Court Opinion

ID: 4606218
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:38:02.517327+00
Date Added: 2024-06-11T07:53:20.041451
License: Public Domain

LANGWELL REAL ESTATE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Langwell Real Estate Corp. v. CommissionerDocket No. 23758.United States Board of Tax Appeals17 B.T.A. 196; 1929 BTA LEXIS 2336; September 10, 1929, Promulgated *2336  Under the circumstances of the case, an agreement to cancel a lease by which the petitioner was relieved of a contingent liability to return a lease deposit held not to result in income in 1923.  David Greenberg, Esq., for the petitioner.  Arthur Carnduff, Esq., for the respondent.  SIEFKIN*196  This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1923, asserted by the Commissioner *197  in the amount of $6,500.  The entire deficiency results from the action of the respondent in adding to the petitioner's net income reported for the year 1923, the sum of $50,000 on account of a deposit on a lease.  FINDINGS OF FACT.  The petitioner is a New York corporation with its principal office at Chicago, Ill.  On February 2, 1920, E. Lewis Jacobs, as landlord, and the Keystone Hotel Corporation, as tenant, entered into a lease agreement, the material portion of which is as follows: Security.  Twenty-eighth: On or before the 1st day of April, 1920, the Tenant shall deposit or cause to be deposited with the Landlord the sum of Fifty thousand ($50,000) Dollars, in cash, as security for the payment*2337  of rent and all other payments to be made by the tenant hereunder; for the faithful performance of the terms and conditions of this lease and for any damage the landlord may sustain by a breach of any condition of said lease.  Said sum of Fifth thousand ($50,000) Dollars is to be retained by the Landlord until the full and complete term of twenty-one years hereby demised has been fully completed, rendering the same or any unused part thereof to the tenant at the end of the said term, provided that all the terms and conditions of said lease have been fully performed by the Tenant.  The Tenant shall, however, be liable for and agrees to pay the Landlord any deficiency which may arise pursuant to the terms of this lease, if the Landlord chooses to apply such security as aforesaid, and the same shall not be sufficient to pay the rent, additional rent and taxes reserved hereunder.  Nothing herein contained shall in any way obligate the Landlord to in any wise impair the security of the said sum of Fifth thousand ($50,000) Dollars, so deposited, or to apply the same or any part thereof, to any payments to be made by the Tenant under this lease, nor to return same to the Tenant until*2338  the Thirty-first day of March, 1941, and then only in the event that the premises demised are returned in good and habitable condition, and that there has been no waste or damage to same, or to any of the appurtenances therein, and said sum of Fifty thousand ($50,000) Dollars shall be free and clear of all claims of any kind, nature or description of any creditor, or creditors of the Tenant or the legal representatives of such creditors.  The Landlord shall pay interest on said deposit at the rate of 4% per annum, which interest shall be payable on the first day of October in each year, computed from the last payment of interest upon condition only, however, that the Tenant has fully complied with all the terms and conditions of this lease.  The said Fifty thousand ($50,000) Dollars deposited as above, provided, or as much thereof as has not been applied from time to time by the Landlord in payment of any sums which should have been paid by the Tenant, shall be and hereby is declared a lien against said premises, during the term hereby demised and until the same is repaid or applied to the payment of rent or other sums to be paid by the tenant as herein provided and shall be inferior*2339  in lien and subject only to mortgages not exceeding the assessed value of said premises at any time, but in all events subject to mortgage or mortgages aggregating at least One Million ($1,000,000) Dollars, as provided in paragraph "Nineteenth" hereof.  Upon the repayment of said Fifty thousand ($50,000) Dollars so deposited or as much thereof as shall be due hereunder the tenant shall give a receipt *198  or satisfaction in such form as the Landlord may require, duly executed to comply with any recording act at that time in force and effect, so that premises hereby demised may be released from such lien.  Nothing herein contained shall prevent the Landlord from transferring and paying over to the subsequent owner or purchaser of the premises hereby demised said sum of Fifty thousand ($50,000) Dollars so deposited or as much thereof as shall at that time be in the possession of such owner or Landlord pursuant to the terms hereof.  And the Tenant will release and hereby does release every such owner or landlord from any obligation to repay same, excepting the owner or Landlord of said premises, on March 31, 1941, who shall be responsible to the Tenant for the full and complete*2340  return of said Fifty-thousand ($50,000) Dollars, or as much thereof as shall at that time be due pursuant to the terms hereof.  