Holden v. Commissioner

CHARLES R. HOLDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Holden v. Commissioner

Docket Nos. 55486, 62198.

United States Board of Tax Appeals

27 B.T.A. 530; 1933 BTA LEXIS 1348;

January 9, 1933, Promulgated

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The petitioner leased for a period of 100 years a residential apartment in a building owned by the lessor corporation, which corporation maintained and operated the building. As a part of the consideration for the demise and lease of said apartment petitioner agreed to and did pay his proportionate part of the annual interest and taxes on the apartment building, apportioned among the lessees on the basis of stock ownership in the corporation. Held, that the amounts so paid by the petitioner in the taxable years 1928 and 1929, on account of interest and taxes representing liabilities of the corporation, are not deductible from his gross income under section 23(b) and (c) of the Revenue Act of 1928.

Julius F. Smietanka, Esq., and Willis D. Nance, Esq., for the petitioner.

B. M. Coon, Esq., and F. S. Gettle, Esq., for the respondent.

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TRAMMELL

These are consolidated proceedings for the redetermination of deficiencies in income tax for the years 1928 and 1929 in the amounts of $265.29 and $376.08, respectively. The issue is whether or not the petitioner is entitled to deduct from gross income for the taxable years certain amounts paid by him in those years in connection with his cooperative apartment on account of interest and taxes.

FINDINGS OF FACT.

The facts were stipulated by the parties as follows:

1. The petitioner is a citizen of the United States with residence at 1320 North State Street, Chicago.

2. The notice of deficiency for 1928 was mailed to the petitioner on February 13, 1931, and for the year 1929 on December 29, 1931.

3. The taxes in controversy are Income Taxes for the calendar years 1928 and 1929 and are in the amounts of $265.29 for 1928 and $376.08 for 1929.

4. The petitioner is engaged in business in Chicago, Illinois, and during the years 1928 and 1929 was the owner of a co-operative apartment building located at 1320 North State Street, Chicago, Illinois. The title to the Land and building located at said address is in the 1320 North State Street Building Corporation, an Illinois corporation.

5. The co-operative apartment building at 1320 North State Street, Chicago, Illinois, is operated under proprietary leases between 1320 North State Street Building Corporation and the various tenant owners. During the years 1928 and 1929 the petitioner owned and maintained his co-operative apartment under the terms of a certain proprietary lease between himself and 1320 North State Street Building Corporation, said proprietary lease containing all of the rights and privileges of the petitioner and all of the obligations and liabilities of the petitioner relating to his co-operative apartment.

6. A copy of the proprietary lease between 1320 North State Street Building Corporation and the petitioner is hereto attached and the contents of said proprietary lease are hereby expressly made a part of this stipulation of facts.

7. Pursuant to the terms and provisions of said proprietary lease, the Treasurer of 1320 North State Street Building Corporation, with the approval of the Board of Directors, notified the petitioner of the pro rata amount which the petitioner would be required to pay to the corporation on account of the operating and maintenance charges of the corporation for the year, and separately set forth in such notices the pro rata amount of the taxes and interest which the petitioner, under his proprietary lease, had agreed to pay to the Treasurer as agent for the petitioner and the other tenant owners, and the Treasurer as such agent was to pay to the public officials and other persons entitled to receive such taxes and interest.

8. Pursuant to such notices and the terms of the proprietary lease, the petitioner during the year 1928 paid to the Treasurer of the Building Corporation, as agent for the petitioner and the other tenant owners, the sum of $660.05 as real estate taxes, and made a similar payment for the same purpose, under similar arrangements, during the year 1929 in the amount of $1,154.07. During the year 1928 the Treasurer of the said Building Corporation, as agent for the petitioner, paid to the proper taxing officials of Cook County the sum of $593.66 as real estate taxes, which was the amount paid to said Treasurer in 1927 by the petitioner, and during the year 1929 paid to the proper taxing officials of Cook County the sum of $660.05 as real estate taxes, which was the amount paid to said Treasurer in 1928 by the petitioner.

