## Facts

- A corporation operated an amusement park and a passenger street railway under a City-granted franchise to operate in Fairmount Park for 50 years.
- The company built and maintained a bridge necessary for streetcar operations at its own expense; by 1934, the bridge had substantial unrecovered cost.
- In 1934, unable to finance repairs, the company deeded the bridge to the City in exchange for a 10-year extension of its street railway franchise.
- The company wrote off the bridge’s unrecovered cost, reported no gain or loss on the exchange, and did not add any amount to the franchise’s basis.
- The company later ceased railway operations and abandoned the franchise, then claimed depreciation and an abandonment loss using a basis for the extension equal to the bridge’s unrecovered cost (or value).
- The Commissioner disallowed the portion of the refund claim that treated the bridge’s unrecovered cost as part of the extension’s depreciable basis.

## Issues

1. Whether the 1934 transfer of the bridge to the City in exchange for a 10-year franchise extension was a taxable exchange.
2. How to determine the taxpayer’s basis in the 10-year franchise extension for depreciation and loss purposes, including whether the bridge’s unrecovered cost could be used as the extension’s basis.

## Decision

- The court held the 1934 bridge-for-extension transaction was a taxable exchange.
- The court held the basis of the 10-year franchise extension is its fair market value at the time of the exchange.
- The court stated that if the fair market value of the property received cannot be determined with reasonable accuracy, the fair market value of the property given up may be used as a substitute measure.
- The court remanded for determination of the fair market value of the 10-year extension (and the resulting amount of any tax recovery).

## Legal Principles

- In a taxable exchange, the “cost” (basis) of property received is measured by the fair market value of the property received at the time of the exchange.
- A taxpayer generally cannot obtain a stepped-up basis from an exchange without accounting for the exchange’s tax consequences under applicable recognition rules.
- Lack of an active market does not excuse valuation; courts may determine fair market value from available evidence with reasonable accuracy.
- If the fair market value of the property received is not reasonably ascertainable, the fair market value of the property surrendered may be used as a proxy for the basis of the property received.

## Conclusion

The court treated the bridge transfer for a franchise extension as a taxable exchange and required the taxpayer to use the extension’s fair market value at the exchange date as its basis for depreciation and abandonment loss, with a remand to determine that value (or, if necessary, to use the value of the bridge given up as a substitute).


Philadelphia Park Amusement Co. v. United States, 126 F. Supp. 184 (Ct. Cl. 1954)