittedly with intent to demolish the improvement should receive a demolition deduction merely because the property was acquired in a section 333 liquidation.
The rule as stated earlier is that the purchaser who intends to demolish is not entitled to a demolition deduction and the entire basis should be allocated to the realty. We*165 pointed out that the rationale for this rule is that the existence of the purchaser's intent to demolish means the building has no value to the purchaser. He suffers no loss when the building is demolished for it is the land alone that has value to him. The acquisition of property by a stockholder in liquidation amounts to a "purchase" within the meaning of section 1.165-3(a)(1), Income Tax Regs. Petitioners do not argue otherwise. Section 331 provides that "Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock." Ordinarily this would be a fully taxable event. All that section 333 does is provide that under certain circumstances the shareholders' gain can go unrecognized. But the character of the liquidation is still one of sale or exchange of stock for assets. In substance the shareholder purchases his share of the corporate assets in exchange for his stock.
As stated petitioners give no reason why the deduction should be made available to them without regard to their intent merely because they acquired the property in a section 333 liquidation. The only case cited by petitioners is N. W. Ayer & Son, Inc., 17 T.C. 631.*166 The case is not applicable. There, a partnership business was incorporated and the business property transferred to the corporation in a tax-free exchange. The partnership's basis carried over to the corporation and the opinion holds the carryover basis included the partnership's intent to demolish the building at the time it purchased the building and paid the purchase price. Actually the partnership only bought land since it intended to demolish the building. This case is not at all like the instant case. It did not involve an acquisition in liquidation. In a transfer of assets *82 under an incorporation of a business statute providing for a tax-free exchange (such as section 351) the assets keep the basis they had in the hands of the transferor. Thus the transferor's intent at the time he bought the asset can be said to control. In a section 333 liquidation, the basis of a distributed asset does not carry over to the stockholder. The asset acquires a new basis in the hands of the stockholder. His stock basis is allocated to the distributed assets pro rata in accordance with the value on the date of liquidation of the assets liquidated. Sec. 334(c); sec. 1.334-2, *167 Income Tax Regs.
We find no merit in petitioners' contention. The corporate intent of Greenwich Title Co. Inc. in 1959 when it purchased the property with respect to demolishing the building is immaterial. The guiding consideration is petitioners' intent in June of 1963 when they surrendered their stock for the deed to the property. As pointed out earlier their intent at the time they acquired the property was to demolish the building. Under section 1.165-3, Income Tax Regs., they and their partnership are precluded from any demolition loss deduction. On the date of the liquidation and the date of their deeds the building had no value to petitioners. They suffered no loss when it was demolished. Respondent was right in disallowing the demolition deduction to the partnership and in determining the deficiencies in issue based on such disallowance.
Decision will be entered for the respondent in each docket.
Footnotes
1. Cases of the following petitioners are consolidated herewith: Robert C. Barnum, Jr., and Marion M. Barnum, docket No. 199-67; Edwin J. O'Mara, Jr., and Helen E. O'Mara, docket No. 200-67.↩
2. All section references are to the Internal Revenue Code, as amended unless otherwise indicated.↩
3. Sec. 1.165-3. Demolition of buildings.
(a) Intent to demolish formed at time of purchase. (1) Except as provided in subparagraph (2) of this paragraph, the following rule shall apply when, in the course of a trade or business or in a transaction entered into for profit, real property is purchased with the intention of demolishing either immediately or subsequently the buildings situated thereon: No deduction shall be allowed under section 165(a)↩ on account of the demolition of the old buildings even though any demolition originally planned is subsequently deferred or abandoned. The entire basis of the property so purchased shall, notwithstanding the provisions of § 1.167(a)-5, be allocated to the land only. Such basis shall be increased by the net cost of demolition or decreased by the net proceeds from demolition.