Court Opinion

ID: 4622235
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:48:57.138476+00
Date Added: 2024-06-11T07:56:09.610325
License: Public Domain

JOHN SHIRLEY WARD AND CHANDLER P. WARD, EXECUTORS, ESTATE OF SHIRLEY C. WARD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ward v. CommissionerDocket Nos. 26580, 43616, 44877.United States Board of Tax Appeals22 B.T.A. 352; 1931 BTA LEXIS 2133; February 25, 1931, Promulgated 1931 BTA LEXIS 2133">*2133  The action of the Commissioner of Internal Revenue, in holding that certain rentals paid to the wife of a lessor of property under assignment made by the latter constituted income to the husband, is sustained.  Chandler P. Ward, Esq., for the petitioners.  R. W. Wilson, Esq., for the respondent.  LANSDON 22 B.T.A. 352">*352  The respondent asserted deficiencies of $1,822.41, $2,774.53, $3,534.12, and $2,320.25 in income tax against the petitioner for the respective years 1922, 1924, 1925, and 1926, which these consolidated appeals seek to review.  The docket numbers and years to which each of these appeals relate are as follows: No. 26580, year 1922; No. 43616, years 1924 and 1925; and No. 44877, year 1926.  The several allegations upon which issues are joined and submitted for decision charge that the respondent committed error (1) in adding to petitioner's income for each taxable year, in the order above stated, $6,000, $16,800, $13,500, and $14,800, on account of rentals originally payable to the taxpayer under leases but legally transferred to his wife before maturity and payment, and (2) in refusing to hold that the taxpayer, in making his income tax returns1931 BTA LEXIS 2133">*2134  for 1924 and 1925, overstated his income by $3,649.59 and $2,400, respectively.  A further issue relating to taxable gain in 1924, 1925, and 1926, arising out of a sale of a certain real estate lease, designated as the "Boulle-Ward" lease, has been eliminated by a stipulation, made by the parties and put in the record at the hearing, which provides the basis of such determination.  22 B.T.A. 352">*353  FINDINGS OF FACT.  The record upon which these issues are submitted for determination includes, in addition to certain supplementary oral testimony, an agreed statement of facts, which we adopt and make a part of our findings by reference.  As thus established the record shows that the decedent, Shirley C. Ward, during the years involved, was a resident of Los Angeles, Calif.  His death, which occurred after the filing of these appeals on November 24, 1929, was suggested at the hearing by the executors of his estate, John Shirley Ward and Chandler P. Ward, who, by appropriate orders of substitution, have been made petitioners herein.  On May 24, 1920, the decedent, Shirley C. Ward, became a subtenant of the Pohlman Leasehold Company, a corporation, under the terms of a written contract, whereby1931 BTA LEXIS 2133">*2135  he acquired the unexpired portion, less one day, of a certain 99-year lease of real estate located within the corporate limits of Los Angeles, Calif.  Under the terms of the sublease, the decedent, among other things, agreed to pay Philip Polhlman, the fee owner of the property, $1,500 for each of the months of May and June of 1920, and $1,600 per month thereafter during the life of the lease; also to the Pohlman Leasehold Company, his immediate lessor, $100 per month during the remainder of 1922, and $300 per month thereafter to the end of the lease.  On May 26, 1920, the decedent executed a lease of the property covered by his sublease from the Pohlman Leasehold Company to the California Chocolate Shops, Inc., E. C. Quinby and P. W. Quinby, as lessees, for the unexpired portion of his said sublease, less one day.  Under the terms of this last mentioned lease and a supplemental contract simultaneously made, the lessees, among other things, agreed to pay to decedent, as rentals for the use of the property, the following amounts: $2,100 per month during the period from May 1, 1920, to December 31, 1922, inclusive; and $3,600 per month thereafter during the life of the lease, excepting1931 BTA LEXIS 2133">*2136  such period, not to exceed one year, as might be actually consumed in the erection of a building on the property, in accordance with the requirements of the lease, during which the rent should be $2,600 per month.  