Meredith v. Comm'r of Internal Revenue, Docket No. 15569.

• Decision Date: 15 March 1949
• Docket Number: Docket No. 15569.
• Citation: 12 T.C. 344
• Parties: OWEN MEREDITH, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

12 T.C. 344

OWEN MEREDITH, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 15569.

Tax Court of the United States.

Promulgated March 15, 1949

The proceeds of fire insurance policies taken out and paid for by the lessee, covering improvements placed on the property by the lessee under a lease agreement which gave the petitioner absolute ownership of improvements when placed on the property, subject only to the lessee's use during the term of the lease, held, taxable to the petitioner at capital gain rates under section 117(j), Internal Revenue Code. John D. McQueen, Jr., Esq., and Carl C. Jamison, C.P.A., for the petitioner.

Frank M. Thompson, Jr., Esq., for the respondent.

OPINION.

LEMIRE, Judge:

This proceeding involves an income and victory tax deficiency of $4,837.31 for 1943. The only adjustment made by respondent is for 1942 income, which is involved by reason of the forgiveness feature of the Current Tax Payment Act of 1943.

The facts have all been stipulated and are incorporated herein as set out in the written stipulation of facts filed by the parties.

The only issue presented is whether the cash payments which the petitioner received in 1942 as the proceeds of certain fire insurance policies, covering improvements placed on the premises by petitioner's lessee, are taxable as capital gain or as ordinary income.

The facts may be summarized as follows: The petitioner entered into a lease agreement on January 10, 1941, with the Petroleum Carrier Corporation, of Jacksonville, Florida, under which the corporation leased from the petitioner for a period of ten years, at a rental of $600 a year, several parcels of real estate located at Tuscaloosa, Alabama. The lessee agreed to pay a rental of $600 annually and to erect on the premises within a period of three months certain improvements consisting of a warehouse, wharf, and docks, to cost not less than $8,000. It was provided that these improvements ‘shall upon being placed, erected and constructed on said lot or parcel of land be and become fixtures, and become and be, the absolute property of said Owen Meredith, subject only to the terms of this lease.‘

The lessee agreed at its own expense to keep the improvements covered by fire insurance policies taken out in the name of and made payable to the lessor. It was further provided that in case of the destruction of improvements by fire the lessor would permit the lessee, upon its request, to use the proceeds of the insurance policies to replace the destroyed property.

The improvements mentioned in the agreement were completed in September 1941 and fire insurance policies thereon in the aggregate amount of $20,000 were taken out by the lessee in the petitioner's name. These improvements were completely destroyed by fire on July 14, 1942, and on August 6 of that year the petitioner received from the insurance companies the net proceeds of the several policies, amounting in the aggregate to $19,132.77. The petitioner held the insurance money intact, awaiting the decision of the lessee as to whether it would replace the improvements. The lessee advised the petitioner on December 24, 1942, that it would not do so and that it desired to cancel the lease as of December 31, 1942. The parties so agreed in writing on December 24, 1942. The petitioner refunded the lessee one-half ($300) of the rent for 1942, and also $889.05 representing unearned premiums which he had received on the policies.

In his income tax return for 1942 the petitioner reported the insurance proceeds as a capital gain. The amount reported was $18,879.52, after the addition to the $19,132.77 of $46.74 realized on the sale of scrap, less $300 of attorney and accountant fees for services in connection with settlement of the claim.

The respondent determined that the entire amount of $18,879.51 is taxable as ordinary gain. That is the only adjustment which he made in the petitioner's return.

The respondent concedes in his brief that:

* * * If the amount he received in fact represented a payment to him for the destruction of the improvements it would appear that he is correct in his contention for in that event section 117(j) applies and only 50 per cent of the gain is to be taken into account as a long-term capital gain. * * *

The section referred to (117(h)) specifically provides that...