
    388 F. 2d 990
    GLAZER STEEL CORPORATION v. THE UNITED STATES
    [No. 215-64.
    Decided December 15, 1967]
    
      
      Alfred H. Moses, attorney of record, for plaintiff. Franklin J. Okin, Diana H. Josephson, and Covington <St Bwrling, of counsel.
    
      Donald T. Fish, with, whom was Assistant Attorney Gen-era1 Mitchell Rogovim,, for defendant. Philip R. Miller, of counsel.
    Before CoweN, Chief Judge, Laramore, Dtjrfee, Davis, SreltoN, and Nichols, Judges.
    
   Per Curiam: ;

This case was referred to Trial Commissioner Lloyd Fletcher with directions to make findings of fact and recommendation for conclusions of law. The commissioner has done so in an opinion and report filed on September 21, 1967. On November 1,1967, plaintiff filed a motion for adoption of the commissioner’s report and the entry of judgment for plaintiff in accordance therewith. Defendant has filed no exceptions to the commissioner’s findings, opinion, and recommended conclusion of law, nor to plaintiff’s motion of November 1,1967, and the time for so filing has expired pursuant to the Rules of the court. Since the court agrees with the commissioner’s findings, opinion, and recommended conclusion of law with modifications, as hereinafter set forth, it hereby adopts the same, as modified, as the basis for its judgment in this case without oral argument. Plaintiff is, therefore, entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 47 (c) in accordance with the opinion.

Commissioner Fletcher’s opinion, as modified by the Court, is as follows:

In this tax case the plaintiff seeks to recover corporate income taxes attributable to defendant’s refusal to allow a deduction for depreciation, during the first seven months of 1956, on plaintiff’s unrecovered cost basis for a brick office building, known as the Exchange Building, located on Ailor Avenue in Knoxville, Tennessee. In opposing plaintiff’s recovery, defendant asserts that plaintiff had no depreciable interest in, and did not actually use, the building for its own business purposes during the period involved. In the alternative, defendant contends that plaintiff is estopped from claiming depreciation because of a failure to disclose to the Internal Revenue Service that it continued to use and occupy the Exchange Building for its general offices subsequent to December 31,1955.

The facts in the case are set forth at length in the findings of fact below. Here they will be summarized only to the extent necessary to explain the basis for the conclusions reached in this opinion.

Plaintiff is a Tennessee corporation. At all material times, its outstanding capital stock was closely held by three brothers, Guilford, Louis, and Jerome Glazer. The corporation’s principal business activity was the buying, selling, warehousing, and fabricating of steel at 2100 Ailor Avenue in Knoxville, Tennessee. It also bought and sold scrap metals. Beginning in the spring of 1949 and continuing through the taxable year in question, plaintiff was also engaged in the buying, selling, and warehousing of steel and other metal products in New Orleans, Louisiana. During the times material, Guilford and Louis Glazer were plaintiff’s president and vice-president, respectively, with their offices in the Exchange Building at Knoxville. Their younger brother, Jerome, was the general manager of plaintiff’s operations in New Orleans and had his office in that city.

For a number of years prior to November 14, 1955, plaintiff had leased most of the premises known as 2100 Ailor Avenue in Knoxville from The Trustee Corporation (Trustee). The majority of the outstanding stock of Trustee was held or controlled by the three Glazer brothers mentioned above; the rest of the stock was owned by other members of the Glazer family. During the period that plaintiff leased the Ailor Avenue property, it had made various leasehold improvements thereto including the construction of a steel fabrication shop, a warehouse and machine shop, a modern brick office building (the Exchange Building), and miscellaneous service buildings. The approximate cost to plaintiff of all these leasehold improvements was $300,000. The lease between plaintiff and Trustee provided that such leasehold improvements were to become the property of Trustee upon termination of the tenancy for any reason. In its income tax returns for 1953,1954, and 1955 plaintiff had deducted and was allowed depreciation on these leasehold improvements. As of December 31, 1955, plaintiff’s remaining depreciable basis for the Exchange Building alone was $124,752.

During 1955 plaintiff continued to be actively engaged in the steel business in Knoxville but its operations there were declining and were not profitable in contrast to those in New Orleans. Sometime in the summer or early fall of 1955, the opportunity was presented to The Trustee Corporation to lease the Ailor Avenue working plant facilities (but not the Exchange Building) to Allied Structural Steel Corporation of Tennessee (Allied), a party in no way related to, or connected with, the Glazer family. The proposed lease was for a comparatively long term and at a considerably more favorable rental than was provided for in the existing lease between plaintiff and Trustee. In order that Trustee might take advantage of Allied’s proposal, it was agreed between plaintiff and Trustee that the existing lease agreement between them relating to 2100 Ailor Avenue would be canceled in its entirety. In consideration for such cancellation, Trustee agreed to pay plaintiff $200,000 in equal monthly installments over a period of 10 years commencing January 1, 1956. The lease cancellation agreement incorporating the aforesaid provisions was entered into on November 14, 1955, to be effective December 31, 1955. By agreement dated November 16, 1955, Trustee leased most of the land and buildings located at 2100 Ailor Avenue to Allied for a term of 20 years commencing January 1,1956. However, the lease to Allied did not include the Exchange Building. At the same time that plaintiff and Trustee agreed to cancel their existing lease, it was orally agreed between them that plaintiff would be entitled to continue its use and occupancy of the Exchange Building as long as it desired, without the payment of any rent. This rather unusual arrangement reflected the fact that, at its own expense, plaintiff had constructed the Exchange Building in 1953, and that Trustee, which would become the owner of the building, had not incurred any substantial expense in connection therewith. Therefoi’e, the agreement for rent-free occupancy of the Exchange Building by plaintiff was a factor in arriving at the figure of $200,000 to be paid by Trustee to plaintiff for cancellation of its Ailor Avenue lease.

Pursuant to the above arrangement, plaintiff continued to occupy the Exchange Building during the taxable period in question and to use it as its general executive and administrative offices just as it did hr previous years. No significant change occurred in either the personnel who continued to occupy the building or in their duties and responsibilities. These persons included plaintiff’s president, vice-president, comptroller and office manager, chief accountant and the entire accounting department, together with general secretarial and clerical help. Plaintiff’s furniture and equipment remained in the building, and plaintiff continued to pay for maintenance and repair of the building, including all utility costs and related expenses.

The Exchange Building continued to serve as the general offices of plaintiff until November 1959, when the books and records, furniture and equipment, accounting office and remaining executive functions (including important personnel other than Guilford Glazer) were moved from Knoxville to New Orleans. At that time plaintiff vacated and abandoned all use of the Exchange Building.

