
    452 F. 2d 1036
    ETHEL ECKSTEIN v. THE UNITED STATES
    [No. 83-66.
    Decided December 10, 1971]
    
      
      Mortimer B. Wolf, attorney of record, for plaintiff. Meyer William Boss and Maloney, Boss, Phelps & Wolf, of counsel.
    
      Dwid Bher, attorney for Cooperative Housing Lawyers Group, Amicus Ouriae. Bobert D. Steefel, of counsel.
    
      
      Joseph Kovner, with, whom was Acting Assistant Attorney General Fred B. Ugast, for defendant. Philip B. Milder, of counsel.
    Before LaRamoke, Acting Chief Judge, Durfee, Davis, ColliNs, and Nichols, Judges.
    
   Per Curiam:

This case was referred to Trial Commissioner Saul Richard Gamer with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 134(h). The commissioner has done so in an opinion and report filed on May 17, 1971. Exceptions to the commissioner’s report were filed by plaintiff and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court is in agreement with the opinion, findings and recommendation of the trial commissioner, with minor modifications, it hereby adopts the same, as modified, as the basis for its judgment in this case as hereinafter set forth. Therefore, plaintiff is not entitled to recover and the petition is dismissed.

Commissioner Gamer’s opinion, with minor modifications by the court, is as follows:

Plaintiff sues to recover alleged overpayments on her individual income taxes for the years 1959 and 1960.

During such year plaintiff was an apartment tenant stockholder in a New York corporation (the 120 East 81st Street Corporation) which she contends was a “cooperative housing corporation” as defined in Section 216(b) of the Internal Eevenue Code of 1954 (26 TJ.S.C. § 216 (1964)). As such a stockholder, plaintiff would enjoy certain tax advantages, i.e., in the computation of her individual income tax, she would be allowed as a deduction amounts paid to the cooperative to the extent that such amounts represented her proportionate share (based on the total shares outstanding) of the real estate taxes and mortgage interest allowable as a deduction to the cooperative.

Under Section 216(b) (1) (D), however, a corporation can gain status as a “cooperative housing corporation” only if at least 80 percent of its gross income (for the taxable year for which the tenant-stockholder claims the real estate and interest deductions) is derived from tenant-stockholders. Since the Commissioner of Internal Revenue determined that, for the years in question, the cooperative in which plaintiff was a tenant-stockholder did not so qualify, the deductions which plaintiff took for her pro rata portion of the mortgage interest and real estate taxes paid by the cooperative during such years were disallowed. Plaintiff here sues to recover the increased taxes she was obliged to pay as a result of such disallowances.

In determining that 80 percent of the cooperative’s gross income was not derived from its tenant-stockholder’s, the Commissioner treated three items in a manner which plaintiff contests. Had these items been treated as plaintiff contends they should have been, the cooperative would have met the 80-percent requirement. The three items are as follows:

1. Each tenant was required to sign a “proprietary lease.” This lease entitled the tenant to live in a specified apartment. In addition, the lease set forth, in certain respects, the manner in which the cooperative would be operated and the rent for the apartment would be determined. The annual rent (commonly referred to as “assessments” on the tenant-stockholders) was to be calculated as the tenant’s proportionate share of the aggregate amount of the cooperative’s “cash requirements” for the year, including mortgage interest and amortization payments. The lease then provided:

Any sums which the Lessee may pay hereunder which are allocated, used or to be used to meet cash requirements of the Lessor for mortgage amortization payments, or any other mortgage principal payments or for capital improvements or any other capital expenditure, shall not be deemed income to the Lessor but shall be credited by the Lessor upon its books as “Paid in Surplus.”

The 1959 and 1960 rental payments made by the tenant-stockholders totaled $400,000.08 for each year. In 1959, the cooperative paid $93,588.33 for reduction of the principal on its mortgage, and $97,871.41 for such purpose in 1960. The cooperative also credited equivalent amounts for such years to its “Paid-in Surplus” account and excluded such sums from its income accounts. Its corporate income tax returns similarly excluded these sums from gross income. The Commissioner did not object to these exclusions and there was and is no controversy between the cooperative and defendant with, respect to these returns.

In making his determination that during both 1059 and 1960, the cooperative did not meet the requirements of Section 216(b) that 80 percent or more of its gross income be derived from tenant-stockholders, the Commissioner similarly excluded from the cooperative’s gross income from tenant-stockholders sums equal to the mortgage amortization payments made by the cooperative, these amounts being the same as the cooperative had credited on its books as “Paid-in Surplus.”

Plaintiff challenges this exclusion by the Commissioner. She contends that the full amount received by the cooperative each year from its tenant-stockholders should be treated as income. Such treatment would, of course, result in a higher figure for the “gross income * * * derived from tenant-stockholders” referred to in Section 216 (b) (1) (I)), and thus help it to meet the 80-percent requirement.

2. In 1957, a New York corporation, the 1186 Lex Corporation, was in the process of constructing the apartment building here involved. The president and one-third stockholder of this corporation was Mr. Nourollah Elghanayan.

The cooperative was organized on June 13, 1957, by the Lex Corporation for the specific purpose of having the cooperative purchase the land and apartment house being constructed thereon (the Lex Corporation sometimes being referred to by the parties as the “sponsor” of the housing project), and on July 1,1957, by a Plan of Organization and a Seller’s Agreement, the cooperative, subject to various terms and conditions, agreed to purchase the land and completed building for $4,875,000. The cooperative had an authorized capital stock of 40,000 shares, all of which were allocated to the apartments in the building.

