Court Opinion

ID: 6912915
Source: CourtListenerOpinion
Date Created: 2022-07-23 22:30:11.295394+00
Date Added: 2024-06-11T16:06:34.032059
License: Public Domain

PARKER, Chief Judge
(dissenting).
These are appeals from the Tax Court involving the question as to whether the value of ground rents payable to the seller of property under an instrument executed in connection with the sale should be considered as a part of the proceeds thereof in computing the income and excess profits taxes of the seller. I think that this question should be answered in the affirmative, as the ground rents clearly constituted a part of the gain from the “sale or other disposition of property” realized by the taxpayer from the sale, within the meaning of 26 U.S.C. § 111(a).
The taxpayer owned the fee simple in the property originally. The ground rents were not created independently of the sale, but for the purpose of facilitating the sale and as an incident thereof. Under the lease creating the ground rents the lessee expressly undertook in behalf of itself and assigns to make annual payments to taxpayer and the taxpayer, in the contract of sale, conveyed the property to the purchaser subject to the payment of the ground rents and specified that they should be redeemable within five years. The lease to the straw corporation creating the ground rents was assigned to the purchaser to whom the property had been sold by taxpayer and who became bound to pay the ground rents to the taxpayer as a condition of retaining the property. Under such circumstances, it cannot reasonably be said that the seller, as the result of the sale to the purchaser, has not received rights under the ground rent contract as well as the cash and the notes secured by mortgage. He has completely parted with the fee simple title which he originally owned, receiving in return therefor, in addition to the cash and notes secured by mortgage, rights under a covenant requiring the payment of ground rents, a covenant which runs with the land, and which, so far as computing gain and profit on the transaction is concerned, cannot be distinguished from a mortgage indebtedness secured by the land.
It is argued that the ground rent was a mere reservation of a part of the fee simple title by taxpayer for which he has not been paid; but it may not be considered in this way since it is elementary that all the steps in connection with the sale must be considered together, Cf. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596; Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, 184, 185, 62 S.Ct. 540, 86 L.Ed. 775. No lease creating ground rents was executed, so far as the transactions here involved are concerned, until a sale was contemplated. Then the lease creating the ground *916rents was made to a straw corporation, which undertook in a covenant of the lease to make the annual payment of ground rents to taxpayer. While this leasehold interest was assigned by the straw corporation to the purchaser of the property, the contract conveying the property was made to the purchaser by the taxpayer, subject to the payment of the ground rents. At the end of the various transactions, therefore, taxpayer had parted with his fee simple interest in the property for the cash payment, notes, secured by mortgage and rights under the covenant as to ground rents, which gave a right of forfeiture and reentry for condition broken, but was not a retention of any other interest in the property. .From the standpoint of economic reality, ■ the right to ground rents which taxpayer received in connection with the sale cannot be distinguished from that part of the purchase price secured by mortgage.
The question presented should be answered in the light of economic realities and not in the light of theoretical •concepts about legal title; but even if the latter be considered it seems clear that the beneficial interest in the property has been conveyed, and that, if there has been any retention of title, this is merely as security for the payment of money. Chief Justice Taney pointed out in Bosley v. Wyatt, 14 How. 390, 14 L.Ed. 468, that as the result of the creation of a ground rent by lease, the owner parted with his interest in the realty and acquired in' lieu thereof .a right under the convenant to receive the payment of money, saying “The interest which the testator had in the land .at the time of the making Of his will was converted into money by his contract with Armstrong”. And in Jones v. Magruder, D.C., 42 F.Supp. 193, 196, Judge Chesnut said: “In practical economic effect the relation of the lessee to the property is that of an owner of land and improvements thereon subject to the payment of the annual rent and taxes on the property; and his economic relation to the owner of the ground rent is much like that of a mortgagor paying interest on a debt where- the principal never matures so long as the mortgagor pays the interest and , taxes”.
It is worth noting that where, as here, the ground rent is -redeemable, the Treasury Regulations provide- that the one who pays the ground rents should treat them as interest payments and deduct them as such for tax purposes. Treasury Regulations 111, sec. 29.23(b)-1. As said by Judge Chesnut in the case cited in applying another statute to Maryland ground rents 42 F.Supp. at page 198, “And if the statute is susceptible of general uniform application, we must apply it without deference to the particularity of the Maryland view of the 'nature of the estate.”
It is said that taxpayer will account for the profits in the interest represented by the ground rents when the ground rents are redeemed or the right is sold by the taxpayer. The answer is that taxpayer should be taxed on all profits made on the sale of the property in the year in which the sale is made; and the rights under the ground rent covenant are as much a part of the proceeds of the sale as the notes secured by mortgage for the balance of the purchase money.- No one would contend that the •latter should not be considered as a part of the purchase price received by the taxpayer, although hé receives nothing :on them at the time of sale. •