The Depreciation Issue

The first question, stated hi the circumstances of this case, is whether a lessee, such as plaintiff, who occupies and uses business premises as a tenant for an indefinite term with it alone having the power to terminate such tenancy, which tenancy follows the cancellation of a preexisting lease for a term of years, may continue to claim a depreciation deduction on its Federal income tax returns for a ratable portion of its unrecovered cost basis in leasehold improvements made by it, or is such lessee required to deduct the entire remaining amount of the undepreciated cost basis in the year when the preexisting lease was canceled? Although it originally took a different position in its tax return for the period involved, plaintiff now says that under section 167 of the 1954 Code and the regulations promulgated thereunder, it is entitled to a depreciation deduction because, despite the cancellation of the preexisting lease, it had the right, which it exercised, to continue its use and occupancy of the Exchange Building on which it had an unrecovered cost basis. In my judgment, plaintiff’s present position is correct, and it is, therefore, entitled to recover.

Section 167 of the 1954 Code permits a deduction for depreciation in the form of “a reasonable allowance for the exhaustion, wear and tear * * * (1) of property used in the trade or business * * *” Insofar as leased property is concerned, the Treasury Regulations implement the section by providing:

Capital expenditures made by a lessee for the erection of buildings or the construction of other permanent improvements on leased property are recoverable through allowances for depreciation or amortization. Treas. Reg. § 1.167(a)-4, T.D. 6520 (1960).

The regulations also provide for the recognition of loss where a taxpayer retires an asset by actual physical abandonment. See Treas. Reg. § 1.167(a)-8(a) (4) (1956). Hence, one circumstance under which a lessee must write off the entire remaining cost of his leasehold improvements, rather than depreciate or amortize such cost, occurs in the year when he irrevocably abandons his right to occupy and use those improvements. By the same token, however, so long as the lessee has, and exercises, his right to use and occupy the leasehold improvements, he can recover his costs therefor only through annual depreciation deductions spread ratably over the useful life of the property or over the term of his lease, whichever is shorter. See Gladding Dry Goods Co., 2 B.T.A. 336 (1925); Fort Wharf Ice Co., 23 T.C. 202 (1954); and Treas. Reg. §1.167(a)-4, T.D. 6520, supra.

Under these principles, it is obviously of first importance to determine whether plaintiff had the right to, and did continue, its use and occupancy of the Exchange Building after December 31, 1955, or whether it must be said to have lost that right and to have abandoned the building pursuant to its agreement to cancel its Ailor Avenue lease effective December 31,1955.

The facts as summarized above and detailed in the findings below are clear. They show that, while plaintiff did indeed agree to a cancellation of its Ailor Avenue lease so that the lessor could then rent a portion of that property to Allied, simultaneously the lessor agreed that plaintiff should have the right to continue its occupancy of the Exchange Building so long as it had need therefor. They further show that, during the period involved, plaintiff did in fact use and occupy the building as its general executive and administrative offices. Defendant seemingly refuses to recognize that, during this period, plaintiff had in fact two offices, one in Knoxville and one in New Orleans. There is simply nothing in this record to warrant a finding that plaintiff intended in the fall of 1955 “irrevocably to discard” its right to nse the Exchange Building. Treas. Keg. § 1.167(a)-8 (a) (4). Ear from that “actual physical abandonment” required by the regulation to support a write-off in 1955, plaintiff continued to use the building just as it always had. It is, therefore, entitled to the depreciation allowance which it claims.

But, says the defendant, the plaintiff has failed to prove entitlement to the deduction because it has not shown that it suffered the burden of any loss from depreciation of the building. In support of its contention, defendant refers to cases with two factual patterns. In the first, the taxpayer had no investment in the property. See, for example, Atlantia Coast Line Railroad Co. v. Commissioner, 81 F. 2d 309 (4th Cir., 1936), cert. denied 298 U.S. 656 (1936). In the second, although the taxpayer had such an investment, it had either been, or was in the process of being, reimbursed for its investment. See, for example, Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943).

Neither of these factual patterns, however, fits the present case. First, it is not disputed that the plaintiff had an investment in the property since it constructed the Exchange Building at an adjusted cost of $140,339.49, of which cost $124,-752.36 remained undepreciated at December 31, 1955. Secondly, while defendant would dispute it, the plaintiff was never actually reimbursed for its remaining investment in the Exchange Building, as such. As stated above, plaintiff had agreed to the cancellation of the remaining term of its Ailor Avenue lease (eight and one-quarter years), provided it was paid $200,000 by Trustee over a ten-year period as consideration for the surrender of both its leasehold improvements (other than the Exchange Building) and of its favorable lease. The leasehold improvements in question, exclusive of the Exchange Building, had an original cost to plaintiff of about $200,000. Furthermore, in agreeing to the cancellation of its lease, plaintiff gave up its potential right to realize over $300,000 of rental income by itself subleasing the property to Allied for the remaining eight and one-quarter-year term. See The Trustee Corporation, 42 T.C. 482, 489, ftn. 2 (1964).

Therefore, if the plaintiff had not retained the right to use the Exchange Building for its general offices, rent-free, subsequent to December 31, 1955, the amount to be paid to it by Trustee could reasonably be expected to have been much higher than it was. It is entirely unrealistic, therefore, to say as defendant does, that plaintiff had been “fully compensated” for its investment in the Exchange Building by its November 1955 contracts with Trustee and, hence, had no further depreciable interest in the building.

The defendant also contends that since plaintiff’s entire Ailor Avenue lease was canceled as of December 31, 1955, plaintiff thereafter had no proprietary interest in the Exchange Building, but rather a mere license to use the building, which was not a sufficient interest to support a depreciation allowance.

It is true the entire lease was canceled, but simultaneously therewith, the parties agreed that plaintiff should have the right to continue to occupy the Exchange Building as long as it required such use. Standing alone, the fact that a lease is canceled may mean that the lessee thereupon loses his depreciable interest in leasehold improvements. However, as the Tax Court has consistently held, where a lease is canceled in favor of a new one, or is extended, the unrecovered cost of any leasehold improvements cannot be written off in the year of cancellation but must be recovered over the useful life of the improvements or the term of the new or extended lease, whichever is shorter. See, for example, Gladding Dry Goods Co., supra; and Glenn-Minnich Clothing Co., Inc., 19 T.C.M. 1131 (1960).

Therefore, the fact that the entire Ailor Avenue lease was canceled must be considered in conjunction with the fact that there was a simultaneous agreement for continued occupancy of the Exchange Building. It has already been pointed out that the $200,000 consideration did not include payment for the Exchange Building. That improvement was segregated out and provided for in the simultaneous agreement which left the plaintiff with a sufficient continuing interest in the Exchange Building that it should be allowed to depreciate it.