The Plan provided that, upon its consummation at the time of the closing, which was to take place promptly after the completion of the building), all of the 40,000 shares would be fully paid for by stockholders who would lease the apartments. The sale of all of such stock (by the leasing of the apartments) would permit the cooperative, at such closing time, to take over the property with no debts or obligations except for a permanent mortgage in the principal amount of $2,600,000. Thus, the leasing of all of the apartments and the sale of the stock allocated to such leases were prerequisites to the enabling of the cooperative to take over the property at the purchase price, the proceeds of the sale of all the stock producing the difference between the purchase price and the amount of the permanent mortgage. As assurance to the cooperative-purchaser that, at the time of the closing, all of such stock would be sold, the Plan provided that if, at such time, all of the stock had not been sold (to proprietary lessees), the Lex Corporation would provide “individual purchasers for such unsold stock and they will enter into proprietary leases for the apartments to which such shares are allocated * * *.” The Seller’s Agreement similarly provided.

At the closing date of September 22, 1958, 21 apartments remained unleased, and the Lex Corporation provided El-ghanayan as the purchaser of the shares allocated to such apartments. As such purchaser, he executed 21 separate leases for the apartments, and the shares allocated thereto were all registered in his name. The value of such shares was credited against the purchase price paid by the cooperative for the building.

For the years 1959 and 1960, the Commissioner excluded from the gross rentals which the cooperative received from its tenant-stockholders tbe rental amounts with respect to the apartments carried in the name of Elghanayan — $15,-962.64 for 1959, and $3,200.04 for 1960. The Commissioner did not feel that such payments could properly be considered as rental income from bona fide “tenant-stockholders.” Such figures were instead added to the cooperative’s other income. These reductions in the “gross income derived from tenant-stockholders” figures and additions to the cooperative’s “other income” figures for such years further contributed to the imbalance between them and the prevention of the former figures reaching 80 percent of the cooperative’s gross income. Plaintiff, of course, contends that the Commissioner erred in not considering such rental payments from Elghanayan to be properly includable as rental income from “tenant-stockholders.”

For many years after the enactment of Section 23 (z) of the Internal Revenue Code of 1939, which was the forerunner of Section 216 of the 1954 Code, many persons associated with cooperative housing projects in New York State adopted the practice under which the sponsor corporation was required to provide individuals to execute, as lessees, proprietary leases on all apartments unsold as of the date of closing title and to purchase the shares allocated to such apartments, with the sponsor guaranteeing that such persons would pay the required rentals. Such individuals were referred to as being “nominated” by the sponsor to carry out such obligations of purchasing the shares, executing the leases, and paying the rentals until the stock was resold as an incident of a transfer of the lease. It was pursuant to such practice and the aforementioned provisions of the Plan and Seller’s Agreement that Elghanayan was “nominated” as the purchaser of the unsold shares. In disallowing the El-ghanayan rental payments as receipts from “tenant-stockholders,” the Internal Revenue Service referred to him as the “Nominee of 1186 Lex Corporation,” and the parties here frequently refer to this issue as “the Elghanayan ‘Nominee’ Issue.”

3. The apartment building also contained some commercial space, consisting of a garage and stores. The agreement between the Lex Corporation and the cooperative for the sale of the property provided that, at the time of closing title, the Lex Corporation would deliver to the cooperative leases, of at least three years’ duration, of such commercial space which would “provide for an average aggregate rental of not less than $80,000 per annum over the three year period or a total of not less than $240,000 over said three year period.” The agreement further provided that, if such leases were not provided at the time of closing, the Lex Corporation would, for three years thereafter, pay to the cooperative “the difference between the average annual rentals provided in such leases and $80,000 * *

During each of the years 1959 and 1960, the commercial income failed to reach the $80,000 guaranteed amount. In 1959, the Lex Corporation paid the cooperative $14,675 to fulfill its guarantee obligation, and in 1960 similarly paid $2,587.50. The cooperative treated such payments as commercial rental income, the amounts being described in its accounts as “Minimum average rental guarantee of Sellers.”

In calculating the income from sources other than tenant-stockholders, the Commissioner similarly included these amounts as commercial rental income. However, as with the mortgage amortization issue, plaintiff says that both the cooperative and the Commissioner erred. She argues that such amounts should not properly be regarded as “rent” since the Lex Corporation was not a lessee of any commercial space. It was, she maintains, only the seller of real property and, as such, the payments made by it under its guarantee should be regarded as an adjustment of the selling price. Accordingly, she argues that such amounts should not be regarded as any kind of “income” at all to the cooperative. The removal thereof from the amounts received by the cooperative as income from sources other than tenant-stockholders, with the consequent lowering of such figure, would make it easier for the amount of income received from tenant-stockholders to meet the 80-percent requirement.

The Mortgage Amortization Issue

Plaintiff argues that the full amount of the moneys received by the cooperative from the tenant-stockholders ought to be treated as “income” to the cooperative because, regardless of the ultimate application of any part of such moneys, they are all first “received” by the cooperative, and thereby necessarily become part of its “gross receipts.” Plaintiff adduced expert accounting testimony to the effect that under generally accepted accounting principles, all receipts by a corporation should be entered into its “gross receipts” account despite the fact that one of the debts to be paid therefrom is mortgage principal.

