Reynolds v. Boos

Decision Date16 March 1951
Docket NumberNo. 14108.,14108.
Citation188 F.2d 322
CourtU.S. Court of Appeals — Eighth Circuit

Harry Marselli, Sp. Asst. to Atty. Gen. (Theron L. Caudle, Asst. Atty. Gen., Ellis N. Slack and Harry Baum, Sp. Assts. to Atty. Gen., Clarence U. Landrum, U. S. Atty. and William P. Murphy, Asst. U. S. Atty., St. Paul Minn., on the brief), for appellant.

Arnold L. Guesmer, Minneapolis, Minn., for appellee.

Before SANBORN, WOODROUGH and JOHNSEN, Circuit Judges.

JOHNSEN, Circuit Judge.

Under section 22(b) of the Internal Revenue Code, 26 U.S.C.A. § 22(b), property acquired by gift "shall not be included in gross income and shall be exempt from taxation" of income.

Did the cancellation of some rental indebtedness by a lessor represent a gift in the present situation or did it constitute taxable income to the lessee?

The question arises in a suit against a Collector of Internal Revenue for refund of the income taxes paid by the lessee on cancellations of $8,232 made by the lessor in each of the years 1940 and 1941. The district court granted the refunds, and the Collector has appealed.

The cancellations were made from a back-rent total of $45,266, which had accumulated through the depression years of 1932 to 1939. The lease was one on space in an office building in Minneapolis, entered into in 1929 before the financial market broke in October of that year, covering a ten-year term, and providing for an annual rental of $20,000, payable in installments of $1,666.66 monthly. From 1932 to 1936, the lessor had accepted payments from the lessee of $1,000 monthly and from 1936 to 1939 the sum of $1,200 per month.

The lessee was not during this period insolvent, but the diminished payments were in line with the changes which had occurred in his business, were in harmony with what generally was being done by landlords in Minneapolis and elsewhere, and represented the fair rental value of the property under the conditions that prevailed. The lessor never made any entries in its records of the unpaid balances.

In 1939, some months before the lease would expire, the lessor and the lessee got together and agreed upon an extension of the lease for a 5-year period, at an annual rental of $15,000, in payments of $1,250 per month. Oral evidence was admitted at the trial, over objection of the Collector, which persuaded the district court, and on which it predicated its findings, that the back-rent accumulation had in no way been a factor of negotiation or of motivation in arriving at the extension arrangement; that the terms of the extension were agreed upon wholly without regard to or even mention of the existence of any back rent; that the rental to be paid under the extension was no more or less than but the same as any other lessee would have paid for such a term at the time; and that the lessee's desire to obtain the extension had been controlled solely by other considerations, such as the strategicness of the location as a patronage source in his dental laboratory and supply business, the long-established conduct of the business there, the special suitability of the space for the business, and the formidable expense that any relocating of the business would entail, with its need for readaptation of part of the machinery and replacement altogether of other equipment usable only at the particular location, as well as the revenue loss which would be occasioned by a disrupting of business operations from the moving and relocating process.

These and other circumstances in the admitted evidence were suggestive that the parties in their extension negotiations had regarded and treated the back-rent accumulation as being a dead issue between them. As previously indicated, no charge had ever been made by the lessor on its books against the lessee for any of the deficiencies. The matter of the back rent was brought up by the lessee's auditor or accountant, who was called in after the lessor and the lessee had agreed upon the extension arrangement. The auditor had had the rental installments under the lease entered on the lessee's records as accruals, and upon being informed of the extension he wanted to know what he was to do about carrying the accumulation or clearing it off the books. The lessor replied, "Well, you don't owe me any back rent," "That is water over the dam," and "That is all to be forgotten."

The auditor was in doubt as to whether clearance of the whole accumulation from the lessee's records at one time might not result in a heavy income tax burden upon the lessee for that year, and he suggested therefore that he be allowed to put a provision in the extension agreement "to spread it over several years." At that time it was not legally clear, as it later was made by Helvering v. American Dental Co., 318 U.S. 322, 63 S.Ct. 577, 582, 87 L. Ed. 785, that payment of income taxes ever could be escaped by any solvent debtor on a debt remission, and especially if the debt previously had been the subject of a tax advantage. Cf., e.g. Helvering v. Jane Holding Co., 8 Cir., 109 F.2d 933, 941, 942. It was in relation to the calendar aspect of this possible tax problem that the auditor wanted to have a free hand to deal with the lessee's records.

The lessor had no concern about these bookkeeping perplexities of the lessee and he said to the auditor, "Whatever you want to do is all right with me. I don't care. You write it up and let me know." The auditor text correction inserted a provision as follows in the extension agreement which the parties signed: "This Extension of Lease being executed on the understanding that a pro rata portion of the unpaid rentals under the existing lease, amounting to $45,266, shall be written off and cancelled one-sixty-sixth (1/66) portion thereof each month on payment by the tenant of the monthly rental of $1,250 commencing July 1st 1939, the said amount to be written off being $686.00 per month."

If the oral evidence which has been set out was competent to be admitted and considered against this provision, we do not think it can here be said that the trial court's finding that the cancellations represented in intention and fact a...

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15 cases
  • Putoma Corp. v. C. I. R.
    • United States
    • U.S. Court of Appeals — Fifth Circuit
    • August 27, 1979
    ...taxation of cancelled debts that have been deducted previously, in situations similar to the facts in the instant case. In Reynolds v. Boos, 188 F.2d 322 (8 Cir. 1951) back rent had been cancelled for a lessee who had previously deducted it. Relying on American Dental, the court held that t......
  • Putoma Corp. v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • June 30, 1976 the obligor, if the cancellations are a contribution to capital, even though the items produced a prior tax benefit. Reynolds v. Boos, 188 F.2d 322 (8th Cir. 1951); Commissioner v. Fender Sales, 338 F.2d 924, 930 (9th Cir. 1964); Utilities & Industries Corp., 41 T.C. 888 (1964), revd. on......
  • OKC Corp. v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • April 25, 1984
    ...652 (1976), affd. 601 F.2d 734 (5th Cir. 1979)) or a gift (see Helvering v. American Dental Co., 318 U.S. 322 (1943); Reynolds v. Boos, 188 F.2d 322 (8th Cir. 1951); Capitol Coal Corp. v. Commissioner, 26 T.C. 1183 (1956), affd. 250 F.2d 361 (2d Cir. 1957)), in which cases the forgiveness o......
  • Meredith Corp. & Subsidiaries v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • March 14, 1994
    ...(parol evidence not admitted with respect to corporate shareholder's obligation to buy stock of second shareholder); Reynolds v. Boos, 188 F.2d 322 (8th Cir.1951) (parol evidence admitted to show period in which debt for back rent was forgiven); Birmingham v. Bartels, 157 F.2d 295 (8th Cir.......
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