Commissioner of Internal Revenue v. Frank W. Babcock

The Commissioner of Internal Revenue petitions for a review of a decision of the Tax Court of the United States in favor of respondent, Frank W. Babcock (hereinafter called taxpayer).

In October 1945 taxpayer purchased the Elk Metropole Hotel in Los Angeles for $89,600. $19,600 was paid in cash, and a purchase money mortgage for $70,000 was given which had been reduced to a balance due of $57,572.63 on November 9,1949.

On that day the State of California condemned taxpayer’s property, paying $207,323.34. The State paid off the balance of the mortgage to its holder, and the balance of the purchase price, $149,-750.71, to the taxpayer. On July 7, 1950, taxpayer bought the Sherwood Apartment Hotel in Los Angeles for $186,125.-00 and the whole $149,750.71 received by him was applied on this purchase price.

In the notice of deficiency no issue was raised as to the requisite similarity of the property, but the Commissioner held that since only $186,125.00 was spent on the purchase, while the taxpayer had received $207,323.34, there was no similar investment within the meaning of the applicable statute and regulations, and a long term gain of $21,198.34, and a tax of $10,599.17,…