Helvering v. Schine Chain Theatres

• Decision Date: 21 July 1941
• Docket Number: No. 328.,328.
• Citation: 121 F.2d 948
• Parties: HELVERING, Commissioner of Internal Revenue, v. SCHINE CHAIN THEATRES, Inc.
• Court: U.S. Court of Appeals — Second Circuit

121 F.2d 948 (1941)

HELVERING, Commissioner of Internal Revenue, v. SCHINE CHAIN THEATRES, Inc.

No. 328.

Circuit Court of Appeals, Second Circuit.

July 21, 1941.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Harry Marselli, Sp. Assts. to Atty. Gen., for petitioner.

John E. Hughes, of Chicago, Ill., and Willard S. McKay, of New York City, for respondent.

Before L. HAND, CHASE, and FRANK, Circuit Judges.

L. HAND, Circuit Judge.

This case comes up on a petition to review an order of the Board, expunging a deficiency in the taxpayer's income tax for the year 1933; the only question is whether the Commissioner was right in increasing the gross income by the sum of $629,805.91. The facts on which this depends are as follows. In August, 1929, the taxpayer was a holding company for some twelve corporations, all of which leased or subleased theatres to the Fox Metropolitan Playhouses, Inc. The lessee paid to the taxpayer, as parent company, the sum of $440,753.46, as an initial payment, and all the leases contained the following provision, "such payment being * * * in consideration of the execution of this lease * * * and * * * no part thereof shall under any circumstances be returned to the Tenant notwithstanding any termination of this lease for any reason whatsoever prior to the expiration by lapse of time of the term hereof." In the same month, two other corporations — not affiliated with the taxpayer — received $38,183.26 for leasing their theatres to the Fox Metropolitan Playhouses, Inc., which they paid to the taxpayer as a commission for negotiating the leases and for a protective agreement touching them. In the same month, Fox Metropolitan Playhouses, Inc., paid $44,061.62 to the taxpayer directly for constructing and letting to it a new theatre. The taxpayer reported some $10,000 of these three amounts as income for the year 1929 and entered the balance upon its books as "Advance Rentals Received," which it did not report as income at all. In January, 1931, an internal revenue agent examined the taxpayer's books and one of its accountants gave him one of the leases and showed him the accountant's working papers, containing an amortization schedule of the sums so received. The agent in his report recommended that the return be accepted as filed, and the "agent in charge" sent the taxpayer a form letter stating that he too so recommended. The taxpayer later made a return for the eight months ending August 31, 1930, still reporting the unamortized deposits as liabilities. Another revenue agent, after an interview with the taxpayer's accountant and comparison of the entries in that return with the taxpayer's books, passed it also, the accountant telling him that this method had been accepted by the first agent. A reviewing officer who examined the second agent's report on April 23, 1931, also confirmed it but he added this note: "There is a question whether * * * the entire amount of prepaid rent received during the year should be reported as income or only the amount prorated over the life of the leases as reported by the taxpayer." The report with this notation was received by the "Bureau of Internal Revenue" on August 4, 1931, and kept without complaint or question.

In 1929 another holding company — Herkimer-Little Falls Corporation — had also presented its income tax return for that year, prepared by one of the taxpayer's accountants; in it was a similar item, amounting to $219,325.40, treated in the same way. This also passed the field agent, who declared in his report that "in the event of the abandonment of any of these theatres by the Fox Theatres, this money was to become the property of the respective lessor corporations and was to be used in part at least to replace deterioration." This report was likewise approved together with a second report of the Herkimer-Little Falls Corporation for the first eight months of 1930. (That company and its subsidiaries became affiliated with the taxpayer in 1932.) As of March 31, 1933, the District Court for the Southern District of New York in an insolvency proceeding cancelled all the leases for which these payments had been made; but the taxpayer continued to carry "Advance Rent" as a liability and to amortize the original payments in accordance with its schedule. The Commissioner disapproved this, and assessed the taxpayer for the balance remaining unamortized in 1933, by including it in the gross income for the fiscal year ending August 31, 1933. His position was that the taxpayer was "estopped" to deny the correctness of the method adopted in the preceding years, and that for tax purposes the unamortized balance of the deposits was to be treated as falling due because by their cancellation the leases had come to an end.

The Commissioner raises upon this appeal a subsidiary question based upon the fact that the figures in the taxpayer's return and in the report of the Board do not quite correspond with those in the taxpayer's books. His argument as to this appears to...