Mantell v. Comm'r of Internal Revenue
| Citation | 17 T.C. 1143 |
| Decision Date | 14 January 1952 |
| Docket Number | Docket No. 27978. |
| Parties | JOHN MANTELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
The sum received by petitioner-lessor upon execution of a lease, as security for the lessees' performance of the terms of the lease, was not taxable income upon receipt where lessor was under obligation to repay it unless in the meantime it should be appropriated to make good a default by the lessees. Maurice Survis, Esq., for the petitioner.
F. L. Van Haaften, Esq., for the respondent.
The respondent has determined a deficiency of $13,771.62 in petitioner's income tax for the taxable year ended December 31, 1946. The entire deficiency results from the respondent's determination that the sum of $33,320 paid to the petitioner upon the execution of a lease in 1946 was paid in prepayment of rent rather than as a security deposit, and was taxable income in that year. An additional sum of $10,000 designated in the lease as security and paid in later years is not in issue.
The petitioner is an individual who maintains his place of business in Miami Beach, Florida. His income tax return for the calendar year 1946 was filed with the collector of internal revenue at Jacksonville, Florida. His income was reported on the cash receipts and disbursements basis.
For approximately 30 years, the petitioner has been a hotel and real estate operator, and occasionally a builder, in Miami Beach. He was the owner of a hotel in Miami Beach which was built by him and known as Mantell Plaza Hotel. The structure and land cost approximately $250,000 and contained personalty which cost approximately $50,000.
On October 17, 1946, the petitioner leased the Mantell Plaza Hotel and the personalty contained therein. On April 30, 1947, the petitioner consented to an assignment of the entire interest of one of the original lessees, namely, Rose K. Rich, to Eli Katz, and Louis Katz, who in turn executed an agreement on the same date, assuming all the terms and conditions of the lease as if they had been parties to the lease agreement as lessees.
On or about November 15, 1948, the lessees filed a bill of complaint against the petitioner-lessor in the Circuit Court of the Eleventh Judicial Circuit in and for Dade County, Florida, alleging ‘that the said defendant has breached said lease and should therefore be declared by this Honorable Court to return to your plaintiffs the security moneys placed by your plaintiffs with the defendant in the sum of $43,320.00 for the faithful performance on their part of the terms of said lease.‘ The petitioner successfully defended this suit.
On August 9, 1949, the petitioner entered into an amended lease with the lessees whereby the term was reduced from 10 (seasonal) years to 5 (seasonal) years, and the dates of the rental installments and the return of the security deposit were changed, and the total rent reduced. Except for these changes, all of the covenants of the original lease remained in full force and effect.
The amended lease was entered into to settle disputes that had arisen between the petitioner-lessor and the lessees. The petitioner had disputes with the lessees over covenants in the lease during each of the four years that the lease was in effect.
On november 9, 1950, the original lease as amended was cancelled because of the lessees' inability to pay the rent.
The original lease provided for a term beginning November 1946, and ending June 1, 1956. The total rent for this term was $333,200. The rental installments from January 1, 1947, to September 1, 1948, were as follows:
+----------------------+
¦Jan. 1, 1947 ¦$15,000¦
+--------------+-------¦
¦Feb. 1, 1947 ¦10,000 ¦
+--------------+-------¦
¦March 1, 1947 ¦8,320 ¦
+--------------+-------¦
¦Sept. 1, 1947 ¦5,000 ¦
+--------------+-------¦
¦Oct. 1, 1947 ¦5,000 ¦
+--------------+-------¦
¦Nov. 1, 1947 ¦5,000 ¦
+--------------+-------¦
¦Dec. 1, 1947 ¦5,000 ¦
+--------------+-------¦
¦Jan. 1, 1948 ¦5,000 ¦
+--------------+-------¦
¦Feb. 1, 1948 ¦8,320 ¦
+----------------------+
There were no rental installments due from February 1, 1948, to September 1, 1948. The rental installments from September 1, 1948, to the end of the term were due on the first day of the months of September, October, November, December, and on December 20 of the years 1948 through 1955. The payments due were to be $10,000, $5,000, $5,000, $5,000, and $8,320, respectively. The final installment was due on December 20, 1955.
