Commissioner of Int. Rev. v. Langwell R. E

Full title: COMMISSIONER OF INTERNAL REVENUE v. LANGWELL REAL ESTATE CORPORATION

Court: Circuit Court of Appeals, Seventh Circuit

Date published: Mar 18, 1931

47 F.2d 841 (7th Cir. 1931)

Opinion

No. 4403.

March 18, 1931.

Petition for review of Decision of United States Board of Tax Appeals.

Petition by the Commissioner of Internal Revenue to review a decision of the United States Board of Tax Appeals, reversing a ruling of the Commissioner in the matter of the income tax of the Langwell Real Estate Corporation.

Reversed, with directions.

Respondent, in 1923, purchased certain Chicago real estate which was under lease. The tenant, under the lease executed in 1920, made a deposit of $50,000 for the "faithful performance of the terms and conditions of this lease." The lease also provided:

"Said sum of Fifty thousand ($50,000) Dollars is to be retained by the Landlord until the full and complete term of twenty-one years hereby demised has been fully completed, rendering the same or any unused part thereof to the tenant at the end of the said term, provided * * *

"Nothing herein contained shall in any way obligate the Landlord to * * * return same to the Tenant until the Thirty-first day of March, 1941 * * *."

Lessee was secured for the $50,000 advanced, by a lien upon the property. The deposit drew interest at 4 per cent.

Upon the conveyance of the property to respondent, $50,000 was credited upon the purchase price, and respondent assumed the obligation to repay the same in 1941 upon the expiration of the lease. Subsequently, in June, 1923, respondent and the tenant entered into an agreement canceling the aforesaid lease. In consideration thereof, the tenant relinquished, assigned, and transferred to respondent all interest in the $50,000 deposit.

The Commissioner added to respondent's net income this sum of $50,000, and determined its tax accordingly. The Board of Tax Appeals reversed the ruling of Commissioner. The Commissioner appealed.

G.A. Youngquist, Asst. Atty. Gen., and Sewall Key and John MacC. Hudson, Sp. Assts. to Atty. Gen. (C.M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Dean P. Kimball, Sp. Atty., Bureau of Internal Revenue, both of Washington, D.C., of counsel), for petitioner.

David J. Greenberg, of Chicago, Ill., for respondent.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

EVANS, Circuit Judge (after stating the facts as above).

We find it impossible to escape the conclusion that, upon the tenant's release of its interest in said $50,000, respondent was enriched by that amount. Regulations 62, Treasury Department, article 50. It was relieved of its obligation to pay this amount to the tenant at the expiration of the lease. At the same time, and as a part of the same transaction, respondent released the tenant from its lease. Whether respondent suffered a loss by reason of the termination of the lease presents another issue, which is not covered by the findings of the Board of Tax Appeals. If respondent could have readily negotiated another lease with a responsible party, as favorable as the lease which was canceled, it suffered no loss. On the other hand, if it could not have negotiated such a lease, then it suffered a loss. The amount of such loss, if any, was the legitimate subject of proof. The actual execution of a new lease was not necessary to the determination of this issue. The rental value of such property could be shown by oral testimony.

The Board of Tax Appeals stated:

"It seems clear that the petitioner assumed an obligation to pay the lessee $50,000 in 1941 if all of the terms of the lease had been performed by the lessee during its life. This obligation, it is also apparent, did not stand alone, but was balanced by a corresponding obligation of the lessee. We are not able to say that they did not exactly balance, or, if not, in whose favor the scales were tipped. This being so, when the lessee and the petitioner then agreed to cancel the lease in June, 1923, it can not be said with any certainty whatever that the $50,000 obligation of the petitioner, contingent and uncertain as it was that return need ever be made, did not represent compensation to the petitioner for the loss sustained by it on the cancellation of the lease. If so, the amount would not be income to the petitioner."

We think the Board was in error in assuming that a loss was sustained which offset the $50,000 gain. In the absence of proof sufficient to support a contrary finding by the Board of Tax Appeals, the finding of the Commissioner should have been sustained. Avery v. Commissioner (C.C.A.), 22 F.2d 6, 55 A.L.R. 1277. The record before us does not warrant our making a finding on this issue, nor is it necessary for us so to do. 26 USCA § 1219; K. Coal Co. D. Co. v. Commissioner (C.C.A.), 29 F.2d 559.

Under all of the circumstances, we think it would be promotive of justice in this instance to remand the case for further hearing. The taxpayer should be given the opportunity of offering evidence to show that it suffered a loss and also the extent of its loss. If the proof be sufficient to sustain a finding of the amount of such loss, that sum should be deducted from the said $50,000. If no such loss be established, then the sum of $50,000 should be included as part of the taxpayer's income.

The order of the Board of Tax Appeals is reversed, with directions to proceed in accordance with the views herein expressed.