Opinion
No. 190, Docket 20794.
March 22, 1948.
Petition by Frankel Smith Beauty Departments, Inc., to review a decision of the Tax Court of the United States redetermining a deficiency in the tax imposed by the Commissioner of Internal Revenue.
Decision affirmed.
The Tax Court held that appellant taxpayer, in its return for the taxable year January 1, 1942 to August 31, 1942, had no right to treat as "borrowed capital," pursuant to I.R.C. § 719, as amended in 1942, 26 U.S.C.A.Int.Rev.Code, § 719, certain amounts owing by it under a written agreement with Jordan Marsh Company, and accordingly, sustained a deficiency in excess profits tax determined by the Commissioner.
Taxpayer is in the business of operating beauty-parlors in department stores. Before establishing such a department in the store of Jordan Marsh in Boston, taxpayer and Jordan Marsh entered into a written "Agreement and Lease" on August 2, 1939. Under that agreement Jordan Marsh (referred to in the agreement as the Company) rented a portion of its store to taxpayer (referred to as the Operators) for the purpose of conducting a beauty salon. Among the provisions of the agreement were the following:
"5. It is contemplated certain changes, alterations, improvements and renewals may be made to the beauty salon herein provided for according to such plans as have been mutually agreed upon. The Operators agree to pay the cost of such changes, alterations, improvements and renewals not to exceed a total cost of $75,000. The Company agrees to finance the above changes in the first instance, and the Operators agree to repay to the Company the amount so advanced.
"1. $25,000 to be paid upon completion of the changes, alterations, improvements and renewals and the balance to be paid in monthly installments during the terms of this agreement, equal to 1/120 of the remaining balance plus interest at the rate of 3-1/2% per annum on the unpaid balance.
"2. At the expiration of this agreement the fixtures shall become the property of the Company. The operating equipment consisting of barber chairs, hair-dressing chairs, hair dryers, manicure tables and chairs, permanent wave machines, electric refrigerator and appliances used in the work, waiting room furniture, etc., shall become the property of the Operators. In the event this agreement is terminated before expiration, all of the permanent fixtures and all of the operating equipment enumerated in this paragraph shall become the property of the Company, however, the Company agrees within thirty days to pay the Operators for each month of the unexpired term a sum equal to 1/120 part of the $25,000. initially paid by the Operators. It is further understood and agreed that in the event this contract is terminated before the expiration, the Operators will not be required to make any further payments or reimburse the Company for finances towards the cost of changes, alterations, improvements and renewals.
"21. This agreement shall commence on the first day of November 1939 and shall continue for a period of ten years, to terminate on November first, 1949. This agreement may be terminated by Company upon sixty (60) days prior written notice at January 31, 1943, and at the expiration of each two year intervals thereafter, such notice to be sent by U.S. Registered Mail addressed to Operators at their usual business address. Upon termination of said sixty (60) days this agreement shall become null and void, except that either party may enforce any and all obligations of the other party arising out of acts, or failures to act, occurring prior to such termination."
The agreement imposed divers obligations on each of the parties and provided, "22. If either party hereto shall fail to keep, observe and perform its respective covenants and agreements hereby made or any thereof, then either party may terminate this agreement by notice in writing to the party breaching the same provided that no termination shall be declared until the party committing the breach shall have been given notice in writing of such breach and shall have failed to remedy same within thirty days after the giving of such notice."
The Tax Court, in its opinion, rejected taxpayer's contention that its monetary obligations under the agreement constituted a "note" within the meaning of the statute.
The pertinent parts of the statute read as follows: "Sec. 719. Borrowed Invested Capital. (a) Borrowed Capital. The borrowed capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following: (1) The amount of the outstanding indebtedness (not including interest) of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust, * * *."
Saul I. Radin, of New York City, for petitioner.
Theron Lamar Caudle, Sewall Key, George A. Stinson and S. Walter Shine, all of Washington, D.C., for respondent.
Before L. HAND, SWAN and FRANK, Circuit Judges.
We have some doubt as to the correctness of taxpayer's basic contention that, for purposes of § 719(a)(1), any unconditional written obligation, contained in a contract, to pay a sum certain is a "note"; but, as the Commissioner does not, at least in this case, take issue with that contention, we shall here accept it arguendo. Even so, we agree with the Tax Court that no "note" exists here.
In the first place, as of the date when the parties contracted, no one could tell, from the face of the contract or otherwise, the amount for which taxpayer was liable, since the undertaking, even assuming it was unconditional, was to pay a sum "not to exceed a total cost of $75,000." Accordingly, we do not have here a sum certain.
In the second place, the obligation, in several respects, was not unconditional. We need point to but one condition: Jordan Marsh had the right to terminate the agreement at will, on sixty days' notice at any one of divers dates during the ten-year period of the lease; if it so acted, then, by the provisions of the contract, taxpayer was not required to make any further payments and Jordan Marsh was required to pay taxpayer "for each month of the unexpired term a sum equal to 1/120 part of the $25,000 initially paid by the" taxpayer.
As we agree with the Tax Court, we do not consider whether its decision is within so much of the doctrine of Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248 as still remains intact.
Affirmed.