Although such accounting principles might well be applicable as a general proposition, the particular situation and facts must control. The fact is that in this instance plaintiff’s general proposition would directly contravene the terms of her proprietary lease. In that instrument, she specifically agreed, as a lessee-stockholder, that such portions of her rental payments “allocated” or “used” to meet the mortgage amortization requirements of the lessor-cooperative “shall not be deemed income to the lessor” and, instead, “shall be credited by the lessor upon its books as ‘Paid in Surplus.’ ”

Considering the purpose of this lease provision and of the cooperative itself, no impropriety is shown in the manner in which the amortization payments were treated. Defendant is making no attempt to upset the provision as a tax avoidance scheme or otherwise. Even in the case of an ordinary corporation, there is no reason why it and one of its stockholders cannot validly agree that a payment or a part of a payment made by the stockholder to the corporation should be used only for the specific, designated purpose of a capital contribution, and therefore not be treated as general income funds of the corporation. Paducah & Illinois R.R., 2 B.T.A. 1001 (1925). Whether payments are excludable from ordinary income as contributions to capital depends, as shown by the facts of the individual case, upon the intent of the parties and “[t] he substance of the whole transaction * * James Hotel Co., 39 T.C. 135, 141 (1962).

The cooperative itself strictly abided by its lease agreement. It did not regard such amounts as “income” and credited them on its books as additional paid-in capital. It did not report the amounts as “income” on its income tax returns and the Commissioner did not object — despite the fact that for 1959 the inclusion of such amount as corporate income would result in the corporation’s showing a taxable profit rather than a loss.

Under the doctrine of Commissioner v. Danielson, 378 F. 2d 771 (3rd Cir.), cert. denied, 389 U.S. 858 (1967), the Internal Revenue Service has the right to accept at face value, if it wishes, the parties’ contractual provisions with respect to characterization of items, unless the taxpayer attacking the contractual provision (for tax purposes) shows that it is unenforceable between the parties because of mistake, undue influence, fraud, duress, etc. No such proof has been made here and there is no reason to disavow the plaintiff’s specific agreement in her proprietary lease as to the characterization of the amortization allocations.

Moreover, the existing law supports the contractual characterization. In 87I Park Avenue Oorf., 23 B.T.A. 400 (1931), the facts were substantially similar. There, however, it was the Commissioner who attempted to have the portion of the tenant-stockholders’ assessments used for the amortization of the housing cooperative’s mortgage indebtedness included in the cooperative’s taxable gross income on the same grounds that plaintiff asserts here, i.e., that such portion should be treated as part of the total rent received from the tenants for the operation of the building. The Board of Tax Appeals rejected the attempt. The proprietary leases there involved contained a provision that “so much of such [rent] assessments collected by the Lessor as shall be devoted to the payment of the principal of a mortgage or mortgages or to other capital expenditure, shall be credited by the Lessor upon its books to the account of ‘paid-in surplus.’ ” (at 407) The cooperative did in fact so ¡use such payments for mortgage amortization purposes, did not include such amounts in its income statements, and added them to its capital account. Although such lease language is less explicit than that here involved because it does not contain the specific provision that such portion of the rental payments “shall not be deemed income to the Lessor,” the Board nevertheless held that “the assessments so made and employed were contributions of capital to the [cooperative] and as such nontaxable.” (at 405) The Board analogized the situation to its previous holding in Paducah & Illinois R.R.. supra, where two railroads organized a third corporation to provide bridge facilities. A contract between the railroads and the bridge company provided that the railroads, as the sole stockholders, would pay the expenses of the bridge company and would make contributions to a sinking fund for the retirement of the company’s bonds. The payments made by the railroads were earmarked partly for the bridge company’s ordinary expenses and partly for the capital contributions. The Board held that insofar as the payments were to be used (and were actually used) for the bridge company’s ordinary expenses, the railroads were paying for services rendered, which payments constituted expenses to themselves and income to the bridge company, but to the extent that the contract required the payments to be used for debt retirement, they constituted capital contributions.

In Cambridge Apartment Building Corp., 44 B.T.A. 617 (1941), where the Commissioner assessed deficiencies against a housing corporation on the theory that the part of the assessments collected from the tenant-stockholders for the purpose of retiring bonded indebtedness constituted income to the corporation, the Board, relying on the Paducah and 871 Parh Avenue cases, again held that such amounts paid by the tenant-stockholders did not constitute income to the corporation. And in Lake Forest, Inc., 22 TCM 156 (1963), which involved the question of whether a housing cooperative could both exclude from income mortgage amortization payments made by its tenant-stockholders and take depreciation deductions, the court again reaffirmed 874 Park Avenue Corp., Cambridge Apartment Building Corp., and Paducah & Illinois R.R. In rejecting the Government’s argument that, since the tenant-stockholders were only tenants and not the owners of the building, all payments made by them should be treated as rent for the use of the cooperative-landlord’s property and be included in taxable gross income of the corporation, the court stated:

It seems clear that if petitioner’s members had contributed the entire purchase price at the time petitioner bought the property * * * then petitioner could both exclude the contributions from income and deduct depreciation on the depreciable property purchased with such contributions. We fail to see a significant difference where petitioner’s members made their capital contributions in installments instead of all at once. Id. at 163-64.

The holdings in 874 Park Avenue Corp., Cambridge Apartment Building Corp., and Lake Forest, Inc., in effect affirmed a ruling of the Bureau of Internal Revenue, promulgated as long ago as 1922, that the amounts paid by tenant-stockholders under proprietary leases which were to be used for mortgage amortization and credited to paid-in surplus were contributions to capital and did not constitute income to the corporation. The ruling stated

* * * that that portion of the assessment payments credited to the “paid-in surplus” account and devoted to the reduction of the corporation’s mortgage indebtedness or for other capital purposes is in the nature of a voluntary assessment upon the stock held by the individual proprietary lessees, which * * * represents additional cost of such stock, and does not constitute income to the corporation. I.T. 1469, 1-2 Cum. Bull. 191, 192 (1922).

