*775 1. INCOME - ADVANCE RENTAL. - Sums paid in advance for the use of a building and equipment held to be advance rentals and income in the year of receipt.
2. STATUTE OF LIMITATIONS. - Advance rent not being income in the year of termination of a lease, there was no omission from its return of gross income properly includible therein and the three-year period of limitations is not extended by section 275(c), Revenue Act of 1934.
3. ESTOPPEL. - The three-year period of limitations is not extended by section 275(c) on some principle akin to estoppel where the lessor, with full knowledge on the part of the Commissioner, returned as income an aliquot part of the advances in each year that the lease was in effect and had not reported the full amount of the advances at the time the lease was terminated.
*1096 The Commissioner determined deficiencies as follows for fiscal years ended May 31:
| Year | Income tax | Excess profits tax |
| 1935 | $4,290.90 | $1,560.33 |
| 1936 | 6.40 | |
| 1937 | 207.90 | |
| 1938 | 207.90 |
The petitioner has assigned the*776 following errors: (1) that the statute of limitations bars the assessment and collection of the deficiencies for 1935 and 1936; (2) that the Commissioner erred in including in income for 1935 $30,000 described as "gain from lease forfeiture"; and (3) that the Commissioner erred in disallowing a deduction for each taxable year of the amount claimed as depreciation on motion picture equipment.
The Commissioner has alleged (a) that the statute of limitations has not run for 1935 because the petitioner omitted from its return for that year gross income properly includible therein in excess of 25 percent of the amount shown on the return (see section 275(c) of the Revenue Act of 1934); (b) that the petitioner is estopped from denying tax liability for 1935 as to the item of $30,000.
FINDINGS OF FACT.
The petitioner is a corporation. It filed its income and excess profits tax return for the fiscal year ended May 31, 1935, on July 9, 1935. It filed its return for the fiscal year ended May 31, 1936, on July 15, 1936. Those returns, as well as its returns for the other two taxable years, were filed with the collector of internal revenue for the first district of New York. It filed*777 on May 19, 1939, a waiver of the statute of limitations for the fiscal year ended May 31, 1939, extending the period for assessment to June 30, 1940. That document was signed by the Commissioner on the date of filing. The notice of deficiency was mailed to the petitioner on June 6, 1940.
The petitioner was engaged early in 1921 in constructing a building in Woodhaven, Long Island. The building was to contain some stores, but the principal part of it was to be occupied as a motion picture theatre. The ultimate cost of the land, building, and equipment was about $220,000. The petitioner was in need of some funds. Two individuals, Muller and Schwartz, agreed to advance it $60,000 - $25,000 upon execution of an agreement, and $35,000 upon delivery of a 20-year lease of the theatre to Muller and Schwartz, or their assignees. They also agreed to pay $40,000 over a period of eight years for the use of the equipment of the theatre. An agreement was entered into under date of March 5, 1921, which is made a part hereof by this reference.
*1097 Muller and Schwartz were officers of the Roosevelt Amusement Corporation. The petitioner leased its theatre on May 5, 1921, to that*778 corporation for 20 years. The lease of May 5, 1921, is incorporated herein by this reference.
The lease provided for an annual rental beginning at $23,000 and increasing to $30,500.
The petitioner, as landlord, acknowledged in the lease that it had received $60,000 - $25,000 paid on March 5, 1921, and $35,000 paid upon the execution of the lease - as partial "and advance payment of rent", which was never to be repaid to the lessee.
The lease also provided for the payment of $40,000 for the use of the equipment in the theatre, which was not to become the property of the lessee. The $40,000 was to be paid in equal installments every three months during a period of eight years, with interest at 6 percent per annum. The tenant was not allowed to remove any of the equipment furnished by the landlord and the property was to remain that of the landlord upon termination of the lease.
The books of the petitioner were kept and its returns were made on an accrual basis. The items of $60,000 and $40,000, above referred to, were shown on its books and on its returns as liabilities described as advances on account of rent of building and equipment. The petitioner, for each of the*779 years 1922 to 1936, inclusive, debited $3,000 to the $60,000 item and $2,000 to the $40,000 item and returned $5,000 as rental income. The items were never otherwise reported as income.
