Forman,*fn* Seitz and Aldisert, Circuit Judges.
This appeal is from a decision of the United States Tax Court, 52 T.C. 986 (1969), which found income tax deficiencies for the years 1959 and 1962. Presented here are questions relating to (1) the cost basis of real estate devised to taxpayer by his father, (2) a condemnation award to taxpayer from the Commonwealth of Pennsylvania which, he insists, included severance damages, and (3) the propriety of assessing penalties under section 6653(a) of the Internal Revenue Code of 1954 for negligent underpayment, and under section 6651 for failure to file a timely return.
Taxpayer's father died in 1940 and by will devised certain real estate and improvements thereon to taxpayer:
Item II. I give, devise and bequeath unto my son Pete Vaira, all the real estate with the improvements thereon, which I own on the west side of "new" Route #51, together with a piece of land on the east side of "new" Route #51 upon which my said son, Pete Vaira, has constructed a brick house. . . . The entire above bequest, however, to be subject to the provision that he pay unto my son, Robert Vaira, the sum of $12.50 on the 1st day of each month, until he has paid unto him the sum of $2,000 dollars. And provided also that he, along with my son Steve Vaira, may keep, provide, maintain and support my wife Angelina Vaira, as long as she may live. This bequest not to include that which is mentioned in Item VII.
Item V. I give, devise and bequeath unto my beloved wife Angelina Vaira, my money which I have in Italy . . . together with the right to live in, dwell in, occupy and use, with family maintaining family relationship, our home as long as she may live.
Under the will, taxpayer received 73 acres which included two gasoline service stations, and two other acres which included a house he had built prior to his father's death. The family dwelling which the mother was to occupy was not included in the real estate devised to taxpayer; it was owned by his brother Steve.
The source of the tax problems was eminent domain proceedings conducted by the Commonwealth of Pennsylvania in 1958. State highway construction involved the taking of much of the land on which the two service stations had been located. Taxpayer was left with a certain amount of frontage on the new highway which could be commercially usable after a significant amount of grading. In 1962, he received a total award of $174,522.88 from the Board of Viewers of Allegheny County, Pennsylvania. The sum of $90,750 had been paid by the state on account in 1959, and the balance of $83,772.88 after the viewers' award in 1962.
The Tax Court found that taxpayer's cost basis in the land and improvements taken by the state totaled $20,430. This was based on the following findings: taxpayer's basis in the total real estate devised to him by his father amounted to $24,200, of which $12,100 was allocated to the condemned portion; his unadjusted cost basis in improvements was $9,250 -- $1,500 for one gas station, and $7,750 for the other -- while depreciation totaled $920, leaving a total adjusted basis in the improvements of $8,330. Taxpayer's cost basis of $20,430 thus represented the sum of his basis in the land ($12,100) and improvements ($8,330).
In determining the cost basis, the Tax Court had the option of applying section 1014, the fair market value of the property at the time of the father's death,*fn1 or section 1012, a value based on purchase price or cost.*fn2 The court utilized the second method of computation. It determined his cost by totaling taxpayer's 222 monthly payments, at $100 per month, to his mother, together with $2,000 in payments to his brother Robert in accordance with Item II of the will.*fn3 The court concluded:
Taking all of the various factors into consideration, we think there was a substantial equivalence between the fair market value of what Peter received and the anticipated payments he undertook to make and that no part of those payments should be treated as gifts.*fn4
While taxpayer does not quarrel with this approach, he contends that the Tax Court failed to consider all the elements that went into his cost, including certain additional monies paid by him for "the support" of his mother under Item II of the will. In 1946 he expended $3,000 for a furnace and $600 for electrical wiring installed in the residence occupied by the mother. From 1941 to 1944, he spent $10,163.01 for the operation of his mother's farm at her request.
Recognizing the settled Pennsylvania law that the acceptance of a devise of land, charged with payment of a legacy, creates a personal liability on the part of the devisee, Logan v. Glass, 136 Pa. Super. 221, 7 A. 2d 116 (1939), aff'd per curiam 338 Pa. 489, 14 A. 2d 306 (1940), taxpayer nevertheless argues that Items II and V of the will imposed charges on his land which were separate from or in addition to any personal liability. We experience extreme difficulty in accepting this argument. The tract upon which the mother's farm was located was devised not to taxpayer, but to his brother Steve. We are not persuaded that Pennsylvania law would impose a charge on land given to one devisee based on an obligation to contribute to the support of a life tenant (Item II) occupying land given to another devisee. Nor can we accept the theory that the improvements to the homestead and the operation of the farm were requirements imposed by Item V, giving to the mother the "right to live in, dwell in, occupy and use, with family maintaining family relationship, our home as long as she may live." In addressing itself to these contentions, the Tax Court found
no way of determining, on the record before us, how much the farm contributed to Angelina's support. In any event, the most that it might have so contributed is the net profit from the operations and not the gross cost thereof. Similarly, capital expenditures by Peter for improvements to the house in which Angelina lived (even if we were able to determine the amount thereof) cannot be considered as being for Angelina's support particularly since they were made to property owned by his brother, Steve. Without categorizing the foregoing expenditures as gifts, ...