The defendant points to the case of Washington Catering Co., 9 B.T.A. 743 (1927), where the lease provided that fixtures added to the leased premises by the lessee would become the property of the lessor should the lease terminate before its full term had run. The lease was subject to a continuing condition that the lessee be successful in its efforts to obtain and retain a liquor license, failing which the lessee had the option to terminate the lease. With the advent of prohibition, the lessee chose to cancel the lease, but it was agreed that the lessee would continue to occupy the premises from month to month for the same rent using the premises as a coffee shop and for the sale of soft drinks and tobacco. The taxpayers successfully contended that its unrecovered cost of improvements could be deducted in the year of cancellation. The Board of Tax Appeals felt that because the lessee thereafter occupied the premises at the sufferance of the owner and could therefore be dispossessed at any time, it should have the right to recover the unamortized cost of its leasehold improvements upon cancellation of the lease. By contrast, in the present case, it cannot be said that plaintiff’s occupancy of the Exchange Building was by sufferance of The Trustee Corporation or anyone else. It had the contractual right to remain there as long as it had need for the building.

The Tax Court has made it clear in Millinery Center Building Corporation, 21 T.C. 817, 824 (1954), rev'd on other grounds, 221 F. 2d 322 (2nd Cir., 1955), aff'd 350 U.S. 456 (1956), that a taxpayer-lessee is only permitted to write off its remaining unamortized cost of leasehold improvements where there is a cancellation of the lease plus “a complete surrender of possession thereunder to the landlords.” Since tbe facts here clearly demonstrate that the plaintiff did not surrender possession of the premises, and did continue to have a substantial interest in the Exchange Building sufficient to support the claimed depreciation deduction, defendant’s contentions are wide of the mark.

The defendant also urges that the plaintiff’s use of the Exchange Building was only “nominal and artificial” and that, in fact, the building was used during the period in question primarily for the personal benefit of plaintiff’s officers and shareholders rather than in the conduct of plaintiff’s own business. While apparently admitting that plaintiff’s general offices (at least, for accounting functions) were located in the Exchange Building, defendant points suspiciously to numerous business activities carried on by Guilford and Louis Glazer which were unrelated to plaintiff’s business. It is difficult to discern the relevance of this fact to the issue at hand. Since plaintiff’s general offices were admittedly in the Exchange Building, it would seem immaterial that two of its officials used their offices to conduct their own business ventures in addition to those of plaintiff. The record clearly shows that both Guilford and Louis Glazer were, in varying degrees, active in performing administrative and supervisory functions for plaintiff which would have required their access to its corporate records, nearly all of which were kept and maintained in the Exchange Building. That they were simultaneously performing services for other Glazer enterprises would seem to prove little other than that they were busy and energetic businessmen.

On the basis of the foregoing, it must be concluded that the plaintiff in fact continued to use and occupy the Exchange Building in its trade or business during the taxable period in question, and, therefore, is entitled to the depreciation deduction thereon which it now seeks.

The Estoppel Issue

In its 1955 Federal income tax return, plaintiff made no mention of any of the transactions whereby its Ailor Avenue lease was canceled in consideration of Trustee’s payment to it of $200,000. In its 1956 Federal income tax return, plaintiff claimed a loss for “leasehold improvements abandoned” as a consequence of the November 1955 agreements, and did not include any of its leasehold improvements as depreciable assets or deduct any depreciation thereon. As to the taxable year 1955, plaintiff and the Government later entered into a binding statutory compromise which precluded both from making any further adjustments for 1955.

The Government contends that plaintiff’s filing of its 1955 and 1956 Federal income tax returns constituted a request of the Internal Eevenue Service to treat its November 1955 transactions in the manner therein indicated and a consent to the assessment and collection of the tax in that manner. Therefore, it says, plaintiff should be estopped from changing the position it originally took that, for tax purposes, it had disposed of its leasehold improvements as a consequence of the November 1955 agreements, because of an alleged double tax benefit which would otherwise be obtained.

In substance, the chronology of events is as follows:

June 15, 1956.—Plaintiff filed its 1955 Federal income tax return on which it reported no gain or loss from the lease cancellation agreement.
August 13, 1956.—Plaintiff submitted an offer in compromise of penalty for late filing of its 1955 Federal income tax return.
November 5, 1956.—Revenue agent’s report on 1955 Federal income tax return completed, proposing additional tax which plaintiff later paid.
March 15, 1957.—Plaintiff filed its Federal income tax return for the period ended July 31, 1956, on which plaintiff claimed loss on write-off of leasehold improvements.
April 4,1957.—Plaintiff’s offer in compromise for taxable year 1955 accepted.
October 1958.—Plaintiff proposed to settle its 1955-1956 tax liabilities by paying capital gains tax on the $200,000 to be paid by Trustee, less a write-off of its leasehold improvements other than the Exchange Building, and that plaintiff be allowed depreciation deductions on the building for 1956 and subsequent years. Proposal rejected by Internal Revenue Service.
April 25, 1960.—Internal Revenue Service stated that plaintiff incurred a loss and not a gain as a result of the lease cancellation, such loss occurring in 1955, and not 1956. Therefore, since 1955 was closed by the compromise agreement, no refund allowable.

There are three essential elements to establish estoppel as to which defendant has the burden of proof. See Birkelund v. United States, 135 Ct. Cl. 503, 513, 142 F. Supp. 459, 465 (1956). First, a request by the taxpayer that the Commissioner of Internal Revenue treat a transaction in a given manner ; second, agreement by the Commissioner to the taxpayer’s request; and third, a change in the taxpayer’s position in its return for a subsequent year at which time the Commissioner is precluded by the statute of limitations from assessing additional tax for the earlier year. See R. H. Stearns Co. v. United States, 291 U.S. 54 (1934); Stern Bros. v. United States, 80 Ct. Cl. 223 (1934); Building Syndicate Co. v. United States, 292 F. 2d 623 (9th Cir., 1961) ; and Akron Dry Goods Co. v. Commissioner, 18 T.C. 1143 (1952), aff'd 218 F. 2d 290 (6th Cir., 1954).

As to the taxable year 1955, plaintiff did not write off the cost of the Exchange Building on its books or its tax return. Therefore, when the revenue agent examined these items, he could not have been misled into thinking that plaintiff no longer considered the Exchange Building as an asset of its business. As to the 1956 return, since this was filed after the revenue agent’s report was filed, it would be impossible for the agent to have relied on anything contained therein.

The agent conducted his examination in plaintiff’s offices in the Exchange Building and well knew that plaintiff was continuing to occupy the building. He also knew that the plaintiff no longer leased the Ailor Avenue plant property, but was using the Exchange Building only for its general offices. From the facts available to him, it is safe to say that the revenue agent was apprised of all the relevant facts con-cering the 1955 lease agreements. With this knowledge, the Government accepted plaintiff’s offer of compromise of a penalty for late filing of its 1955 Federal income tax return and cannot say that, in doing so, it was in any way misled. See Ross v. Commissioner, 169 F. 2d 483, 495 (1st Cir., 1948).

A further requirement for the invoking of estoppel is that the Commissioner had agreed with, or acquiesced in, the taxpayer’s treatment of the item in question. Stern Bros. v. United States, supra. In this case, however, the Commissioner did not acquiesce in the manner in which plaintiff treated the transactions on its tax returns.

