Belz Inv. Co. v. Comm'r of Internal Revenue
| Decision Date | 27 September 1979 |
| Docket Number | Docket No. 7079-77. |
| Citation | 72 T.C. 1209 |
| Parties | BELZ INVESTMENT CO., INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner's subsidiary, Expressway, sold a Holiday Inn to Holiday Inns of America, Inc., in a sale-leaseback agreement which contained an option to repurchase. Held, all of the rental payments made by Expressway to Holiday during the year 1973 were deductible by Expressway as rent.
2. Petitioner constructed three special purpose stores for Miller-Wohl Co., Inc., on property owned by petitioner in Memphis, Tenn., and leased the properties to Miller-Wohl, which guaranteed payment of the rent. The construction was financed through deeds of trust, had control over any proceeds from insurance on, or condemnation of, the properties. Not long after the stores were completed, Miller-Wohl filed for an arrangement under chapter XI of the Bankruptcy Act and vacated the properties. Petitioner filed a claim in the bankruptcy proceeding for “rental.” This claim was settled by payment to petitioner of $750,000, $60,037.46 of which was attributable to its administrative claim and the balance to its general claim. Petitioner and the financing institutions agreed that the general claim proceeds would be used to modify the special purpose buildings so they could be rented to others. Held, the entire amount of the claim received by petitioner in 1973 is taxable to petitioner as rent.
3. Petitioner is not liable for an addition to tax under sec. 6653(a), I.R.C. 1954, for either 1970 or 1973. Tommy H. Jagendorf, for the petitioner.
Wesley J. Lynes, for the respondent.
Respondent determined the following deficiencies in, and additions to, the Federal corporate income tax of petitioner:
+--------------------------------------------------+
¦ ¦ ¦Addition to tax ¦
+---------------+------------+---------------------¦
¦Taxable year1 ¦Deficiency ¦under sec. 6653(a)2 ¦
+---------------+------------+---------------------¦
¦ ¦ ¦ ¦
+---------------+------------+---------------------¦
¦1970 ¦$102,568.94 ¦$5,128.45 ¦
+---------------+------------+---------------------¦
¦1973 ¦278,221.25 ¦13,911.06 ¦
+--------------------------------------------------+
After concessions by both parties,3 the three issues which remain for the Court's decision are:
(1) Whether payments made in 1973 by petitioner's subsidiary pursuant to a lease agreement executed in a sale-leaseback with option to repurchase transaction relative to a Holiday Inn were deductible as rental expenses or were nondeductible as amount attributable to the repurchase price;
(2) To what extent petitioner, as lessor of real property, is required to include in income an amount received in settlement of a claim filed in the bankruptcy proceeding of the lessee of the real property; and tax under section 6653(a) for either taxable year in issue.
The deficiency and addition to tax for taxable year 1970 result from respondent's adjustments concerning 1973. These adjustments eliminated the net operating loss petitioner claimed to have sustained in 1973 and which petitioner carried back to 1970. Whether petitioner sustained a net operating loss in 1973, which was available to be carried back to 1970, depends upon the resolution of the above issues.4
Some of the facts were stipulated and are found accordingly. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. is a corporation which was incorporated on December 29, 1955, under the laws of the State of Tennessee. Petitioner had its principal place of business in Memphis, Tenn., when the petition in this case was filed.
During the taxable years in issue, petitioner filed consolidated corporation income tax returns with the following corporate subsidiaries, all of which had their principal places of business in Memphis, Tenn.:
+--------------------------------------------+
¦Subsidiaries ¦Date incorporated ¦
+------------------------+-------------------¦
¦ ¦ ¦
+------------------------+-------------------¦
¦Thomas Development Co ¦Nov. 9, 1962 ¦
+------------------------+-------------------¦
¦White Station Road Corp ¦Apr. 17, 1968 ¦
+------------------------+-------------------¦
¦Poplar X-Way Corp ¦May 10, 1966 ¦
+------------------------+-------------------¦
¦Expressway Motel Corp ¦May 23, 1963 ¦
+------------------------+-------------------¦
¦Gateway Development Corp¦Aug. 15, 1962 ¦
+--------------------------------------------+
“Rental”5 Payments
In 1967, Holiday Inn of America, Inc. (hereinafter Holiday), completed construction of a motel in White Plains, N.Y., for Expressway Motel Corp. (hereinafter Expressway). This motel, later to be known as the Holiday Inn of White Plains, N.Y., was constructed on land which Expressway had previously leased from a third party under a 99-year lease.6 This lease provided for initial monthly rental payments of $1,000 and subsequent monthly payments of $1,200. Land adjacent to the leasehold was owned by Expressway in fee simple. This adjacent land was used as a parking lot for the motel. Expressway operated the motel for approximately the second half of 1967.
