Pennsylvania Co. for Ins. etc. v. Commissioner

PENNSYLVANIA COMPANY FOR INSURANCES ON LIVES AND GRANTING ANNUITIES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Pennsylvania Co. for Ins. etc. v. Commissioner Docket No. 32055. United States Board of Tax Appeals 19 B.T.A. 699; 1930 BTA LEXIS 2350; April 24, 1930, Promulgated *2350 TAXABLE TRANSACTION - GROUND RENT. - Where the petitioner sold real estate in Pennsylvania for part cash and for the balance reserved a ground rent which the purchaser agreed to pay and extinguish on or before a fixed date, and which ground rent had a fair market value of the unpaid portion thereof, held that this constituted a taxable transaction in the year the indenture was made. Joseph A. Lamorelle, Esq., for the petitioner. Harold Allen, Esq., and W. R. Lansford, Esq., for the respondent. BLACK *699 Petitioner seeks redetermination of a deficiency of $51,028.23 for the fiscal year ending November 30, 1925. As a basis for its appeal it alleges that in the fiscal year ending in 1925 it transferred certain real estate in Philadelphia, Pa., to the First Penny Savings Bank of that city, receiving at the time of transfer $500,000 cash and reserving to itself out of the said premises a ground rent of $40,000 per annum, the principal of said ground rent being $800,000 and payable on or before 10 years after the date of said transfer. The ground rent was redeemed and extinguished by payments of $200,000 in 1925, $200,000 in 1926 and $400,000*2351 in 1927. Both parties agree that there was a profit of $376,108.58 in the transaction and the respondent determined this profit was taxable in 1925. Petitioner contends that this action of the Commissioner was erroneous and that the profit was properly taxable in the fiscal year ending in 1927, when the last payment of $400,000 was made. The parties entered into a written stipulation of facts, which we adopt and, in so far as pertinent and material, hereinafter state as our findings of fact. FINDINGS OF FACT. The petitioner is a corporation organized and existing under and by virtue of the laws of the State of Pennsylvania, with its principal office at the southeast corner of 15th and Chestnut Streets, Philadelphia, Pa. During the fiscal year ending November 30, 1925, petitioner herein being the owner of premises 1322-24 Chestnut Street, in the city of Philadelphia, Pa., transferred said premises, reserving, however, to itself out of the said premises a ground rent of $40,000 per annum, the principal of the said ground rent being $800,000. Petitioner *700 received at the time of the said transfer of the said real estate the sum of $500,000 in cash. During the*2352 said fiscal year ending November 30, 1925, but subsequent to the date of the transfer of the said property, petitioner received the sum of $200,000 on account of the principal of the said ground rent above mentioned. During the fiscal year ending November 30, 1926, petitioner received the sum of $200,000 on account of the principal of the said ground rent above mentioned, and during the fiscal year ending November 30, 1927, petitioner received the sum of $400,000, being the balance of the principal of the said ground rent. The net profit realized by petitioner from the transfer of the said real estate was $376,108.58. The ground rent reserved by petitioner at the time of the transfer of the said real estate had at all times subsequent thereto a fair market value equal to the then unpaid portion of the principal thereof. The Commissioner determined that petitioner acquired a taxable profit during the fiscal year ending November 30, 1925, from the aforesaid transfer of premises 1322-24 Chestnut Street in the city of Philadelphia, Pa., in the amount of $376,108.58. The property was sold to the First Penny Savings Bank of Philadelphia, by deed dated December 22, 1924, the material*2353 parts of which are as follows: WITNESSETH, That the said Grantor as well for and in consideration of the sum of Five hundred thousand dollars, unto it at or before the sealing and delivery hereof by the said Grantee well and truly paid, the receipt whereof is hereby acknowledged, as of the payment of the yearly rent and taxes and water rent, and performance of the covenants and agreements hereinafter mentioned, which on the part of the said Grantee, its successors and assigns, is and are to be paid and performed, hath granted, bargained, sold, aliened, enfeoffed, released and confirmed, and by these presents doth grant, bargain, sell, alien, enfeoff, release and confirm unto the said Grantee, its successors and assigns. [Description omitted.] TOGETHER, with all and singular the buildings and improvements thereon erected ways, streets, alleys, passages, waters, watercourses, rights, liberties, privileges, hereditaments