Ward v. Commissioner of Internal Revenue, 6616.

• Decision Date: 23 May 1932
• Docket Number: No. 6616.,6616.
• Citation: 58 F.2d 757
• Parties: WARD et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

58 F.2d 757 (1932)

WARD et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 6616.

Circuit Court of Appeals, Ninth Circuit.

May 23, 1932.

Chandler, Wright & Ward and Chandler P. Ward, all of Los Angeles, Cal., for petitioners.

G. A. Youngquist, Asst. Atty. Gen., J. Louis Monarch, F. Edward Mitchell, and J. P. Jackson, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, and R. W. Wilson, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before WILBUR and SAWTELLE, Circuit Judges.

SAWTELLE, Circuit Judge.

This appeal involves an alleged deficiency in income taxes, as found by the Board of Tax Appeals, for the years 1922, 1924, 1925, and 1926 in the amounts of $1,822.41, $2,435.81, $3,252.87, and $1,765.86, respectively. During the pendency of this proceeding before the Board of Tax Appeals, Shirley C. Ward, the taxpayer, died. The executors of his estate are the petitioners in this court.

The following is disclosed by the agreed statement of facts herein: In 1913 the decedent became the lessee for a term of 99 years of certain premises known as the Pohlman property, located at Seventh street and Grand avenue, in the city of Los Angeles, Cal., owned by one Philip Pohlman. In 1917 decedent assigned this lease to the Pohlman Leasehold Company for the remainder of its term. In 1920 the Pohlman Leasehold Company sublet the property back to decedent for the unexpired term, less one day. Under the provisions of the latter agreement and of the original basic lease, decedent agreed to pay to the Pohlman Leasehold Company the sum of $200 per month for the first two years and $300 per month thereafter, and the sum of $1,600 per month to Philip Pohlman.

May 26, 1920, decedent sublet the property for the remainder of his term, less one day, to the California Chocolate Shops, Inc., E. C. Quinby, and P. W. Quinby, and the sublessees assumed all of the obligations of decedent to Philip Pohlman and the Pohlman Leasehold Company. The rentals agreed to be paid thereunder ranged from $2,100 per month for certain years to $3,600 per month for the remaining years. This sublease provided that all rents due under it would be paid to a trustee, to be distributed by the trustee to the owner and the sublessors. This provision reads as follows: "As security to the lessees that the ground rental called for in the original lease on the demised premises from Philip Pohlman to Shirley C. Ward, dated December 4, 1913, as modified by the agreement hereinabove mentioned of December 22, 1917, will be paid by the lessor herein to the original lessor, Philip Pohlman, or his heirs, successors or assigns, as and when the same becomes due, and as security that the rental payable by Shirley C. Ward, as lessee to the Pohlman Leasehold Company, as lessor, under the lease of said premises held by said Ward from the Pohlman Leasehold Company, will be paid as and when the same becomes due and payable, it is agreed that all rentals payable hereunder shall be payable to the Los Angeles Trust and Savings Bank, as trustee under instructions to said bank to distribute such rental in accordance with the rights thereto of Philip Pohlman, the original lessor, and of the Pohlman Leasehold Company, the subsequent lessor, and the remainder of such rental, after the rentals due Philip Pohlman and due the Pohlman Leasehold Company have been paid, to the lessor herein, Shirley C. Ward. The lessor herein, or his heirs, successors or assigns, may have the privilege at any time of changing the trustee to whom said rentals shall be payable, provided said trustee shall at all times be a responsible trust company having an office in and doing business in the city of Los Angeles."

January 2, 1922, decedent executed and delivered to Blanche C. Ward, his wife, a written assignment of all his interest in the rentals from the sublease to the California Chocolate Shops. The pertinent portions of this assignment read as follows:

"In consideration of love and affection, I hereby assign, set over and transfer to my wife, Blanche C. Ward, the following property to be her own, absolute and sole and separate property, free from any claim of mine whatsoever, viz.: * * *

"Second. All my interest in the rentals on the Pohlman property at the northeast corner of 7th Street and Grand Avenue, Los Angeles, California, payable to me under lease from me to the California Chocolate Shops, E. C. Quinby and P. W. Quinby, dated May 26, 1920, now recorded in the office of the County Recorder of Los Angeles County, California. * * *

"It is my interest in such Chocolate Shops-Quinby rentals, subject to the foregoing charges thereon, that is intended to be assigned hereby; the net rentals coming to me and so assigned hereby being as follows, viz.: Until January 1, 1923, $300.00 per month; thereafter until Bryan and Bradford are paid off $1150; thereafter to the end of the ninety-nine year lease $1450 per month. * * *"

Thereafter the said rentals were paid by the trustee to Blanche C. Ward and to her daughters, to whom she subsequently assigned a portion of the income.

January 12, 1922, decedent executed an assignment to his sister, Annie E. Ward, of $250 per month from these same rentals, and thereafter that sum was paid monthly by the trustee to Annie E. Ward.

The net income accruing to the decedent under the terms of the California Chocolate Shops sublease, and paid by the trustee to the assignees of decedent, amounted to $3,600 in 1922; $16,800 in 1924; $13,800 in 1925; and $12,400 in 1926. These rentals were included as income for the respective years in the income tax returns filed by the assignees, decedent's wife, daughters, and sister. No part of the amounts was reported as income by decedent in his returns for those years. The Commissioner of Internal Revenue determined that the amounts should have been returned as income by decedent in the respective years, and this determination was affirmed by the Board of Tax Appeals.

Decedent was also the owner of a certain lot in Los Angeles and the building thereon, known as the Kinema Theatre Building, which covered all of the lot except a strip ten feet wide along the southern boundary. This property was sold by decedent in 1919, but the deed reserved to the grantor, his heirs and assigns, an easement over the vacant strip of land on the southern boundary of the lot as long as the Kinema Theatre Building remained thereon. In 1920 decedent granted to the Standard Fireproof Building Company the right to use this strip of land as a means of access to and egress from a structure adjacent thereto known as the Brack Shops Building, for a consideration of $200 per month. By the assignment of January 2, 1922, above referred to, decedent also assigned to his wife his right to receive this $200 per month payment from the Brack Shops Building for the use of the easement and thereafter she received said rental.

In 1924 and 1925 decedent included the rentals received from the Brack Shops Building for the use of the easement in his income tax returns, but the rentals were not included as income in his returns for the years 1922 and 1926. The Commissioner of Internal Revenue determined that the rentals should have been included in the 1922 and 1926 returns also, and his determination was affirmed by the Board of Tax Appeals.

The question thus presented is whether an assignor, by an assignment of bare rentals without assigning the lease that produces the rentals, can relieve himself of income taxes thereon. We think the question must be answered in the negative.

From the language of the assignments, it seems clear that decedent intended to assign only his right to the income from the lease and not the lease itself or any interest therein, other than the rentals to accrue thereunder. The language used is: "I hereby assign * * * all of my interest in the rentals on the Pohlman property; * * *" again: "It is my interest in such Chocolate Shops-Quinby rentals * * * that is intended to be assigned hereby"; and, again: "I further hereby assign, transfer and set over to my wife my right...