Plaintiff, it is true, claimed a loss on its 1956 tax return as a result of the write-off of its leasehold improvements, but the Service disallowed the loss. As to 1955 the taxpayer asserted no gain or loss on the lease cancellation transactions. By 1960 the Internal Bevenue Service had reversed the earlier position taken by its examining agent and determined that plaintiff’s loss had occurred in 1955 but added that no refund was possible due to the prior compromise agreement of penalties for that year. Therefore, since the Internal Beve-nue Service never agreed with the plaintiff’s treatment of the transactions either on its 1955 or 1956 returns, the defendant cannot establish the elements necessary for the application of an estoppel. Cf. Stern Bros. v. United States, supra.

Accordingly, plaintiff is entitled to recover with the amount of recovery to be determined pursuant to Buie 47 (c).

FiNniNGS oe Fact

Introductory

1. Plaintiff is a corporation, organized and existing under the laws of the State of Tennessee. It was formed in February 1946, as successor to Glazer Iron and Metal Company, a partnership. Its principal offices are now located at 1556 Tchoupitoulas Street, New Orleans, Louisiana.

2. This is an action for the recovery of a portion of the income taxes paid by plaintiff for its taxable period ending July 31,1956. Plaintiff kept its books and reported its income and expenses on tire accrual basis. On Marcli 15,1957, it filed a Federal income tax return for the short taxable year commencing January 1,1956, and ending July 31,1956. The total amount of income taxes paid by plaintiff for such taxable year was $116,076.25.

The amount of taxes in controversy arises from the defendant’s refusal to allow as a deduction in computing plaintiff’s taxable income for its taxable period ending July 31, 1956, depreciation or amortization under Sections 162 and 167 of the Internal Eevenue Code of 1954 on the cost of a certain brick office building at 2100 Ailor Avenue in Knoxville, Tennessee, discussed in detail below and referred to hereafter as the “Exchange Building.”

3. Plaintiff filed with the District Director of Internal Eevenue, New Orleans, Louisiana, timely claim for refund of income taxes overpaid for its taxable year ending July 31, 1956. This claim, which was based on substantially the same allegations as are set forth in the petition herein, was filed in accordance with law and applicable regulations of the Secretary of the Treasury. It set forth the basis of the claim for refund and the reasons why the amount claimed should be refunded. A waiver of Statutory Notification of Claim Dis-allowance pursuant to Section 6532(a) (3) of the Internal Eevenue Code of 1954 (Form 2297) was filed on behalf of plaintiff on July 19,1962.

4. At all times material to this action, the outstanding capital stock of plaintiff was owned by the following persons and in approximately the following percentages:

Guilford Glazer-38%
Louis A. Glazer_31%
Jerome S. Glazer-1_31%

During the period involved (in addition to plaintiff), there were in existence 21 corporations, all of which were controlled by Guilford, Louis and/or Jerome Glazer, and all of which kept their books and records and maintained their general offices in the Exchange Building. These corporations were engaged variously in the construction, operation, and management of shopping centers, garden type apartments, low-cost home developments, a high-rise apartment building, an office building, insurance brokerage, and the leasing of steel fabricating equipment.

5. Through December 31, 1955, plaintiff was engaged in buying, selling, warehousing, and fabricating steel at 2100 Ailor Avenue in Knoxville, Tennessee. It also bought and sold scrap metals. Beginning in the spring of 1949 and continuing through the taxable year in question, plaintiff was also engaged in the buying, selling, and warehousing of steel and other metal products in New Orleans, Louisiana. During all material times here involved, Guilford and Louis A. Glazer were plaintiff’s president and vice-president, respectively, with offices in the Exchange Building in Knoxville. Jerome S. Glazer was the general manager of plaintiff’s operations in New Orleans and had his office in that city.

The Ailor Avenue Property

6. In February 1946, Ida B. Glazer, the mother of Guilford, Louis, and Jerome Glazer, purchased from an unrelated seller approximately 6y2 acres of land, together with improvements, located at 2100 Ailor Avenue, Knoxville, Tennessee, for $70,000. The property had formerly been used as a marble mill and was in the industrial section of Knoxville, located near the tracks of two railroads. When acquired by Mrs. Glazer the Ailor Avenue property had not been used for several years. It had only two buildings of any consequence and a craneway with one crane. In addition to a small brick building which had served as the office of the marble mill, the property also contained an old house. It was moved from the property line on Ailor Avenue, connected to the former marble mill office by plaintiff, and the combination initially served as plaintiff’s offices. Due to its former use as a marble mill, the property contained many blocks of marble together with equipment especially designed for the processing of marble. After the marble had been removed and other improvements made which were necessary to convert the property for use in plaintiff’s business, this Ailor Avenue property became plaintiff’s principal plant.

7. In 1949, Mrs. Glazer conveyed the Ailor Avenue property to Guilford Glazer, as trustee, for the benefit of her three daughters, three of her four sons, and Lillian Glazer, the wife of Louis A. Glazer, her fourth son.

On July 1, 1952, Guilford Glazer, as such trustee, deeded the Ailor Avenue property to The Trustee Corporation, a corporation organized and existing under the laws of the State of Tennessee, which corporation has continued to own the Ailor Avenue property. As of November 14, 1955, the outstanding stock of The Trustee Corporation was held by the following persons in the following proportions:

Guilford Glazer_ 29%
Jerome Glazer_ 22%
Louis Glazer (and wife)_ 22%
Morris Glazer_ 9%
Besse Glazer Hite_ 9%
Bella Glazer Leeds_ 9%

The capital stock of The Trustee Corporation was initially issued in accordance with the beneficial interests of those persons referred to above as the beneficiaries under the trust agreement pursuant to which Guilford Glazer, as trustee, held the Ailor Avenue property from 1949 to July 1, 1952. The Trustee Corporation was formed and the Ailor Avenue property transferred to it by the trustee because of the desire of the beneficiaries to have a direct voice in the management of the property as stockholders which would not be possible under the trust form of ownership. Also, there was a business reason for the transfer in that the trust had recently acquired real property in Louisiana.

8. By lease agreement entered into on February 21, 1946, Mrs. Glazer leased the Ailor Avenue property to plaintiff for a term of five years beginning on April 1,1946, for an annual rental of $7,500. Under the terms of the lease plaintiff agreed to maintain and pay for fire and liability insurance and local and state property taxes assessed with respect to the leased property. Some four years later, on April 21,1950, Guilford Glazer, as trustee, entered into an agreement with the Tennessee Valley Authority (T.V.A.) and plaintiff, whereby the lease previously entered into between ¿daintiff and Ida B. Glazer was modified to exclude therefrom a portion of the Ailor Avenue property not being utilized by plaintiff. Such portion was then leased to T.V.A. for a term of ten years at an annual rental of $10,200. The lessor paid insurance and property taxes with respect to those leased premises. Shortly thereafter, by agreement dated June 15, 1950, Guilford Glazer, as trustee, leased to plaintiff that part of the Ailor Avenue property not leased to T.V.A., for a term of three years begimiing April 1,1951, at an annual rental of $6,000. Plaintiff agreed to pay for fire, casualty, liability and comprehensive coverage insurance, as requested by the lessor, and also local and state property taxes.