and appurtenances whatsoever, unto the said hereby granted premises belonging, or in any wise appertaining, and the reversions and remainders thereof: TO HAVE AND TO HOLD the said described lots or pieces of ground, hereditaments and premises hereby granted, *2354 with the appurtenances, unto the said Grantee, its successors and assigns, to the only proper use and behoof of the said Grantee, its successors and assigns forever. YIELDING AND PAYING therefor and thereout, unto the said Grantor its successors and assigns, the yearly rent or sum of Forty Thousand Dollars, lawful money of the United States of America, in equal half-yearly payments, on the First day of the months of June and December in every year hereafter, forever subject to the covenants hereinafter contained, without any deduction *701 defalcation, or abatement for any taxes, water rent charges or assessments whatsoever, to be assessed, as well on the said hereby granted lots as on the said yearly rent hereby and thereout reserved; the first half-yearly payment thereof to be made on the First day of June One Thousand Nine hundred and Twenty-five (1925) * * * AND the said Grantee, for itself its successors and assigns, doth covenant, promise and agree, to and with the said Grantor its successors and assigns, by these presents, that it the said Grantee, its successors and assigns, shall and will well and truly pay, or cause to be paid, to the said Grantor, its successors*2355 and assigns, the aforesaid yearly rent or sum of Forty thousand Dollars, lawful money of the United States of America, aforesaid, on the days and times hereinbefore mentioned and appointed for payment thereof, without any deduction, defalcation, or abatement for any taxes, water rents, charges or assessments whatsoever; it being the express agreement of the said parties that the said Grantee, its successors and assigns, shall pay all taxes and water rents whatsoever that shall be hereafter laid, levied or assessed by virtue of any laws whatever, as well on the said hereby granted lots and buildings thereon erected or to be erected, as on the said yearly rent now charged thereon. * * *. PROVIDED ALWAYS, nevertheless, That if the Grantee, its successors or assigns, shall and do at any time pay or cause to be paid to the said Grantor, its successors or assigns the sum of Eight hundred thousand dollars, lawful money of the United States of America, as aforesaid, and the arrearages of the said yearly rent to the time of such payment, then the same shall forever thereafter cease and be extinguished, and the covenant for payment thereof shall become void; and then it the said Grantor, its*2356 successors or assigns, shall and will at the proper costs and charges in the law of the said Grantee, its successors and assigns, seal and execute a sufficient release and discharge of the said yearly rent hereby reserved, to the said Grantee, its successors and assigns, forever any thing hereinbefore contained to the contrary thereof notwithstanding. AND the said Grantee for itself, its successors and assigns doth hereby covenant and agree, to and with the said Grantor, its successors and assigns, that it the said Grantee, its successors and assigns, shall and will pay to it the said Grantor, its successors and assigns, the principal sum of the said yearly ground rent, to-wit the sum of Eight hundred thousand dollars, lawful money as aforesaid, in extinguishment of the said yearly ground rent, on or before the Twenty-second day of December A.D. 1934, and in default of the payment of the said principal sum of the said yearly ground rent, to-wit: the sum of Eight hundred thousand Dollars, lawful money as aforesaid, on the Twenty-second day of December A.D. 1934, the same may and shall be forthwith recoverable by the said Grantor, its successors and assigns, against it, the said Grantee, *2357 its successors and assigns, with all arrearages of the said rent, and shall be first payable out of the proceeds of the sale of the said premises under any judgment for said principal sum, and upon payment and satisfaction of said judgment, with all arrearages of said rent to the date of such payment, the said yearly ground rent shall forthwith cease and become extinguished as aforesaid, providing that no payment of the said half-yearly sum to accrue as aforesaid, nor any judgment nor any judicial or other sale of said premises therefor shall in any wise alter, effect or prejudice the title and estate in and to the said ground rent, which shall remain in all respects as if this covenant for the payment of the capital or principal sum of said ground rent had never been made. PROVIDED ALSO: That the Grantee, its successors and assigns may have