Court Opinion

ID: 4611753
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:49:38.241924+00
Date Added: 2024-06-11T07:54:18.813308
License: Public Domain

BOULEVARD THEATRE AND REALTY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Boulevard Theatre & Realty Corp. v. CommissionerDocket No. 43640.United States Board of Tax Appeals23 B.T.A. 905; 1931 BTA LEXIS 1804; June 29, 1931, Promulgated *1804  1.  Petitioner leased part of its building for theatrical purposes at a fixed annual rental.  The lessee subleased the premises to a corporation at a rental measured by one-half of the net profits from operation of the theatre, the net profits to be computed by first deducting the fixed rental to be paid to the lessor, and at the same time, by separate instruments, he assigned to petitioner his right to the fixed rental, and assigned to a third person, individually and as trustee for named beneficiaries who, with one exception, were also stockholders of petitioner during the taxable year, his right to the rent measured by one-half of the net profits, or additional rent.  Held, the petitioner had no right to, and neither actually nor constructively received more than, the fixed rental, and, as the additional rent received and distributed by the trustee inured only to petitioner's lessee, the petitioner could not be taxed thereon.  2.  Held, further, that the additional rent was shared by the distributees by virtue of their contractual right under the lessee, and the fact that they were also shareholders of the petitioner was immaterial.  George M. Morris, Esq.,*1805  for the petitioner.  F. R. Shearer, Esq., for the respondent.  STERNHAGEN *905  The Commissioner has determined deficiencies of $5,853.49, $7,497.74 and $9,410.92 in petitioner's income taxes for 1925, 1926, and 1927, respectively.  He has included in gross income as additional rents sums which petitioner contends should be excluded.  FINDINGS OF FACT.  Petitioner, a New York corporation with office at 565 Fifth Avenue, New York City, was organized in 1912.  In 1913, it completed a two-story building of brick and terra cotta, located on Southern Boulevard near Westchester Avenue, New York City.  This structure, known as the Boulevard Theatre, contained on the main front floor six stores, rented for retail business, and an entrance led to the theatre auditorium which was located in the rear.  The upper floor was rented as a billiard parlor.  Petitioner originally intended to operate the theatre, but soon after its completion, Marcus Loew, who was interested in a number of theatres in New York, proposed leasing the premises.  Loew was doubtful of the theatre's ability to earn the rent asked, and suggested a partnership venture in which the rent would be*1806  fixed at one-half the earnings.  Petitioner, however, did not want such *906  an arrangement, and proposed a lease to an individual who would enter into the suggested partnership and then transfer his interest to a corporation to be formed.  Pursuant to this plan, a lease of the theatre was made on November 1, 1913, by petitioner to Joseph Wein for a period of ten years at an annual rent of $30,000.  On the same day Joseph Wein entered into an agreement of copartnership with the Comet Amusement Corporation, which represented the Loew interests.  By this agreement Wein contributed his lease to the partnership which undertook to pay the rent therein stipulated, and all profits and losses from operating the theatre were to be divided equally between the two partners, Wein and the Comet Corporation.  Provision was made for the right to terminate the agreement at the end of six months by the Comet Corporation if the venture was not profitable.  The business was began under the name of "Boulevard Theatre." On November 29, 1913, Joseph Wein, who had no substantial interest in the transaction, transferred all his interest in the partnership to the Solwil Amusement Corporation, which*1807  had been organized for taking over this interest.  All its stock was held by petitioner's shareholders, and among its assets was $2,500 which had been advanced to the partnership under the original agreement requiring each partner to contribute said amount to the business.  In 1918, petitioner's stockholders were informed that Marcus Loew wished to consolidate his several enterprises into a single company, and they were requested to have the partnership dissolved and a new arrangement made with Loew's Theatrical Enterprise, the new corporation to be formed.  The partner corporations then executed a document surrendering the leasehold to petitioner in consideration of one dollar, and the Solwil Corporation applied for voluntary dissolution.  Thereafter a new lease of the theatre was made by petitioner to Joseph Wein, dated June 1, 1918, for a term ending October 31, 1923, at an annual rent of $30,000.  On the same day, Wein subleased the premises to Loew's Theatrical Enterprises for the period of the lease.  The rental stipulated in the sublease was to be "one-half of the net profits" of the sublease in conducting the theatrical business after deducting the $30,000 to be paid petitioner. *1808  This arrangement was made at the suggestion of Loew's representatives.  On the same day, Joseph Wein executed an instrument transferring to petitioner the stipulated annual sum of $30,000 payable under his sublease to Loew's Theatrical Enterprises during the term of the lease, and by a second instrument of the same date he assigned and transferred to named individuals in specified proportions his right, *907  title and interest "to the further sum or additional rental" to be paid him under the terms of the sublease with Loew's Theatrical Enterprises.  In February, 1923, in view of the expiration of the existing lease on October 31, 1923, petitioner made a lease of the theatre to Abraham L. Goldstone, for a period of ten years beginning November 1, 1923, at an annual rental of $30,000.  On the same day, Goldstone, who likewise had no substantial interest in the transaction, Made a lease of the theatre to Loew's Boulevard Corporation for the period of his lease.  