58th St. Plaza Theatre, Inc. v. Comm'r of Internal Revenue, Docket Nos. 24825

• Decision Date: 27 February 1951
• Docket Number: 24826,24827.,Docket Nos. 24825
• Citation: 16 T.C. 469
• Parties: 58th STREET PLAZA THEATRE, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JEANNETTE BRECHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LEO BRECHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

16 T.C. 469

58th STREET PLAZA THEATRE, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JEANNETTE BRECHER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LEO BRECHER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 24825

24826

24827.

Tax Court of the United States.

Promulgated February 27, 1951.

Paul R. Russell, Esq., and Howard D. Pack, Esq., for the petitioners.

Joseph F. Lawless, Esq., for the respondent.

1. DEDUCTIONS— DEPRECIATION— AMORTIZATION OF LEASEHOLD.— The transaction in which the taxpayer purchased a leasehold from its principal stockholder was bona fide so that thereafter the taxpayer was entitled to deductions for depreciation of the leasehold.

2. INCOME— CAPITAL gain— sale OF LEASEHOLD.— The taxpayer made a bona fide sale of a leasehold to a corporation of which he was the principal stockholder and the purchase price as received by him represented long term capital gains rather than dividends from the corporation.

3. INCOME— FAMILY OWNED CORPORATION.— The sublease of a theater by a corporation to a minority stockholder, where the remainder of the stock was owned by her husband and children, is not recognized for income tax purposes. The sublease served no business purpose of the corporation but merely effected a redistribution of income within an intimate family group at the expense of the corporation and was intended to result in a large reduction in the excess profits taxes of the corporation.

4. INCOME— DIVIDEND— FAMILY OWNED CORPORATION.— Income received by the wife in the above transaction held taxable to her as a dividend from the corporation.

5. DEDUCTIONS— LOSSES— TRANSACTION ENTERED INTO FOR PROFIT.— A security trading arrangement between the taxpayer and his sister-in-law was a transaction entered into for profit and payments made by the taxpayer to his sister-in-law in settlement of litigation arising out of the termination of the arrangement were deductible under section 23(e)(2).

The Commissioner determined deficiencies as follows:

+-----------------------------------------------------------------------------+
                ¦                              ¦ ¦    ¦         ¦              ¦Declared value¦
                +------------------------------+-+----+---------+--------------+--------------¦
                ¦                              ¦ ¦    ¦Income   ¦Excess profits¦excess-profits¦
                +------------------------------+-+----+---------+--------------+--------------¦
                ¦Taxpayer                      ¦ ¦Year¦tax      ¦tax           ¦tax           ¦
                +------------------------------+-+----+---------+--------------+--------------¦
                ¦58th Street Plaza Theatre, Inc¦(¦1942¦$124.74  ¦$7,951.91     ¦              ¦
                +------------------------------+-+----+---------+--------------+--------------¦
                ¦                              ¦(¦1943¦1,674.88 ¦40,197.57     ¦$6,095.50     ¦
                +------------------------------+-+----+---------+--------------+--------------¦
                ¦Jeannette Brecher             ¦ ¦1943¦714.00   ¦              ¦              ¦
                +------------------------------+-+----+---------+--------------+--------------¦
                ¦Leo Brecher                   ¦ ¦1943¦19,713.47¦              ¦              ¦
                +-----------------------------------------------------------------------------+
                

The issues for decision are whether:

1. Plaza is entitled to deductions of $9,523.80 and $11,428.56 for the years 1942 and 1943 for the amortization of a leasehold which it acquired from Brecher on February 28, 1942, for $200,000;

2. Payments received by Brecher from Plaza of $12,000 in 1942 and $14,400 in 1943 on account of the $200,000 selling price of the lease constituted dividends to Brecher rather than long term capital gains;

3. The income from the operation of the Plaza Theatre in 1943, in the amount of $40,396.64, is taxable to Plaza as income, and to Jeannette as a dividend from Plaza;

4. The Commissioner erred in reducing Jeannette's earned income credit for 1943 from $1,400 to $300;

5. The Commissioner erred in disallowing to the extent of $5,000, a $6,500 deduction claimed by Plaza as salary paid to Brecher in 1943;

6. Brecher is entitled to a deduction of $15,833.33 and one of $1,750 for 1943, representing payments made in settlement of litigation instituted by his sister-in-law, Anna Brecher;

7. Brecher, in computing his 1943 tax, is entitled to a deduction of $500 for 1942 representing legal fees in defense of a suit instituted by his sister-in-law;

8. The Commissioner erred in failing to adjust Plaza's excess profits credit for the years 1942 and 1943; and

9. Jeannette is entitled to credits in the amount of $700 for 1943 for two dependents.

FINDINGS OF FACT.

