Before MARIS, GOODRICH and KALODNER, Circuit Judges.
The principal issue presented by the Commissioner's petition to review the decision of the Tax Court is whether the taxpayer, Girard Trust Company ("Girard"), held the property here involved as an owner in fee or as a mortgagee in possession. If Girard held as an owner in fee, rents received were includable in its gross income. If it held as a mortgagee in possession, the rentals were, of course, simply a return of capital to be applied in reduction of the mortgage debt and were not taxable as income.
The Tax Court found (five judges dissenting) that Girard held as a mortgagee in possession and not as owner.*fn1 The facts as found by the Tax Court may be summarized as follows:
The Penn Athletic Club of Philadelphia ("Penn") was organized under the laws of Pennsylvania on October 31, 1922. On September 15, 1924, Penn purchased a plot of ground for the purpose of erecting a clubhouse, and contemporaneously organized the Rittenhouse Square Corporation ("Rittenhouse") for the purpose of holding title to the site. All of the stock of Rittenhouse was owned by Penn. On the date mentioned the real estate was conveyed to C. Benton Cooper ("Cooper"), a "straw man" who executed a mortgage to Girard as Trustee to secure an issue of $3,000,000 first mortgage bonds. The mortgage, in Article VI, provided, among other remedies, that, in case of default, Girard could enter on the property, lease it, and after deducting expenses including taxes, apply the moneys to the payment of principal and interest, and pay the balance to the mortgagor.
On September 25, 1924, Cooper conveyed the premises to Rittenhouse under and subject to the mortgage, and Rittenhouse utilized the proceeds from the sale of the bonds and from the sale of its own bonds to erect and furnish a clubhouse on the property here involved.
On September 25, 1924, Rittenhouse leased the premises to Penn for 25 years from March 1, 1926. Default on the mortgage occurred after March 15, 1932.
On December 1, 1936, Penn and Rittenhouse filed petitions for reorganization under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207.
Following long drawn-out reorganization proceedings, the United States District Court for the Eastern District of Pennsylvania approved a plan pursuant to which Rittenhouse conveyed the clubhouse property to Penn and was dissolved, and Penn entered into a Supplemental Mortgage Agreement with Girard on January 30, 1940, which provided in Paragraph 14 that in the event of default by Penn for a period of a year, Girard might require conveyance of the property.
Late in 1941, Girard learned that the Securities and Exchange Commission ("S. E.C.") desired to lease the premises for a period of seven years subject to termination by it after three years. The S.E.C. sought immediate possession and suggested that Girard request conveyance from Penn, inasmuch as under the practice of the courts (Federal and State) a mortgagee in possession could otherwise not lease for more than a year.
On January 13, 1942, Girard wrote a letter to Penn requesting, in view of its default, conveyance of the mortgaged premises, subject to the lien of the mortgage, in accordance with the terms of Paragraph 14 of the Supplemental Mortgage Agreement. Subsequently, on January 19, 1942, a meeting was held with Penn's board of governors, and a transfer under the original and supplemental mortgages was discussed. A resolution was adopted by the officers of Penn providing for the conveyance of all real estate, buildings, etc., to Girard upon its execution of a release of all indebtedness due by Penn including tax liability and retention by Penn of $25,000 of the clubhouse furnishings. The resolution further provided that Girard satisfy Penn's current indebtedness to other creditors out of the proceeds of the balance of the furniture.
On January 21, 1942, pursuant to the resolution, Penn executed and delivered a bill of sale to Girard as trustee under the original and supplemental mortgage agreements, covering all the furnishings, except certain items valued at $25,000. On the same day, Penn executed a deed of conveyance to Girard covering the clubhouse property.
The deed designated the grantee as: "Girard Trust Company, of Philadelphia, Pennsylvania, a corporation organized and existing by virtue of the laws of the Commonwealth of Pennsylvania, Trustee under Indenture of Mortgage dated September 15, 1924, recorded on October 2, 1924, in the office for the Recording of Deeds in and for Philadelphia County, in Mortgage Book J. M.H. No. 3660, p. 427 as modified by Supplemental Mortgage Agreement dated January 30, 1940, recorded on March 8, 1940, in ...