C.V.L. Corp. v. Comm'r of Internal Revenue

• Citation: 17 T.C. 812
• Decision Date: 23 November 1951
• Docket Number: Docket No. 25198.
• Parties: C.V.L. CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 812

C.V.L. CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 25198.

Tax Court of the United States.

Promulgated November 23, 1951.

1. A sum received the petitioner in the taxable year constituted the purchase price of an option and was not rental income in that year.

2. A delinquency penalty was properly determined for a year for which it was later ascertained that no tax was due because a net operating loss for a subsequent year was allowable as a carry-back to the taxable year. Cf. Manning v. Seeley Tube & Box Co. of New Jersey, 338 U.S. 561. Hugh F. Purvis, C.P.A., for the petitioner.

Newman A. Townsend, Jr., Esq., for the respondent.

The respondent has determined deficiencies in the petitioner's income tax liability for the taxable years ended September 30, 1945, 1946, and 1947 in the amounts of $645.52, $1,571.20 and $39,011.89, respectively, and a 25 per cent delinquency penalty amounting to $161.38 for the taxable year ended September 30, 1945. Some of the issues raised in the pleadings have been settled by the parties. Two issues remain for decision: (1) whether the sum of $120,000 paid to petitioner in the taxable year 1947 constituted taxable income when received; and (2) whether the respondent erred in determining a 25 per cent delinquency penalty for the taxable year 1945. Our decision on the first issue will determine the amount of the net operating loss for 1947 which may be used as a net operating loss carry-back from the taxable years 1945 and 1946.

FINDINGS OF FACT.

The petitioner was organized as a corporation under the laws of Florida on October 1, 1942. Its income is computed in its books of account and in its tax returns on the accrual basis and for a fiscal year ending September 30. For the fiscal years ended September 30, 1945, September 30, 1946, and September 30, 1947, the petitioner filed its tax returns with the collector of internal revenue for the district of Florida at Jacksonville.

In 1946, all of petitioner's outstanding capital stock was owned by Vincent and Margot Valcarce, hereinafter referred to as Vincent and Margot, who are husband and wife. Vincent owned two-thirds of the stock which he acquired in 1942 and Margot owned the remaining third which she acquired in 1943. Vincent is a citizen of Cuba and does not speak English. Margot is a naturalized citizen and speaks English fluently.

The petitioner owned and operated a hotel known as the Royalton Hotel located in Miami, Florida, which it purchased in 1942. Margot and her two sisters were active in the management of the hotel until 1943 when it was leased and managed by the Navy Department as quarters for Navy personnel. In 1946, when the petitioner reacquired possession from the Navy, Vincent and Margot no longer desired to operate the hotel because one of Margot's sisters who was active in its management had died and, in addition, Margot was expecting a child.

On October 31, 1946, the petitioner leased the hotel property to Flagler Leases, Inc., for a 99-year term commencing November 1, 1946, for $14,000 annual rental, plus the lessee's agreement to pay taxes, assessments, insurance, and water rents imposed on the property and to make repairs and to rebuild or repair the property in case of destruction by casualty. In addition to provisions for leasing the property, the lease indenture contained an ‘Option to Purchase‘ section which provided that in consideration of the sum of $120,000 received upon execution of the lease indenture, the lessor gave the lessee an option to purchase the fee simple title to the property for $500,000 during the period commencing November 1, 1960, and ending October 31, 1965. The $120,000 sum was to be applied to the purchase price of the fee simple title if the option was exercised.

This section also provided that the option was ‘co-existent with the lease and demise herein made‘ and the $120,000 sum would be forfeited to the lessor as damages if the lessee defaulted in any of the terms, covenants, and conditions of the lease. The section of the lease indenture containing the mutual covenants of the lessor and lessee contained a similar provision. This section expressly provided that the lease was not ‘co-existent with‘ the option, and remained in effect if the option was not exercised.

The lease indenture contains no provision restricting the petitioner's use or disposition of the $120,000 sum. Nor is there any provision for the return of the sum to the lessee except that it is to be applied to the purchase price if the lessee exercises the option.

On the lessee's books of account, the $120,000 sum was charged to an account entitled ‘Option to Purchase‘ and was still carried in this account as of March 1, 1951.

The lease and option provisions of the indenture were still in effect at the time this proceeding was heard.

In negotiating the lease and option, the lessor contemplated using the $120,000 sum to retire the mortgage on the hotel. The balance due on the mortgage on September 30, 1945, 1946, and 1947 was as follows:

+--------------------------------+
                ¦Date              ¦Balance due  ¦
                +------------------+-------------¦
                ¦September 30, 1945¦$115,396.00  ¦
                +------------------+-------------¦
                ¦September 30, 1946¦110,795.74   ¦
                +------------------+-------------¦
                ¦September 30, 1947¦85,416.89    ¦
                +--------------------------------+
                

The annual installments of principal and interest were approximately $10,000.

Since October 31, 1946, the petitioner's activity has been confined to the collection of rents from the lessee of the hotel property. The petitioner incurred and reported a net operating loss of $17,181.67 for the taxable year 1947.

The petitioner purchased the hotel property at a cost of $163,275.54, allocable as follows:

+-----------------------+
                ¦Land       ¦$42,726.11 ¦
                +-----------+-----------¦
                ¦Furnishings¦13,734.16  ¦
                +-----------+-----------¦
                ¦Building   ¦106,815.27 ¦
                +-----------+-----------¦
                ¦           ¦$163,275.54¦
                +-----------------------+
                

On September 30, 1946, the petitioner's adjusted basis for the hotel property was as follows:

+-------------------------------------+
                ¦Land                     ¦$42,726.11 ¦
                +-------------------------+-----------¦
                ¦Building                 ¦106,815.27 ¦
                +-------------------------+-----------¦
                ¦Furnishings              ¦27,911.23  ¦
                +-------------------------+-----------¦
                ¦Total                    ¦$177,452.61¦
                +-------------------------+-----------¦
                ¦Less depreciation reserve¦28,859.48  ¦
                +-------------------------+-----------¦
                ¦Net depreciated value    ¦$148,593.13¦
                +-------------------------------------+
                

On its Federal tax returns, the petitioner claimed deductions for depreciation upon the basis of a remaining useful life of 20 years for the hotel building and of 10 years for the furnishings.

The rental paid by the Navy Department during its occupancy of the hotel from 1943 to 1946 was $32,500 a year. The Navy Department paid all operating costs, including repairs,...