The second ratio calculated was based on the total acres retained in relation to the total acres purchased. Under this approach, the percentage for the retained portion of the property retained was determined to be 23.3 percent of the total property purchased (5.916 acres divided by 25.306 acres). The ratios determined were then applied to the total purchase price, or the total purchase price reduced by a value assigned to the residence. Calculations were made with an assigned value of $50,000 to the residence and with an assigned value of $75,000 to the residence. By application of the first ratio of 25.2 percent (based on developable land), the following allocations of basis to the retained property were tentatively determined: Without assigning a value to the residence.... With an assigned value of $50,000 to the residence_. With an assigned value of $75,000 to the residence_ $350, 000 390, 200 408, 900 By application of the second ratio of 23.3 percent (based on all land), the following allocations of basis to the retained property were tentatively determined: Without assigning a value to the residence_. With an assigned value of $50,000 to the residence_. $326, 000 364, 550 383, 725 Consideration was then given to the Shattuck Company appraisal as of April 28, 1969. In that appraisal, the value of the retained property was determined to be $400,000. The final consideration was to calculate the net amount invested by the President in the retained portion of the land. This was determined by Coopers and Lybrand to be $400,700. In formulating a final opinion as to the portion of the purchase price allocable to the retained property, the staff was advised by Coopers and Lybrand that the amounts considered most relevant were: Allocation based on developable land with an assigned value of $50,000 to the residence.. Allocation based on developable land with an assigned value of $75,000 to the residence___. Shattuck Company appraisal. $390, 200 408, 900 400, 000 400, 700 Considering the range of these four amounts considered most relevant, a final determination of the portion of the purchase price allocable to the retained property fixed the amount at $390,000. The purchase price allocable to the property sold was determined to be $1,010,000 by subtracting from the total purchase price of the Cotton estate ($1,400,000) the cost allocable to the property retained ($390,000). The total basis of the property sold was then determined to be $1,131,630. This total basis was arrived at by adding that portion of the Cotton estate purchase price allocated to the property sold ($1,010,000); that portion of the commission survey, and other costs allocated to the property sold ($21,630); and the cost of the Elmore property ($100,000). Accordingly, it was determined that a gain of $117,370 resulted from the sale of the property. The gain was determined as follows: The staff believes that the Coopers & Lybrand determination is subject to question on several grounds. First, the allocation of total cost basis based on acreage does not reflect relative values. These calculations are based on the assumption that each acre is of equal value. Second, the reconstructed purchase price calculation assumes that the sale to B & C Investment Company was an arm's-length transaction. This is open to question and in any event would represent the relative values at the time of sale not at the time of purchase. Third, the appraisal considered by Coopers and Lybrand is understood to be more in the nature of an opinion letter than an appraisal. 5. Summary Under the tax law, the total cost basis of the Cotton estate must be "equitably apportioned" between that portion of the Cotton estate sold 18 to B & C Investment Company and that portion of the Cotton estate retained. The staff believes that an equitable allocation in this case must be one that reflects the relative fair market values of these portions at the time of the purchase of the Cotton estate, on July 15, 1969. Although the estimates of actual fair market values varied considerably, the important element is the relationship between the estimated value of the portion that was sold in 1970 and the portion that was retained. Of the four allocations that were made, the table below indicates that three of these allocations arrived at similar relative values. ALLOCATION OF COTTON ESTATE COST BASIS FOR PURPOSES OF COMPUTING GAIN ON 1970 SALE Mr. Blech, per tax return. Committee Staff. Coopers & Lybrand. Adjusted basis Gain or loss1 2 $1, 149, 000 0 $109, 163 117,836 117, 370 1 Amount received by the President ($1,249,000), less the sum of: (1) allocated portion of Cotton estate basis and (2) Elmore property basis. 2 Amount stated on the President's return ($1,249,000) less basis of the Elmore property ($100,000). 18 A question can be raised whether less than the entire cost of the 24 acres sold to B & C Investment Company should be used in computing the gain on the sale, since the President has had the use and the possession of the 24 eres ever since the date of the sale. The issue is whether the principle presented in the case of Eileen M. Hunter, 44 T.C. 109 (1965), applies. In that case the taxpayer sold real estate to the United States Government and retained a life estate. In computing the gain on the sale the taxpayer used her entire cost of the real estate. The Tax Court held that the cost basis of the property had to be allocated between the interest sold and the interest retained, based upon their relative fair market values at the time of sole. It is clear that since the sale (more than three years ago) the President has had as much use and enio' ment of the 24 acres as he would have had without the sale. He still has the use of the golf course, and the security fence still surrounds the entire original property sold. At a briefing of the press at the White House on December 7, 1973, Mr. Ziegler stated with respect to the excess acreage: "The President did not want all that land around. He wanted 5.9 acres. It was beneficial to the President not to have that other surrounding property sold. So, Bebe and Abplanalp came in and participated in the trust." Under the sales agreement, the buyers are not entitled to deeds to the property until the Cotton mortgage is discharged. The mortgage is not due and payable in full until July 15, 1974, so the President cannot be forced to provide deeds prior to that date. If the sales agreement were to be construed so that the seller is retaining possession and enjoyment of the property from the date of sale to July 1, 1974, a period of 3 years and 7 months, then under the rule of the Eileen M. Hunter case only a portion of the cost of the 24 eres should be used as the basis in computing the gain on the sale. (Under the 3% percent tables used by the I.R.S. in 1970, the value of the right to use $1 for 3 years and seven months was $.11598, and so under this method 88.402 percent of the fee simple basis would be used in computing gain on the sale.) Although there may have been an oral