of Thirty considered to be disturbing trends in the real estate market

in that area.

From November 9, 1950, through June 5, 1952, the following sales were made by Thirty on the dates indicated:

Property sold

30 and 38-40 Broad Street (land only).

52 Broadway-

Date of sale Nov. 9, 1950

Nov. 30, 1950

July 16, 1951

49 Broadway

55 Broadway

51 Broadway

53 Broadway..

25 Broad Street..

30 and 38-40 Broad Street (building and leasehold interests) --

Aug. 6, 1951

Aug. 23, 1951

Aug. 23, 1951

June 1, 1952

June 5, 1952

Except for the property at 30 and 38-40 Broad Street, each of the above sales included land and building, involved no leaseback or retention of any other interest by Thirty apart from a security interest, and in most cases these sales were made at a profit by Thirty.

After 1952 neither City nor any of its subsidiaries (including Thirty) owned or thereafter acquired any property in Lower Manhattan.

In the case of the property at 30 and 38-40 Broad Street, the officers of Thirty decided to dispose of the land separately for two reasons. First, they were of the opinion that a higher overall price could be obtained for the property by so doing; second, they wanted to set off the large loss which Thirty would incur from the sale of the land alone against profits realized or to be realized from the sales of other properties.

Thirty negotiated with several different insurance companies for the sale of the land at 30 and 38-40 Broad Street. At all times Thirty intended to couple any such sale with a leaseback of the land in order to protect its retained interest in the improvements thereon.

On September 7, 1950, Thirty signed a contract for the sale of the land at 30 and 38-40 Broad Street with Connecticut General Life Insurance Company, hereinafter referred to as Connecticut, a corporation unrelated to both City and Thirty. This contract stated that Thirty "agrees to sell and convey, and the Purchaser agrees to purchase" the land and that the "purchase price of the land only is Four Million and 0100 Dollars." The purchase price of $4 million was arrived at through negotiation with Connecticut and represented the highest price that Thirty was able to obtain.

The contract of September 7, 1950, provided that simultaneously with the delivery of the deed of the land Connecticut would execute and deliver to Thirty a lease of the land for an "original term" of 21 years with "three options of renewals" in favor of Thirty as tenant for 21 years each and a further "option of renewal" for 15 years. The rent for the "original term" was set at $180,000 per annum. The

rent for the renewal terms was to be determined by arbitration or appraisal at 412 percent of the arbitrated or appraised value less certain specified amounts, but in no event was the net rent per annum. during any renewal term to be less than $180,000. In addition, the contract provided as follows:

Should said lease not be agreed upon within thirty (30) days from the date hereof, then either party shall have the right to terminate this contract by giving written notice to such effect to the other party not later than twenty (20) days from the date of said notice. Upon the giving of such notice this contract shall become null and void from its inception and neither party shall have any claim against the other excepting that the Seller shall be obligated to return to the Purchaser the down payment made hereunder.

Prior to entering into the September 7, 1950, contract with Thirty for the purchase of the land at 30 and 38-40 Broad Street, Connecticut requested that Thirty obtain an independent appraisal of the land for Connecticut's use. Such appraisal, dated August 14, 1950, was made by Cruikshank Company and estimated the value of the land subject to a net lease similar to that provided for in the contract of September 7, 1950, to be $4 million and estimated the value of the land without any net lease to be $2,600,000.

On November 9, 1950, pursuant to the contract of September 7, 1950, Thirty conveyed the land at 30 and 38-40 Broad Street to Connecticut subject to the specified leaseback for $4 million. On the same day, also pursuant to the contract of September 7, 1950, Connecticut leased the land at 30 and 38-40 Broad Street to Thirty for an original term of 21 years at a net annual rental of $180,000. The lease contained provision for nine renewal terms extending for an aggregate of 204 years. The renewal provisions covered eight pages of the printed lease and were the result of the extensive negotiation between Thirty and Connecticut. The renewal terms were not automatic extensions of the lease, but rather each such renewal required an affirmative election by the lessee, Thirty. At no time during the first four renewal terms of the lease, extending through the year 2049, could the annual net rental to be paid by Thirty to Connecticut be less than $180,000 per year. Depending upon the future market value of the land, the net annual rental during the renewal terms could be more than $180,000. Under the terms of the lease Thirty had no right to reacquire the land at any time by purchase or otherwise.

The 21-year original term of the lease was determined by Thirty to be the maximum period during which it was willing to obligate itself to pay the net rental demanded by the lease in view of the risks involved in such a real estate investment. Prior to November 9, 1950, no negotiations had been conducted by Thirty for the disposition of its interest, exclusive of the land, in the property at 30 and 38-40 Broad Street.

The deed which conveyed title to the land at 30 and 38-40 Broad Street from Thirty to Connecticut on November 9, 1950, was expressly made "subject to the terms, covenants, conditions, limitations, agreements and provisions" contained in the lease of November 9, 1950, between Connecticut as lessor and Thirty as lessee.

Thirty incurred expenses in the amount of $122,801.10 in connection with the transfer of the land at 30 and 38-40 Broad Street to Connecticut.

