BRADFORD HOTEL O. CO. v. Commissioner of Int. Rev.
| Decision Date | 27 May 1957 |
| Docket Number | No. 5179.,5179. |
| Citation | 244 F.2d 876 |
| Parties | BRADFORD HOTEL OPERATING CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — First Circuit |
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.
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 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
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:
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. 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 correct, I would restrict to some extent the language of the Tax Court's opinion as it might pertain to future cases. In doing so, this court is free to look beyond the law of Massachusetts, since a national scheme is desirable in the determination of tax questions.
The relation in which the security is to be held is a matter of agreement between the parties. Fields Holding Co. v. Chanbrook Realty Co., 1936, 246 App.Div. 241, 285 N.Y.S. 182. Accordingly, the intent of the parties, as gathered from the language employed in the lease agreement, must be given great weight in determining the nature of this relation. See Connecticut Land & Mortgage Co. v. Lesser, 1950, 136 Conn. 580, 72 A.2d 805.
In the instant case it is abundantly clear from the terms of the lease that the parties intended the deposit to be held only as security for the faithful performance of all of the covenants by the lessee, Blossom. "Where such a deposit is made by a tenant for security, the lessor's right of retention exists as long as the relation of landlord and tenant continues and until the termination of such relation and consequent cessation of the liabilities which the deposit was intended to secure, at which time the landlord is bound to return the deposit or security, or account therefor." Thibault v. Frechette, 1948, 135 Conn. 170, 175, 62 A.2d 863, 865. See also Connecticut Land & Mortgage Co. v. Lesser, supra; Vailsburg Amusement Co. v. Criterion Inv. Co., 1931, 156 A. 114, 9 N.J.Misc. 951; 1 Underhill, Landlord & Tenant § 370 (1909).
Applying this principle to the case at hand, as did the Tax Court, it would seem that once the relation of landlord and tenant was terminated by the agreement of September 14, 1949 there existed no further liabilities which the deposit was intended to secure and therefore the petitioner was obliged to return the entire deposit to Blossom at that time.2 If the petitioner had returned to Blossom the deposit of $250,000 when possession of the premises was surrendered by Blossom in January 1950 and Blossom had immediately paid petitioner $185,000 in cash as consideration for the termination of the lease, there would be no doubt that the entire sum of $185,000 would constitute income to the taxpayer in 1950. Hort v. Commissioner, 1941, 313 U.S. 28, 61 S.Ct. 757, 85 L.Ed. 1168. In substance the transaction in the present case does not differ materially from the situation in the Hort case.
The petitioner, however, seems to argue that the provision in the instant lease which states that the deposit was to be...
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Fiore v. Commissioner
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