9. Pursuant to such notices and the terms of the proprietary lease, the petitioner paid to the Treasurer of the Building Corporation, as agent for the petitioner, the amount of $1,600.22 as interest during the year 1928, and made a similar payment, under similar arrangements, in the amount of $1,578.71 during the year 1929. It is stipulated and agreed that the Treasurer of said Building Corporation, as agent for the petitioner, paid to the persons entitled thereto, during the same year, the same amount of interest in each year as was paid to him by the petitioner.

10. The 1320 North State Street Building Corporation filed a Corporation Income Tax return for each of the years in question, in which it disclosed no profit or loss, and in which it did not include as income the items of interest and taxes herein involved, and did not take as deductions from income the items of interest and taxes herein involved.

11. The Individual Income Tax returns of the petitioner for the years 1928 and 1929 were filed and the income computed thereon upon the cash receipts and disbursements basis.

The lease contract referred to in paragraph 6 of the above stipulation is by reference made a part hereof in full, and only those provisions thereof which are deemed essential to the consideration of the issue presented are set forth as follows:

That the Lessor, for and in consideration of the rents hereinafter reserved, and of the covenants and agreements herein contained to be kept, observed and performed by the Lessee, does hereby demise and lease unto the Lessee apartment number on the floor in the apartment building of the Lessor known as street number 1320 North State Street, Chicago, Illinois, and known by legal description as: [Description omitted as not material]

TO HAVE AND TO HOLD the above demised apartment unto the said Lessee and the family of the said Lessee, as a private residential apartment, and not otherwise, for and during the term beginning on the day of 19 and ending on the 30th day of September, 2025, A.D., unless said term shall be sooner terminated in accordance with the provisions hereinafter contained.

IT IS EXPRESSLY UNDERSTOOD AND AGREED that the title of the Lessor in and to said apartment building, and the land upon which the same is located, is subject to:

(A certain trust deed, taxes after 1925, and "proprietary leases," descriptions of which are omitted as not material)

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I.

COVENANTS OF THE LESSEE TO PAY RENT AND OTHER CHARGES

(1) The Lessee, in consideration of said demise, hereby accepts and takes said demised premises for said term, and covenants and agrees to pay to the said Lessor as rent for said demised premises the following:

(a) The sum of One Dollar ($1.00) on the first day of January of each and every year of said demised term, beginning with a first payment on the first day of January following the date when said apartment is ready for occupancy and ending with a last payment on the first day of January next preceding the last day of said demised term.

(b) A further sum payable in advance upon the first day of each and every month of said demised term beginning with a first payment upon the first day of the first month commencing after the beginning of said demised term and ending with a last payment upon the first day of the month in which said demised term ends. Said sum thus to be paid monthly by said Lessee shall be determined as follows:

At least ten days prior to said payment date and on or before each first day of February thereafter during said demised term, the Lessor, with the approval of a majority of its Board of Directors and stockholders, given at their respective annual meetings held in accordance with the By-laws of the Lessor Corporation, shall prepare an estimated budget of all foreseeable expenditures of money, as hereinafter provided, which the Lessor will be required to make during the period expiring on the next following thirty-first day of January, or which may be chargeable in whole, or in part upon an accrual basis of accounting to said period, although the actual disbursement thereof may not be required until after said period but within twelve months following the termination thereof. Said estimated budget shall include, but not be limited to, all the operating expenses of said building and premises, whereof said demised premises are a part, the cost of insurance upon said building against all kinds of loss by fire or other casualty and against liability for damage to persons and property, the cost of repairs to said property, taxes and all other costs and expenses necessary or desirable for the Lessor to pay or incur, or which will accrue against the Lessor, in owning, maintaining and operating said premises and building and maintaining its own existence during said budget period, exclusive, however, of any item of expenditure expressly stated in the following paragraph 2 of this lease.

