Waterman, Moore and Feinberg, Circuit Judges.
Petitioners Fort Hamilton Manor, Inc. (Fort Hamilton) and Dayton Development Fort Hamilton Corp. (Dayton Development) appeal from judgments of the Tax Court wherein it was adjudged that there were deficiencies in income taxes due from Fort Hamilton for the fiscal years ending May 31, 1961 and May 31, 1962 of $362,379 and $12,705, respectively and from Dayton Development for the fiscal year ending November 30, 1961 of $159,047.
Fort Hamilton and Dayton Development were organized under the New York Stock Corporation Law on April 21, 1950 and October 21, 1949, respectively, for the purpose of constructing and operating rental housing projects.*fn1 They pursued this purpose by leasing in 1950 from the United States a tract of land on which they constructed residential units to be rented to personnel of the armed services (sometimes referred to as Wherry Housing). Four brothers, the Zukermans, each owned a 25% stock interest in the corporations.
In 1957 petitioners were advised by the Army that it desired to acquire the Wherry Housing projects, a desire which the Government accomplished by a Declaration of Taking filed in the United States District Court for the Eastern District of New York on December 15, 1960. The efforts of petitioners subsequent to the 1957 notice of prospective condemnation to acquire replacement property for the reinvestment of the proceeds received upon condemnation so as to qualify for nonrecognition under Section 1033 of the Internal Revenue Code of 1954 and whether those efforts were successful are the subject matter of this appeal.
The facts in large part have been stipulated and are not seriously in issue. It is the consequences of these facts and the proper interpretation to be given to § 1033 that form the real issues.
Petitioners contend that they made timely purchases of replacement property within the time period specified by § 1033(a)(3)(B) and, hence, did not have to report a gain in their income tax returns.*fn2 This contention, in turn, is based upon the assumption that the use of the cash proceeds from the condemnation, which were paid in January and February 1961, to make advances on contracts for the acquisition of replacement properties (the contracts were executed on March 15, 1961 and provided for petitioners' purchase of replacement properties) satisfied the requirements of § 1033 despite the fact that the properties were not conveyed by deed to petitioners until October 11, 1963. March 15, 1961 was well within the allowable time; October 11, 1963 was beyond even the extended period.
The Commissioner argues that nonrecognition under § 1033(a)(3)(A) is available only when a taxpayer "purchases other property" within "one year after the close of the first taxable year in which any part of the gain upon the conversion is realized" (subject to extension by the Secretary (B)(ii)). The expiration dates were respectively May 31, 1963 (Fort Hamilton by extension) and November 30, 1962 (Dayton Development).
Petitioners' principal argument is based upon the premise that a review of the history of § 1033 prior to the insertion of the words "purchases other property" in the 1951 amendment, enables the conclusion to be reached that acquisition of the replacement property within a prescribed period was not required -- hence, as here applied, the "purchase" was effected by the contracts of March 15, 1961 within the period and that acquisition by deed was permissible beyond the period.
The Tax Court recognized that "it was the intention of the petitioners to replace the condemned Wherry properties with portions of the Seaside Rockaway project" but concluded that petitioners did not purchase the properties until October 11, 1963, the date on which the properties were conveyed by deed to them. The Court traced the steps taken by petitioners in their endeavor to achieve their purpose.
To replace their Wherry Housing, petitioners successfully negotiated with the City of New York (the City) for the right to construct a housing project in the Rockaway section of Queens County. To qualify for certain property tax benefits under the Redevelopment Companies Law (McKinney's Unconsolidated Laws, Chap. 2, secs. 3401-3426),*fn3 the owner had to be a "redevelopment company". Dayton Seaside Corporation (Seaside) was organized by the Zukermans on March 5, 1959 to construct six buildings.*fn4 On October 8, 1959 Seaside agreed with the City to construct low or middle income housing thereon. The land was conveyed to Seaside by the City on November 2, 1959. On March 15, 1961, Seaside agreed to sell to each petitioner a building to be constructed, the agreements reciting the condemnation and petitioners' desire to reinvest the proceeds therefrom. To satisfy Federal Housing Administration requirements, a separate redevelopment company Dayton Seaside No. 2 (Seaside No. 2) also owned by the Zukermans was organized and by deed dated April 23, 1962 land was conveyed by Seaside to it. Construction of the two buildings (by Seaside and Seaside No. 2) started in April 1962.
The buildings were completed, certificates of occupancy were issued on October 11, 1963 and on that date Seaside and Seaside No. 2 conveyed the land and buildings by separate deeds to Fort Hamilton and Dayton Development, respectively.
The tax consequences were as ...