Court Opinion

ID: 4592853
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:08:51.252628+00
Date Added: 2024-06-11T07:50:56.359128
License: Public Domain

CLINTON HOTEL REALTY CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Clinton Hotel Realty Corp. v. CommissionerDocket No. 104314.United States Board of Tax Appeals44 B.T.A. 1215; 1941 BTA LEXIS 1216; August 8, 1941, Promulgated *1216  Petitioner during the taxable year leased properties owned by it under an agreement by which it received from the lessee a $21,000 payment at the time of the execution of the lease to serve as security for the lessee's performance and to be applied on the last year's rent due under the lease.  Held, the payment thus received is taxable to the petitioner in the year of its receipt as advance rental.  Theodore Witkin, C.P.A., for the petitioner.  J. Marvin Kelley, Esq., for the respondent.  ARUNDELL*1215  The respondent has determined deficiencies in income and excess profits taxes for the fiscal year ended May 31, 1936, in the sums *1216  respectively of $2,803.15 and $706.83.  He has added a 5 percent delinquency penalty of $175.50.  The single issue presented is whether the petitioner realized income of $21,000 in the taxable year from the payment made to it in that amount under the terms of a lease, to be held by it as security for the lessee's performance and to be applied on the last rental due under the lease on June 3, 1944.  The case is submitted under Rule 30 of the Board's Rules of Practice on a stipulation of facts.  *1217  FINDINGS OF FACT.  The petitioner is a corporation, organized under the laws of Florida, with offices in the Ingraham Building, Miami, Florida.  The petitioner's books are kept and its returns filed on an accrual basis.  The return in question was filed with the collector for the District of Florida.  On June 3, 1935, the petitioner executed an agreement by which it leased the Clinton Hotel, Miami Beach, Florida, which it owned, to Wellington Operating Co., for a term of ten years, beginning on the date of the instrument.  The total rental for the ten years was fixed at $210,000.  The lessee agreed to pay to the lessor $21,000 cash at the time of the execution of the lease, which should be "credited upon the rental for the last year of the term of this lease on the 3rd day of June, 1944, upon the terms and conditions hereinafter set forth.  * * * It is further understood and agreed that the sum of Twenty-one Thousand ($21,000.00) Dollars this day paid by the Lessee to the Lessor shall be considered as security for the payment of rent reserved by this lease, and also as security, for the performance by the Lessee of the covenants, conditions and agreements of this lease and also*1218  for any damage which the Lessor may sustain by reason of any act by the Lessee.  The Lessee agrees that if it vacates or surrenders the premises or is dispossessed, or if it violates any of the covenants, terms and conditions of this lease, then, and in that event the sum of Twenty-one Thousand ($21,000.00) Dollars deposited as security with interest thereon, shall be retained by the Lessor as liquidated and stipulated damage.  * * *" The petitioner, as lessor, by further provision of the lease, agreed, during the term of the lease while the lessee was not in default, to pay interest of $1,000 per year on the $21,000 paid to it as set out above, which was to be credited on the rent due each year from the lessee.  In the event of the total destruction of the premises at any time before the beginning of the last year of the lease, the lessor agreed to remit the $21,000 deposit to the lessee unless the petitioner elected to rebuild the premises.  The lessor might assign the lease during its term, paying over the $21,000 to the assignee, but this *1217  was not to release it from liability to refund the deposit in the event such refund became due.  The lessee agreed to pay the*1219  first installment of rent on February 15, 1936, in the sum of $21,000 and to make the following payments annually thereafter on the dates indicated: November 1$2,000December 13,000January 18,000February 158,000The final payment of $8,000 was due on February 15, 1944, and on June 3, 1944, the rental of $21,000 for the last year of the lease was to become due and be paid from the deposit made at the execution of the lease.  Finally, the lessor agreed to pay a commission to the real estate broker effecting the lease in the amount of $1,000 on the execution of the lease and additional sums of $1,000 each on March 5 of each year during the full term of the lease.  The provisions of the agreement recited above were carried into effect on June 3, 1935, on which date the petitioner received the $21,000 cash deposit described above.  In addition, the petitioner received during the taxable year the sum of $21,000 as rental due for the first year.  The petitioner included in its return for the taxable year the $21,000 rent for the first year, but did not include the deposit paid to it at the time of the execution of the lease.  OPINION.  ARUNDELL: The*1220  issue before us is whether $21,000 received by the petitioner on June 3, 1935, under the terms of the lease executed on that date is includable in petitioner's gross income for the taxable year.  The petitioner contends that the sum was a deposit paid as security for the lessee's performance and that its repayment might be compelled in certain contingencies.  Accordingly, he argues that it was not income.  To bolster his position he points to the fact that the lessor was required to pay interest on the sum deposited.  The respondent's argument for inclusion of the sum in income is based on the petitioner's unfettered control in using the $21,000 payment and on the fact that it was to be applied to rentals due under the lease.  He therefore contends that the payment was an advance rental.  The question may be reduced to one of determining whether, on the basis of all the facts adduced, the payment was more nearly an advance rental or a security deposit.  Once that determination is made, the applicable legal principles are not to be questioned.  Sums *1218  paid in advance, to be applied to rentals falling due in later years, are income to the taxpayer at the time of receipt*1221  where his control of the funds is unfettered, even though under certain contingencies he may be compelled to refund certain portions of these payments. ; ; ; . On the other hand, sums deposited solely for purposes of security, which are to be refunded to the lessee on his completion of performance unless appropriated to compensate for specified defaults, do not constitute income and may not be taxed to the lessor.  ; ; modified, . The facts in the instant case bring it within the principle first stated.  The petitioner here received the payment in question without restriction as to its use, to serve as security for the lessee's performance up until the last year of the lease, when it was to replace the rental due for that year.  In the event of the destruction of the premises, if the lessor*1222  elected not to rebuild, the sum was to be refunded.  This latter circumstance, however, was in the nature of an intervening condition which does not disturb the petitioner's present use of the funds.  The petitioner points to the fact that it was obligated to pay interest on the $21,000 payment.  This interest, however, was to be credited on the rent due from the lessee, and in that circumstance it has been held that the nature of the advance payment as rent is not altered by the interest provision.  Argument is further made by the petitioner that, since the real estate broker was not to receive his commission on the payment until 1944, it may not be regarded as earned until then.  This contention, however, falls beside the point when it is seen that the basis for taxing to the petitioner the payment in question is its receipt of the sum during the taxable year under an unfettered right to retain and use the funds, subject only to the intervention of developments which might cut off that right.  Moreover, it is not plain that the commission was not payable until 1944, since the broker received $1,000 at the time of the execution of*1223  the agreement.  As we have pointed out, decisions in the present and similar situations must turn largely on an appraisal of all the facts.  In these circumstances the answer is to be found in an assembly of all of the circumstances of one case rather than in a comparison of isolated facts in separate cases.  Applying this method to the present case, it must be concluded that the payment was advance rental, and accordingly it is to be taxed to the petitioner in the year of its receipt.  *1219  The petitioner places his entire reliance on an unpublished memorandum opinion of the Board, Authentic Realty Co. (Aug. 5, 1940).  Viewing all of the pertinent facts there, we concluded that the deposit was intended principally as security for the lessee's performance.  It was provided primarily to cure defaults in current rentals and, in the event there were no defaults, a material portion of the deposit was to be refunded to the lessee.  The full and unfettered control of the funds which is found in the present case was there lacking.  Our conclusion here thus does not conflict with that holding.  Decision will be entered for the respondent.