agreement or an understanding that the B & C Investment Company would not develop the land so log as the President desired, it would seem that such an agreement or understanding would not have been enforceable. No Investment Company would not develop the land so long as the President desired, it would retention of use and possession was contained in the written sales agreement. This sales agreement provided that no other agreements or understandings, oral or written, existed which were not set forth. Accordingly, the staff has concluded that the principle of the Eileen M. Hunter case should not be applied in computing the gain on the sale of the 24 acres. PART THREE NONRECOGNITION OF GAIN ON THE SALE OF PRESIDENT AND MRS. NIXON'S NEW YORK CITY RESIDENCE IN 1969 1. Scope of Examination Facts concerning the sale of the New York apartment and purchase of San Clemente On May 14, 1963, President and Mrs. Nixon purchased an apartment in a New York City cooperative apartment building located at 810 Fifth Avenue. Because the building was organized as a cooperative, this transaction was accomplished by selling to the President 770 shares of common stock in the apartment building corporation. The President paid $100,000 for this stock. President and Mrs. Nixon lived in that apartment from 1963 until just before the President's inauguration in 1969. It was reported on the President's 1969 tax return that he spent $66,860 for improvements to the apartment. According to the President's counsel, Kenneth Gemmill and H. Chapman Rose, just before the President's inauguration in 1969, the Nixons moved out of their New York apartment and did not return. At the same time, President and Mrs. Nixon began to look for a house in California. In March 1969, the Franklin National Bank, acting as Trustee for the President and his wife, requested any parties interested in purchasing a fifth floor apartment at 810 Fifth Avenue in New York City to submit written bids. The closing on the sale of the apartment was completed by the Franklin National Bank on June 30, 1969, with the property being sold for $312,500. The President's 1969 tax return reported that he realized a gain of $142,912, an amount he calculated by subtracting the $100,000 purchase price, the $66,860 cost of improvements and $2,728 in legal fees and miscellaneous expenses of sale from the sales price.' On July 15, 1969, the President purchased for $1.4 million a 27acre property in San Clemente, California, known as the Cotton estate;2 additional acreage adjacent to the estate was bought in October 1969. The additional acreage and much of the acreage surrounding the residence grounds were sold to B&C Investment Company in December 1970. The remaining property, consisting of the homesite and the immediately surrounding acreage and beach, is still owned by the President through the trust. Shortly after acquiring the San Clemente estate, according to the President's counsel, the Nixons had it redecorated and moved most of their personal effects and some of their furniture there from New York. The President obtained memberships or honorary memberships in a number of civic and social clubs in the Southern California area. He and Mrs. Nixon registered to vote in California on January 8, 1970. The President has assigned substantial responsibility for his personal legal business to a California law firm and to a Čalifornia. ! There are minor discrepancies between these tax return figures and the figures contained in the brief submitted by the President's counsel. For purposes of this report, the staff has used the tax return figures. The purchase was made through means of a trust of which the President and his wife were sole beneficiaries with Title Insurance and Trust Company of Los Angeles trustee. certified public accountant. The staff understands that the President's will indicates that he is a resident of Orange County, California. According to the President's counsel, the President and Mrs. Nixon spent 35 days at San Clemente in 1969, 50 days in 1970, 50 days in 1971, 34 days in 1972, and 42 days in 1973. During the period beginning when the San Clemente property was purchased and ending one year after the sale of the New York apartment (July 15, 1969 through May 31, 1970) it is stated that the Nixons spent 49 days at San Clemente. Treatment of Gain on the Sale of the New York City Apartment. On the tax return the President filed for 1969, the profit of $142,912, which was realized on the sale and is subject to long-term capital gain treatment, was deferred because of the claim that the San Clemente residence was to be the principal residence of the President. The tax return also indicated that there was no business use at any time of the New York City apartment and that there was no business use of the San Clemente residence. Questions are raised below whether the treatment of the gain on the New York apartment on the 1969 tax return was appropriate. 2. Analyses of Tax Treatment and Staff Conclusions The nonrecognition question Section 1034 (a) of the Internal Revenue Code provides for the nonrecognition of any gain received upon the sale of property "used" by the individual as the "principal residence" if (and to the extent that) an amount equal to the sales price is reinvested within one year of the sale in another property which is "used" by him as his "principal residence." If nonrecognition treatment is obtained, the tax is postponed and the taxpayer's basis in the property purchased is reduced by the amount of the deferred gain. Section 1034 (f) provides that owners of stock in cooperative housing corporations (like the corporation owning the President's New York apartment) can qualify for nonrecognition treatment. However, as with any other form of property ownership, the cooperative owner must have used the old property as his principal residence and within one year must use the new property as his principal residence. In addition, where the old or new residence is used in part as a residence and in part for other purposes (such as business purposes), the tax law provides that only the gain which can be allocated to the residential portion of the property may qualify for nonrecognition treatment. (Reg. § 1.1034-1 (c) (3) (ii)). Thus, in order to determine the extent, if any, to which the President is entitled to nonrecognition treatment with respect to the sale of his New York apartment and the subsequent purchase of the San Clemente property, it is necessary to answer the following questions: (1) whether either the New York apartment or the San Clemente property was used to any extent for nonresidential purposes; (2) whether at the time of the sale of the New York apartment that apartment was the President's principal residence; and (3) whether the San Clemente property was used by the President as his principal residence within one year from the time of the sale of the New York apartment. In addition, there is a further issue whether the amount of the gain was properly computed or whether, in computing his |