By agreement dated December 24,1951, Guilford Glazer, as trustee, and plaintiff modified the lease agreement entered into on June 15, 1950, to provide for an increased annual rental of $7,800 and to extend the term of such lease for an additional ten years beginning April 1,1954. All other terms and conditions of the June 15,1950, lease agreement remained unchanged.

9. Throughout 1955, plaintiff continued to be actively engaged in the steel business, and to a considerably lesser extent in the scrap metal business, at the Ailor Avenue location in Knoxville. However, it was losing money there in contrast to the profitable operations being achieved by its New Orleans branch. The total 1955 sales generated by the Knoxville division were $2,164,699 or over 40 percent of plaintiff’s 1955 sales. Plaintiff’s gross sales from all sources for 1955 were $4,883,640. The difference between the gross sales from all sources and the Knoxville sales was attributable to the New Orleans operations which in 1955 accounted for sales of $2,718,940.

10. By agreement dated November 16, 1955, The Trustee Corporation leased most of the land and buildings located at 2100 Ailor Avenue to Allied Structural Steel Corporation of Tennessee (Allied) for a term of 20 years beginning January 1,1956, at an annual rental of $45,000. Allied agreed to maintain and pay for fire and liability coverage insurance and for state and local taxes assessed with respect to the leased property. Allied was a wholly owned subsidiary of Allied Structural Steel Companies, a partnership, composed of three corporations none of which was in any way related to plaintiff, The Trustee Corporation, or any members of the Glazer family.

In order to accomplish the aforesaid lease transaction, plaintiff and The Trustee Corporation by agreement dated November 14,1955, canceled the existing lease agreement between them relating to that portion of the premises at 2100 Ailor Avenue then under lease to plaintiff. The lease cancellation agreement called for a consideration of $200,000 to be paid by The Trustee Corporation to plaintiff in equal monthly installments over a period of 10 years commencing January 1,1956, in return for plaintiff’s canceling the lease of the portion of the premises which it then occupied and surrendering the premises to The Trustee Corporation, both effective December 31, 1955. The purpose of the aforesaid lease cancellation was to enable The Trustee Corporation to lease most of the Ailor Avenue property to Allied on more favorable terms than those of its preexisting lease to plaintiff. The agreed consideration for the cancellation was paid by a promissory note, dated November 14, 1955, in the sum of $200,000, payable without interest in equal monthly installments over a 10-year period beginning January 1, 1956.

The Exchange Building

11. During the period that plaintiff was lessee of the Ailor Avenue property, it made various leasehold improvements thereon including the construction of a steel fabrication shop, a warehouse and machine shop, a modern brick office building (the Exchange Building), and miscellaneous service buildings. The approximate cost of these leasehold improvements was $300,000. The various leases between plaintiff and The Trustee Corporation provided for all such leasehold improvements to become the property of The Trustee Corporation upon lease termination for any reason.

In particular, during 1953, plaintiff improved the Ailor Avenue property by constructing thereon the modern brick office building referred to herein as the “Exchange Building,” and a machine shop. The Exchange Building was joined to the existing office building made up of the old house and the former marble mill’s original office. The old house’s interior was completely remodeled as part of the construction of the Exchange Building, and the costs so incurred were charged to part of the cost of constructing that building. The offices in the former marble mill’s office were not remodeled in 1953.

12. In plaintiff’s 1953, 1954, and 1955 income tax returns it deducted depreciation on its 1953 leasehold improvements in the amount of $5,829.04 for the year 1953, $11,658.08 for the year 1954, and $11,658.08 for the year 1955. An examining revenue agent recommended an adjustment increasing plaintiff’s adjusted basis for its 1953 leasehold improvements by $40,257.65, which adjustment was subsequently made by plaintiff.

As of December 31, 1955, plaintiff’s unamortized cost or depreciable basis for the Exchange Building was $.124,752.36,

computed as follows:

Original cost of construction per plaintiff’s books_$100,081.84
Amount capitalized as a result of revenue agent’s adjustment_ 40, 257.65
Total cost basis_ 140,339.49
Less: Accumulated depreciation or amortization _ (15,587.13)
Exchange Building basis as of December 31, 1955_$124, 752.36

The lease agreement between The Trustee Corporation and Allied did not include the Exchange Building. Allied did lease for its use the original marble mill office which, although accessible through the Exchange Building, had not been improved when that building was built in 1953.

13. At the same time that it was agreed by plaintiff and The Trustee Corporation to cancel their existing lease, it was orally agreed that the plaintiff could continue to occupy the Exchange Building as long as it desired, rent-free. This separate agreement for rent-free occupancy of the Exchange Building was made contemporaneously with the overall lease cancellation and was effective on the same date, i.e., December 31,1955. It was a factor in calculating the fairness of the $200,000 to be paid to plaintiff by The Trustee Corporation for the lease cancellation. Plaintiff alone had constructed the Exchange Building, and as of December 31,1955, The Trustee Corporation had incurred no substantial expense in connection with the Exchange Building.

Upon advice of counsel the above described transaction was carried out by canceling the entire existing lease instead of by canceling the lease only as to that portion of the premises intended to be leased to Allied. Counsel recommended casting the transaction in that form because of possible difficulties which might attend upon a partial cancellation. In any event there was never any doubt in the minds of any of the principal officers concerned but that plaintiff would continue to occupy the Exchange Building, rent-free, for as long as it desired following the lease of plaintiff’s other Knoxville facilities to Allied. The existing lease was canceled to enable The Trustee Corporation to lease the Ailor Avenue working plant facilities to Allied, and it was never contemplated that Allied would lease the Exchange Building.

14. During the first seven months of 1956, plaintiff continued to occupy the Exchange Building and to use it as its general executive and administrative offices just as it had in 1953,1954, and 1955. These offices in the Exchange Building were used by plaintiff during said seven-month period (as in prior years) to perform the following functions: the same executives who had offices in the Exchange Building prior to January 1, 1956, the accounting department and the secretarial staff continued to be housed in the Exchange Building, and the general administration of plaintiff’s business was conducted from its offices in the Exchange Building; all bills were paid from the Exchange Building, except for emergency requisitions by the New Orleans division and a petty cash account; accounts were maintained at four banks, two in Knoxville and two in New Orleans, but only petty cash withdrawals were made from one New Orleans bank and less than ten checks were written on the other New Orleans account, all payroll checks and 3,160 non-payroll checks were written on the Knoxville accounts; the books and records, including the accounting books of original entry, were maintained in the Exchange Building; all corporate meetings of directors and stockholders were held in the Exchange Building; revenue agents examined plaintiff’s books and records in the Exchange Building; and the independent certified public accountants audited plaintiff’s financial reports in the Exchange Building. In sum, the record establishes that, during the period in question, the executive and management functions of Glazer Steel Corporation, as distinguished from its steel warehousing, trading, and fabrication operations, were essentially performed by its officers and employees located in the Exchange Building.

