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September 22, 1971


The opinion of the court was delivered by: Will, District Judge.


This is an action to recover federal income taxes. The record in this case consists of the pleadings, a stipulation filed June 16, 1971, and the depositions of John R. Thompson and Theodore P. Parker submitted to the Court in lieu of a trial. The basic issue in this case is whether plaintiff sustained a loss which is deductible from ordinary income in computing its federal income tax under either Section 165 or Section 167 of the Internal Revenue Code. We find that plaintiff sustained no such deductible loss and, consequently, that it is entitled to no recovery in the instant proceeding.


The relevant facts are as follows:

1. The taxpayer is a corporation duly organized and existing under the laws of the State of West Virginia with its principal office at 29 West Randolph Street, Chicago, Ill. 60601.

3. For the calendar year 1962, the taxpayer filed a federal income tax return showing a consolidated net operating loss which constituted a net operating loss carryback to the year 1959 in the amount of $404,553.72. This carryback loss resulted in allowance by the government of a tentative carryback adjustment and refund of 1959 tax in the amount of $218,453.61.

4. Thereafter, upon audit of the return of the taxpayer for the year 1962, the government adjusted the 1962 tax loss and the carryback to the year 1959 and asserted a deficiency for the earlier year of $105,300 in tax principal and $22,579.67 in interest. The assessed tax and interest, plus additional accrued interest to time of final payment of the assessment of $2,789.82 were satisfied by payments made and credits applied, beginning with a payment by the taxpayer of $13,493.70 on October 3, 1966. The remainder of the payments ($113,928.29) were made on or after August 1, 1967.

5. On July 28, 1969, the taxpayer filed with the District Director of Internal Revenue, Chicago, Illinois, a claim for refund of $105,300 in assessed tax, plus deficiency interest and interest allowable by law, attributable to taxes paid for the calendar year 1959. Since the claim for refund was filed more than three years after the return for 1962 was filed and more than two years after the first payment of $13,493.70 was made on August 3, 1966, the claim for refund was untimely as to that payment of $13,493.70, pursuant to Section 6511(a) and (b) of the Internal Revenue Code. Consequently, this Court lacks jurisdiction over that amount.

6. With regard to the remainder of the assessment, in excess of the original payment of $13,493.70, the claim for refund was timely, since it was filed within a two-year period after payments made. Accordingly, this Court has jurisdiction over the claim for refund to the extent of the assessment and payments of $113,928.29 pursuant to Title 28, United States Code, Section 1346(a)(1).

7. The deficiency assessment for the year 1959 was attributable to the government's disallowance of a portion of the net operating loss carryback from the year 1962 in the amount of $195,000. This $195,000 represented a loss shown on the 1962 tax return and claimed to have been incurred upon the partial worthlessness of a collection of paintings owned by the taxpayer and utilized by it in the operation of a trade or business carried on in the name of Henrici's Randolph Street Restaurant located at 61-65 and 67-71 West Randolph Street, Chicago, Illinois.

8. The principal business of the taxpayer and its subsidiary corporations in the tax years in controversy herein and during all prior periods extending back through 1929 was the operation of various restaurants or restaurant chains. In 1929, the taxpayer acquired from the Philip Henrici Co. an established family-owned restaurant business (hereinafter referred to as either "Henrici's" or "Henrici's Restaurant") conducted in downtown Chicago for many years by Philip Henrici Co. The Henrici's Restaurant, as it was commonly known, had been started by Philip Henrici in Chicago in the year 1868. Its principal location from 1868 to 1962 was on West Randolph Street, Chicago. It had a unique decor, character and quality identified with its early family history and the "flavor" of its Victorian period origin.

9. Over a period of many years prior to 1929, commencing before the death of Philip Henrici in 1906, the Philip Henrici Co. had acquired and used in the decoration of its Randolph Street premises a collection of 57 large oil paintings, five engravings and two prints by 19th Century artists (hereinafter referred to as the "1929 paintings").

10. These 1929 paintings were acquired by the taxpayer in 1929 as part of the assets of Henrici's Restaurant and were assigned a value at that time for basis purposes of $252,500 which the parties agree was both the cost basis for all the paintings (under section 1012 of the Code) and the adjusted basis for the paintings (under section 1011 of the Code) on January 1, 1962.

11. The leasehold and improvements in which Henrici's Restaurant was located were condemned by the City of Chicago in the year 1962 for the construction of a new City Hall and Courts Building to occupy the entire block in which the premises were located. Henrici's Restaurant was closed pursuant to this condemnation on August 15, 1962.

12. From the condemnation proceedings which occurred during the taxable year 1962, the taxpayer recovered an award in the amount of $89,000 for its loss of the leased business premises and fixtures therein. The parties agree that the taxpayer neither asked for nor did it receive any compensation from the condemning authority for any loss in value of any paintings. The taxpayer's claim that a loss occurred in 1962 is grounded upon the fact that the condemnation terminated the business in which the paintings were utilized, at a time when the market value of the paintings was less than their adjusted basis.

13. From the moment of acquisition in 1929 until sometime in 1962, the paintings were used by the taxpayer in its conduct of Henrici's Restaurant at 61-65 and 67-71 West Randolph Street. The parties agree that both the cost basis (under section 1012 of the Code) and the adjusted basis (under section 1011 of the Code) on January 1, 1962, of forty-two enumerated paintings from the 1929 collection which were appraised five days prior to Henrici's closing on August 15, 1962, was $184,699.04. The parties further agree that the fair market value of these paintings immediately after the condemnation was $44,150. This figure is based upon an appraisal report made by Irving S. Tarrant, a qualified art appraiser, on August 10, 1962. At the time of the condemnation of the premises in 1962, the physical condition of all of the paintings was good, and not significantly different from their condition at the time the paintings were acquired in 1929. Paintings of similar quality, style and atmosphere were generally available for purchase at art galleries in Chicago and New York. Hanzel Galleries of Chicago, which ultimately sold the paintings in issue in 1964, holds sales of generally similar paintings three or four times a year.

14. From the time of the condemnation in 1962, until October 18, 1964, the taxpayer held the paintings for disposition in the most profitable (or least unprofitable, as the case may be) manner possible. On October 18, 1964, the 1929 paintings, together with the remainder of the paintings acquired prior to 1929 having a total adjusted basis of $252,500, were sold through a public auction at the Hanzel Galleries. The Internal Revenue Service treated the difference between the basis of the paintings of $252,500 plus the sales commissions paid of $10,083.75, and the sales proceeds received of $40,335.00, as a capital loss in the amount of $222,248.75 in 1964, the year of sale.

15. The parties have stipulated that the only question to be decided in this case is:

  Did the taxpayer, during its taxable year ended
  December 31, 1962, sustain a loss — with
  respect to those 1929 paintings located at Henrici's
  Restaurant — which loss is deductible from
  ordinary income in computing its Federal income tax
  under either

(a) Section 165(a) of the Code, or

(b) Section 167 of the Code?

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