The petitioner, 58th Street Plaza Theatre, Inc., hereafter called Plaza, is a corporation organized and existing under the laws of the State of New York. It used an accrual method of accounting and filed its returns for 1942 and 1943 with the collector of internal revenue for the third district of New York. The petitioners, Leo brecher and his wife, Jeannette, thereafter called Brecher and Jeannette, are individuals who, during the period here in question, filed their returns on a cash basis with the collector of internal revenue for the third district of New York. They filed a joint return for 1942 and individual returns for 1943.

Brecher has been engaged successfully for a long time in the motion picture industry as an exhibitor operating, owning, or leasing motion picture theaters in New York and vicinity. He leased property on 58th Street near Madison Avenue in New York in 1929 and converted the existing stables on the property into a motion picture theater, expending approximately $125,000 of his own funds for that purpose. He called it the Plaza Theatre. The lease was to terminate on September 1, 1939. He managed the theater at all times material hereto, devoting only a part of his time to it. He was engaged in other business activities during the taxable years.

He organized Plaza in 1930 and sublet the theater property to it for a term ending August 31, 1939. The rent paid by Plaza under the sublease was the equivalent of the rent which Brecher had to pay to the landlord plus amounts sufficient to return to Brecher, over the period of the lease, the $125,000 which he had expended in the renovation of the building. The outstanding stock of Plaza consisted of 1,975 shares of which, in the early part of 1939, Brecher owned 1,550 and Jeannette owned 425, which he had given to her.

The land and building, subject to the lease, were sold to Walter Reade in the latter part of 1938. Reade was an operator of motion picture theaters in the New York area. The sale came as a complete surprise to Brecher who immediately attempted unsuccessfully to negotiate a new lease with Reade. Brecher then appealed to influential friends in a motion picture business who interceded in his behalf with Reade and, as a result, Reade leased the premises on June 21, 1939, to Brecher for a term of 20 years commencing September 1, 1939. The rental was $30,000 per year, 15 per cent of annual box office receipts in excess of $225,000, plus all taxes on the property in excess of $7,500 per annum. Brecher was required to make a security deposit of $50,000, most of which he paid out of his own funds and for the balance of which he gave his personal notes. He was to remain personally liable for the payment of the notes notwithstanding any assignment of the lease, and was subject to certain restrictions should he acquire another theater or any interest in another theater near the Plaza Theatre.

Brecher negotiated the lease for his own account and not on behalf of Plaza. Plaza could not have obtained the lease from Reade.

Plaza occupied and operated the theater commencing September 1, 1939, under an oral agreement with Brecher for tenancy from month to month terminable at will. Plaza, pursuant to that agreement, paid to Reade the rent required under his lease to Brecher and also paid to Reade such notes of Brecher's for the security payment as became due after September 1, 1939. That arrangement continued until February 28, 1942, on which date Brecher sold the lease to Plaza for $200,000, payable $1,200 per month without interest. The fair market value of the lease at that time was at least $200,000.

Plaza paid Brecher $12,000 in 1942 and $14,400 in 1943 as a part of the purchase price of the leasehold. Brecher reported those amounts as long term capital gains on the sale of the lease. The Commissioner, in determining the deficiencies, held that they constituted dividends from Plaza. The sale of the lease by Brecher to Plaza was bona fide and the above amounts received on the purchase price were long term capital gains.

Plaza claimed deductions for 1942 and 1943 of $9,523.80 and $11,428.56, representing amortization of the cost of the leasehold. The Commissioner disallowed those deductions in determining the deficiencies on the grounds that Plaza was always the beneficial owner of the lease and the lease had no value on February 28, 1942. The Commissioner erred in disallowing the deductions claimed by Plaza for amortization of the cost of the lease.

Brecher owned 1,050 shares, Jeannette owned 425 shares, their son owned 250 shares and their daughter owned 250 shares of the stock of Plaza on December 29, 1942. The children received their shares as gifts from Brecher. Plaza on that day subleased the theater to Jeannette for a term of 5 years commencing January 1, 1943, with provision for renewals. Jeannette was required to pay all taxes on the property in excess of $7,500 per annum, a fixed rental of $40,000, 15 per cent of the amount by which the box office receipts exceeded $225,000 in each year and $15,000 per annum out of the profits from the operation of the theater. The lessor could cancel the lease if less than $20,000 was paid out of the profits in any two consecutive years.

Reade was not informed of the sublease.

1942 and 1943. The proof on this issue is so...