The Commissioner requested and received from the petitioner in March 1923 a copy of the lease to the Roosevelt Amusement Corporation. The petitioner, in the letter of transmittal, referred to the liabilities of $60,000 and $40,000, and called the attention of the Commissioner to the paragraphs of the lease under which it claimed those amounts were advance payments of rents. The record does not show that the Commissioner ever made any adjustment of the way the petitioner was reporting these items as income. The Commissioner advised the petitioner in 1927 that its return for the fiscal year ended in that year had been examined and was considered correct as submitted.
The Roosevelt Amusement Corporation had difficulty in meeting the rent payments in 1935, and by agreement with the petitioner dated April 29, 1935, the lease was canceled.
The petitioner, in the fiscal year ended May 31, 1937, transferred the $25,000 then remaining in the advance rent accounts to surplus. No part of the amount*780 thus transferred was ever reported as income.
The Commissioner, in determining the deficiency for 1935, added to the income as reported $30,000 described as "gain from lease forfeiture" and explained as follows:
The items added to your taxable income reported, representing amounts realized through the forfeiture of a lease in the year 1935, constitute gross *1098 income for that year within the purview of Section 22(a) of the Revenue Act of 1934.
The gross income reported on the return for 1935 amounted to $27,789.95.
The building constructed by the petitioner had a useful life of 50 years from May 31, 1921. The petitioner for all years thereafter to and including 1938 claimed a deduction for depreciation of the building computed at the rate of 2 percent of cost. The equipment in the theatre had a useful life of 20 years from May 31, 1921. The petitioner for all years thereafter to and including 1938 claimed a deduction for depreciation of that equipment computed at the rate of 5 percent of cost. The Commissioner, in determining the deficiencies, disallowed each of those deductions for each of the four taxable years. The building and theatre equipment were in*781 use during the entire period here involved.
OPINION.
MURDOCK: The petitioner contends that the statute of limitations has run for both 1935 and 1936. It fails to demonstrate, however, that the statute has run for 1936, and the facts clearly disclose that it has not. The return was due on August 15, 1936, and was filed on July 15, 1936. The petitioner, on May 19, 1939, agreed with the Commissioner to extend the time for assessment to June 30, 1940. The notice of deficiency mailed on June 6, 1940, was thus timely and the statute of limitations has not run for 1936.
The question of most importance to the petitioner is whether the statute of limitations has run as to 1935. The return for that year was due on August 15, 1935, and was filed on July 9, 1935. The period was never extended by agreement. The general rule provided by section 275(a) of the Revenue Act of 1934 is that taxes must be assessed within three years after the return was filed. "Filed" here means "was due." Sec. 275(d). That three-year period expired in August 1938, whereas the notice of deficiency was not mailed until June 6, 1940.
The notice of deficiency makes no reference to this subject, but the*782 Commissioner alleged in his answers that the petitioner omitted from its return for 1935 gross income properly includible therein in excess of 25 percent of the amount of gross income shown on the return. He thus seeks to make section 275(c) applicable. That section provides that if a taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the gross income stated in the return, then the period of limitations shall be five years after the return was filed. The petitioner, having made a prima facie showing under the general *1099 rule, contends that the burden of going forward to show that this exception to the general rule applies was upon the Commissioner. ; . While there may be force to this contention of the petitioner, the point need not be decided here because the record contains all facts necessary for a decision on the merits.
The amount of gross income shown on the return was $27,789.95. The Commissioner contends that $30,000 has been omitted from gross income. This $30,000 is made up of two items, one of $18,000*783 and one of $12,000. If either item was "properly includible" in gross income, then the five-year period applies and the Commissioner was not too late. It is important to note that the statute provides for the five-year period only in case the taxpayer has omitted from gross income an amount "properly includible therein."