As soon as said budget is prepared by the Lessor, and approved by a majority of its Board of Directors and Stockholders, as aforesaid, the aggregate amount thereof shall be apportioned among the Lessees occupying apartments in said building under proprietary leases, the same or similar to this lease, by allotting to each said Lessee such portion of said aggregate budget as is proportionate to the whole thereof in the same ratio as the number of shares of the Lessor's capital stock owned by said Lessee at the beginning of said demised term (to-wit shares) is to the total number of shares of the Lessor's capital stock outstanding when said budget is completed. Said sum thus allocated to the Lessee shall be the sum payable by the Lessee under this paragraph as additional rent for the period expiring on the next following thirty-first day of January and divided by the number of full months in said period shall be the amount of additional rent payable monthly in advance by the Lessee as above provided.

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2. In further consideration of said demise the Lessee covenants and agrees to pay to the Lessor or for its account (but not as rent), the following:

(a) In addition to the above enumerated items of expenditure to be set forth in said budget, there shall be stated separately by the Treasurer of the Lessor in the budget communication to the Lessee above referred to, an estimated and itemized amount of all taxes payable under any law of the State of Illinois, whether upon real estate, personal property, capital stock, franchise, or income of the Lessor, or upon the income of the holder of any security of the Lessor wherein the Lessor has agreed to pay said tax, and all interest upon the Lessor's indebtedness to accrue during or for the period covered by each said budget, and the portion of each of said expenditures to be paid by the Lessee, apportioned among said proprietary lessees in the same manner upon a monthly basis as above provided with respect to said budget expense; and said Lessee hereby covenants and agrees to pay, as aforesaid, his said apportioned share of said taxes and interest for the Lessor. Said payments on account of the items enumerated in this paragraph, however, shall not be considered a payment of rent, but the same shall be the Lessee's share of the taxes and interest of the Lessor which the Lessee hereby covenants and agrees to pay; and the Lessee hereby constitutes the Treasurer of said Lessor his agent to collect from the Lessee his portion of said taxes and interest and pay the same on behalf of the Lessee for the credit of the Lessor to the proper persons to receive the same.

(b) The above paragraphs 1, (a) and (b), and 2(a) are intended to include all expenditures of whatsoever kind and nature, which said Lessor may be required or find it desirable to make or provide for, during each of said budget periods, whether enumerated above or not, except (1), principal amounts maturing for payment during said budget period upon any funded indebtedness of the Lessor, (2) special assessments assessed against said premises and building for local improvements and falling due within said budget period, and (3) the cost of all additions, improvements or replacements to said premises, authorized by the Board of Directors, to be made within said budget period, which estimated items of expenditure approved as aforesaid shall be apportioned among said proprietary Lessees on the same monthly basis and communicated to them in the same manner as above required with respect to said budget expenses; and the Lessee agrees in the same manner and at the same time as he pays his apportioned monthly share of said budget expense and of said taxes and interest, to pay to the Lessor a sum of money equivalent to the Lessee's apportioned monthly share of the expenditures enumerated in this paragraph. Said payments by the Lessee under this paragraph, however, shall not be rent paid by the Lessee, but shall constitute additional capital paid to the Lessor by the Lessee as a stockholder of the Lessor, and shall be credited to "Paid In Surplus" on the books of account of the Lessor.

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(16) That the Lessee will not and shall not sub-let the demised apartment in whole or in part and that the Lessee will not and shall not assign this lease or permit the same to be assigned by operation of law without in each case the consent in writing of the Lessor first had and obtained as hereinafter provided and in compliance with the following terms and conditions: [Omitted as not material].

IV.

