Court Opinion

ID: 4603494
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:32:05.25446+00
Date Added: 2024-06-11T07:52:51.444721
License: Public Domain

ALAMEDA PARK CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Alameda Park Co. v. CommissionerDocket No. 8355.United States Board of Tax Appeals10 B.T.A. 1115; 1928 BTA LEXIS 3952; March 1, 1928, Promulgated *3952  In 1916 the petitioner, by assignment, became the lessee of an amusement park.  The lease had a life of 15 years.  The petitioner's assignor had incurred debts for the construction of permanent improvements on the park, which debts petitioner assumed under a contract which stipulated that it should pay over to the creditors all income from the operation of the park in excess of operating expenses.  Held, that the payments so made to such creditors were capital investments in permanent improvements and should be prorated and deducted over the remaining life of the lease.  George E. H. Goodner, Esq., for the petitioner.  Harold Allen, Esq., for the respondent.  LOVE *1115  This proceeding results from the partial rejection by the Commissioner of a claim in abatement of a jeopardy assessment of a deficiency for the year 1917.  The amount rejected, which is the amount in controversy, is $4,457.69.  The petitioner alleges that the Commissioner erred in disallowing as a deduction from gross income the entire amount paid by it during the year 1917, as assignee of a lease, to the creditors of the lessor.  FINDINGS OF FACT.  The petitioner is*3953  a California corporation, organized in 1916, with principal office and place of business at Alameda.  The Surf Beach Amusement Company was the owner and operator of Neptune Beach, an amusement park, and having made quite extensive permanent improvements for which it owned large amounts of money, in 1916 it had become involved in financial difficulties.  Its creditors were pressing their claims, filing builders' and materialmen's liens and threatening bankruptcy proceedings.  In order to avoid bankruptcy and to satisfy its creditors, the Surf Beach Amusement Co., with the consent of its various creditors, on August 15, 1916, entered into a lease agreement with one August Freese, whereby Freese became the lessee of Neptune Beach for a *1116  term of 15 years, with privilege to purchase at a fixed price.  The lease provides that Freese, the lessee, might assign the lease to a corporation to be organized for the purpose of becoming the assignee of the lease and operating the business.  Pursuant to this provision, the lease between the Surf Beach Amusement Co. and Freese entered into August 15, 1916, was assigned to the petitioner, and during the year 1917 the business was operated*3954  by it.  The material parts of the lease are as follows: That the Lessor has leased and demised and by these presents does lease and demise to the lessee, and the lessee does hereby hire from the lessor, the following described premises, to-wit: * * * TOGETHER with any and all buildings, structures and improvements and any and all personal property of the lessor now in, on upon or about said premises and the appurtenances thereunto belonging or in any wise appertaining, for the term of fifteen years, beginning with 15th day of August, 1916, and ending with the 14th day of August, 1931, at and for the monthly rental of one dollar ($1.00) payable in advance on the 15th day of each and every month during said term beginning one the said 15th day of August, 1916.  The lessee agrees to expend twenty-five thousand dollars ($25,000) in completing and opening the bathing and amusement resort now on said premises, and to complete and open the same with all possible dispatch.  All sums of money paid by lessee in satisfaction or liens against said premises for labor heretofore furnished, or for purchase of personal property necessary for the opening of said resort shall be considered*3955  a part of said $25,000.  The lessee may if he desires expend in excess of $25,000 in opening or improving said resort.  The lessee agrees to operate said resort as soon as completed and thereafter during the continuance of this lease; provided that the same may be closed at the option of the lessee any time during the months of October, November, December, January, February, March, and April, the lessee however shall be permitted to sublet any part of the said premises and to make agreements with third parties for the erection, construction, operation or maintenance by said third parties of concessions and attractions in and upon the demised premises, and the said lessee further agrees to apply all moneys received from the operation of said resort, including all moneys received from any concession on said demised premises in the following manner, to-wit: FIRST: To the payment of all costs, expenses and charges of operating and maintaining said resort; provided the manager's salary shall not exceed $400.00 a month; SECOND: To the payment of any money as it becomes due under that certain Deed of Trust dated the 8th day of September, 1915, made by the Surf Beach Amusement Company*3956  as party of the first part, and F. W. LUCAS and S. F. WALTER as parties of the second part, and Newark Development Company, a California corporation as party of the third part, covering the premises hereby demised.  