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Commissioner of Internal Revenue v. Revere Land Co.

decided. as amended july 29 1948. : June 18, 1948.


Author: Kalodner


KALODNER, Circuit Judge.

These two appeals present an intriguing financial triangle. Involved are three corporations, organized for the purpose of (1) acquiring a site; (2) financing; and (3) erecting and operating thereon an office building in the City of Pittsburgh, Pennsylvania.

First, there is the Revere Land Company (hereinafter referred to as "Revere"), the owner of the site. Second, there is the Strasswill Corporation (hereinafter referred to as "Strasswill"), which played the role of promoter and financing agent in the construction of the office building. Third, there is the Grant Building, Incorporated (hereinafter referred to as "Grant"), which is the builder and operator of the building and which holds title to it.

A close relationship exists among the three corporations. During the tax years under review, Revere, the owner of the land, owned 50% of the common stock of Strasswill and the latter, in turn, owned in excess of 90% of the common stock of Grant. A prominent figure in the transaction was one W.J. Strassburger, president of both Strasswill and Grant. It was Strassburger who originally promoted the acquisition of the site and the subsequent financing and construction of the office building.

Preliminarily it may be stated that pursuant to a 99-year lease agreement dated August 16, 1927,*fn1 providing for an annual rental of $138,000 (later reduced to $130,140), Grant erected, on Revere's land, the 35-story Grant Building with underground garage. The building was completed in 1929 at a cost of approximately $5,600,000.

Revere was the originating source of the $1,026,227.50 which is the controversial item involved in these two appeals. The Tax Court first held in the Revere case that Revere had a depreciable interest in the Grant Building in the sum of $1,026,227.50 (deductible at the rate of 2% per annum)*fn2 and some nine months later (citing its ruling in the Revere case) reduced Grant's depreciable interest in the Grant Building by the same amount. In both instances the Tax Court premised its rulings in favor of Revere and against Grant, on its fact finding that Revere had "contributed" the $1,026,227.50 towards the construction of the Grant Building as a "capital investment", and accordingly had a depreciable interest in the building in that amount.

The Commissioner appealed in the Revere case, No. 9450. Grant appealed in No. 9539. The Commissioner takes the position in both the Revere and Grant cases "that the Tax Court did not correctly interpret the facts and Grant, not Revere, should have been allowed depreciation."*fn3 He contends that the record in the Revere case establishes that the $1,026,227.50 was part of Revere's "cost of the land leased to Grant upon which depreciation cannot be taken", and points to the fact that Revere so treated the transaction on its own books, classifying the outlay under the heading "Cost of Land".

Finally, the Commissioner urges that his view, that Grant and not Revere is entitled to the depreciation, is supported by the additional facts established by the Grant record and that this Court can take judicial notice of the additional evidence in the Grant record and reverse and remand in the Revere case "in order to prevent a grave miscarriage of justice."

The Commissioner asserts that the record is so clear in the Revere case that the decision of the Tax Court should be reversed. In the event of such reversal it "consents" to a reversal of the Tax Court's decision in the Grant case. The Commissioner urges that as a "minimum" both cases should be reversed and remanded for further proceedings.

In reply, Revere urges that the Tax Court's findings in its favor are based on substantial evidence, that there was no "clear-cut mistake of law" and that accordingly, under the Dobson doctrine, there must be an affirmance by this Court.*fn4

The contentions of the parties impose the necessity of considering the records in the two cases in order to determine whether there was "substantial basis" for the Tax Court's findings. Since the Grant record contains evidence absent in the Reverse case, the cases will be treated separately.

I. The Revere Case.

The findings of fact of the Tax Court*fn5 taken from the stipulation of facts, exhibits and oral testimony, may be summarized as follows:

Revere, Strasswill and Grant are Pennsylvania corporations, each having its principal office in Pittsburgh, Pennsylvania. Revere was incorporated on July 7, 1927 Strasswill and Grant were incorporated prior to July 30, 1927.*fn6 On July 30, 1927, while Revere was "negotiating and * * * about to consummate the purchase of * * * a certain tract of land * * *"*fn7 on Grant Street, Pittsburgh, it entered into a contract with Strasswill. The contract, in its preamble, stated that Strasswill had proposed to Revere "the promotion, financing and erection and construction of an office and garage building" upon Revere's land; that Strasswill had had plans and specifications prepared for the proposed building and had completed arrangements for the major portion of financing of the project, and further, had obtained sufficient responsible tenants to justify erection of the building.