Section 118(a) of the 1954 Code (26 U.S.C. § 118(a) (1964)) specifically provides that “[i]n the case of a corporation, gross income does not include any contribution to the capital of the taxpayer.”

Plaintiff points to the provision in her lease which includes “mortgage amortization payments” in the various “expenses” of the cooperative which may be included in its “cash requirements” for the purpose of the annual computations to be made by the cooperative’s board of directors of the amounts to be paid by the tenant-stockholders as rent. Therefore, says plaintiff, the full amount of such “rent” must necessarily be considered as gross receipts of, and income to, the cooperative, even though a portion of it is used for mortgage principal payments.

This contention fails to give consideration to the later explicit provision in the lease that the portion of the rental payments allocated or used to meet the mortgage amortization requirements is to receive special treatment. In 874 Park Avenue Corp. the same contention was made, i.e., that because the mortgage amortization contributions were referred to as “rent” in one part of the lease, “they were in fact payments of rent.” 23 B.T.A. at 407. However, the Board held that “this contention is completely refuted, it seems to us, when the lease is read as a whole and the purpose of the individual corporators. of [the cooperative] in creating the corporation are taken into account.” Id.

The fact that the cooperative kept the tenant-stockholders’ payments in a single bank account from which both the general expenses and mortgage indebtedness were paid is of no significance. 874 Park Avenue Corp., id. at 405. It is the “substance of the whole transaction” (James Hotel Co., 39 T.C. at 141) that is determinative, not the bank account mechanics the cooperative employed.

The income from the commercial space went into the same general bank account. Due to such commingling of funds and the consequent impossibility of tracing specific dollars, plaintiff urges that at the least the amortization payments made from such account should be deemed to have been composed of both the rent from the tenant-stockholders and from the commercial space, the amount from each calculated on a basis proportionate to their contributions to the total in the account. Plaintiff says there was nothing to prevent the use of the commercial income for any of the cooperative’s needs, including principal payments on the mortgage. Thus, even if the portion of the rents from the tenant-stockholders used to make the amortization payments is excluded from the cooperative’s gross income, the contribution to such payments from tlie commercial income would result in a lesser amount being contributed by tire tenant-stockliolders and excluded from such, income.

This argument too lacks merit. The inability to trace specific dollars as between the commercial space rental income and the tenant-stockholders’ rental payments, is unimportant, as is the fact that the board of directors of the cooperative did not provide for an actual segregation of the commercial receipts from the tenant-stockholders’ assessments. On the facts there can be no question that, for the years here involved, the cooperative intended that only the tenant-stockholders’ rental payments would constitute the source of the mortgage principal installments due, and that it therefore must be deemed to have “used” or “allocated” such portion of their rents as was necessary to completely liquidate such installment indebtednesses.

Just prior to the September 22, 1958 closing of title, the stockholders and directors, at a special meeting held on September 4, 1958, adopted a resolution that the amount to be paid by the cooperative “and needed to make payments on account of or for amortization of the principal of the mortgage indebtedness * * * is to be deemed a contribution of capital and shall be added to the paid-in surplus of the Corporation * * It would be most unusual, indeed, for the commercial tenants to make a “contribution” to the capital of the corporation. They would have no interest in so contributing. It is normally the stockholders who make “contributions” to the capital of a corporation, for they would be the ones to benefit thereby. Unlike the tenant-stockholders’ proprietary leases, the commercial leases made no mention of mortgage amortization. In view of the “contribution of capital” language in the resolution, the only rational conclusion is that, for the years in question, the directors and stockholders considered these capital contributions as coming only from the tenant-stockholders. The cooperative’s accounting statements for these years leave no room for doubt concerning tins point. The statement for 1959 attributed the full amount of the mortgage principal installments paid in such year ($93,588.33) as having been “appropriated” from the “[assessments on tenant-stockholders.” And the statement for 1960 similarly attributed the full amount of the mortgage amortization payments made during such year ($97,8†1.41) to the “[p]ortion of assessments allocated” for such purpose. The balance sheets included in such statements show the identical full amounts which had been “appropriated” and “allocated” for the amortization payments as “Additional paid-in capital” under the caption “Stockholders’ equity.”

As further proof that the tenant-stockholders’ assessments constituted the sole source of the mortgage amortization payments during such years is the fact that subsequent thereto, the board of directors, on August 30, 1961, adopted a resolution specifically providing that the portion of the assessments which would be allocated to the payment of mortgage principal during any period, would be the percentage which the total of the assessments bore to the total income of the cooperative for such period. This is the alternative formula which plaintiff urges should be adopted for the two years here involved. Plainly, however, the adoption of the resolution marked a change in the cooperative’s policy. Such adoption followed a special meeting of the board held on August 8, 1961, attended also by the accountants, at which the question of the propriety of such a formula was considered.