A further provision relative to the method of payment of these rentals is set forth in the lease in the following language: As security to the Lessees that the ground rental called for in the original lease on the demised premises from Philip Pohlman to Shirley C. Ward, dated December 4, 1913, as modified by the agreement hereinabove mentioned of December 22, 1917, will be paid by the Lessor herein to the original lessor, Philip Pohlman, or his heirs, successors or assigns, as and when the same becomes due, and as security that the rental payable to Shirley C. Ward, as lessee to the Pohlman Leasehold Company, as Lessor, under the lease of said premises held by said Ward from the Pohlman Leasehold Company, will 22 B.T.A. 352">*354  be paid as and when the same become due and payable, it is agreed that all rentals payable hereunder shall be payable to the Los Angeles Trust and Savings Bank, as Trustee, under instructions to said bank to distribute such rental in accordance with the1931 BTA LEXIS 2133">*2137  rights thereto of Philip Pohlman, the original lessor, and of the Pohlman Leasehold Company, the subsequent lessor, and the remainder of such rental, after the rentals due Philip Pohlman and due the Pohlman Leasehold Company have been paid, to the Lessor herein, Shirley C. Ward.  The lessor herein, or his heirs, successors or assigns, may have the privilege at any time of changing the Trustee to whom said rentals shall be payable, provided said Trustee shall at all times be a responsible trust company having an office in and doing business in the city of Los Angeles.  In accordance with the provisions above quoted, the parties, on June 3, 1920, transmitted to the Los Angeles Trust & Savings Bank the lease and a copy of the supplementing rent agreement accompanied with a letter of instructions, as follows: We herewith hand you an executed original of lease between Shirley C. Ward as lessor, and the California Chocolate Shops, Inc., P. W. Quinby and E. C. Quinby, as lessees, covering the Pohlman property at the northeast corner of Seventh Street and Grand Avenue, this city, such lease having ninety-two years and six months to run from July 1, 1920.  The rentals called for in such1931 BTA LEXIS 2133">*2138  lease are set forth in a separate unrecorded agreement between the parties, a copy of which is hereby handed you.  Under such lease and such agreement you will be paid by the lessees named in such lease, on the first day of each calendar month beginning July 1, 1920, the rentals in such agreement named, and you will pay out such rentals as provided in such lease in the following order, viz: First: Pay to Philip Pohlman, his heirs, successors and assigns, the ground rental for the leased premises called for in lease from Philip Pohlman to Shirley C. Ward, dated December 4, 1913, as modified by the agreement between said Philip Pohlman, Shirley C. Ward and the Pohlman Leasehold Company, dated December 22, 1917, a copy of which lease and agreement will be furnished you by Mr. Ward.  Second: Pay to the Pohlman Leasehold Company, its successors and assigns, the rental to which it is entitled for such premises under lease from the Pohlman Leasehold Company to Shirley C. Ward, an original of which lease Mr. Ward will furnish you.  Third: Pay to Shirley C. Ward, his heirs, successors and assigns, any balance that may be in your hands after paying the payments above provided for to Philip1931 BTA LEXIS 2133">*2139  Pohlman and to the Pohlman Leasehold Company, and after deducting your charges for executing this trust.  On September 19, 1919, the decedent was the owner of a certain city lot in Los Angeles, on which was located a structure known as the "Kinema Theatre Building." This building covered the entire surface of said lot except a strip ten feet in width extending along its south line, which formed a common boundary between it and adjoining property lying immediately south and to the east.  On said date the decedent sold and conveyed said lot and theatre building to T. S. Tally of Los Angeles, in a deed which reserved to himself, heirs and assigns, "all surface rights over" and the exclusive 22 B.T.A. 352">*355  use and control of the said vacant strip lying along said south line; such rights to continue only so long as the Kinema Theatre Building remained on the granted premises.  On May 18, 1920, the decedent, by deed in writing, granted to the Standard Fireproof Building Company the right to use the ten-foot strip of land above referred to as a means of "rear access to and egress from" certain properties lying south and adjacent thereto on which was located a structure known as the Brack Shops1931 BTA LEXIS 2133">*2140  Building.  For these rights, which were to continue so long as the existing Kinema Theatre building remained, as located, a purchaser, whose identity is not disclosed, of the Standard Fireproof Building Company's long-term lease on the Brack Shops Building agreed in writing to assume payment of rent to decedent of $200 per month during the existence of such rights.  