Prior to completion of the motel, Expressway became dissatisfied with the time delays involved in completing the motel and with the quality of workmanship with which the motel was built. During the course of negotiations with Holiday concerning these problems, and, from Expressway's viewpoint, as a way of solving them, Expressway agreed to sell the motel to, and simultaneously lease it from, Holiday. rights under the ground lease, and the land adjacent to the motel which Expressway held in fee simple. Specific evidence was not introduced as to how Expressway originally intended the motel to be owned and operated.
Expressway and Holiday entered into an agreement for a concurrent sale and leaseback of the motel property effective as of January 1, 1968. Expressway conveyed its right, title, and interest in the property to Holiday for $1,502,000, of which amount approximately $35,000 represented a profit for Expressway.7 Concurrently, Expressway leased the motel property from Holiday pursuant to a lease agreement (hereinafter agreement), which required Expressway to pay Holiday annual rent in the amount of 25 percent of gross annual guestroom rentals and 5 percent of gross annual restaurant and bar beverage the agreement. During the years 1968 through 1973, the following amounts were generated pursuant to the percentage rental formula:
+-------------------+
¦Year ¦Amount ¦
+------+------------¦
¦ ¦ ¦
+------+------------¦
¦1968 ¦$224,260.02 ¦
+------+------------¦
¦1969 ¦247,371.72 ¦
+------+------------¦
¦1970 ¦261,719.35 ¦
+------+------------¦
¦1971 ¦265,073.28 ¦
+------+------------¦
¦1972 ¦273,481.86 ¦
+------+------------¦
¦1973 ¦276,835.72 ¦
+-------------------+
The agreement further provided: (1) For a term of January 1, 1968, to April 30, 1987, with Expressway having the right to renew the agreement on the same terms and conditions for three additional terms of 10 years each; (2) that Holiday warranted the premises for a period of 1 year against defects in workmanship or materials; (3) that Expressway was to maintain the premises and to pay all charges for assumed, with certain exceptions, the obligations of “tenant” under the ground lease executed between Expressway and the third party and assigned by Expressway to Holiday, including the right to purchase the property;8 (5) that Expressway was to provide and keep in force personal injury insurance, fire insurance, and extended coverage insurance for the property, said insurance to be payable to Expressway, Holiday, and any mortgagee according to their respective interests; (6) that if the premises were partially or totally destroyed and Holiday decided not to rebuild, then Expressway could utilize fire insurance proceeds to rebuild and deduct from the rental amounts otherwise due, any amount expended in excess of the insurance proceeds; Holiday nor Expressway decided to rebuild, then the agreement was terminated, Expressway was to receive the insurance proceeds in excess of Holiday's outstanding first mortgage balance, and Holiday, at Expressway's election, was to quitclaim and assign the property to Expressway; (8) that if damages were awarded as a result of condemnation of all or a portion of the motel property, then Expressway was entitled to all damages awarded with respect to its leasehold interest plus two-fifths of the damages awarded with respect to Holiday's fee and ground lease interests, while Holiday was only entitled to three-fifths of the damages awarded with respect to its own interests; and (9) that if the motel property was so substantially taken by condemnation as to make the premises unsuitable for continuing motel operations, then the agreement was terminated, Expressway was to receive the condemnation awards in excess of Holiday's outstanding first mortgage balance, and Holiday, at Expressway's election, was to quitclaim and assign the remaining property to Expressway.
16. At any time after this * * * Agreement has been in effect for a period of nine years and ten months and upon two months written notice, * * * the Lessee shall have the option to purchase the subject premises for the purchase price of $1,502,000.00 reduced by the excess, if any, of the gross rental payments made by Lessee * * * over and above the sum of $1,438,000.00, provided, however, if said option is exercised prior to the time that this * * * Agreement has been in effect for a period of ten years there shall be substituted for the $1,438,000 above, the sum of (a) the...
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