*963 1. Pursuant to a 15-year lease of real property of which the taxpayer was landlord, $125,000 was deposited by the tenant as security for the performance of its obligations under the lease. In the seventh year of the lease, the parties entered into an agreement whereby the lease was canceled and the deposit forfeited to the taxpayer. Held:
:a) The forfeited deposit constitutes income in the year of forfeiture rather than the year of receipt.
:b) The taxpayer suffered no deductible loss because of its inability to relet the property on terms as advantageous as those embodied in the canceled lease.
2. The respondent erred in the imposition of an excess profits tax under section 216:a) of the National Industrial Recovery Act since the taxpayer was exempt from capital stock tax under section 215:a) of the same statute. See Colson Co.,37 B.T.A. 1031">37 B.T.A. 1031.
*856 This is a proceeding to redetermine deficiencies in income and excess profits taxes of $4,649.24 and $1,690.63, *964 respectively, for the calendar year 1933. There are two issues: :1) Whether petitioner received income through the forfeiture to it of a sum deposited to secure the performance of the covenants of a lease; and :2) whether petitioner is subject to excess profits tax under section 216:a) of the National Industrial Recovery Act.
FINDINGS OF FACT.
Petitioner is a corporation organized under the laws of the State of New York, with its principal business offices in New York City.
The Warren-Nash Motor Corporation was a large distributor of Nash automobiles in the territory consisting of the eastern part of New York State, the northern part of New Jersey, and western Connecticut. *857 In 1926, this corporations's sales volume, in excess of $22,000,000, was the largest in its history and it needed a larger building to take care of its increasing business. As a result of negotiations between petitioner and the Warren-Nash Motor Corporation, a plan was worked out under which petitioner would buy certain land, lease it to the Warren-Nash Motor Corporation, and construct a building thereon to fill the needs of the tenant. The rentals were to be sufficient to finance the purchase*965 of the land and the erection of the building by petitioner.
Pursuant to this plan, petitioner, on August 2, 1926, executed a lease, for a term of fifteen years, to the Warren-Nash Motor Corporation, of premises located at 133d Street and Broadway, New York City. The lease provided that petitioner, as landlord, would acquire title to the premises on or before October 1, 1926, and thereafter construct a building suitable for the tenant's purposes in accordance with its specifications. The average annual rental, net to petitioner, was $125,000. The lease also contained the following provision:
:13) To secure the performance by the Tenant of the conditions and agreement of this lease, and to furnish indemnity to the Landlord for the payment of the rentals hereunder, there shall be paid to the Landlore by the Tenant, on the day when the Landlord secures and accepts title to the said premises, the sum of One hundred twenty five thousand :$125,000.) Dollars, in the use of which the Landlord shall be entirely unrestricted. * * *
If the tenant shall faithfully perform the convenants, agreements and stipulations in this lease contained by it to be performed until August 1, 1941, or*966 having made default therein, shall have amended such default, then and in that event the Landlord shall pay over to the Tenant on August 1, 1941, the amount paid to it as provided by this Section 13.
The $125,000 was duly paid to petitioner by the tenant, in 1926, and was used in paying the cost of construction of the building.
Following the execution of the lease, petitioner acquired title to the parcel of realty located at 133d Street and Broadway, by a deed dated August 2, 1926, acknowledged August 3, 1926, and recorded August 4, 1926. The cost of this property was $300,000.
The lease called for the erection of a seven-story building of modern reenforced concrete construction with not less than 200,000 feet of floor space, suitable for housing the tenant's general offices, providing a salesroom for both new and used cars, and leaving at least one floor available for storage purposes. As finally constructed, it had seven floors and a penthouse, a 218,000 feet capacity, a double ramp, and three elevators. Located away from the automobile district in New York, it was specialized in design and adapted for the automobile distribution business, but unsuitable for other enterprises*967 requiring buildings of its general type, especially storage and furniture warehouses. It was completed in 1927 at a cost of $792,328.15 to petitioner.
*858 Petitioner would not have made such a large investment had it not secured a responsible tenant who was willing to pay a relatively high rental over a long period, and it bought the land in reliance on the commitment of the Warren-Nash Motor Corporation embodied in the lease. The amount of net rental that could have been obtained for the property in 1926 from a tenant other than Warren-Nash Motor Corporation was not more than $80,000.
The amounts received by petitioner under the lease with the Warren-Nash Motor Corporation as net rentals were as follows:
| 1926 | $85,000.00 |
| 1927 | 135,000.00 |
| 1928 | 135,000.00 |
| 1929 | 135,000.00 |
| 1930 | 135,000.00 |
| 1931 | $131,033.44 |
| 1932 | 114,383.25 |
| 1933 | 24,000.00 |
| Total | 894,416.69 |
These rentals were not to petitioner in that, under the terms of the lease, the tenant was required to pay taxes, assessment, water rents, current charges, insurance premiums, and repairs.
At the time entered into the lease, the Warren-Nash Motor corporation was doing an annual business*968 of more than $22,000,000. But it began losing money in 1929. In 1933, the Nash Motor Co., whose policy was to keep the financial condition of its distributors under close observation, notified the Warren-Nash Motor Corporation that unless operating expenses were reduced, its distributor franchise would be canceled. Thereafter, and on May 1, 1933, petitioner and the Warren-Nash Motor Corporation entered into an agreement whereby the lease was canceled and the tenant released all right, title, and interest in and to the sum of $125,000 previously paid by it to petitioner as security for the performance of its lease obligations, provided that petitioner should hold such sum or the avails thereof for the protection of the holders of petitioner's 6 percent secured notes until they should have been paid in full with interest.