COVENANTS WITH RESPECT TO DEFAULT AND TERMINATION

(1) As a further consideration for the leasing aforesaid, the Lessee hereby covenants, understands and agrees, and hereby accepts this lease upon the express conditions and agreement, that this lease, and the estate hereby created, shall, at the option of the Lessor, cease and determine, and the term hereby demised come to an end upon the happening of any of the following events or contingencies:

(a) In the event that the Lessor, at any time during the demised term, with the consent of the holders of at least two-thirds in amount of its capital stock at such time outstanding, given at a stockholders' meeting duly called for that purpose and in conformity with the By-laws of the Lessor corporation and the laws of the State of Illinois, shall determine to sell the entire building and premises, of which the demised apartment is a part, or shall enter into a valid contract for the sale thereof, then, and in either of said events, this lease and all the right, title and interest of the Lessee hereunder shall terminate at the expiration of ninety (90) days from and after written notice thereof.

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(3) The Lessee further hereby covenants, understands and agrees that the Lessee shall be in default under this lease, entailing the consequences hereinafter provided:

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(c) In the event that the Lessee shall make default, at any time during the demised term, in the payment of the rent or other moneys due to the Lessor or on its account hereunder or any installment or part of said rent or other moneys, as herein provided, or if default shall at any time during the demised term be made in any of the other covenants and agreements herein contained, to be kept, observed and performed by the Lessee, and any such default, either in the payment of the rent or other moneys or any installment or part thereof, or in the performance of any of the other covenants and agreements herein contained, on the part of the Lessee to be kept, observed and performed, shall continue for a period of thirty (30) days after notice thereof in writing by the Lessor to the Lessee specifying wherein such default consists; it being understood and agreed, however, that the failure to properly state any amount or amounts due the Lessor from the Lessee shall not invalidate any such notice.

In either of said events of default, specified in the foregoing subparagraphs (a), (b) and (c) of this paragraph (3), (including the running of any period of time and the giving of any notice mentioned in said sub-paragraphs), the Lessor at its election, may serve upon the Lessee in the manner hereinafter provided, a demand in writing demanding that the Lessee correct said default within thirty (30) days after said demand or quit and surrender up possession of said demised apartment to the Lessor; and in such event if said default is not corrected and satisfactory evidence of said correction is not furnished to the Lessor within said period of thirty (30) days, the Lessee covenants and agrees to quit and surrender up possession of the demised apartment to the Lessor without the receipt of any further notice or demand whatsoever upon the expiration of said thirty (30) days, and the mere retention of possession thereafter by the Lessee of the demised apartment shall constitute a forcible detainer, and it shall be lawful for the said Lessor, at its election, at any time thereafter and without further demand or notice, and either declaring the said term ended or not, as it may see fit, the said demised apartment and every part thereof, either with or without process of law to re-enter, and the Lessee and every other person occupying in or upon the same to expel, remove and put out, using force as may be necessary in so doing and the demised apartment again to re-possess and enjoy without such re-entry constituting a trespass or forcible entry or detainer or working a forfeiture of the rents or other monies to be paid by the Lessee, or the covenants to be performed by the Lessee during the full original term of this lease.

OPINION.

TRAMMELL: The sole issue in this case is whether the petitioner is entitled to deduct from his gross income for the taxable years certain amounts paid by him during said years on account of interest and taxes accruing on the cooperative apartment building in which the petitioner had leased a residential apartment under the terms of the lease contract referred to in our findings of fact hereinabove.

The facts were stipulated by the parties, and the issue of law presented may be resolved into the question of whether or not the payments made by the petitioner were so made on account of his liability for interest and taxes as such. This question in turn depends upon the ownership of the apartment building, since the interest accrued and the taxes were levied upon the building and real estate.

There can be no doubt that interest and taxes of the kind here involved, when liability is incurred and they are in fact paid as such by the taxpayer in the taxable year, constitute allowable deductions from gross income. Sec. 23(b) and (c), Revenue Act of 1928. However, where a taxpayer pays the interest and taxes of his creditor, or makes such payments in behalf of another person, either individual or corporate, they do not represent interest and tax obligations of the taxpayer and are not deductible as such by him.