THIRD: To the payment of any and all sums of money paid or advanced by the lessee under the provisions of this lease or to preserve the demised premises, including any payments made under said Deed of Trust.  *1117  FOURTH: To the payment ratably at the times hereinafter specified of the existing claim of all bona-fide creditors of said Surf Beach Amusement Company, except H. M. OWENS and WILLIAM EDWARDS.  FIFTH: To the payment ratably at the times hereinafter specified of the existing claims of the said H. M. OWENS and WILLIAM EDWARDS against lessor; SIXTH: To the payment of the Surf Beach Amusement Company, lessor of the sum of $9,986.00; By the payment to the lessor of the said sum of $9,986.00, as specified in the preceding paragraph, or by the sooner payment thereof, provided all claims of creditors of lessor have been paid and discharged, the lessee shall become entitled to all the right, title and interest of the lessor in or to the herein demised*3957  premises and property and each and every part thereof, and by such payment all such right, title and interest of the lessor shall ipso facto vest in the lessee, his representatives, successors and assigns, and upon such payment the lessor shall cause to be delivered to the lessee, his representatives, successors or assigns, its grant, bargain and sale deed covering the herein demised premises and property and each and every part thereof - said deed having this day been deposited in escrow with appropriate instructions.  It is particularly understood and agreed that the lessee may assign this lease to a corporation to be organized for the purpose and further that after lessee, his representatives, successors or assigns, shall have expended the sum of $25,000 as aforesaid, he or they may at any time cancel and terminate this lease by surrendering possession of the herein demised premises and property, and thereupon all further liability on the part of the lessee, his representatives, successors or assigns hereunder shall cease and terminate.  The lease also contained the usual covenants with respect to the payment of the rent and other charges, subletting, surrendering possession*3958  to the lessor upon termination of the lease "together with any and all alternations, additions, or improvements thereto," holding over after termination of the lease, assignment, insurance, and other rights and obligations not here material.  In accordance with the terms of the lease, petitioner applied all of its income, other than necessary operating expenses, to the extinguishment of the debts of the lessor, and in its return for the year 1917 deducted from gross income all payments made to the creditors of the Surf Beach Amusement Co.  The Commissioner disallowed as a deduction for 1917 the entire amount paid to the lessor's creditors in that year and determined that the amount so paid should be prorated over the remaining life of the lease and that for 1917 petitioner was entitled to deduct an aliquot part thereof.  OPINION.  LOVE: The petitioner contends that the entire amount paid in 1917 to the creditors of the Surf Beach Amusement Co. was properly deductible in that year.  And, in support of this contention, it takes the position that as assignee of the lease it had no option in the matter of the payment of the lessor's creditors, but, on the contrary, it had to apply*3959  all money, other than necessary operating *1118  expenses, to that purpose.  Consequently, it is urged, that all money which came into its hands, other than necessary operating expenses, was impressed with a trust for the benefit of lessor's creditors and as such it was properly deductible.  We are unable to agree with this contention.  It is clear that if petitioner had made improvements on the property leased, the cost of such improvements would be prorated over the remaining life of the lease from the time such improvements were made.  ; . What, then, was the effect of the transaction whereby the petitioner took over the property of the lessor for a term of 15 years, operated it and agreed to pay the lessor's outstanding debts, which were, as alleged, mainly for improvements.  The Board is of the opinion that the ultimate effect or result of that transaction was the same as if petitioner had erected or made improvements on the leased property to the extent of the amount of the lessor's obligations which it paid within the taxable year.  And, it is immaterial in our estimation, *3960  that petitioner agreed to apply all of its income over and above necessary operating expenses to the extinguishment of those debts.  The petitioner was free to contract as it wished and the mere fact that it sought quickly to pay off the debts in question can not and does not affect the nature of the expenditure any more than is the nature thereof altered by the fact that such payments were made pursuant to a contract.  Having reached the conclusion that the amount paid by petitioner in 1917 to the creditors of the lessor was, in effect, an improvement made by it to the extent of the amount paid, we are of the opinion that the Commissioner's action in prorating the amount over the life of the lease, including a deduction of an aliquot part for 1917, was correct.  Reviewed by the Board.  Judgment will be entered for the respondent.