Boston Fish Mkt. Corp. v. Comm'r of Internal Revenue, Docket No. 6054-70.
| Decision Date | 29 March 1972 |
| Docket Number | Docket No. 6054-70. |
| Citation | 57 T.C. 884 |
| Parties | BOSTON FISH MARKET CORPORATION, FULHAM AND MALONEY, INC., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Richard G. Maloney, for the petitioners.
William T. Hayes, for the respondent.
Upon termination of various leases of certain of its property, petitioner received a cash payment of $47,500 in settlement of the tenant's obligation, under the controlling agreements, to restore leasehold improvements on the premises to their original, release condition. Held, such a cash payment is not excludable from gross income under sec. 109, I.R.C. 1954, and is taxable as capital gain to the extent that it exceeds the basis of the leasehold improvements.
The Commissioner determined deficiencies of $6,750.59 and $76,871.67 in petitioners' income tax for the calendar years 1966 and 1968, respectively. The principal issue for decision is whether $47,500 paid to petitioner in 1968 by one of its tenants in satisfaction of the tenant's obligation to restore certain leased premises to their original, release condition, is excludable from gross income under section 109, I.R.C. 1954, or taxable in the same manner as an amount received from the sale or exchange of a capital asset (sections 1221 and 1231, I.R.C. 1954). The facts have been stipulated.
Petitioners are Boston Fish Market Corp. and its wholly owned subsidiary, Fulham & Maloney, Inc. Both are Massachusetts corporations. At the date of the filing of the petition in this case, petitioners' principal places of business were at 253 Northern Avenue, Boston, Mass. They filed consolidated Federal corporate income tax returns for the calendar years 1966 and 1968 with the district director of internal revenue at Boston, Mass.
During the years in issue and for a number of years prior thereto, Boston Fish Market Corp. (petitioner) derived a substantial part of its income from the rental of commercial property situated on pier No. 6 in Boston, commonly known as the Boston Fish Pier. Under a series of lease agreements, the first of which was dated September 25, 1947, petitioner leased a certain portion of the Boston Fish Pier property to First National Stores, Inc. (First National or lessee). The September 25, 1947, lease agreement between petitioner and First National covered the contiguous stores numbered 4, 6, 8, and 10 of building 1 on the pier. Subsequent lease agreements between petitioner and First National dated December 22, 1953, May 1, 1958, and September 11, 1963, covered the same stores and the adjoining stores numbered 12 and 14 of building 1 in addition thereto. An amendment to the September 11, 1963, lease agreement was entered into by petitioner and First National on August 11, 1967, covering these same six premises, but converting the term of the lease to a month-to-month tenancy. In terms of store area the premises leased by First National under these agreements did not exceed 10 percent of the property on the pier which was commercially leased by petitioner.
The lease agreements and amendments entered into by petitioner and First National contained substantially identical provisions requiring the lessee, at the termination of the lease, to restore all of the stores to the condition in which they existed at the time First National originally became the lessee thereof. Such provision in the August 11, 1967, lease amendment read as follows:
(The four previous agreements provided that in order to be effective the lessor's written notice of election was to be received ‘on or before the forty-fifth day before the termination of the lease or the date of the termination of any extended (or ‘renewed) term thereof, whichever is later.’)
In a letter dated February 20, 1968, First National notified petitioner of its intention to terminate its lease and vacate the six stores covered thereby. By a letter dated March 6, 1968, petitioner acknowledged such notice and also gave written notice of its own election, under the above-quoted provision of the September 11, 1963, lease and August 11, 1967, amendment thereto, that the premises be restored to their original condition by the lessee. Thereupon, petitioner and First National entered into negotiations in respect of the restoration of the leased property. As a result of these negotiations they arrived at a settlement under which First National paid $47,500 to petitioner on or about March 28, 1968, in lieu of actually restoring the premises to their original condition. And accordingly, on March 28, 1968, petitioner executed a document releasing First National from liability arising out of the lease of the six stores. At the time of the execution of the final release by petitioner and the payment of the $47,500, First National, as lessee, had no outstanding liability for rent under the terms of the lease inasmuch as the rent had been paid in full for the period of time up to the termination date of the lease.
