Demirjian v. Commissioner

Sisters Anne and Mabel Demirjian (plaintiffs) each owned half the stock in Kin-Bro Realty Corporation, which owned an office building in Newark, New Jersey. In 1960 the sisters dissolved the corporation and formed a partnership called Kin-Bro Realty Company and conveyed the building to the partnership. The sisters did not execute a formal partnership agreement but did file a trade-name certificate to conduct a real estate investment business under that name at the Newark office building. Two years later, the city condemned the building and distributed the net proceeds to the sisters. Instead of reporting gain on the building, the sisters elected to take advantage of § 1033 of the tax code, which allows taxpayers who have property involuntarily converted to replace it with equivalent property within a specified time and avoid recognizing gain. The taxpayer recognizes gain only to the extent that the conversion proceeds exceed the price of the replacement property. However, the sisters each bought new properties as individuals instead of partners. Anne bought a similar building within the time allotted. Mable did not find suitable property in time but applied for and received an extension from the district director of internal revenue for Newark, then purchased suitable property. Neither sister reported gain on her 1962 tax return. In 1964, the sisters filed amended joint returns with their husbands reporting the proceeds from the condemned building less the cost of the replacements as capital gain. The tax commissioner assessed deficiencies, claiming that only the partnership could elect not to recognize gain by purchasing replacement property under § 1033. The tax court affirmed that finding. The sisters appealed, arguing that (1) they owned the Newark office building as tenants in common and not as partners, (2) they made the § 1033 elections as partners and not as individuals, and (3) estoppel required the Internal Revenue Service (IRS) to recognize the election.