This sublease provided in part: TO HAVE AND TO HOLD the above mentioned described premises with the appurtenances unto the Tenant for the term of ten years commencing on the 1st day of November, 1923, and ending*1809  on the 31st day of October, 1933, at a rental equal to and measured by one half of the net profits of the party of the second part, in conducting the theatrical business of operating the Boulevard Theatre above described, after first deducting from said net profits annually the sum of Thirty Thousand ($30,000) Dollars to be paid to the BOULEVARD THEATRE AND REALTY CORPORATION, the Lessor of the party of the first part, out of the receipts in equal monthly installments, so far as practicable.  The net profits shall be ascertained by deducting from the gross receipts of the Boulevard Theatre, all expenses in operating the Boulevard Theatre, including the rent aforesaid, usual and customary in the operation of a moving picture and vaudeville theatre, and in addition thereto a booking fee of One Hundred ($100) Dollars per week.  After making these deductions, the balance that shall remain of the receipts shall be deemed net profits above referred to, and a sum equal to one-half thereof, shall be paid to the party of the first part by the party of the second part as additional rent under this lease as above provided.  This provision was inserted at the suggestion of Loew's representatives. *1810  By the terms of the sublease Goldstone undertook to repair the premises at his expense in case of partial destruction by fire; to return security of $15,000 deposited by the tenant with petitioner for faithful performance if the latter should conclude its covenants in no default and to ensure the peaceful and quiet enjoyment of the premises.  On the same day Goldstone executed an instrument transferring to petitioner the stipulated annual sum of $30,000 payable under his sublease to Loew's Boulevard Corporation, and by a second instrument of even date he assigned and transferred to Alexander H. Pincus, individually and as trustee for named persons in specified proportions his right, title and interest "to the further sum or additional rental" to be paid him under the terms of the sublease to Loew's Boulevard Corporation.  While Pincus had not been designated as trustee under the assignment of June 1, 1918, he had actually received and distributed to the named individuals the *908  "further sum or additional rental" by a power of attorney, and after February 23, 1923, continued to receive and distribute such funds in the same manner as trustee.  The $30,000 rent was deposited*1811  to petitioner's credit in monthly installments of $2,500.  On November 23, 1923, Joseph L. Graf transferred his 125 shares of petitioner's stock to the Farg Company, Inc., which thereafter received dividends from them.  Graf retained, however, his one-eighth interest in the trust, continuing to receive from Pincus his portion of the trust distributions.  Otherwise petitioner's stockholders and the trust beneficiaries were identical during 1925, 1926 and 1927.  Besides its theatre, petitioner also rented the six stores and the billiard parlor through separate leases for annual rents aggregating approximately $24,000.  In so doing it was required to make leases, institute proceedings to dispossess, and keep the building in condition, excepting the theatre.  Such activities, which consumed a large part of the time of an employee, were paid for by petitioner.  In the latter part of September, 1930, when the instruments of February, 1923, were still in effect, the beneficiaries under the Pincus trust paid $6,652 as their share of operating losses which occurred.  Petitioner paid no part of such losses.  In determining petitioner's tax liability for 1925, 1926 and 1927, the Commissioner*1812  increased gross income by $41,028.37, $51,540.35 and $65,712.05, respectively, said amounts representing moneys distributed by Pincus to the trust beneficiaries.  During said years the Commissioner allowed petitioner to deduct as annual depreciation on the building 2 per cent on a basis of $237,577.52, or $4,751.55 each year.  A reasonable allowance for depreciation of the building is, as agreed by the parties, $7,127.23 for each of the years 1925, 1926, and 1927.  OPINION.  STERNHAGEN: The foregoing detailed findings are made because the respondent justifies his determination upon the ground that under all the circumstances the rent paid by the sublessee who operated the theatre must be regarded as accruing to the petitioner.  It seems to us clear, however, that this can not be.  There is in the evidence no suggestion of attempted tax evasion or lack of good faith.  Apparently the purpose of the method adopted was to confine the function of petitioner to that of landlord with an assured fixed rental for its property, thus relieving it of the burdens and depriving it of the benefits of the more hazardous operation of the theatre.  Whether the several agreements be treated separately*1813  or, as respondent suggests, as a single arrangement, the fact persists that *909  the petitioner had no right to more than the primary rent of $30,000, and neither actually nor constructively received more.  The amount of the so-called "additional rent" inured only to petitioner's lessee.  Whatever such lessee did with it was by arrangement to which petitioner was legally a stranger.  It was a fact that some of the persons who received distributions from Pincus were shareholders of petitioner, but their relations to Pincus' lessee or sublessor were legally distinct from their relations to petitioner as shareholders.  If this were not plain as a matter of law, it would be demonstrated by the fact that Graf and the Farg Company were each separately related, the former to the lessee and the latter to petitioner.  Those who shared in the rent under the sublease did so not as shareholders of petitioner, but because of their contractual right under its lessee.  The situation is entirely different from cases like , and *1814 . They might indicate as to Pincus that the subrental might be attributable to him (about which we need say nothing in this proceeding); but they fasten no tax liability upon petitioner, who was not a receipient from Pincus and to whom Pincus owed no duty.  The amount of $30,000 the petitioner has returned as income and has paid tax accordingly.  The respondent was in error in ascribing to it the additional amounts. The depreciation will be adjusted as agreed.  Judgment will be entered under Rule 50.