Galt v. Comm'r of Internal Revenue
| Decision Date | 27 February 1953 |
| Docket Number | Docket Nos. 27844,29528. |
| Citation | 19 T.C. 892 |
| Parties | ARTHUR T. GALT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Walter W. Ross, Esq., Gerhard E. Seidel, Esq., and Elroy C. Sandquist, Jr., Esq., for the petitioner.
Thomas A. Steele, Jr., Esq., for the respondent.
1. Rental income of property owned by petitioner and leased by him for 20 years partially on a percentage arrangement, held taxable to petitioner notwithstanding that part of the percentage income was given to his sons for the full lease period as evidenced by a letter and lease lease terms covering payment to the sons.
2. Pursuant to concessions of the parties, gift tax liability of petitioner for 1946 determined.
3. Deduction of lawyer's fee for various services determined.
Respondent determined deficiencies in petitioner's taxes for 1946 as follows:
+--------------------------------------+
¦Docket No. 27844¦Gift tax ¦$68,079.00¦
+----------------+----------+----------¦
¦Docket No. 29528¦Income tax¦69,622.52 ¦
+--------------------------------------+
Concessions have been made by petitioner and respondent with respect to their claims relating to both the income and gift tax deficiencies.
The following issues remain in controversy: (1) Is petitioner subject to income tax on certain rental payments made to his sons? (2) Is petitioner subject to gift tax, by reason either of those payments or of any assignment to the sons? (3) Is a lawyer's fee paid by petitioner in 1946 deductible in whole or in part as an expense in that year, or must it be amortized over a longer period?
These proceedings were consolidated for trial.
The stipulations filed by the parties are incorporated herein, and the facts stipulated are made part of these findings.
Petitioner is an individual, with an office at 69 West Washington Street, Chicago, Illinois. Petitioner was engaged in managing his business affairs, which included considerable dealings in real estate. He was admitted to the Illinois Bar in 1901, but practiced regularly as an attorney only for a short while. For 1946, he filed Federal income tax and gift tax returns with the collector of internal revenue for the first district of Illinois.
In February 1946, and for some time prior thereto, petitioner owned certain real estate (hereinafter also referred to as the ‘Fair Grounds property ‘) situated in the unincorporated limits of Cook County, near Maywood, Illinois, a suburb of Chicago.
Petitioner acquired the Fair Grounds property, consisting of approximately 80 acres, in 1922 at a cost of $64,000. From 1922 until 1946 the property was rented out for various purposes, including truck farming, pig raising, a county fair, automobile racing, and as a stabling ground for riding horses. The rents received by the petitioner from these various activities were not very substantial.
In 1931 the property was leased to the Cook County Fair Association, which constructed a spectators' grandstand and a one-half mile dirt oval track for harness races. Its attempt to operate a county fair was unsuccessful, however, and in 1934 petitioner ejected it from possession, but the track and the grandstand remained permanent improvements on the property.
At the beginning of 1946, the race track had a good foundation, but had not had any maintenance for some time. The steel work of the grandstand was in fair condition, but a considerable portion of the woodwork, such as seats and railings, was in poor condition. There were a number of barns on the property, some of which also were in poor condition.
On February 26, 1946, petitioner, as lessor, entered into a 20-year lease (hereinafter also referred to as ‘the lease‘) with Maywood Park Trotting Association, Inc. (hereinafter also referred to as ‘Maywood Park‘), applicable to some 60 acres of the Fair Grounds property.
The lease provided:
By this lease, made this 26th day of February, A.D. 1946, between Arthur T. Galt of Chicago, Illinois, Lessor, and Maywood Park Trotting Association, Inc., an Illinois corporation, Lessee, Lessor for and in consideration of the covenants and agreements hereinafter mentioned to be kept and performed by Lessee has leased to Lessee the premises in the County of Cook, State of Illinois, known and described as follows:
(Here followed a description of the premises.)
to be occupied solely for the purpose of operating a harness racing track and for the attendant uses usually associated therewith, and for no other purpose without the written consent of the Lessor.
To have and to hold the same unto the Lessee from the 2nd day of January, 1946 until the 31st day of December, 1965.