the privilege at any Ground Rent paying period of paying on account of said *702 principal sum an amount of not less than One hundred thousand Dollars, to be credited on account of said principal sum and the half-yearly rent to be reduced proportionately after said payments. * * * Other provisions of the deed related to the right of*2358 petitioner as ground rent landlord to distrain for ground rent in arrears, waiving exemptions on the part of the grantee, and covenants to pay insurance, taxes, water rents, and similar charges. The deed was signed by both parties. After the payment of $100,000 on the principal of the ground rent the petitioner conveyed the ground rent to three trustees for its reserve fund by deed dated July 30, 1925. After the payment of the entire $800,000 principal of the ground rent these trustees on March 31, 1927, conveyed the ground rent to the First Penny Savings Bank of Philadelphia, releasing and extinguishing it. OPINION. BLACK: Briefly stated, it is contended by petitioner that, because of the peculiar nature of a Pennsylvania ground rent, the contract of sale herein did not become a closed transaction until the payment in full of the principal of the ground rent in 1927, and therefore was not taxable until then, while respondent contends that it was a closed transaction in 1925 and taxable then. Mr. Justice Shiras, in the case of *2359 , speaking of irredeemable ground rents under the laws of Pennsylvania, said: It is defined to be rent reserved to himself and his heirs by the grantor of land, out of the land itself. It is not granted like an annuity or rent charge, but is reserved out of a conveyance of the land in fee. It is a separate estate from the ownership of the ground, and is held to be real estate, with the usual characteristics of an estate in fee simple, descendible, devisable, alienable. The decisions of the Pennsylvania courts are to the same effect. Cf. ; ; ; ; Nicholson on Pennsylvania Real estate, p. 65. It results that when the petitioner delivered its deed December 22, 1924, the grantee therein became the absolute fee simple owner of the ground, subject to a ground rent reserved in favor of petitioner. The grantee had a fee simple estate in the land and the petitioner a fee simple estate in the ground rent. A transaction of this kind*2360 has been held to be a sale in , where the court said: *703 Now a sale on a ground rent differs from an ordinary sale only in this, that the consideration in the first is an annual sum perpetually charged on the land, instead of a gross sum paid or secured, as in the second. The court was there speaking of irredeemable ground rents, which have since been made redeemable by statute and may be so by contract. The deed in the instant case contained the unqualified written agreements of the grantee savings bank to pay the annual ground rent of $40,000 and to pay the principal sum of $800,000 in extinguishment thereof on or before 10 years from date of the deed. Thus, in addition to the ordinary reservation of ground rent, the deed carried the express obligation to pay $800,000. As we have seen in , that a transaction of this kind is a sale, and only differs from an ordinary sale in the method of collecting or securing the purchase price, it remains to consider when this sale took place. Under the terms of the deed of December 22, 1924, the land, "together with all and singular*2361 the buildings and improvements thereon erected, ways, streets, alleys, passages, waters, watercourses, rights, liberties, privileges, hereditaments and appurtenances" were granted to the purchaser "to have and to hold" forever. Possession was taken by the purchaser. The petitioner received $500,000 cash and the written obligation of the purchaser to pay it $800,000 on or before 10 years after date, which it admits was always of the fair market value of the unpaid amount. Ground rents have long been a popular form of investment in Pennsylvania and are used as a form of securing deferred payments on sales of real estate. on sales of real estate. Counsel for petitioner in his brief lays much stress on the fact that the reservation of ground rent by the vendor of real estate in Pennsylvania is an interest in realty and he cites many Pennsylvania cases to support that contention. We have no disposition to deny these authorities, but do not regard them as changing the method of Federal income taxation on realty sales made in Pennsylvania from what they ordinarily are in other States. *2362 . Under the facts in this case, which have been stipulated, we hold that the sale was made in the fiscal year ending November 30, 1925, and the profit was income for that year. ; ; . Reviewed by the Board. Judgment will be entered for the respondent.