Plaintiff’s final argument is based upon the stipulated fact that during the two years here involved, the assessments paid 'by plaintiff “were not more than rental charges then obtaining for equivalent apartment space in non-cooperative rental buildings in that area of New York City.” The contention is that the full value of services rendered by the corporation, including those rendered to its stockholders, must be deemed to constitute income, otherwise what plaintiff terms a “bargain purchase” situation results, causing an improper understatement of the cooperative’s income. If the “income” the cooperative derives from the tenant-stockholders is less than, the fair rental value of their apartments, then, plaintiff argues, a distribution of income to the stockholders would, in effect, result. The difference between such lower amount and the actual fair market value therefore must, says plaintiff, constitute imputed income to the cooperative. By this reasoning, only amounts paid by the stockholders in excess of the fair market rental value of their apartments could 'be considered as contributions to capital. And plaintiff further points out that, while Section 1.118-1 of the Treasury Regulations on Income Tax (1954 Code) repeats the Code provision that contributions to the capital of a corporation are to be excluded from income, it specifically provides further that “the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered * * The entire amount of the rent, plaintiff urges, must here be regarded as 'being paid “in consideration for goods or sendees rendered” because under the proprietary lease possession of the premises was conditioned upon the paying of such rent. Thus, “[t]he entire rent was paid for services and the entire rent was necessarily income to the Corporation,” and this must be so, plaintiff argues, regardless of any labels that may have 'been applied to any portion of such rent.

Even though one of the purposes of a cooperative may be to furnish products or services to members at prices below those which nonmembers must pay for comparable products or services, no reason is apparent why even a cooperative could not run into the tax problems which are incident to the furnishing of products or services at prices below the cost of furnishing them or below “fair market value,” resulting in a distribution of income to the members and a depressing of the cooperative’s taxable income. See Anaheim Union Water Co. v. Commissioner, 321 F. 2d 253 (9th Cir. 1963). If they realize profits, cooperative corporations too must pay the regular corporation income taxes.

However, even if the “rent” of the tenant-stockholders is deemed not to include the portion allocated to mortgage amortization, so that, on a monthly basis, they are paying less than renters of comparable space in noncooperative buildings in the same area, it does not necessarily follow that on an overall basis they are the recipients of any “bargain purchase.” This is so because such a calculation gives no consideration to the fact that the tenant-stockholders were obliged to make a substantial purchase of stock for the privilege of living in the building, an investment which the tenants in the commercial apartment building were not obliged to make. Plaintiff paid $15,750 for the shares allocated to her apartment. There is here no showing that the amount of the “rent” plaintiff paid, even if calculated at the reduced figure resulting from the elimination therefrom of the al-locable mortgage amortization, but adding thereto the costs flowing from her stock purchase, did not equal “fair market value.”

Plaintiff’s contention thus necessarily falls because comparing her situation with renters of similar space in commercial buildings is improper. The correct comparison is, instead, with the homeowner. As the legislative history shows, the very purpose of Section 216 and its predecessor Section 23 (z) of the 1939 Code is to give tenant-stockholders of housing cooperatives the same tax deductions as are allowed to homeowners. S. Kep. No. 1631, 77th Cong., 2d Sess. (1942-2 Cum. Bull. 504, 546). The allowance to tenant-stockholders of qualified housing cooperatives of deductions similar to those of homeowners, i.e., amounts equal to their proportionate share of mortgage interest and real estate taxes paid by the cooperative, is accomplished by in effect disregarding the corporate entity in this respect and “passing through” these deductions to the tenant-stockholders, as if they were the “owners.”

Accordingly, in analogizing plaintiff’s situation, as the law does, to a homeowner, who also is normally required to make a substantial initial capital investment, considerations of “bargain purchase” — in the sense that plaintiff here uses the term of comparing amounts of monthly “rental” payments with those of commercial apartment occupants — become inapplicable. On plaintiff’s theory, when the time arrives that the mortgage will be liquidated and the “cash requirements” of the cooperative will therefore be reduced, the cooperative would nevertheless be obliged to continue to charge its tenant-stockholders “rent” equal to the “fair market value” of equivalent space in commercial buildings, or to credit itself, as “imputed income,” with the difference between the reduced “rent” charged its tenant-stockholders, and such “fair market value.” However, on the correct analogy to that of the homeowner, whose periodic payments of mortgage principal increase his equity in his property, the equity of a tenant-stockholder in a cooperative housing corporation is similarly regarded as being increased when the cooperative’s mortgage principal payments are made, which is clearly the rationale for the lease provision that such portion of the “rent” which is “allocated” or “used” for mortgage amortization purposes is to be considered as a capital payment, to be credited to “paid-in surplus,” and not to “income.” The homeowner too, after liquidating his mortgage, may be able, on a current monthly outlay basis, to live on his property less expensively than his neighbor who is renting similar premises — provided again that no consideration is given to Ms capital investment (and loss of interest thereon over the years).

Because of the special nature of the relationsMp between a cooperative housing corporation and its tenant-stockholders insofar as the tax statutes are concerned, the court in Lake Forest, Inc. did not feel that the decisions in cases of other types of membership cooperatives or corporations involving the question of “whether certain payments by stockholders were contributions to capital or payments for services rendered or to be rendered * * * require a different decision in this case.” 22 TCM at 164.

Based upon the above considerations, the refusal of the Commissioner to change the “income” figure on the cooperative’s 1959 and 1960 returns by adding thereto the amounts of the mortgage amortization payments, and considering such additions as “income” from tenant-stockholders for application of the 80-percent rule, was proper.

The Elghanayom, Nominee Issue

Plaintiff’s case for overturning the Commissioner’s determination on this issue is insufficient.

Section 216 (b) of the Code defines a “cooperative housing corporation” as one in which “each of the stockholders * * * is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes * * * an apartment in a building, owned * * * by such corporation * * (Emphasis supplied.) As noted, Section 216 first appeared as Section 23 (z) of the 1939 Code. It has remained substantially unchanged since its enactment. Section 23 (z) was added by a Senate amendment to the House bill (H.R. 7378, being the Revenue Act of 1942). The aforementioned Senate report on such bill explains, with respect to such section (constituting Section 129 of the Revenue Act) :

The definitions of the terms “cooperative apartment corporation” and “tenant-stockholder” prescribe certain standards which are designed to safeguard the revenue by assuring that the apartment corporations involved are bona fide cooperative apartment corporations and that the individuals entitled to deductions under section 23(z) are tona fide tenant-stockholders of such corporations, (Emphasis supplied.)