On January 27, 1923, E. Lewis Jacobs, as seller, and Abraham J. Cooper and Samuel J. Cooper, as purchasers, entered into a contract for the sale of the same real estate covered in the lease agreement above.  That portion of the contract for sale which is material, is as follows: WITNESSETH: That the Seller agrees to sell and convey, and the Purchasers agree to purchase; * * * [Then follows a description of the property.] The price is Nine Hundred fifty thousand ($950,000) Dollars, payable as follows: $10,000. - Ten Thousand Dollars - in cash on the execution hereof, receipt whereof is hereby acknowledged.  $550,000. - Five hundred fifty thousand Dollars - by taking the premises subject to a first mortgage of $625,000, with interest at 5% per annum, which will be reduced before March 1st, 1923, to $550,000, now a lien upon said premises.  $300,000. - Three hundred thousand dollars - by the purchasers executing and delivering a purchase money bond and second mortgage in that amount, which bond and mortgage are to bear interest at six per cent per*2341  annum, payable semi-annually, and which bond and mortgage are to be drawn by the attorney for the seller at the expense of the purchasers, who shall also pay the recording fees, mortgage tax and stamps on bonds as part of the purchase price hereof.  Said mortgage is to contain the usual clauses generally employed by the Title Insurance Companies in the City of New York in second mortgages, and is to provide that the same shall be payable in ten (10) years from the date of taking title as hereinafter set forth, and shall be amortized at the rate of Seventy-five Hundred ($7,500) Dollars semi-annually on each interest date, with the privilege to the owner of said premises at any time to pay larger installments.  $90,000.00. - Ninety thousand ($90,000) Dollars in cash or certified check at the time of closing as hereinafter set forth.  Said premises are sold subject to the terms and conditions of a certain lease dated February 2, 1920, made to the Keystone Hotel Corporation, which lease shall be in full force and effect on the time of closing title herein, and any other leases of record affecting said premises; mentioned in said lease or made by the Keystone Hotel Corporation.  *2342  * * * It *199  is further understood that on the sum of Ninety thousand ($90,000) Dollars to be paid by the purchasers at the time of closing of title, the purchasers shall receive credit of Fifty thousand ($50,000) Dollars, the deposit made by the tenant under the lease above referred to.  The stipulations aforesaid are to apply to and bind the heirs, executors, administrators, successors and assigns of the respective parties.  The above contract was assigned by Abraham Cooper and Samuel Cooper to the petitioner herein during 1923, and the petitioner assumed the terms of the contract and agreed to carry out the provisions and actually carried out the deal with E. Lewis Jacobs.  On June 20, 1923, the petitioner and the Keystone Hotel Corporation entered into an agreement under which the cancellation of the lease of February 2, 1920, was agreed to.  The material portions are as follows: KEYSTONE agrees to surrender to LANGWELL the lease heretofore described and recorded in the office of the Register of the County of New York, Section 4, Liber 3105 of Mortgages, Page 460, with all its right, title and interest therein, and LANGWELL agrees to accept said surrender.  *2343  IT IS AGREED that a formal instrument of surrender is to be executed, delivered and accepted by the parties simultaneously with the execution and delivery of this agreement.  IT IS FURTHER AGREED as part of the consideration of this agreement that KEYSTONE does hereby agree to and does relinquish, assign, transfer and set over to LANGWELL all its right, title and interest in and to the sum of $50,000 mentioned in the said lease and heretofore deposited by KEYSTONE as security, together with any interest therein, and does hereby release LANGWELL and/or any future owner of the premises from any liability for the return to KEYSTONE of the said $50,000, or any part thereof.  KEYSTONE further agreed upon the execution of this agreement to execute and deliver a satisfaction piece of its lien for the said $50,000 upon the premises herein contained.  [Other provisions of the agreement were that the petitioner purchased the furniture and fixtures subject to chattel mortgage by assumption of the mortgage and receipt for the use and occupancy of the premises from May 1, 1923, to September 30, 1923, and certain promissory notes.  The petitioner further agreed to pay certain improvements*2344  or repair charges and Keystone, on its behalf, agreed to vacate the premises by September 30, 1923.] The purchase price of the property was $950,000, of which $100,000 was to be paid in cash, and, in lieu of said amount of $100,000 in cash, only $50,000 was paid by the petitioner and credit was given to the petitioner for the $50,000 additional because of the deposit under the lease agreement.  The petitioner did not actually get the $50,000 deposit in cash, but such deposit was retained by the seller of the property.  The petitioner, in its income-tax return for 1923, reported gross income of $2,757.10 on account of interest on bank deposits, notes, mortgages and corporation bonds, and $52,782.16 representing rents, or a total gross income of $55,539.26.  