In paragraph 4 of the stipulation of the parties, above set out, it is stated that the "title to the land and building" here involved "is in the 1320 North State Street Building Corporation, an Illinois corporation," and in paragraph 5 of the same stipulation it is stated that "during the years 1928 and 1929 the petitioner owned and maintained his co-operative apartment under the terms of a certain proprietary lease between himself and 1320 North State Street Building Corporation." These are conflicting and contradictory stipulations, since the petitioner could not have "owned and maintained" his cooperative apartment if the title to the land and building was in the corporation; and the designation of the lease contract as a "proprietary lease" is a contradiction in terms, because a proprietor or owner can not at the same time be a lessee of his own property.

However, disregarding these apparent conflicts in the stipulation, we think it is clear that under the lease contract the petitioner was in no sense the proprietor or owner of the apartment which he had leased. The apartment was leased to him by the owner, the building corporation, for a period of 100 years from 1925, or until the year 2025, in consideration, among other things, of the payment by the petitioner to the corporation of certain monthly payments as rental, and other payments stated not to be rent, and also additional capital contributions, to all of which further reference will be made. Furthermore, the lease of the apartment to the petitioner was expressly conditioned upon the right of the building corporation, the owner, to sell the entire building and premises at any time, in which event the lease contract provides, in paragraph 1(a) of Title IV, that "this lease and all the right, title and interest of the Lessee hereunder shall terminate at the expiration of ninety (90) days from and after written notice thereof."

The petitioner, in consideration of the demise and lease of said apartment, agreed to pay, specifically as rental, the sum of one dollar per year, and, specifically as additional rental, his proportionate part of the cost of maintenance and operation of the building upon the basis of his stock ownership in the corporation.

The lease contract, in paragraph 2 of Title, I, provides that "In further consideration of said demise the Lessee covenants and agrees to pay to the Lessor or for its account (but not as rent), the following:". There is then set out in subparagraph (a) of said paragraph a detailed description of the interest and taxes which the petitioner agreed to pay and which are the subject matter of the controversy herein.

The petitioner in his brief lays stress upon the fact that it is provided in the lease contract that the interest and taxes were not payments of additional rent. But we think no argument or citation of authority is necessary to support the elemental proposition that, if the circumstances of the case establish that the payments of interest and taxes were made as part of the consideration for the lease of the apartment, then they constituted additional rent, and such fact is not changed and can not be disregarded because of a contrary statement contained in the lease contract between the petitioner and his lessor. However, notwithstanding said statement in the lease contract, we think a fair construction of the provisions of that contract clearly indicates that the interest and taxes paid by the petitioner constituted nothing more nor less than additional rental. The very language used in the paragraph above quoted describes the payments as "in further consideration of said demise," that is to say, as further consideration for the lease of the apartment, which is the equivalent of additional rental. The only items of rental or consideration for the demise theretofore stated in the contract consists of the cash rental of one dollar per year and the petitioner's proportionate part of the operating expenses. Subdivision (b) of paragraph 2 of the lease contract provides for the payment by the petitioner of his proportionate part of the principal amount of the funded indebtedness of the lessor, special assessments for local improvements, and the cost of improvements to the building, all of which it is provided should constitute additional capital paid to the lessor by the lessee as a stockholder. Thus it would appear that the interest and taxes in question were not intended by the parties as additional capital contributions.

If we should be in error in viewing these payments of interest and taxes as additional rental under our construction of the lease contract, they would nevertheless not constitute allowable deductions from the petitioner's gross income, for the reason that interest and taxes were the direct obligations of the building corporation which owned the apartment house, and were merely paid by the petitioner for and in its behalf. The petitioner does not contend and has not attempted to show that the payments are deductible as a business expense, or otherwise than as interest and taxes. In the circumstances disclosed, the payments are not allowable deductions from the gross income of the petitioner. ; ; affd., ; certiorari denied, .

Judgments will be entered for the respondent.