The issue is thus whether Elghanayan was a bona fide tenant-stockholder of the housing cooperative who owned stock therein “to occupy for dwelling purposes * * * an apartment” at 120 East 81st Street, New York City. It is plain that Elghanayan was not.

The reason is that it is clear that Elghanayan was the nominee, not of an individual, but of a corporation, the selling company, while Section 216(b)(2) requires a tenant-stockholder to be an “individual.” His taking over the 21 unsold apartments on the closing date, as the “nominee” of the seller-corporation, the buyer-cooperative not being given any amount for its stock by the individual Elghanayan, but instead being given, by the seller-corporation, credit against the purchase price for the full value of the stock allocated to such apartments, amounted in effect only to a price adjustment between the seller and buyer corporations. As “nominee,” Elghanayan was, clearly, only a figurehead for the selling corporation of which he was the president and a major stockholder, a device manifestly adopted, as plaintiff frankly admits, to effect seeming compliance with the requirement of Section 216(b) (2) that a “tenant-stockholder” be "an individual who is a stockholder in a cooperative housing corporation * * *,” (Emphasis supplied.) It was the seller-corporation that took all deductions in its income tax returns for the proportionate share of the interest and taxes allocable to the 21 unsold apartments, and that reported all gains and losses on the later sales of the stock allocated to the apartments, although such sales were effected by agreements executed by Elghanayan personally.

The emphasis upon the “nominee” device being a common practice in the New York area is apparently for the purpose of imposing something in the nature of an equitable estoppel against the Commissioner. Plaintiff feels that the Commissioner must have known what was going on over the years and, through his inaction in obtaining a judicial determination of the question, must be deemed to have accepted the practice as satisfying the requirements of Section 216 — until he suddenly acted otherwise in this case.

The contention has no merit. Even if the Commissioner had expressly ruled that the “nominee” practice, with respect to nominees of the selling corporation (which is all that is involved here), satisfied Section 216, he could nevertheless reverse himself if he later concluded otherwise, for “[t]he doctrine of equitable estoppel is not a bar to the correction by the Commissioner of a mistake of law.” Automobile Club of Michigan v. Commissioner, 353 U.S. 180, 183 (1957). In this instance, however, the practice should not reasonably have been based upon a conclusion of Commissioner acceptance or acquiescence because in 1955, well prior to the events here involved, Revenue Puling 55-316 announced that “* * * individuals who hold * * * proprietary leases as nominees for [the] seller [corporation] do not qualify as tenant-stockholders since the beneficial ownership is in a corporation, which cannot so qualify under section 23 (z); * * 1955-1 Cum. Bull. 312, 315.

Moneys Received, Under Seller’s Commercial Rent Guarantee

Plaintiff has made no real showing, by testimony or otherwise, that, for the purpose of the 80-percent rule, the Commissioner erred in classifying these funds as “commercial rental income.” As with the mortgage amortization moneys, the Commissioner here too was simply accepting the designation which had been applied to the funds by plaintiff’s own cooperative (and its certified public accountants).

Plaintiff’s contention is that the seller-corporation was “not a tenant”; that “it received neither space nor services”; that the guarantee moneys were, therefore, “not true income at all” but instead actually amounted to a seller’s “adjustment of the purchase price of the building and land” resulting from a breach of the “warranty of minimum receipts from commercial rents,” and that such breach made the property “less valuable than had been represented and warranted,” with the result that “a portion of the purchase price was returned.” This is an ingenious argument, but plaintiff cites nothing in support. The more natural manner of regarding these funds is to consider them as commercial income. They certainly flowed to the cooperative in respect of commercial space. “The fund involved must be considered in the light of the claim from which it was realized * * Farmers' & Merchants' Bank v. Commissioner, 59 F. 2d 912, 913 (6th Cir. 1932). (Moneys recovered through compromised litigation represented compensation for lost value of business (capital), not taxable earnings or income.) To the cooperative iit made no difference whether such rental income was produced from leases or from the guarantee. Cf. Mellinger v. United States, 54-1 USTC ¶ 9197 (S.D. Tex. 1953). (Proceeds received under a policy insuring loss of rents when building was rendered untenantable by fire are to be treated as being in replacement of the lost rentals and therefore properly taxed as ordinary income and not as capital gain resulting from involuntary conversion of property destroyed by fire.)

To carry its burden of overcoming the presumption of correctness attaching to the Commissioner’s determination, the taxpayer “must do more than merely claim alternative designations for” the nature of moneys received. Sager Glove Corp. v. Commissioner, 311 F. 2d 210, 211 (7th Cir. 1962). (Commissioner’s determination that sum received in settlement of litigation constituted reimbursement for lost profits, taxable as income, and not nontaxable return of capital, sustained.)

CONCLUSION

Since it is not possible to sustain any of the three bases upon which plaintiff attempts to change the ratio between the gross income which the cooperative received in 1959 and 1960 from its tenant-stockholders and the total gross income it received in such years, the Commissioner’s determination that the 80-percent requirement was not satisfied must be upheld.

