Oregon Terminals Co. v. Commissioner

OREGON TERMINALS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Oregon Terminals Co. v. Commissioner Docket No. 68893. United States Board of Tax Appeals 29 B.T.A. 1332; 1934 BTA LEXIS 1399; February 28, 1934, Promulgated *1399 Under the facts herein, held that petitioner was not required to accrue as income rentals owing to it under lease which in all probability it would never receive. Charles E. McCulloch, Esq., and Ivan F. Phipps, Esq., for the petitioner. Willis R. Lansford, Esq., for the respondent. ARUNDELL *1332 The respondent determined a deficiency in income tax for the fiscal year ended April 30, 1930, in the amount of $3,143.27. The deficiency is the result of an adjustment made by respondent in the profit reported on the sale of property. The adjustment so made is not contested, but petitioner contends that it was error to include in its income accrued rentals only a portion of which were received during the year. FINDINGS OF FACT. Petitioner, an Oregon corporation, leased certain dock properties owned by it under date of May 11, 1927, to two individuals, with a provision for assignment to a corporation to be organized for the purpose of operating the properties. The operating corporation was subsequently organized under the name of Oceanic Terminals, hereinafter called the lessee. The lease was taken by the lessee subject to a deed*1400 of trust and bond issue. The annual rental agreed upon in the lease was $175,000, payable monthly. The lessee entered into possession of the premises in the latter part of 1927 or the early part of 1928. Due to some delay in the completion of the properties the trustee under the deed of trust and the underwriters who handled the bond issue consented to a reduction of rent in the fiscal year ended April 30, 1928. Shortly after the lessee began to operate the properties it became apparent that its earning would be insufficient to meet the full rentals provided for in the lease. In no year has it made full payment. The amounts actually paid through the fiscal years ended April 30, 1928 to 1931, inclusive, are as follows: [1928] $29,330.91 [1929] 160,732.73 [1930] 39,000.00 [1931] 79,000.00 *1333 The amount of $160,732.73 paid in the fiscal year 1929 was not all cash, but included notes in the amount of $47,499.98, and stock of the lessee in the amount of $14,583.33. The net income of the lessee, exclusive of its obligation under the lease for the fiscal years ended June 30, 1928 to 1933, inclusive, was as follows: [1928] $14,751.00 [1929] 85,564.90 [1930] 55,843.40 [1931] 78,921.15 [1932] $59,109.37 [1933] 58,729.66 352,919.48 *1401 The officers of the lessee corporation were considered by petitioner to be efficient operators, and petitioner desired to have them continue operating the properties even though it did not receive the full rentals agreed upon. In the fall of 1929 petitioner's officers discussed the situation with the officers of the lessee, the conclusion of which was that petitioner agreed to accept the nominal sum of $1 per year rental from the lessee, and that the lessee should pay over to the trustee under the deed of trust all net earnings. The trustee in turn was to apply the amounts thus received towards the liquidation of bond interest. An attempt was made by petitioner's officers to secure the consent of the trustee and the underwriters to a reduction of rent, but the underwriting firm was unwilling to make any concession. Both the underwriting from and trustee, however, were aware of the oral agreement reached between petitioner's officers and the lessee. Petitioner's officers did not communicate to their bookkeeper the oral agreement made with the lessee in the fall of 1929, and the bookkeeper accrued upon petitioner's books the amount of $175,000 as rental for the year ended April 30, 1930. *1402 Said amount was included in petitioner's income tax return for that year. The lessee has not had sufficient assets at any time since April 30, 1929, to satisfy its unpaid rentals or to pay off the notes taken by petitioner as part of the rent for the year ended April 30, 1929. Since the fall of 1929 petitioner's officers have never expected that arrears in rentals would be paid by the lessee. OPINION. ARUNDELL: The facts developed in this case bring it within the principle of , wherein we held that the taxpayer was not required to include uncollectible interest in income even though its books were kept on the accrual basis. The evidence in this case establishes to our entire satisfaction not only that the rentals were uncollectible in full within the year when due, but also that collection in the future was highly improbable *1334 and that petitioner's officers were fully aware of this situation before the close of the fiscal year 1930. Following the Great Northern case, supra, we hold that it was error to include in income any more than the amount of $39,000 actually received as rentals. *1403 See to the same effect, ; . Decision will be entered under Rule 50.