*197 Decision will be entered for the respondent.
1. Petitioner is the owner of a hotel property in New York City which it acquired February 14, 1947, and at the end of its first fiscal year ended January 31, 1948, it had received rents in the operation of its business in the sum of $ 3,138.62 relating to a period within the next fiscal year, which said amount petitioner treated on its books and in its income tax return as prepaid rent to be taken into income in the period to which the said rents applied. Respondent has determined that the $ 3,138.62 is taxable income to petitioner in its fiscal year ending January 31, 1948. Held, that prepaid rent which, as here, was received under a present claim of full ownership and subject to petitioner's unfettered control was taxable income in the year of receipt. Palm Beach Aero Corporation, 17 T. C. 1169, followed.
2. The contract of purchase between petitioner and the seller provided that rents should be apportioned between the parties as of the closing of title and in accordance therewith, petitioner, as purchaser, received as a credit the sum of $ 8,724.06, representing its apportionment of rents already*198 received in advance by the seller and relating to time subsequent to the closing of title. Held, the $ 8,724.06 was rent which the petitioner received during its fiscal year ending January 31, 1948, and was taxable income to petitioner in that year. It did not represent a reduction in the purchase price of the property as petitioner contends.
*44 The Commissioner has determined a deficiency in petitioner's income tax of $ 719.33 for its fiscal year ended January 31, 1948. To this determination of the Commissioner, petitioner assigns error as follows:
1. The inclusion in income of prepaid rental income in the sum of $ 3,138.62 as rental income in the fiscal year ended January 31, 1948;
2. Or, in the alternative, if the said amount in question, $ 3,138.62, does constitute taxable income to the taxpayer in the fiscal year involved, then the prepaid rents at the beginning of the said taxable year in the sum of $ 8,724.06 should be excluded from the taxable income of the taxpayer.
FINDINGS OF FACT.
The facts have been stipulated and are adopted as our Findings*199 of Fact.
Petitioner Hyde Park Realty, Inc., is a corporation organized and existing under the laws of the State of New York, having its principal office and place of business in New York City. The corporation was organized on February 4, 1947.
Petitioner's Federal income tax return for the fiscal year ended January 31, 1948, was duly filed with the collector of internal revenue for the third district of New York.
On or about January 10, 1947, David Bisgeier and Hyman I. Cohen entered into a contract with Hyde Park Hotel Corporation to purchase premises known as Hotel Hyde Park in the City of New York. Thereafter the contract referred to above was assigned by David Bisgeier and Hyman I. Cohen to the petitioner, Hyde Park Realty, Inc., which contract was closed on February 14, 1947. At closing of title, the transactions took place and closing adjustments were made as set forth in the closing statement prepared by Irving S. Friedman, attorney for the petitioner.
*45 The contract of purchase provided that rents should be apportioned between the parties as of the closing of title and in accordance with the contract at the closing of title petitioner, as purchaser, received as a*200 credit the sum of $ 8,724.06 for rents received by the seller before the closing of title and relating to the taxable period subsequent to the closing of title. The petitioner on its tax return for its first fiscal year ended January 31, 1948, gave such rents collected by the seller its conventional accounting treatment as rental income and included the same as rental income in its operations for the fiscal period in question. At the end of its first fiscal year ended January 31, 1948, the petitioner had received rents in the operation of its business in the sum of $ 3,138.62 relating to the fiscal year following the fiscal year in question, which amount the petitioner, in accordance with the conventional principles of accounting, treated on its books and in its income tax return as prepaid rent to be taken into income in the period to which the prepaid rents applied, namely, the following fiscal year.
The Commissioner in his 30-day letter of proposed deficiency dated April 19, 1951, included in income for the fiscal year ended January 31, 1948, the sum of $ 3,138.62 as rent actually received within the fiscal year, explaining his adjustment "Unearned rental income not included *201 in income." However, the Commissioner refused to make an adjustment, as of the beginning of the year, by excluding from income the sum of $ 8,724.06.
The sum of $ 8,724.06 relating to the beginning of the year and the sum of $ 3,138.62 relating to the end of the year in question are rents paid in advance, namely, rents relating to the operation of the premises, Hyde Park Hotel.
It is agreed that in the event the Court finds that the sum of $ 8,724.06, relating to the beginning of the taxable year, was not properly includible in income of petitioner Hyde Park Realty, Inc., the basis of the property for depreciation purposes will have to be reduced by the sum of $ 8,724.06. In the return filed by Hyde Park Realty, Inc., for the taxable year beginning February 14, 1947, and ending January 31, 1948, the basis used for depreciation purposes was predicated upon the sale price of $ 1,180,000.
The sale of the Hyde Park Hotel to Hyde Park Realty, Inc., was reported in the income tax return of Hyde Park Hotel, Inc., in the taxable year beginning December 1, 1946, and ending November 30, 1947. The gross sale price of the property was reported in Schedule D of the return of Hyde Park Hotel, *202 Inc., to be $ 1,180,000. The tax rate for Federal income tax purposes for Hyde Park Hotel, Inc., *46 for the taxable year beginning December 1, 1946, and ending November 30, 1947, was not in excess of 25 per cent.
The contract of purchase and sale entered into by the parties on January 10, 1947, contained the following paragraph:
The purchase price is One million one hundred eighty thousand Dollars ($ 1,180,000) payable as follows: Fifty thousand Dollars ($ 50,000) on the signing of this contract, * * * Three hundred five thousand Dollars ($ 305,000) by purchaser's certified check made payable to the order of the seller, drawn on a bank which is a member of the New York Clearing House Association, at the time of closing of title hereunder * * * and the balance of Eight hundred twenty-five thousand Dollars ($ 825,000) shall be assumption of existing first mortgage.
