Medina, Smith and Hays, Circuit Judges.
Taxpayer appeals from a decision of the Tax Court, 26 CCH Tax Ct.Mem. 1035 (1967), determining a deficiency in its income tax payments for the year ended August 31, 1960*fn1 on the ground that it was taxable as a personal holding company under Section 541 of the Internal Revenue Code of 1954 as then in effect, ch. 736, § 541, 68A Stat. 182. During this year taxpayer was engaged in a real estate business and in a financing business.
Taxpayer's liability for the personal holding company tax turns, first, on whether rental income constituted 50% or more of its gross income. If it did then none of taxpayer's rental income was "personal holding company income" under Section 543(a) (7) of the Code as then in effect*fn2 and its remaining personal holding company income would not be a sufficiently large percentage of its gross income (i.e. 80%) to make it subject to the tax.*fn3 If rental income did not amount to at least 50% of gross income, then all of that income would be "personal holding company income" and this taken together with other income which was concededly personal holding company income would be sufficient to make the taxpayer subject to the tax.
The Tax Court reviewed seven items claimed as rental income by taxpayer under Treasury Regulation 1.61-8(c) (1957)*fn4 and found that six of them were not rental income. It assumed without deciding that another item in the amount of $2040 was rental income. Under the findings of the Tax Court taxpayer had rental income of $113,163.67 including the unallocated item of $2040, and gross income of $227,158.05. As the rental income, including the $2040 item, did not constitute 50% of gross income, the court found that the rental income was personal holding company income, and since this income taken together with that arising from taxpayer's finance operations, which was concededly personal holding company income, constituted over 80% of its gross income, the court held that taxpayer was subject to the tax.
Taxpayer contends that the six contested items were in fact rental income. However, unless the Tax Court's findings are clearly erroneous, we must accept them. Commissioner v. Duberstein, 363 U.S. 278, 291-92, 80 S. Ct. 1190, 4 L. Ed. 2d 1218 (1960).
The six items considered by the Tax Court under the Treasury Regulation*fn5 are as follows:
(1) Addition to a store ($650): The Tax Court reasonably found that the testimony did not establish an intention by taxpayer to treat as rent the value of this improvement made by the lessee.
(2) Boiler ($230): The boiler installed by the lessee cost $425 but taxpayer allowed him a credit against his rent of only $195. The Tax Court treated this amount as rent and properly found that the parties did not intend the remaining $230 to be rent.
(3) Security deposit ($40): The Tax Court heard testimony to the effect that the $40 portion of a security deposit retained by the taxpayer was held to cover the cost of cleaning and restoring vacated premises. It reasonably found however that the departing lessee owed taxpayer no additional rent so that the $40 did not constitute rental income.
(4) Heat for stores ($1750): Because taxpayer was specifically relieved of any obligation to supply heat, the tenants were not paying an expense of the taxpayer when they provided heat themselves. Thus the cost of the heat was not rental income to taxpayer.
(5) Superintendent's apartment ($297): Taxpayer's records show that it valued the superintendent's services rendered in return for the apartment at $600 a year and the Tax Court credited it with this amount of rental income. The fact that under New York law the apartment could legally have been rented for $897 a year did not require the Tax Court to ignore taxpayer's own valuation of the services by revaluing them at $897.
(6) Cost of screen installation ($10): A tenant paid taxpayer $10 as partial reimbursement for the cost of installing new screens. The Tax Court reasonably found the evidence insufficient to establish that the $10 was intended as rent, if the screens were an improvement, or that it reimbursed taxpayer for an expense as lessor, if the screens were a repair. Taxpayer's treatment of the $10 in its records as a ...