Plaintiff stresses the alleged unfairness of this result to the tenant-stockholders who in good faith thought that, as apartment residents in a housing cooperative building, they would be entitled to the income tax deductions in question. Their disappointment in this respect is understandable. Nevertheless, Congress imposed the 80-percent requirement as a condition to (their receiving such favorable tax treatment. During the initial period of a housing cooperative’s existence, it may have difficulty, because of too many unsold apartments, in meeting the requirement. That was obviously the situation in the early years here involved, the cooperative commencing its existence with the shares allocated to 21 of the 101 apartments in the building remaining unsold. Since the device of the “nominee” of the selling corporation taking over these 21 vacant apartments is not permissible in order to bridge this gap, the occupants of the remaining apartments are necessarily in the unfortunate position of having become tenant-stockholders before their cooperative was able to qualify as a “cooperative housing corporation” under the tax laws.

The Plan of Organization pursuant to which the cooperative corporation was organized by its sponsor corporation specifically stated that tenant-stockholders would receive their income tax deductions “when 80 percent of the income of the Apartment Corporation [the cooperative] consists of rent received from tenant-stockholders,” and, as shown, the proprietary leases specifically excluded the mortgage principal portion of the rent from the cooperative’s “income,” so that the tenants were all fully apprised of the existence of the 80-percent requirement and the relationship of their rental payments to it. Every prospective tenant-stockholder received a copy of the Plan (and, of course, the proprietary lease, which the lessee had to sign) prior to his stock purchase. The Plan further warned that neither the sponsor nor the cooperative corporation made any warranty or representation that the Government would hold that the cooperative met the requirements imposed by the statutes for eligibility as a cooperative housing corporation. Under the circumstances, therefore, the tenant-stockholders cannot fairly claim surprise concerning the existence of the 80-percent requirement, upon which their tax status depended.

Por the reasons indicated, plaintiff is not entitled to recover.

FINDINGS or Fact

1. Plaintiff is an apartment lessee and stockholder in the 120 East 81st Street Corporation, a cooperative housing corporation organized under the laws of the State of New York (hereinafter the Cooperative Corporation). Her suit is to recover overpayments of federal income taxes for the years 1959 and 1960. The alleged overpayments resulted from the disallowance of deductions, claimed by plaintiff as a tenant-stockholder under 26 U.S.C. § 216 (1961), consisting of her proportionate share of real estate taxes and interest paid in 1959 and 1960 by the Cooperative Corporation.

2. The income tax assessments upon plaintiff which resulted in the alleged overpayments arose solely by reason of the disqualification of the Cooperative Corporation as a “cooperative housing corporation” within the meaning of Section 216(b) (1) of the Internal Revenue Code of 1954. For the years 1959 and 1960, the Internal Revenue Service determined that 80 percent or more of the Cooperative Corporation’s gross income was not derived from tenant-stockholders, as required by Section 216(b)(1)(D). Consequently, the deductions to which plaintiff would otherwise be entitled under Section 216(b) as a tenant-stockholder, and which she duly claimed on her federal income tax returns, were denied.

3. Sixty-five other tenant-stockholders of the Cooperative Corporation have filed refund claims to recover deficiency assessments paid for the years 1959 and 1960. These assessments are in all respects identical with the assessments made upon plaintiff, except in amount. Final administrative action under these refund claims is being withheld by the Internal Revenue Service until this case is finally decided. The refund claims referred to involve approximately $126,000 in income taxes and interest thereon for the years 1959 and 1960.

4. The Cooperative Corporation was organized in 1957 for the specific purpose of purchasing the land and the apartment house situated at 120 East 81st Street, New York, New York, from the 1186 Lex Corporation (hereinafter the Seller Corporation), a New York corporation which was the seller-sponsor of the Cooperative Corporation. The Cooperative Corporation’s charter of incorporation provided:

* * * The primary purpose of this corporation is to provide homes for its stockholders by leasing to them, under leases now commonly known as proprietary leases, apartments in a building erected or to be erected on said premises. All of the stockholders shall be entitled, solely by reason of their ownership of stock in the corporation, to occupy for dwelling purposes apartments in such building pursuant to such proprietary leases.

The Cooperative Corporation also intended to lease commercial store space therein to appropriate tenants.

5. The purchase of the building was closed and title was transferred from the Seller Corporation to the Cooperative Corporation on September 22, 1958.

6. Prior to such closing, a printed Plan of Cooperative Organization (hereinafter the Plan) and Purchase Agreement had been distributed to prospective tenant-stockholders, as required by the laws of New York. The Plan, dated July 1, 1957, allocated the capital stock of the Cooperative Corporation, consisting of 40,000 shares of $1.00 par value, to the proprietary lessees of the 101 apartments contained in the building, in a varying number of shares for each apartment. The selling price to the tenant-stockholders was $59 per share. Attached as an exhibit to the Plan was a copy of the Seller’s Agreement, also dated July 1, 1957, between the Seller Corporation and the Cooperative Corporation, setting forth the terms and conditions under which the former would sell, and the latter would purchase, the premises at 120 East 81st Street. Also included was a copy of a Purchase Agreement form setting forth the terms and conditions of a purchase of shares of capital stock in the Cooperative Corporation by one who desired to receive a proprietary lease from the Cooperative Corporation for a designated apartment.

7. At the time of the closing of title to the real property, the shares allocated to 80 apartments had been sold to tenant-stockholders and the shares allocated to 21 apartments remained unsold. However, since the Seller’s Agreement required the Seller Corporation to provide purchasers for any unsold stock, the Cooperative Corporation received a credit for all of the authorized shares against the purchase price to be paid for the land and the building, including those shares as yet unsold to tenants, at the regular issuance price of $59 per share. Said provision of the Seller’s Agreement was as follows:

* * * At the time of closing, any stock not theretofore sold will be purchased by individual purchasers to be provided by the Seller and such stock and proprietary leases accompanying the same will be executed and delivered to such purchasers, who will at such time pay the purchase price therefor.