As contrasted to prior years, plaintiff’s business activities in New Orleans were increasing while its Knoxville activities were decreasing. However, during the period involved, plaintiff’s New Orleans office did not maintain a second set of plaintiff’s books or perform any accounting functions other than typing invoices to plaintiff’s New Orleans customers. All payments by customers on these invoices and their accounts were controlled in the general offices in the Exchange Building. There also were inventory and personnel records kept in New Orleans, but that office had no accounting department as such and depended upon the Knoxville office for the performance of that function.

15. The Exchange Building continued to serve as the general offices of the plaintiff until November 1959, when the books and records, furniture and equipment, accounting office and all remaining administrative and executive functions were removed from Knoxville to New Orleans, Louisiana. At this time plaintiff abandoned its business use of the Exchange Building. This move to New Orleans was not contemplated at the time the lease to Allied was negotiated, nor was it contemplated during the tax year in question.

16. During the first seven months of 1956, plaintiff paid for repairs to the Exchange Building and all utility bills and was allowed these items as deductions on its Federal income tax return. It also claimed and was allowed depreciation on office furniture and equipment in the Exchange Building for the first seven months of 1956. The revenue agent who audited plaintiff’s 1956 and 1957 returns required that certain items relating to improvements to the Exchange Building, which had been expensed by plaintiff, be capitalized and depreciated as leasehold improvements on the ground that plaintiff was a tenant at will of the Exchange Building.

17. During the first seven months of 1956, plaintiff continued to maintain its general offices in the Exchange Building at Knoxville for good business reasons. Two of its principal officers, its assistant secretary and office manager, other operating personnel and its trained accounting staff lived in Knoxville and were available there to serve the corporation’s needs. Also, plaintiff’s principal officers who lived in Knoxville were actively engaged not only in the management of plaintiff’s business affairs but also in those of plaintiff’s wholly owned subsidiary and other related Glazer enterprises. For these purposes, Knoxville was a more central and convenient location than New Orleans. In addition, the Exchange Building was a modern office building with the equipment to meet the requirements of plaintiff’s general offices and was rent-free, whereas the New Orleans facilities owned by plaintiff were relatively small and would have required enlargement to accommodate the plaintiff’s office personnel and equipment.

18. In addition to their performance of strictly management functions, during the first seven months of 1956, plaintiff’s officers also carried on active business operations in plaintiff’s behalf at Knoxville. For the most part these operations comprised the handling of a scrap metal business from a rented warehouse on Jackson Avenue in Knoxville. Plaintiff’s scrap purchases in Knoxville during the period amounted to $102,793.73, and its scrap sales for the same period totaled $196,235.73. It also sold warehouse steel in Knoxville to Allied during this period amounting to $321,-597.09. Plaintiff’s top officials in Knoxville also devoted considerable time to the development of Swifton Shopping Center, a venture of plaintiff’s wholly-owned subsidiary, General Development Corporation, which filed a consolidated Federal income tax return with plaintiff for the fiscal year 1956.

19. During 1955 and prior years, plaintiff had paid the fire, liability, comprehensive coverage, boiler and machinery insurance costs for all the Ailor Avenue property under lease to it. In addition, it had paid local and state property taxes thereon. This arrangement changed following the cancellation of plaintiff’s lease. For the first seven months of 1956, plaintiff paid the City of Knoxville, state and county personal property taxes on the equipment and furniture in the Exchange Building. It also paid that portion of the boiler and machinery insurance which was attributable to the Exchange Building. The city, state, and real property taxes and fire insurance expense attributable to the Exchange Building, however, were paid by The Trustee Corporation.

20. During the first seven months of 1956, as they had in prior years, plaintiff’s officers and employees performed management, bookkeeping, and related services for other corporations in which the Glazer brothers had an interest. These services were performed in the Exchange Building free of any charge. Except for General Development Corporation, during this period most of these other corporations were principally engaged in real estate projects which did not then require extensive management guidance or bookkeeping services. Later it was determined by the Glazer brothers that these services had become sufficiently substantial as to warrant a charge therefor by plaintiff. This determination was made voluntarily by plaintiff’s officers and not at the instigation or suggestion of agents or employees of the Internal Revenue Service.

21. As explained in finding 12, supra, pursuant to the recommendation of an examining revenue agent, an adjustment was made increasing plaintiff’s 1958 leasehold improvements by $40,257.65. This adjustment was attributable in its entirety to the cost of construction of the Exchange Building. The revenue agent characterized the adjustment as “leasehold improvements” without specifying whether the Exchange Building or a machine shop also constructed by plaintiff in 1952 and completed in 1953 was to be charged with the items capitalized. The agent’s work papers which would show the specific items capitalized could not be located by defendant. However, the conclusion that the adjustment was chargeable in its entirety to the cost of the Exchange Building is justified by the following considerations:

(a) Plaintiff’s officer who conferred with the revenue agent-stated that the agent examined major subcontract files and records relating to the construction of the Exchange Building.

(b) Plaintiff’s records, and the recollections of its officers, show that the plumbing, heating, and air conditioning for the Exchange Building were performed by Cureton Plumbing & Heating Company for an adjusted contract price of $83,960 and that the electrical work on the building was performed by the Tennessee Armature & Electric Company for an adjusted price of $27,881.04.

(c) On plaintiff’s books and records, $12,334.15 of the Cureton Plumbing & Heating Company contract and the entire amount of the Tennessee Armature & Electric Company work were not originally charged to the cost of construction of the Exchange Building but were expensed.

(d) These two items, which were part of the cost of construction of the Exchange Building, total $40,215.19 or within $42.46 of the total adjustment made by the revenue agent.

(e) The plumbing, heating, and air conditioning items could not be attributable to the machine shop which does not contain such facilities.

(f) A recent review of plaintiff’s records revealed no costs for the machine shop which were not previously reflected on plaintiff’s leasehold improvements ledger cards.

(g) A former officer of plaintiff, who has not had access to its books and records since 1959, but who negotiated the adjustment in question with the revenue agent, when asked to identify the items capitalized by the agent, recalled that they comprised the Cureton and Tennessee Armature bills for the Exchange Building.