On its consolidated Federal income tax return for the taxable year ending April 30, 1951, City claimed that a deductible loss in the amount of $3,947,801.10 had been sustained by Thirty as a result of the transfer of the land at 30 and 38-40 Broad Street to Connecticut. Of such claimed loss, $1,295,136.81 was applied by City to reduce gains realized by Thirty during the year ending April 30, 1951, under section 117(j) of the 1939 Code and $591,044.43 was applied by City to reduce ordinary income realized by Thirty during such year. Of the remainder of the claimed loss, $558,129.70 was claimed by City on Form 1139 as a net operating loss carryback to be applied against ordinary income realized by Thirty during the year ending April 30, 1950, and $528,835.68 was claimed by City as a net operating loss carryover and was applied against ordinary income realized by Thirty during the year ending April 30, 1952.

In a statutory notice of deficiency, dated July 13, 1959, respondent disallowed the loss deductions claimed for the taxable years ending April 30, 1950 through 1952. The notice contained the following explanation of the disallowance:

The transfer on or about November 9, 1950 by the Thirty Broad Street Corporation of land located at 30 and 38-40 Broad Street, New York, New York, in consideration for $4,000,000.00 and a leasehold, is held to constitute an exchange of like property under which no deductible loss is recognizable under Sections 112(b)(1) and 112(e) of the Internal Revenue Code of 1939.

The denial of this loss is the only matter presently in controversy between the parties.

On June 5, 1952, Thirty sold the building at 30 Broad Street and its leasehold interests as lessee of the land at 30 and 38-40 Broad Street and as sublessor of the land at 38-40 Broad Street to Thirty Associates, a corporation unrelated to both City and Thirty, for $7,100,000. Thirty reported a gain on the sale of $4,358,331.52 for Federal income tax purposes. In connection with this sale, also on June 5, 1952, Thirty and Connecticut signed an agreement of modification of the lease on the land at 30 and 38-40 Broad Street.

The gross rentals and net income derived by Thirty from the buildings at 30 and 38-40 Broad Street in each of the years ending April 30, 1944 through 1952, were as follows:

The above figures for the years 1951 and 1952 take into account ground rent paid by Thirty of $85,000 and $180,000, respectively. Repairs and other expenses of operation increased significantly during the year 1952 and account for the decline in net income during that in excess of the decline attributable to the ground rent.

year

Net rental payments received by Thirty from Western Union Telegraph Company for 38-40 Broad Street amounted to $33,750 during the years 1944 through 1948 and to $38,750 during the years 1949 through 1952.

The properties at 30 and 38-40 Broad Street were assessed for purposes of real property taxes at the following values for the periods indicated:

Real property in New York City is required by law to be assessed at its full value for purposes of real property taxes.

The fair market value of the land at 30 and 38-40 Broad Street on November 9, 1950, was not in excess of $4 million. On the same day the fair market value of such land subject to the leaseback signed on that day was not in excess of $4 million.

A fair annual net rental payment for the land at 30 and 38-40 Broad Street on November 9, 1950, was not in excess of $180,000.

OPINION.

RAUM, Judge: On November 9, 1950, Thirty purportedly conveyed a fee simple interest in the land at 30 and 38-40 Broad Street in New York City to Connecticut General Life Insurance Company for a cash consideration of $4 million. On the same day Connecticut leased back the same land to Thirty for an original term of 21 years for an annual net rental of $180,000. The true nature of these two transactions, which the parties agree were closely linked in form as well as in substance, is the issue to be decided.

Respondent has determined that Thirty's formal sale and immediate leaseback of the land did not constitute a bona fide sale and separate leasing for tax purposes, but rather that it was an exchange of "property *** for property of a like kind" plus boot (cash in the amount of $4 million) pursuant to sections 112(b) (1) and 112(e) of the 1939 Code1 with the result that the loss which Thirty claimed " as a consequence of the purported sale was not deductible under the statute. Petitioner's primary position is that there was a genuine sale of the land, not an exchange of property interests. As proof that the transaction constituted a true sale, petitioner has presented evidence that the fair market value of the subject land at the time of the transfer was not in excess of the $4 million which Connecticut paid to Thirty. However, if we should hold that there was an exchange and not a sale for tax purposes, petitioner makes the secondary argument that such exchange was not of property of "like kind" as required for nonrecognition of the loss under the statute.

After careful consideration of all the evidence, we agree with petitioner that there was a bona fide sale of the land by Thirty. Cf. Standard Envelope Mfg. Co., 15 T.C. 41; May Department Stores Co., 16 T.C. 547. Therefore, we do not pass upon the question whether the exchange of the particular leasehold interest here involved for an interest in fee in the same land could be considered

SEC. 112. RECOGNITION OF GAIN OR LOSS. (b) EXCHANGES SOLELY IN KIND.—

(1) PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.-No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securitles or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

(e) Loss FROM EXCHANGES NOT SOLELY IN KIND.-If an exchange would be within the provisions of subsection (b) (1) * of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

* Neither the amount of the loss which Thirty sustained if the sale was bona fide nor the manner in which such loss was carried back as a net operating loss and deducted in the taxable year ending April 30, 1950, deducted as a net operating loss for the taxable year ending April 30, 1951, and carried forward as a net operating loss and deducted in the taxable year ending April 30, 1952, is presently in Issue.