On January 2, 1922, the decedent executed and delivered to his wife, Blanche C. Ward, an assignment in writing, based upon a consideration of love and affection, in which, after first reserving therefrom a permanent annuity of $250 per month in favor of his sister.  Annie E. Ward, he conveyed to her all of his net interest in the rentals payable under the lease to the California Chocolate Shops, E. C. Quinby and P. W. Quinby, dated May 26, 1920; and also his "right to receive" from the Brack Shops Building the "monthly rental of $200 per month" provided for in his contract with the owners of the lease on such premises negotiated through the Standard Fireproof Building Company.  In reference to the rentals first above mentioned, this instrument, after first showing the gross payments to be made under the lease, and the1931 BTA LEXIS 2133">*2141  disbursements to be made by the bank, before payment of the balance to the lessor, concluded with this explanatory recital, to wit: It is my interest in such Chocolate Shops-Quinby rentals, subject to the aforegoing charges thereon, that is intended to be assigned hereby; the net rentals coming to me and so assigned hereby being as follows, viz: Until January 1, 1923, $300.00 per month; thereafter until Bruan & Bradford are paid off, $1,150.00; and thereafter until the end of the ninety-nine year lease $1,450.00 per month.  Thereafter, on the 12th day of January, 1922, the decedent made a similar assignment in writing in favor of his sister, Annie E. Ward, conveying to her, out of the net rentals due him under the California Chocolate Shops lease, a perpetual annuity of $250 per month, beginning January 1, 1923.  Copies of these assignments were delivered to the bank designated by the parties to receive and disburse the rentals, and the sums made payable by them to Blanche C. Ward and Annie E. Ward were thereafter duly paid to said assignees by the bank.  Similar recognition was given to the assignment 22 B.T.A. 352">*356  made by decedent to Blanche C. Ward of the rentals due him under1931 BTA LEXIS 2133">*2142  the contract with the Fireproof Building Company, and the monthly payments of $200 each were at all times thereafter paid to her.  In none of the taxable years did the decedent report in his returns any of the money paid to Blanche C. Ward or Annie E. Ward under these assignments, excepting as to the payments to Blanche C. Ward in 1924 and 1925 under the Fireproof Building Company contract.  In each of these two years the decedent reported as income to him $2,400 as rentals received under such contract.  The petitions allege that such inclusions were erroneously made and ask to have $2,400 for each of these years excluded in recomputation of the tax.  The respondent, in auditing the decedent's income tax returns for the years involved, added to gross income for each of these years the several amounts respectively paid to Blanche C. Ward and Annie E. Ward under the assignments above referred to, excepting the rentals reported by decedent for 1924 and 1925, as shown.  OPINION.  LANSDON: Two items of income are affected by the assignments of error under consideration here.  The first is a balance in rent payable to the decedent through the bank and the other is made up of sums paid1931 BTA LEXIS 2133">*2143  direct under a written contract with decedent for easement rights.  It is the contention of the petitioners that in each case the decedent, by his assignment, completely divested himself of all property rights and interests in and to the several sums paid under these contracts to his assignees, so that when paid they constituted income to such assignees and not to decedent.  In support of such contention many authorities are cited by petitioners in their brief to show that under the laws of the State of California such interests are assignable; also that in similar instances the Board has so recognized them.  Looking first to the payments made to decedent's assignees by the bank out of funds collected under the so-called Pohlman property lease, it is noted that they were from the residue of the rental paid by the lessees under their lease from decedent after obligations of said lessor to prior landlords were paid.  This was (1) in accordance with the terms of the lease, which made the bank agent for decedent and his lessees to receive and disburse the rents, and (2) the decedent's directions to the bank to pay the net balance to his assignees.  It was this residue or "net rentals, 1931 BTA LEXIS 2133">*2144  " as so characterized by decedent in describing the interest intended to be assigned of the total rents paid which decedent assigned to his wife and sister, and which was paid to them by the bank after all other charges against decedent's interests were liquidated.  