22. As of January 1, 1956, the Exchange Building had a remaining useful life for tax purposes of twenty years. As of that date, $15,587.13 of the total depreciation or amortization allowed with respect to prior years on account of plaintiff’s 1953 leasehold improvements was attributable to the Exchange Building, said figure being calculated as follows:

Item Year Per After Exchange Building Return Audit Depreciation
$151,555.09 1953. $5,829.04 $3,367.92 $2,222.83( 66%)
40,257.65 1953. 894.60 894.60(100%)
151 555.09 1954.... 11,658.08 6,735.84 4,445.65( 66%)
40,257.65 1954. 1,789.20 1,789.20(100%)
151,555.09 1955. 11,658.08 6,735.84 4,445.65( 66%)
40 257.65 1955. 1,789.20 1,789.20(100%)
Total Depreciation of the Exchange Building Allowed in Prior Years. 15,587.13

23. Jerome Glazer, who was in charge of plaintiff’s operations in New Orleans, consistently maintained to his brothers, Guilford and Louis, that all of plaintiff’s managerial functions and accounting records should be located in New Orleans where its steel business was being operated. Although they gave consideration to Jerome’s arguments in this regard, for a number of years Guilford and Louis rejected Jerome’s request. Both men had their families and homes in Knoxville; they were actively engaged not only in plaintiff’s affairs but in the affairs of other Glazer enterprises located in the general area; they had a complete accounting organization, including personnel and equipment, located in the Exchange Building with adequate office space to which plaintiff was entitled rent-free ; and they were aware that the office space in New Orleans was inadequate for their purposes. Taking all the foregoing into consideration, Guilford, Louis, and plaintiff’s comptroller persisted in the opinion that the Exchange Building was the best place for plaintiff’s management and accounting offices.

However, sometime in 1959, Louis Glazer changed his mind. At a stockholders’ meeting in October 1959, he joined Jerome in voting to move to New Orleans all of the books and records, and all accounting equipment, furniture and fixtures of plaintiff and its wholly owned subsidiaries. According to the minutes of the meeting, the motivating cause behind the move was that economies could be effected in the operations of plaintiff by consolidation of the records. Luring November 1959, plaintiff vacated its offices in the Exchange Building. Thereupon, it moved its books and records, furniture and equipment, and transferred certain key personnel from Knoxville to New Orleans. Louis Glazer also moved his family and residence to New Orleans.

Facts Relating to The Estoppel Issue

24. On June 15, 1956, plaintiff filed its Federal income tax return for the calendar year 1955 in which return it reported $105,517 tax liability and tax due in the amount of $90,517. The District Director of Internal Revenue, Nashville, asserted a $14,327.55 delinquency penalty against plaintiff for late filing of its 1955 return. In response to an invitation by the Internal Revenue Service, plaintiff filed on August 13, 1956, an offer in compromise of the penalty for the least amount which the Service indicated it would consider, namely, $1,357.76.

25. Thereupon, Internal Eevenue Agent W. H. Graham began an examination of plaintiff’s tax returns for the calendar years 1953, 1954, and 1955. This examination was conducted during the fall of 1956 in plaintiff’s offices in the Exchange Building. He completed his audit on or about November 5, 1956, and mailed his report to plaintiff in which he proposed a tax deficiency for 1955 in the amount of $19,586.03. This tax, plus a delinquency penalty for late filing, was assessed and paid during January 1957.

In its 1955 return, plaintiff did not disclose the fact that it had entered into an agreement with The Trustee Corporation in November 1955 cancelling the existing lease on the Ailor Avenue property as of December 31, 1955. However, during his audit of the return, Agent Graham had full access to plaintiff’s books and records which contained references to the lease cancellation. His report dated November 5, 1956, shows that he was aware of the lease of the Ailor Avenue property to Allied, but he appears to have been under the mistaken impression that the lessor in the transaction was plaintiff.

On April 4, 1957, the Chief of the Compromise Branch, Internal Eevenue Service, mailed plaintiff a letter which accepted plaintiff’s August 13,1956, offer in compromise for 1955 in tbe revised amount of $1,651.53.

26. On or about March 15,1957, plaintiff filed its Federal income tax return for the short fiscal year January 1 to July 31, 1956, and paid tax in the amount of $14,081.59. In this return (which is the one for the period involved herein), plaintiff claimed a deduction for a loss in the amount of $111,953.76 which it described in the return as “Leasehold Improvements Abandoned.” In its returns for prior years, plaintiff had claimed depreciation deductions for the Exchange Building, inter alia, under a general heading in its depreciation schedule of “Leasehold Improvements.” On the return in question, however, the item of “Leasehold Improvements” was eliminated entirely from the depreciation schedule, and no depreciation was claimed therefor. This was consistent with a journal entry of July 31, 1956, which eliminated the leasehold improvements from plaintiff’s general ledger account No. 251 entitled “Fixed Assets— Leasehold Improvements.”

On or about October 15, 1957, plaintiff filed its Federal income tax return for the fiscal year ended July 31, 1957. As in the case of the short period return described above, in this fiscal 1957 return, plaintiff’s depreciation schedule disclosed no item of “Leasehold Improvements” and no depreciation was claimed therefor.

27. Plaintiff’s tax returns for the fiscal periods ending July 31, 1956, and July 31, 1957, were assigned for audit to Itevenue Agent J. N. Hunley. He conducted his examination of these returns during the summer of 1958 in plaintiff’s offices in the Exchange Building.

By letter dated September 23,1958, addressed to plaintiff, Revenue Agent Hunley set forth proposed adjustments in tax including the disallowance for fiscal year 1956 of the $111,953.76 abandonment loss claimed on plaintiff’s 1956 return for the cancellation of the lease involved in this case.

In disallowing the abandonment loss for the period in question, Revenue Agent Hunley advised plaintiff’s officers at a meeting in the Exchange Building that a loss with respect to the Exchange Building was not a proper deduction in 1956 because plaintiff had continued to use and occupy the building as its general offices and that, therefore, the loss would be a proper deduction only in the year that plaintiff abandoned such use and occupancy of the Exchange Building.

28. That Revenue Agent Hunley entertained no doubt as to plaintiff’s continued use and occupancy of the Exchange Building during the first seven months of 1956 is further evidenced by the following:

(a) Plaintiff had expended $572 for additional air conditioning equipment in the Exchange Building. Agent Hun-ley disallowed plaintiff’s deduction of this amount and required it to be capitalized as a leasehold improvement.

(b) He proposed no adjustments to plaintiff’s deductions for depreciation on its furniture and equipment in the Exchange Building, for the cost of utility services to the building, for the cost of boiler and machinery insurance attributable to the building, and for the salaries of officers and employees who occupied offices in the building.

29. At a conference between plaintiff’s representatives and Internal Revenue Service conferees held in October 1958, plaintiff proposed that the tax consequences resulting from the cancellation of the lease at issue in this case be resolved by treating the transaction in the following manner:

(a) Plaintiff would pay for the year 1955 a tax at long term capital gains rates on the $200,000 to be paid to it by The Trustee Corporation,

(b) Plaintiff would be entitled to an abandonment loss in the amount of $59,014 for the year 1955, this amount being the unamortized portion of the leasehold improvements other than the Exchange Building, and

(c) Plaintiff would be entitled to take a deduction for depreciation for the unamortized cost of the Exchange Building for the year 1956 and subsequent years based on a useful life for the Exchange Building of twenty years, as of January 1,1956.