And the Lessee in consideration of said demise, covenants and agrees with the said Lessor as follows:
SECTION 1. To pay as rent for said demised premises the sum of Seven Hundred Thousand ($700,000) Dollars at the rate of Thirty-five Thousand ($35,000) Dollars per year; one-half of said first annual rental shall be payable upon the signing of this lease and one-half of the first annual rental shall be payable on July 1, 1946, thereafter said annual rental shall be payable in advance on the 2nd day of January of each and every year of the term of this lease. The rental hereinabove mentioned in this Section, being Section 1 of the lease shall be known as ‘the guaranteed fixed rental‘ and all of the said rent provided for herein is hereby reserved.
SECTION 2. In addition to the guaranteed fixed rental provided for in Section 1, Lessee agrees to pay the Lessor the following sums:
One per centum of the first Ten Million ($10,000,000) Dollars wagered on said premises in any one calendar year and agrees to pay two per centum on all amounts wagered in excess of Ten Million ($10,000,000) Dollars in any one calendar year.
The money or amounts wagered on said premises provided for in this Section means all monies wagered on the premises in accordance with the provisions of the ‘Illinois Harness Racing Act‘ in any one calendar year.
All monies wagered on the premises in any one calendar year shall be added to determine the total sum wagered on the premises for that calendar year.
On all monies wagered in any one calendar year on the said premises, the sum of Seventeen Thousand Five Hundred ($17,500) Dollars shall be credited on the amount due Lessor under the per centum clause of this Section. However, nothing herein contained shall relieve the Lessee from paying Lessor the amount provided in Section 1 of this Lease as the guaranteed fixed rental.
All sums that may be due and owing under the provisions of this Section shall be paid on or before Sixty (60) days after the termination of any racing meeting held on the said premises.
SECTION 3. In the event the State of Illinois shall increase or diminish the net percentage of the amount wagered now permitted to be retained by Lessee, the percentage of the Lessor as provided for in Section 2 of this Lease shall be proportionately raised or lowered.
If the United States government or the State of Illinois or any political subdivision thereof shall hereafter impose any additional tax on pari-mutuel wagering at harness racing tracks in the State of Illinois, the percentage of the Lessor as provided for in Section 2 of this Lease shall be proportionately lowered to conform to the diminished net percentage of the Lessee, during the term of such tax.
SECTION 4. Any sums that may be due under the provisions of Section 2 of this lease shall be paid as follows: 40% to Arthur T. Galt, Lessor
The above persons designated to receive 20% each are sons of the Lessor who have irrevocably been given said interests by the Lessor, Arthur T. Galt, and any sums due them hereunder shall be paid to them by mailing the amount so due to their respective residences.
SECTION 5. Lessee shall also have all rights, privileges, easements and appurtenances on or connected with the said premises, together with the use of any and all equipment, houses, stables, grandstand, sheds, fences and other buildings and improvements now existing thereon for and during the term of this lease.
SECTION 6. As a further consideration for this lease, Lessee agrees to and with the Lessor that the Lessee will pay all taxes and assessments, general and special, and all other impositions, ordinary and extraordinary, of every kind and nature whatsoever levied or assessed upon the demised premises, or any part thereof, or upon any buildings or improvements * * *
Fifty per centum of any and all amounts paid by Lessee for general taxes assessed against the said premises shall be deducted from the amount due Lessor under the percentage clause of Section 2 of this lease.
SECTION 9. All buildings, improvements, betterments and changes or alterations on said premises shall at the expiration or termination of this Lease whether by lapse of time or for any other cause, remain on said premises and belong to the Lessor.
SECTION 26. That if, during the term of this lease, Lessee shall abandon the premises hereby leased, or if the same shall become vacant, or if Lessee shall become insolvent or bankrupt, or take advantage or receive the benefits of any bankruptcy, insolvency or debtor's relief act, or if Lessee shall compound its debts or sign over its estate or effects for payment thereof, or if any execution or attachment shall be issued against the Lessee or any of Lessee's effects whereupon the said premises shall be taken or attempted to be taken, or if a receiver or trustee should be appointed of the Lessee's property, or if this lease shall by operation of law devolve upon or pass to any person or persons, firm, association or corporation other than Lessee, or if the Lessee, without Lessor's prior written consent, shall suffer or permit the demised premises or any part thereof to be used or occupied except as herein provided by any person, firm,...
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