It deducted from that gross *200  income the sum of $45,614.02, leaving a net income of $9,925.24, on which it paid a tax of $990.66.  The return also shows that on October 1, 1923, the petitioner sold the same property that it had purchased from E. Lewis Jacobs for $1,050,000 and the petitioner in said return reduced the cost of the property to it by the sum of $50,000, by reason of the release of said deposit of $50,000, *2345  thereby showing a profit on the sale of $50,872.89.  But since there was taken by the petitioner in part payment of the purchase price a third mortgage in the sum of $157,500, which had no readily realizable market value, no tax was reported on the transaction in the year 1923.  The respondent, in determining the deficiency involved herein, added to the net income reported by the petitioner the sum of $50,000 on account of the lease deposit.  OPINION.  SIEFKIN: The respondent determined that the release of the petitioner from liability to pay an amount of $50,000, designated as a lease deposit, resulted in additional income for 1923, and the deficiency in question results from such determination.  The facts, which were stipulated, may be summarized as follows: By the lease of February, 1920, the tenant deposited $50,000 with the landlord as security for the performance of the lease during its term of 21 years.  The landlord agreed to return the $50,000 in 1941, paying 4 per cent interest meanwhile, if the tenant performed the conditions of the lease.  On January 27, 1923, the landlord sold the property, subject to the lease, to the Coopers, who assigned to the petitioner, which*2346  performed the conditions placed by the contract for sale upon the Coopers, the buyers.  The agreed purchase price was $950,000, of which $100,000 was to be paid in cash.  Instead of paying $100,000, however, the petitioner received credit for the $50,000 deposit, which was retained by the seller.  In June, 1923, the petitioner and the lessee, to whom the petitioner now had an obligation to return $50,000 in 1941, executed an agreement by which the lessee released claim to the $50,000 and by which they virtually agreed to cancel the lease, the petitioner bought the lessee's furniture and the tenant agreed to vacate at a certain time.  It must be this last named agreement that is the basis of the respondent's conclusion that the petitioner realized income, since it is evident that the only other transaction in which the petitioner was interested could not so result, i.e., the purchase of the property from the owner, subject to the lease.  The agreement for purchase carried out by the petitioner called for a cash payment of $100,000, but instead of requiring $100,000 cash, the contract provided for and the *201  petitioner paid only $50,000 cash and the seller retained the $50,000*2347  deposit.  At this point, since the petitioner bought the property subject to the lease, it seems clear that the petitioner assumed an obligation to pay the lessee $50,000 in 1941 if all of the terms of the lease had been performed by the lessee during its life.  This obligation, it is also apparent, did not stand alone, but was balanced by a corresponding obligation of the lessee.  We are not able to say that they did not exactly balance, or, if not, in whose favor the scales were tipped.  This being so, when the lessee and the petitioner then agreed to cancel the lease in June, 1923, it can not be said with any certainty whatever that the $50,000 obligation of the petitioner, contingent and uncertain as it was that return need ever be made, did not represent compensation to the petitioner for the loss sustained by it on the cancellation of the lease.  If so, the amount would not be income to the petitioner.  This conclusion is strengthened when we examine the reasoning back of the various cases holding that cancellation of indebtedness may be income.  The cases cited by the respondent are *2348 ; ; ; ; ; and . The Denholm & McKay case holds that the amount paid by a lessee to a lessor as a consideration for the cancellation of a lease is an ordinary and necessary expense to the lessee. G. Butler relates to income realized to a lessor by improvements made by a lessee; The Goerke Co., holds that the amount received by a lessee for the cancellation of an existing lease is income; Wm. C. Huntoon, so far as we can see, does not bear upon the question, directly or indirectly, Planters Operating Co. deals with a question of lease value and Farrelly-Walsh, Inc., involves the same question as in The Goerke Co.Those cases holding cancellation of indebtedness to be income, and article 50 of Regulations 62, likewise, rest upon an assumption that the relation of debtor and creditor exist.  The facts in this case indicate to us that such a relation did not exist at the time*2349  of the contract of June, 1923.  The lessee and the lessor cancelled the lease, each was relieved of obligations under it, and the contingent obligation to pay $50,000 in 1941 was not the obligation of a debtor in 1923, the cancellation of which constituted income in that year.  That being the only issue raised and tried, we conclude that the respondent added the amount to income in error.  Reviewed by the Board.  Judgment of no deficiency will be entered.