Since the status of the decedent, as lessor, under this lease remained unchanged and all payments 22 B.T.A. 352">*357  of rent were made to his nominee, it follows that when so made they belonged to him and were a part of his income when received by the bank.  Ormsby McKnight Mitchel,1 B.T.A. 143">1 B.T.A. 143; Louis Cohen,5 B.T.A. 171">5 B.T.A. 171; Samuel V. Woods,5 B.T.A. 413">5 B.T.A. 413; Alfred LeBlanc,7 B.T.A. 256">7 B.T.A. 256; Ella D. King,10 B.T.A. 698">10 B.T.A. 698; Arthur Van Brunt,11 B.T.A. 406">11 B.T.A. 406; George M. Cohan,11 B.T.A. 743">11 B.T.A. 743; Mitchel v. Bowers, 9 Fed.(2d) 414; Mitchel v. Bowers,273 U.S. 759">273 U.S. 759; Bing v. Bowers, 22 Fed.(2d) 450. In each of the several decisions cited by the petitioners to sustain their contentions, the basic facts have shown not simply that the rights involved were such as could be legally1931 BTA LEXIS 2133">*2145  assigned, but the further fact that the assignor had in each case actually parted with all or some part of his title to the income-producing corpus.  In the present case the producer of the income was decedent's lease, not the funds after payment into the bank.  And it was to portions of this fund that the decedent passed title by his assignments which, after receipt and disbursements otherwise made by the bank but not before, became accounts receivable in favor of the assignees.  After these conditions were fulfilled the assignees could have maintained an action against the bank for the amounts due under the assignments; but they at no time could have sued the lessee for such under the lease, since they were neither landlords nor the holders of any interest in the legal title of the property. Murphy v. Hopcroft,142 Cal. 43">142 Cal. 43; 75 P. 567. Neither did such assignments convey an interest in a trust, as further contended by petitioners, since the bank's acceptance of them, under the circumstances, constituted no more than its mere promise to pay the sums specified out of the balance, if any, in its hands that might be found due to the assignor.  1931 BTA LEXIS 2133">*2146 Deeble v. Exchange National Bank,32 Cal. App. 9; 161 P. 1010; Tatsuno v. Pedersen,21 Cal. App. 585; 132 P. 609; Hogan v. Globe Mutual,140 Cal. 610">140 Cal. 610; 74 P. 153; Pohlman v. Wilcox,146 Cal. 440">146 Cal. 440; 80 P. 625; O'Brien v. Garibaldi,15 Cal. App. 518; 115 P. 249. In respect to the second item of income, which includes the several amounts collected by decedent's assignee under the contract with the owners of the Brack Shops Building, we have only the contract made between the decedent and the Standard Fireproof Building Company, which does not set forth the terms and conditions governing the payments of rent.  The agreed statement of facts made by the parties to these proceedings, however, shows that the purchasers of the lease from the Standard Fireproof Building Company agreed in writing to "assume" a payment of $200 per month to decedent for the use of "such easement," and did thereafter pay said rental to decedent until the second day of January, 1922, at which date the assignment under consideration became effective. 1931 BTA LEXIS 2133">*2147  As pertaining to 22 B.T.A. 352">*358  these rentals, the language of the decedent as set forth in the conveying clause of this assignment is as follows: I further hereby assign, transfer and set over to my wife my right to receive from the Brack Shops Building, 527 W. 7th St., Los Angeles, California, as consideration for rear light and entrance privileges secured by me for such building a monthly rental of $200 per month to continue as long as such rear entrance privilege and such rear light protection continues and so long as I am entitled to said $200 per month compensation therefor.  Although we are without complete details respecting the owners' agreement to "assume" payments of these rentals, it is clear that by this assignment only the decedent's "right to receive" them from the Brack Shops Building so long as such right existed, was transferred to the wife, and that the assignor retained in himself full title to the basic easement and the reversion.  Since rent is an incident to the reversion and passes with it, we have uniformly held that its character as income of a lessor who retained the reversion could not be changed by the bare assignment of his right to receive it when due. 1931 BTA LEXIS 2133">*2148 Fred W. Warner,5 B.T.A. 963">5 B.T.A. 963; 11 B.T.A. 406">Arthur H. Van Brunt, supra; Julius Rosenwald,12 B.T.A. 350">12 B.T.A. 350; Charles F. Colbert,12 B.T.A. 565">12 B.T.A. 565; and Bing v. Bowers, supra. Exceptional conditions in the cases cited by petitioners, which they argue point to contrary holdings, do not obtain here.  The determination of the respondent is approved. Decision will be entered under Rule 50.