BRADFORD HOTEL O. CO. v. Commissioner of Int. Rev., 5179.

• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)
• Writing for the Court: MAGRUDER, , and WOODBURY and HARTIGAN, Circuit
• Citation: 244 F.2d 876
• Parties: BRADFORD HOTEL OPERATING CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Docket Number: No. 5179.,5179.
• Decision Date: 27 May 1957

244 F.2d 876 (1957)

BRADFORD HOTEL OPERATING CO., Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 5179.

United States Court of Appeals First Circuit.

May 27, 1957.

Phillip J. Nexon, Boston, Mass., with whom Thomas Kaplan, David H. Greenberg and Goulston & Storrs, Boston, Mass., were on brief, for petitioner.

Morton K. Rothschild, Attorney, Department of Justice, Washington, D. C., with whom Charles K. Rice, Asst. Atty. Gen., and Robert N. Anderson, Attorney, Department of Justice, Washington, D. C., were on brief, for respondent.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit Judges.

HARTIGAN, Circuit Judge.

This is a petition brought by Bradford Hotel Operating Co. for review of a decision of the Tax Court of the United States, entered July 30, 1956, determining deficiencies in its income tax for the fiscal years ending August 31, 1948 and August 31, 1949.

Petitioner, Bradford Hotel Operating Co., under an indenture of lease dated December 20, 1946, leased to Blossom Operating Co. Inc., hereinafter referred to as Blossom, a certain parcel of real

244 F.2d 877

estate, together with a building (known as the Hotel Bradford), equipment, furniture and fixtures located thereon, all situate in Boston, Massachusetts. The term of the lease was thirty-five years, commencing on January 1, 1947 and ending on January 1, 1982, "unless sooner terminated" under the provisions of the lease

By the terms of the lease, as amended by an agreement dated January 16, 1947, Blossom agreed to deposit $250,000 with petitioner, to be held by petitioner "as security for the faithful performance of all of the covenants, conditions and agreements in this lease set forth and contained on the part of Blossom to be fulfilled, kept, observed and performed. * * * It is hereby understood and agreed that petitioner shall always have the right to apply said deposit or the part or portion thereof not previously applied, or from time to time, such one or more parts or portions thereof to the curing of any default that may then exist, without prejudice to any other remedy or remedies which petitioner may have on account thereof."

The lease further provided that petitioner was under no obligation to pay any interest on the deposit, was entitled to mingle the deposit with its own funds throughout the term of the lease and could use the funds as it desired. However, petitioner was obligated to return the deposit to Blossom "immediately upon the expiration of this lease" (or any extension or renewal thereof) provided that Blossom had fulfilled all of its obligations under the lease.

On or about January 1, 1947 Blossom entered into possession of the leased property and by January 16, 1947 Blossom had deposited with Bradford a total of $250,000 pursuant to its obligations under the terms of the aforementioned lease, as amended.

Under an agreement dated September 14, 1949 petitioner and Blossom agreed to a premature termination of "all * * * rights and obligations of the parties" under the lease, as of January 3, 1950, provided Blossom fulfilled certain conditions prior to the effective date of surrender. Clause 6 of this agreement provides as follows:

"In accordance with the terms of said lease, as amended by said indenture dated January 16, 1947, the Tenant deposited with the Landlord the sum of Two hundred fifty thousand dollars ($250,000) as security for the faithful performance by it of all covenants, conditions and agreements in said lease set forth and contained, on the part of the Tenant to be fulfilled, kept, observed and performed. With respect to said deposit, the Tenant releases and discharges the Landlord of and from the obligation to repay or return to the Tenant a portion thereof, viz., One hundred eighty-five thousand dollars ($185,000), and the Landlord agrees to repay or return to the Tenant the balance thereof, viz., Sixty-five thousand dollars ($65,000) as provided in paragraph 7 hereof."

Pursuant to the undertakings contained in this agreement, Blossom delivered up possession of the premises on January 3, 1950 to petitioner and the lease was surrendered as of that date.

Petitioner reflected the above transaction in its tax return for its fiscal year ending August 31, 1950 by reporting as taxable income the value in 1950 of the sum of $185,000 due to be paid in 1982, computed in accordance with the instructions and tables appearing in the regulations. (U.S.Treas.Reg. 108, § 86.19). The dollar amount of income so reported was $52,735.73. As a result the petitioner claimed a net operaing loss for its fiscal year ending August 31, 1950 which it claimed gave rise to a net operating loss deduction for its fiscal years ending August 31, 1948 and August 31, 1949, respectively.

The respondent, however, pursuant to § 22(a) of the Internal Revenue Code, 26 U.S.C.A. § 22(a), determined that, as a result of the September 14, 1949 agreement, the petitioner received taxable income in the amount of $185,000.

244 F.2d 878

As a consequence of this determination, the respondent further determined that the petitioner had no net operating loss in fiscal 1950 which it could carry back to 1948 and 1949, but, on the contrary, that the petitioner had taxable income in 1950. Accordingly, respondent determined a deficiency in income tax for petitioner's fiscal year 1950, and because, prior to the time of respondent's determination, refunds had been made to the petitioner for its fiscal years 1948 and 1949, reflecting the claimed net operating loss arising in petitioner's fiscal year 1950, respondent also determined deficiencies in income tax for petitioner's fiscal years 1948 and 1949.¹

The petitioner duly petitioned the Tax Court for a redetermination of the deficiencies found by the respondent. The sole question before the Tax Court, and presently before us, was whether petitioner in 1950 received $185,000 as taxable income, or only the present value in 1950 of $185,000 due in 1982.

It seems to me that this depends upon whether the petitioner was obliged to return the deposit of $250,000 in 1950 when the lease was terminated, or in 1982 when the original lease would have expired. For, if Blossom could have required the return of the $250,000 deposit upon termination by mutual consent in 1950, then there would be no doubt that the entire sum of $185,000, which it was agreed petitioner did not have to repay, would constitute taxable income in 1950 to petitioner, as a discharge of a present obligation to repay the deposit in 1950.

The Tax Court, declaring that "it is the well-established rule of landlord and tenant law that a deposit made by the tenant as security for promised performance of the covenants of a lease can be retained by the landlord only as long as the relationship of landlord and tenant continues," held, one member dissenting, that upon termination of the lease petitioner had a present obligation to repay the deposit and therefore realized income to the extent of the $185,000 of the deposit it was allowed to retain.

Petitioner, however, urges here, as it did before the Tax Court, that the 1950 termination agreement released it of a non-interest bearing future obligation to repay the deposit in 1982 and therefore as a result of that transaction it was in receipt of taxable income only to the extent of the present value of the sum of $185,000.

Although I believe that the decision of the Tax Court is...