In February 1959, the District Director’s Office in Nashville rejected the above proposal and requested technical advice from the Tax Rulings Division, I.R.S., in Washington regarding the proper tax treatment of the lease cancellation agreement between plaintiff and The Trustee Corporation.

30. On April 25,1960, the Tax Rulings Division responded to Nashville’s request by a memorandum of technical advice. Pertinent parts of that memorandum follow:

Based upon our consideration of the facts, we have concluded that there is no basis for Glazer’s contention that it is entitled to an abandonment loss to the extent of the unrecovered cost of the leasehold improvements. The term “abandonment” for tax purposes is ordinarily construed as meaning the discarding of property because it has no further profitable business use. Such term cannot be properly applied to the instant case. Where property is sold for a valuable consideration, it is not abandoned. Thus, Glazer did not abandon the leasehold when it exchanged it for a valuable consideration, $200,000.
Upon further study of the issue, it is our conclusion that the cancellation of the lease qualifies as an exchange within the meaning of section 1.1241-1 (a) of the Income Tax Regulations. Inasmuch as this leasehold was used for business purposes, it would constitute a non-capital asset, as well as property of a character subject to depreciation. Therefore, this leasehold meets the definition of property under section 1231 of the Internal Revenue Code, so that the gain or loss on the sale or exchange thereof is governed thereby.
‡ í5 ‡ $
Under the terms of the lease cancellation agreement entered into November 14, 1955 between Trustee and Glazer, Glazer agreed to “immediately cancel the lease hereinabove referred to as Exhibit ‘A’, such cancellation to become effective as of the 31st day of December, 1955, and to surrender the premises therein described as of the date of such cancellation.” It is our conclusion that the lease cancellation agreement covered the entire leasehold, rather than only the portion pertaining to the steel fabrication operations. Furthermore, since all the eyents occurred during the taxable year ended December 31,1955 to fix the right of Glazer to receive the $200,000 for cancellation of the lease and Trustee’s obligation to pay the $200,000, Glazer should have reported the transaction in its income tax return for the calendar year ended December 31, 1955 since it is an accrual basis taxpayer.
* * * the $29,513.76 loss on the exchange of the leasehold is allowable as an ordinary loss for the taxable year ended December 31, 1955. However, no refund can be made to Glazer, by reason of the allowance of such loss, because the Service accepted an offer in compromise of a delinquency penalty with respect to Glazer’s 1955 income tax return, which action closed the year for the purpose of assessing any further deficiency or refunding any part of the tax previously assessed and collected.

Ultimate Findings or Fact

31. Coincident with the cancellation of its lease with The Trustee Corporation, plaintiff entered into an oral agreement with that corporation under which plaintiff was entitled to continue to occupy the Exchange Building commencing January 1,1956, for as long as it desired and without payment of rent. Plaintiff continued to occupy the Exchange Building until November 1959, when it removed its general administrative offices to New Orleans, Louisiana.

32. None of plaintiff’s officers or employees ever made any efforts to disguise or conceal the fact of plaintiff’s continued use and occupancy of the Exchange Building as its general administrative offices subsequent to December 31, 1955. All actions taken by agents of the Internal Bevenue Service have been consistent with knowledge on their part that, subsequent to December 31,1955, plaintiff did in fact continue to use and occupy the Exchange Building as its general administrative offices.

CONCLUSION OF Law

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and judgment is entered to that effect with the amount of recovery to be reserved for further proceedings under Rule 47 (c) in accordance with this opinion. 
      
      The opinion, findings of fact, and recommended conclusion of law are submitted under tbe order of reference and Rule 57(a).
     
      
       Plaintiff would Rave been surrendering leasehold Improvements having an original cost of about $300,000 with a depreciated cost of about $230,000, plus the opportunity to receive a very substantial rental income from Allied for eight and one-quarter years, all for the sum of $200,000.
     
      
       Defendant’s suggestion that this contractual right arising out of an oral agreement was unenforceable under the Tennessee Statute of Frauds may, or may not, be true. Cf. Interstate Co. v. Bry-Block Mercantile Co., 30 F. 2d 172 (W.D. Tenn., 1928). But the relevancy of the suggestion here Is not at all apparent. This suit Is not a contest between the landlord and the tenant, and In tax cases only the parties to the allegedly tainted contract may invoke the statute of frauds with respect thereto. See Mustard v. United States, 140 Ct. Cl. 205, 216, 155 F. Supp. 325, 332 (1957) ; Charlotte Union Bus Station, Inc. v. Commissioner, 209 F. 2d 586, 589 (4th Cir., 1954), and J. N. Wheelock, 16 T.C. 1435, 1442 (1951).
     
      
       Tlie failure appears to have been due to plaintiff’s original theory (now conceded to have been erroneous) that the cancellation took effect on January 1, 1956, and therefore constituted a 1956 transaction.
     
      
       With full knowledge of the facts, he had asserted that no write-off was available to plaintiff during the periods involved because plaintiff had not abandoned the Exchange Building and, therefore, must continue to recover its unamortized cost through the annual allowances for depreciation. Essentially, this is plaintiff’s position here. See findings 26, 27, and 28, infra.
      
     
      
      The $151,555.09 item consists of both the $100,081.84(66%) cost of the Exchange Building and the $51,473.25(34%) cost of the machine shop, as capitalized on the books of plaintiff in 1953. Therefore only 66% of the depreciation of 1953 leasehold improvements taken on prior years’ tax returns is attributable to the Exchange Building.
     
      
       See finding 21, supra.
     
      
       In August and September 1969, The Trustee Corporation entered into lease agreements for the rental of office space in the Exchange Building to the Home Insurance Company and the Walter Electrical Company. It is not clear from the record whether these leases were made in anticipation of plaintiff’s move to New Orleans, or whether they simply covered office space in the building which plaintiff was not using.
     
      
       Guilford Glazer moved his residence to California. He had failed to be reelected as plaintiff’s chief executive officer, and a bitter family dispute had ensued.
     
      
       Defendant’s records indicate that plaintiff had filed a tentative return for 1955 on March 23. 1956, and at the same time had paid an estimated tax of $15,000.
     
      
       Following the acceptance by the Service of plaintiff’s offer in compromise, referred to below, the penalty of $2,937.90 was refunded.
     
      
       The lessor, of course, was The Trustee Corporation. See finding 10, supra.
      
     
      
       Plaintiff’s initial offer of $1,357.76 (see finding 24, supra) had been amended to $1,651.53 so as to take Into account the 1955 deficiency in tax proposed by Agent Graham.
     
      
       The improvements were not identified by name but only by year of construction.
     
      
      
         In his Revenue Agent’s Report dated May 10, 1960, Agent Hunley described plaintiff’s use and occupancy of the Exchange Building as “tenants at will.”
     
      
      Neither he nor Revenue Agent Graham were called to testify at f;he trial herein.
     