The closing statement which was compiled on February 14, 1947, by Irving S. Friedman, attorney for the petitioner, contains, among other things, the following:
GRANTOR: HYDE PARK HOTEL CORP.
to
GRANTEE: HYDE PARK REALTY, INC.
* * * *
| FINANCIAL STATEMENT | |
| DEBIT (Due seller): | |
| Purchase price | $ 1,180,000.00 |
| Insurance | 997.99 |
| House bank | 1,300.00 |
| Oil | 273.21 |
| Sales tax | 370.00 |
| Telephone | 123.55 |
| Transients and incidentals | 44.60 |
| Service contracts | 49.94 |
| TOTAL DEBITS | $ 1,183,159.29 |
| CREDITS (Due purchaser): | |
| Paid on signing contract | $ 50,000.00 |
| First mortgage | 825,000.00 |
| Interest from Jan. 1, 1947 to Feb. 14, 1947 at 4 1/4% | 4,382.81 |
| Taxes, Jan. 1 to Feb. 14, 1947 | 4,740.62 |
| Gas meter reading | 10.25 |
| City ledger accounts | 10.42 |
| Rents (Schedule of adjustments delivered to purchaser at | |
| closing) | 8,724.06 |
| Water | 1,379.28 |
| [Sub] TOTAL CREDITS | $ 894,247.44 |
| BALANCE PAID ON CLOSING | 288,911.85 |
| TOTAL | $ 1,183,159.29 |
*203 *47 OPINION.
The issues raised by the pleadings are: (1) whether the sum of $ 3,138.62 collected by the petitioner within the fiscal year ended January 31, 1948, but representing rents paid in advance for a period beyond the end of the fiscal year is properly includible in income during the taxable year ended January 31, 1948, and (2) whether the sum of $ 8,724.06, which was collected by petitioner's predecessor in title and which represents rents covering a period beginning February 14, 1947, and extending on into that year and which was credited by the seller against the purchase price, was income to the petitioner in the fiscal year ended January 31, 1948.
Issue 1.
We think Issue 1 must be decided in favor of respondent on the authority of . In that case, among other things, we said:
The respondent in his pleadings alleged that the entire advance rental in the amount of $ 50,000 received by the petitioner from Gulf Oil Corporation during the years 1946 to 1948 was taxable income in 1946, but on brief concedes that only $ 39,287.07, the sum received in 1946, constitutes taxable income in that year. *204 The petitioner does not deny the well established rule that prepaid rent which, as here, is received under a present claim of full ownership and subject to the lessor's unfettered control, is taxable income upon receipt. , affd. ; , certiorari denied ; ; ; , but nevertheless argues the payments are not taxable income because they were applied to the cost of constructing a hangar to which it never at any time had title. * * *
We find no merit in the petitioner's argument. The sums paid by the Gulf Oil Corporation to the petitioner were paid as rental pursuant to the agreement entered into with the petitioner. The fact that the petitioner saw fit to use the sums to finance the construction of a hangar cannot change the fact that they constituted*205 rental income when received. We, therefore, hold that the sum of $ 39,287.07 received from the Gulf Oil Corporation in 1946 was taxable income to the petitioner in that year.
Under the facts in the instant case, we would be unable to distinguish , on Issue 1. This issue is decided in favor of respondent.
Issue 2.
Petitioner contends that if we decide Issue 1 in respondent's favor, logic should cause us to decide Issue 2 in petitioner's favor. In *48 discussing this contention in its brief, petitioner says, among other things:
if the Court should decide that the rule stated in , and cases cited therein, is applicable to such prepaid rents and that such rule takes precedence over conventional and sound accounting practice, then the prepaid rents in the sum of $ 8,724.06 received by the taxpayer's predecessor in title to the premises constituted income not to the taxpayer but to the taxpayer's predecessor in title under the rationale of the Palm Beach Aero Corp. case (supra) in which income is held to arise upon receipt rather than the period*206 to which it relates. The fact that taxpayer received an adjustment for said item on the closing of title indicates only that there was an adjustment of the purchase price and not that the said income of the predecessor in title was assigned to taxpayer.
We are unable to agree with petitioner that the $ 8,724.06 credit which petitioner received in the settlement for rents, which was effected upon the closing of title, represented an adjustment of the sale price. It has been stipulated that:
4. The contract of purchase provided that rents should be apportioned between the parties as of the closing of title and in accordance with said contract at the closing of title petitioner, as purchaser, received as a credit the sum of $ 8,724.06 for rents received by the seller before the closing of title and relating to the taxable period subsequent to the closing of title.
Can there be any doubt as to what this $ 8,724.06 represented? We do not think there can be any doubt but that it represented rents. It represented rents paid over to petitioner to cover its period of ownership of the property beginning with February 14, 1947. It is true that the seller had already collected these rents*207 from the tenant in advance and if the seller had remained the owner of the property, it would have had to include the entire amount of this prepaid rent in its taxable income in the year when it was collected. But the seller did not remain the owner of the property but sold it to petitioner and in the agreement of sale agreed to apportion the rents with petitioner, the purchaser. That has been done, and it seems to us that the $ 8,724.06 in a real sense represents rents which petitioner received in its fiscal year ended January 31, 1948, and did not represent a reduction in the purchase price. The fact that the $ 8,724.06 was used in the settlement at the closing of title as a credit on the payment of the purchase price does not change the incidence of the tax.
It just so happens that petitioner received in its first taxable year ending January 31, 1948, both of these rental payments, one of $ 8,724.06 and the other the advance payment of $ 3,138.62, and we think that under the doctrine of ,*208 petitioner is taxable on both payments. We so hold.
Decision will be entered for the respondent.