Prior to the cancellation of the lease, petitioner had made efforts to obtain a new tenant for the property and, on May 1, 1933, rented it for a three-year term at an annual gross rental of $30,000 to the Warren-Nash Motor Corporation. This lease was renewed upon its expiration for a year and a half, and was later extended for a further period of five years, *969 the rent reserved under the last extension being at the annual rate of $40,000. These rentals were the highest then obtainable for the property.
Petitioner still owns the land and building, subject to a mortgage owned by the Metropolitan Life Insurance Co. of New York, since 1926. The original amount of this mortgage was $500,000. In 1933, it was reduced to $300,000, at which amount it still remains.
*859 In its original income tax return for 1933, petitioner included as income $85,910.65 representing the present worth, at December 31, 1933, of petitioner's contingent obligation, which was released by the cancellation agreement, to pay $125,000 to the tenant in 1941. It now claims that this amount was offset by losses resulting from the cancellation of the lease, while respondent contends that the entire amount of $125,000 is includable in petitioner's income.
During the calendar year 1933, petitioner's business consisted of the ownership of real estate and the distribution of rentals received. It filed capital stock tax returns for the fiscal years ended June 30, 1933, and June 30, 1934, on which claims were made for exemption from capital stock tax. In letters*970 dated respectively, August 20, 1934, and October 15, 1935, petitioner was advised by respondent that its claim for exemption for both years was sustained, on the ground that it was not doing business within the meaning of section 215 of the National Industrial Recovery Act as to the first fiscal year, and within the meaning of section 701 of the Revenue Act of 1934 as to the second fiscal year.
The respondent computed petitioner's excess profits tax as follows:
| Net income | $33,812.66 |
| Less: 12 1/2 per cent of None, declared value of capital stock | None |
| Subject to excess-profits tax of 5 per cent | $33,812.66 |
| Correct excess-profits tax liability | $1,690.63 |
| Assessed, Account #NC 853789 | None |
| Deficiency in excess-profits tax | $1,690.63 |
OPINION.
LEECH: While the payment of $125,000, although received in 1926 could not be considered as income to the petitioner until used to cover a default by the lessee (), it was clearly income to petitioner in 1933 when the contingent obligation to pay it back to the lessee was discharged. Commissioner v. Langwell Real Estate Corporation, 47 Fed. *971 :2d) 841; . See Virginia Iron Coal & Coke Co. v. Commissioner, 99 Fed.:2d) 919. It was none the less income, although petitioner agreed to hold it for the protection of the holders of petitioner's 6 percent notes, because those notes evidenced petitioner's debt. , reversing 76 Fed.:2d) 507, which reversed .
The amount of the income thus received by petitioner in 1933, through the tenant's surrender of all interest in the deposited sum, was $125,000, *860 and not the then worth of an obligation to pay $125,000 in 1941. ; Commissioner v. Langwell Real Estate Corporation, supra; . Assets worth $125,000 were freed in 1933 for petitioner's immediate unrestricted use. .
But petitioner urges that it suffered losses by the cancellation of the lease which offset any income thus received in 1933. Specifically, it points to its inability to secure a new tenant who would pay as much rent*972 as the tenant had been paying under the lease which was canceled in that year.
It is well settled that disappointment in expectations of profit and mere lessening of income form no basis for a deductible loss. ,; ; .
Moreover, this Board has consistently held that losses in connection with real estate are not deductible so long as the owner of the property retains the title thereto, for the reason that there is no identifiable event to fix the amount of the loss beyond possibility of recoupment. ; affd., 65 Fed.:2d) 1017; ; . Cf. Rhodes v. Commissioner, 100 Fed.:2d) 966.
It is difficult to see, on this record, how petitioner suffered any loss other than a reduction of expected profits from an extremely advantageous lease. The property continued to posses the capability of producing income. It was relet on the day of the cancellation for $30,000*973 a year. That it was now less fruitful than formerly was an economic misfortune which the revenue acts do not palliate through the allowance of a deduction.
We are aware that the court which decided the Langwell case, while holding that a sum deposited to secure the performance of a lease constituted income in the year of forfeiture, held that such income might legally be offset by losses resulting from the cancellation of the lease, and that losses of that character were allowable when established by proof that the landlord could not have negotiated another lease as favorable as the one which had been cancceled. However, in our view, this ruling ignores the necessity for a closed transaction, such as a sale, to establish a loss and also the possibility of some recoupment through other leasing arrangements. With all due respect for the tribunal which made that ruling, we find ourselves unable to follow it here. See
In its claims for exemption from capital stock tax, petitioner asserted facts to show that it was not doing business within the meaning of section 215:a) of the National Industrial Recovery Act and within *861 the meaning*974 of section 701 of the Revenue Act of 1934. These claims were for the fiscal years ending June 30, 1933 and June 30, 1934. The Commissioner sustained petitioner's claims for exemption for both years on the ground advanced in the claims. Neither the deficiency letter nor respondent's answer in this proceeding repudiate those rulings, although both declare that petitioner is liable for excess profits tax. Respondent's computation of petitioner's excess profits tax shows, moreover, that the declared value of petitioner's capital stock was from capital stock tax. It follows that there is no liability for excess profits tax, since section 216:a) of the National Industrial Recovery Act provides that the excess profits tax shall be imposed for income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 215. .
Decision will be entered under Rule 50.