The $18,000 is a portion of the original $60,000 received by the petitioner in 1921 as advance rental for the theatre. Advance rental is income when received. ; ; ; ; ; affd., ; (on appeal); . In the last case the court said:
Upon consideration of the facts, however, it is apparent that the advanced rentals were income in the full sense of the word. They were payments of rental upon a lease covering a period of years. Whether*784 amortization should be allowed against them is a question for the Congress. If a taxpayer receives earnings upon property under a claim of right and without restriction as to its disposition, he has received income for which he is required to account, * * *
The taxpayers in some of the above cited cases were using a cash method of reporting income and others were using an accrual method. The $60,000 received by the petitioner in 1921 was clearly designated in the lease as advance rental. It was received as such by the petitioner; there was no restriction as to its disposition of use; and it was not merely a deposit as security for the performance of some provision of the lease. This last circumstance clearly distinguishes the case of , relied upon by the Commissioner. Thus, the $60,000 should have been reported in income for 1921 and it is not "properly includible" in gross income for 1935.
The $12,000 which the Commissioner has included in income for 1935 was a part of the $40,000 paid in equal installments every three months during the eight-year period, beginning in the calendar year 1921*785 and ending in the calendar year 1929. The entire $40,000 was rent paid for the use of equipment in the motion picture theatre. It *1100 was paid long before 1935 and as advance rent was properly includible in gross income for prior years. It did not represent an amount properly includible in gross income for 1935.
The Commissioner makes an alternative argument in regard to the equipment in the theatre. He calls attention to paragraph 4 of the lease in which the $40,000 is described as a payment "for the equipment in the said theatre" instead of for the use of the equipment. He argues from this that the tenant purchased the equipment and the petitioner realized income to the extent of the fair market value of the equipment in 1935, when the equipment was turned back to the petitioner. The lease should be read in its entirety to determine the intention of the parties, and when so read an intention that title was to remain in the petitioner is disclosed. The tenant was not allowed to remove any of the equipment in the theatre "furnished by the landlord." The equipment was to be turned over to the landlord upon the termination of the lease and was to "remain the property*786 of the landlord." The original agreement of March 5, 1921, between the petitioner and Muller and Schwartz, which provided how the lease should be drawn, stated that the tenant would "pay for the use of the equipment" $40,000 during the first eight years of the term, in equal installments, every three months, together with interest on each installment at the rate of 6 percent. There was no restriction on the use of this money by the petitioner. It was not put up as a pledge, but as advance rental.
No part of the $30,000 which the Commissioner has included in the petitioner's income for 1935 was "properly includible therein", and section 275(c) has no application. The three-year statutory period of limitations provided by section 275(a) expired before the notice of deficiency was sent and the Commissioner is foreclosed from assessing or collecting the deficiency which he has determined for 1935.
The Commissioner makes one further contention in an effort to show that the five-year period of (c) rather than the three-year period of (a) applies. He points to the fact that the petitioner chose from the beginning to report the $60,000 and the $40,000 ratably over the 20-year period*787 of the lease and he says that on some principle akin to estoppel (although not strictly estoppel) the petitioner should not be heard to deny that the unreported portion of the $100,000 should be included in income for 1935 when the lease was terminated. He admits that he was at all times fully informed of the facts and by the very nature of his contention he admits that the $100,000 is not "properly includible" in the gross income of 1935 under any statutory provision. If the question were fairly presented, we would not suppose that estoppel, or anything akin to estoppel, would suffice for the purpose of making section 275(c) *1101 applicable. It is an exception to the general rule of the statute of limitations, and applies only in accordance with its terms. But the question of whether or not estoppel or something akin to estoppel might be the equivalent of "properly includible" need not be decided here, because the Commissioner has not made out a case. Both parties made an honest mistake of law in deciding how these advance rentals should be reported. Such a mistake will not support estoppel or anything akin to estoppel. *788 ;; ; ; .
The facts found clearly show that the petitioner is entitled to the deductions which it claimed for depreciation on the building and the theatre equipment for the taxable years. The respondent makes no argument in its brief in regard to depreciation on the building and his chief argument, if not his only argument, in regard to depreciation on equipment is that the equipment was sold prior to 1935 and reacquired in 1935. The petitioner, as has been stated above, did not sell the equipment, but at all times remained the owner of it. It was in use during all of the taxable years and the deductions claimed were proper.
Decision will be entered under Rule 50.