In the course of negotiating the final settlement of its obligations to restore the leased premises, First National had prepared at its request and for its use a report of the estimated cost of such restorations. The report showed a total estimated cost of $47,991. The required restorations consisted principally of (1) the construction of walls to divide the various stores from one another, (2) the installation of specified concrete stairways, (3) the installation of a certain number of toilets and sinks, (4) certain electrical work, and (5) the reconnection of existing radiators. Such repairs or restorations were required as a result of First National's removal, disconnection, or destruction, during the terms of the various leases or at the commencement of the initial leases, of the designated walls, stairways, plumbing fixtures, electrical wiring, and heating apparatus.
Petitioner did not maintain detailed asset ledgers. The parties have, however, stipulated to a Depreciation Schedule (as of December 31, 1967) of a portion of petitioner's depreciable assets, including the leasehold improvements made in connection with petitioner's commercial rentals of the Boston Fish Pier. The only leasehold improvements shown on this schedule as having been acquired prior to the time that First National leased all the stores in issue (December 22, 1953) had an undepreciated basis of $6,337.19 as of December 31, 1967. The record does not show that petitioner had acquired any leasehold improvements after December 22, 1953, in the stores which it had leased to First National. The foregoing pre-December 22, 1953,1 leasehold improvements related to all of petitioner's rental assets at the Boston Fish Pier and were not specifically identified with that portion of petitioner's property that had been leased to First National.
Petitioner did not report as taxable income the $47,500, which it received in 1968 from First National in lieu of the restoration of the six stores. Instead, petitioner reduced the unrecovered basis of certain leasehold improvements, listed in the foregoing Depreciation Schedule, by book entries made as of January 1, 1968, in the total amount of $47,500, as follows:
+----------------------------------------------+
¦Date acquired¦Cost ¦Accumulated ¦Unrecovered¦
+-------------+-------+------------+-----------¦
¦ ¦ ¦depreciation¦cost ¦
+-------------+-------+------------+-----------¦
¦ ¦ ¦ ¦ ¦
+-------------+-------+------------+-----------¦
¦1957/1962 ¦$66,377¦$49,617 ¦$16,760 ¦
+-------------+-------+------------+-----------¦
¦1963 ¦32,166 ¦9,611 ¦22,555 ¦
+-------------+-------+------------+-----------¦
¦1964 ¦12,940 ¦4,755 ¦8,185 ¦
+-------------+-------+------------+-----------¦
¦ ¦111,483¦63,983 ¦47,500 ¦
+----------------------------------------------+
The assets listed in these book entries as having been acquired during the period ‘1957/1962’ also included the above-mentioned assets acquired prior to December 22, 1953, which had an undepreciated basis of $6,337.19 as of December 31, 1967.
In his deficiency notice, the Commissioner determined that petitioner ‘realized taxable income in the amount of $47,500 as a result of the payment * * * by the First National Stores, Inc., on the termination of * * * (its) lease’ of the six Boston Fish Pier stores. The Commissioner accordingly increased taxable income in the amount of $47,500.
The principal issue for decision is whether the $47,500, which petitioner received in lieu of First National's restoration of the six stores to their original condition, is excludable from gross income under section 109, I.R.C. 1954, or is taxable in the same manner...
To continue reading
Request your trial
-
Sirbo Holdings, Inc. v. CIR
...decision here, Judge Raum of the Tax Court accorded capital gains treatment to a payment almost identical in nature. Boston Fish Market Corp., 57 T.C. 884 (March 29, 1972). Sirbo immediately moved for reconsideration, but its motion was denied without a word of explanation. The government d......
-
Sirbo Holdings, Inc. v. C. I. R.
...to be a considered opinion, Judge Raum had allowed such treatment in a similar case decided only two months later, Boston Fish Market Corp., 57 T.C. 884 (1972), or even to explain the differences in result when Sirbo sought reconsideration. Thinking that the Tax Court's lack of response to ......
-
Sirbo Holdings, Inc. v. Comm'r of Internal Revenue
...the value of the property was, if anything, enhanced. 3 Washington Fireproof Building Co., 31 B.T.A. 824 (1934), and Boston Fish Market Corp., 57 T.C. 884 (1972), both involved situations wherein the lessee surrendered possession of the property and, in lieu of its obligation for restoratio......