Under the amended lease of August 9, 1949, the rents for the period beginning September 1949 and ending June 1, 1951, the date the amended lease expired, totaled $85,960, which was $14,000 less than the total sum of payments due for this period under the original lease. This reduction in rent was part of the settlement of the disputes between the lessor and the lessees.
The amount of rent payable and the payment dates under the amended lease were:
+---------------------------------------------+
¦ ¦1949 ¦ ¦1950 ¦ ¦1951 ¦
+-------+-------+-------+-------+------+------¦
¦Sept. 1¦$14,000¦Aug. 15¦$10,000¦Jan. 1¦$3,864¦
+-------+-------+-------+-------+------+------¦
¦Oct. 1 ¦3,700 ¦Sept. 1¦7,700 ¦Feb. 1¦3,864 ¦
+-------+-------+-------+-------+------+------¦
¦Nov. 1 ¦7,700 ¦Oct. 1 ¦3,850 ¦Mar. 1¦3,864 ¦
+-------+-------+-------+-------+------+------¦
¦Dec. 1 ¦3,700 ¦Nov. 1 ¦3,850 ¦Apr. 1¦3,864 ¦
+-------+-------+-------+-------+------+------¦
¦Dec. 20¦4,220 ¦Dec. 1 ¦3,850 ¦May 1 ¦3,864 ¦
+-------+-------+-------+-------+------+------¦
¦ ¦ ¦Dec. 20¦4,070 ¦ ¦ ¦
+---------------------------------------------+
Under the terms of the original lease, the lessees covenanted with the lessor to deposit the sum of $33,320 upon the execution of the lease and additional sums of $5,000 on April 1, 1947, and $5,000 on April 1, 1948, resulting in a total sum of $43,320, which was to be held by the lessor ‘as security for the performance by the Lessees of all terms, conditions, covenants and agreements in this lease contained by the Lessees to be kept and performed, as well as security for the return by the Lessees unto the Lessor of the real and personal property hereby demised in accordance with the terms of this agreement, and to indemnify the Lessor against any damage to the said premises, both real and personal, and for any damage sustained by the Lessor on account of any breach of or default in the lease by the Lessees.‘ In the leases executed by the petitioner-lessor and the lessees and in the bill of complaint filed by the lessees against the petitioner-lessor, the $43,320 security deposit was always designated as security and never as prepaid rent.
The security payments were paid to the petitioner-lessor when due. The lessor and the lessees at all times regarded the sum as a security deposit. There was an acknowledged liability on the part of the petitioner-lessor to hold himself accountable to the lessees for the full security fund and to return it at a future date to the lessees.
The original lease specifically provided that the security deposit was not to be applied as rent and that the lessor was not required to pay interest on the sums or keep them in a separate account.
In the original lease, it was agreed that if the lessees ‘shall not then be in default,‘ the lessor will return the security deposit to the lessees, partly in the tenth year of the term and partly after the expiration of the lease, in the following installments:
+-----------------------------------------------------------------------------+
¦Sept. 3, 1955 ¦$10,000¦
+---------------------------------------------------------------------+-------¦
¦Oct. 3, 1955 ¦5,000 ¦
+---------------------------------------------------------------------+-------¦
¦Nov. 3, 1955 ¦5,000 ¦
+---------------------------------------------------------------------+-------¦
¦Dec. 3, 1955 ¦5,000 ¦
+---------------------------------------------------------------------+-------¦
¦Dec. 20, 1955 ¦8,320 ¦
+---------------------------------------------------------------------+-------¦
¦Simultaneously with the return by lessees unto the Lessor of the ¦ ¦
¦demised premises in accordance with the terms of the Lease respecting¦10,000 ¦
¦such return ¦ ¦
+---------------------------------------------------------------------+-------¦
¦Total ¦$43,320¦
+-----------------------------------------------------------------------------+
In the amended lease, the dates and amounts with respect to the return of the security deposit were...
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