Bradford Hotel Operating Co. v. Comm'r of Internal Revenue

• Decision Date: 06 June 1956
• Docket Number: Docket No. 51840.
• Citation: 26 T.C. 454
• Parties: BRADFORD HOTEL OPERATING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

26 T.C. 454

BRADFORD HOTEL OPERATING CO., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 51840.

Tax Court of the United States.

Filed June 6, 1956.

Phillip J. Nexon, Esq., and David H. Greenberg, Esq., for the petitioner.

Joseph Landis, Esq., for the respondent.

Petitioner leased real property for a 35-year term commencing January 1 1947, expiring January 1, 1982. A deposit of $250,000 was made by the lessee with the petitioner, as security for the performance of its obligations under the lease, and the petitioner was given the right to commingle and use the deposit for its own purposes without interest. The deposit was to be returned upon the expiration of the lease. On September 14, 1949, the parties entered into an agreement for the termination of the lease on January 3, 1950, the agreement providing for the return on that date of $65,000 of the deposit and was to be released from its obligation to repay the balance of $185,000. Held, the petitioner was immediately obligated to repay the deposit in 1950 when the lease was mutually terminated and it realized income of $185,000 in that year when it was released from its obligation to repay the $185,000 balance of the security deposit. Warren Service Corporation v. Commissioner, (C.A. 2) 110 F.2d 723, not followed.

MULRONEY, Judge:

The respondent determined deficiencies in petitioner's income tax for the fiscal years ended August 31, 1948, 1949, and 1950, in the amounts of $10,269.24, and $17,004.65, respectively. All issues with respect to 1948 and 1949, and certain issues with respect to 1950, have been settled. The only issue for decision is the amount of income petitioner-lessor realized in January 1950 when a lease was canceled by mutual agreement of petitioner and lessee, and petitioner was released from an obligation to repay to the lessee $185,000 of a $250,000 deposit lessee had made for the faithful performance of a 35-year lease.

Petitioner, a corporation, together with its subsidiary, Oceanside Hotel, Inc., filed its consolidated income tax returns for the district of Massachusetts. The stipulation of facts and the exhibits annexed thereto and the supplemental stipulation of facts show the following:

On December 20, 1946, petitioner, as landlord, entered into an indenture of lease, with Blossom Operating Co., Inc., as tenant, whereby the tenant leased landlord's hotel in Boston, together with equipment, furniture, and fixtures, for a term of 35 years ‘commencing at five (5) P.M. on the first day of January, 1947 and ending at five (5) P.M. on the first day of January, 1982, unless sooner terminated as hereinafter provided.’ The lease provided for certain rights of termination by either party in case of damage by fire or appropriation in condemnation proceedings. The lease granted the tenant the right to extend the lease 7 years upon proper notice. Clause 4 of the lease provided for an annual rental of $300,000, payable in monthly installments of $25,000. The lease instrument contains several pages of covenants by tenant, wherein tenant agrees to numerous conditions with respect to its operation of the leased hotel, and agrees to make repairs and replacements. It contains the usual clauses for the landlord's right of reentry in case the tenant shall fail to perform ‘any of the covenants, terms, provisions, conditions or agreements contained in this lease’ and it secures to the landlord the right to collect any existing deficiency existing at the time of reentry and the difference between the fair rental value for the remainder of the term and the rent named in the lease.

Clause 16 of the lease provides, as follows:

The Landlord hereby acknowledges that the Tenant has this day deposited with it the sum of one hundred thousand dollars ($100,000) and the Tenant agrees that it will deposit with the Landlord on or before January 10, 1947 the further sum of two hundred thousand dollars ($200,000.00, which said total deposit of three hundred thousand dollars ($300,000.00) shall be held 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 the Tenant to be fulfilled, kept, observed and performed. If the Tenant shall fail, refuse or neglect to deposit with the Landlord said sum of two hundred thousand dollars ($200,000.00) on or before January 10, 1947 as herein provided, this lease shall, at the option of the Landlord, be null and void and the Landlord shall be entitled to keep and retain said deposit of one hundred thousand dollars ($100,000.00) as liquidated damages. It is hereby understood and agreed that the Landlord 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 the Landlord may have on account thereof. If the Tenant shall faithfully fulfill, keep, perform and observe all of the covenants, conditions and agreements in this lease set forth and contained on the part of the Tenant to be fulfilled, kept, performed and observed, the deposit or the part or portion thereof not previously applied, shall be returned to the Tenant immediately upon the expiration of this lease or any extension or renewal thereof, provided the Tenant has vacated the demised premises and surrendered possession thereof to the Landlord at the expiration of said term or any extension or renewal thereof as provided herein. * * * The Landlord shall not be obliged to hold said deposit as a separate fund, but on the contrary may use the said deposit for its own purposes and commingle the same with its other funds, and the Landlord shall not be liable to the Tenant for any interest thereon or on any part or portion thereof.

On January 16, 1947, after the tenant was in possession under the lease, the parties to the lease indenture executed an amendment to the lease of December 20, amending the rent paying clause to provide for an annual rental of $250,000 for the first 5 years, $275,000 for the next 5 years, and $310,000 for the balance of the term and the 7 extension providing the tenant exercised the option to extend. The amendment also changed the first two sentences of clause 16 to read, as follows:

16. The Landlord hereby acknowledges that the Tenant has deposited with it the sum of two hundred fifty thousand dollars ($250,000.00) which, together with the further deposits (hereinafter collectively referred to as ‘deposit’) to be made as provided hereunder, shall be held 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 the Tenant to be fulfilled, kept, observed and performed. The Tenant agrees that on or before January 1, 1952 it will deposit with the Landlord the further sum of twenty-five thousand dollars ($25,000.00) and on or before January 1, 1957 it will deposit with the Landlord the further sum of thirty-five thousand dollars ($35,000.00).

On September 14, 1949, the parties to the lease indenture executed another agreement which provided for the earlier termination of the original lease. The preamble of this instrument recites, in part:

WHEREAS the Landlord did let unto the Tenant under an indenture of lease dated December 20, 1946 a certain parcel of land in the City of Boston, County of Suffolk Commonwealth of Massachusetts, with the building thereon, known as the Bradford Hotel, numbered 275 Tremont Street, and more particularly described therein, for the term commencing at five p. m. on the first day of January, 1947 and ending at five p.m. on the first day of January, 1982, unless sooner terminated or extended by the exercise of an option, all as provided in said lease, * * * and

WHEREAS the Tenant desires to terminate and end said lease and to relieve itself of any further obligations thereunder and to voluntarily surrender its possession of the demised premises under said lease on the effective date hereinafter specified and the foregoing is acceptable to the Landlord upon the terms, provisions and conditions which are hereinafter recited, * * *

Paragraph 1 of the agreement goes on to provide the tenant will surrender and deliver up possession of the leased premises ‘at five p.m. on the third day of January, 1950 * * * and it is agreed that thereupon said lease shall terminate and end, the rent for the month of January, 1950 shall be apportioned, and all further rights and obligations of the parties hereto under said lease shall cease and terminate except as hereinafter provided in this agreement.’

Clause 6 of this agreement is, 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.

Clause 7 of this agreement makes provision for the payment of the $65,000 ‘Provided the Tenant has surrendered possession of the demised premises to the Landlord as set forth in paragraph 1’ and has kept the other provisions and conditions contained in this agreement. The clause makes provision for the payment of the $65,000 by paying $25,000 simultaneously with the surrender of possession and the balance by a series of...