The contract then stated the following provisions:

Conditioned upon Revere acquiring title to the site and further conditioned upon Strasswill "producing evidence satisfactory to" Revere of its "ability * * * completely to finance the erection and construction to completion of said proposed building with the sum hereinafter to be contributed by" Revere "towards such construction", Revere gave to Strasswill a 90-day option to lease the site for a 99-year term, with options for renewals, at a net annual rental of $138,000, the latter to be reduced by an amount equal to 6% annually of the a4ount received by Revere from the City of Pittsburgh for the taking of a part of the site.*fn8 Conditioned upon Strasswill's negotiation of a valid contract with Thompson-Starrett Company for the erection of the proposed office and garage building at a cost of not less than three million dollars in accordance with plans and specifications to be approved by Revere, the latter, upon the execution of the 99-year lease previously mentioned, agreed to "pay or cause to be paid" to Strasswill, or its nominee, the sum of $1,030,877.95*fn9 of which $1,002,500 was "to be used, employed and applied exclusively and solely" by Strasswill "towards or on account of the cost of the construction and completion of the aforesaid proposed office and garage building in manner to be hereafter mutually agreed upon", and the balance of $28,377.95 was to be used in payment of Strasswill's expenses in connection with the building project.

The Revere-Strasswill option agreement was assigned by Strasswill on the day of its execution to Grant.

On August 1, 1927, Grant served on Revere "Notice to Exercise Option". In the "Notice" Grant advised Revere of the fact that Strasswill had assigned to it the July 30, 1927, Revere-Strasswill option agreement. At the same time, it made demand upon Revere for payment of the $1,026,227.50 therein provided.

On August 5, Grant entered into a "Building Contract" with Thompson-Starrett Company for the construction of the Grant Building. This contract throughout refers to Grant as the "owner" of the proposed building. It provides, too, that Grant is to pay all of the cost of construction, architects' fees, etc. A photostat of a copy of the Contract was offered in evidence by Revere in its case.

According to the Stipulation, Revere's Board of Directors either authorized in advance or subsequently ratified the Contract.*fn10

On August 16, 1927, Grant and Revere executed the 99-year term lease. On February 7, 1928, a Supplemental Agreement was executed fixing a reduced rental of $130,140 a year pursuant to the taking of a part of the site by the City of Pittsburgh.

The August 16, 1927, lease, in addition to fixing the term, option for renewals, rent and construction of the Grant Building at a cost of not less than $3,000,000, previously mentioned, contained the following provisions:

"Article III

"Demolition and Construction of Building.

"Sec. 3. The Lessee at its own expense * * * will demolish the present buildings on the leased premises and in place thereof will construct * * * a new building * * *." (Emphasis supplied.)

"Sec. 5. In case of destruction of or damage to any building * * * the Lessee, * * * shall, within eighteen (18) months, completely restore, rebuild or replace such building * * *."

"Removal, Repairs and Alterations of Buildings.

"Sec. 10. * * * and during the term of this lease the Lessee shall at all times keep in good order and repair inside and out all buildings and structures hereafter constructed on or appurtenant to said premises, including any and all equipment which may be therein contained, and shall from time to time make renewals and replacements of such equipment so that at all times said buildings, structures and equipment shall be in good order, condition and repair."

"Article IV

"Surrender and Ejectment

Sec. 6. Lessee shall, * * * at the end of the term * * * deliver up quiet and peaceable possession of the said pre4ises, including all improvements thereon * * *."

"Article V

"Mortgage and Leasehold

"Sec. 2. The lessee may at any time and from time to time encumber its interest in and under this lease by creating a mortgage or mortgages thereon mortgaging or pledging this lease * * *."

"Obsolescence of Building

"Sec. 10. In the event that at any time or from time to time any building or buildings erected upon the said demised premises shall have, in the opinion of the Lessee, become obsolete * * * the Lessee, shall have the right and privilege, at its own cost, risk and expense, partially or wholly to demolish or raze the building or buildings or any part thereof so erected on said premises and in place thereof and in substitution therefor to erect such new buildings or parts of buildings upon the said premises of such character, style and design as shall be best adapted to and for the locality in which the demised premises are situate, but only upon the following conditions:

"Sec. 10(2). That no demolition or razing of the building or buildings then upon the premises or any part thereof shall be begun until Lessee shall have given satisfactory assurance to the Lessor that a building or buildings, to cost not less than $2,000,000, will, without delay, be erected upon said premises in substitution for the building or buildings so to be demolished, and until the plans and specifications for such new building or buildings shall have been approved in writing by the Lessor, its agent or representative; and

"Sec. 10(4). In the event of the demolition or razing of the building or buildings or any part thereof, as hereinbefore in this Section provided, the salvage shall belong to the Lessee."

"Sole and Entire Contract

"Sec. 14. This lease constitutes the sole and entire contract between the Lessor and Lessee relative to the above demised premises and shall bind all persons claiming under them in whatsoever character or capacity as fully as if they were in every instance named herein. No waiver or alteration of any of the provisions of this lease shall be valid or of any effect except the same be in writing, signed by the party to be bound thereby." (Emphasis supplied.)

Upon the execution of the lease Grant proceeded to erect the Grant Building. Revere paid an aggregate of $1,273,772.50 for the three parcels of land leased to Grant. The cost was later reduced to $1,142,772.50 as the result of the payment made by the City ...

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