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
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
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,
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
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
(a) Section 165(a) of the Code, or
(b) Section 167 of the Code?