8. After the enactment of Section 28 (z) of the Internal Revenue Code of 1939 (the forerunner section of Section 216 of the Code of 1954), many persons associated with cooperative housing corporations in New York State adopted the practice whereby the contract under which a sponsor corporation sold real property to a cooperative housing corporation required the sponsor corporation to provide individuals to purchase the shares and execute, as lessees, the proprietary leases which pertain to apartments which have not yet been sold at the time when title closes. In most instances the sponsor corporation also guaranteed performance, by the individuals so nominated by it, of the obligations undertaken by them in the proprietary leases. Although the practice was in effect for many years, it is not known to what extent the Internal Kevenue Service, at the times herein involved, had knowledge of, or had approved such practice. The provision of the Seller’s Agreement hereinabove referred to was in accordance with such practice.

9. (a) The Seller Corporation was, in 1957, in the process of erecting the 15-story and penthouse apartment building at 120 East 81st Street. The president of the Seller Corporation was Mr. Nourollah Elghanayan, who was also a one-third stockholder. All the other stockholders were relatives of Elg-hanayan. The matter of whether or not the other stockholders left the entire control of the corporation in Elghanayan’s hands was and is outside the knowledge or control of the Cooperative Corporation or the tenant-stockholders thereof, including the plaintiff.

(b) The Seller Corporation organized the Cooperative Corporation to create a buyer for the building it was constructing. It originally appointed all seven members of the board of directors of the Cooperative Corporation, and even after the closing of title on September 22, 1958, the new board of directors still contained two members who were controlled by the Seller Corporation. The Plan provided:

At the time of the consummation of the Plan of Organization, the number of directors of the Apartment Corporation [120 East 81st Street Corporation] will be seven. So long as the individual purchasers provided by the Seller [1186 Lex Corporation] continue to own among them 2,000 or more shares of the stock of the corporation, they shall have the right to designate two of the seven directors. At the time of the consummation of the Plan, and subject to the foregoing qualification, as to two of the seven directors, all of the officers and directors then in office will resign and the new owners of the stock of the Apartment Corporation may fill the vacancies * * *.

(c) The reference to ownership of 2,000 shares of stock in the Cooperative Corporation is explained later in the Plan, as follows:

UNSOLD STOCK
If at the time of closing title all the stock allocated to apartments has not been subscribed for by others, the Seller has agreed to provide individual purchasers for such unsold stock and they will enter into proprietary leases for the apartments to which such shares are allocated, so that at the time of the conveyance of the property to the corporation, all of said stock will have 'been subscribed for * * *. Any such stock and leases so acquired by purchasers provided by the Seller may be sold or assigned or such apartments may be sublet without the consent of the board of directors of the Apartment Corporation * * *.

As hereinabove noted, a similar provision was contained in the Seller’s Agreement. The Plan further provided that the Cooperative Corporation would sell the 40,000 shares allocated to the apartments to persons who would become proprietary lessees and that

[s]ales will be limited to persons resident in the State of New York who purchase for their own occupancy, except that a purchaser provided by the Seller, of stock unsold to others at the time of closing title, may not purchase for personal occupancy but for resale. Such purchaser, however, will be fully liable for the maintenance charges of the apartment until the stock is resold.

10. At the closing of title, the Seller Corporation provided Elghanayan as the individual purchaser of the unsold shares and the proprietary lessee of the 21 apartments. On September 22, 1958, proprietary leases pertaining to the 21 vacant apartments were executed by the Cooperative Corporation, as lessor, and by Elghanayan, as lessee, and the shares allocated to those apartments were registered in the name of Elghanayan. Elghanayan executed such leases and received the stock certificates pertaining to such apartments in his own name, as required by the Seller’s Agreement, and without mention of the 1186 Lex Corporation or his office therein.

11. (a) The proceeds of the sales of its shares were devoted by the Cooperative Corporation to (1) the acquisition of the land and building, and (2) working capital. The Plan allocated such proceeds as follows:

Acquisition cost of land and building-$4, 875,000
Mortgage indebtedness- 2, 600, 000
Equity in land and building- 2,275, 000
Working capital and excess expense reserve- 85,000
Stockholders’ equity (40,000 shares at $59)- 2,360,000

(b) As hereinabove set forth, since the Seller Corporation was required to provide purchasers for the Cooperative Corporation’s stock, it credited the receipts from the prospective tenants for such stock against the purchase price to be paid by the Cooperative Corporation for the land and building. No check was issued by Elghanayan to the Cooperative Corporation for the shares taken in his name. Instead, the Cooperative Corporation received payment for the shares issued to Elghanayan and for those issued to all the other stockholders, by being credited against the purchase price of the real property with the proceeds of the sale of the entire 40,000 authorized shares at $59 per share, or a total of $2,360,-000, as if all the apartments had been sold. The matter of whether or not payment was ever made by Elghanayan to the Seller Corporation for the shares allocated to the 21 vacant apartments, which shares were registered in Elghan-ayan’s name, was and is outside the knowledge or control of the Cooperative Corporation or the tenant-stockholders thereof, including the plaintiff.

(c) The Cooperative Corporation made assessments of rents under the proprietary leases with Elghanayan, which rents totaled $15,962.54 in 1959, and $3,200.04 in 1960. The Corporation’s managing agent rendered monthly bills to Elghanayan individually “c/o 1186 Lex Corporation.” Payments of the rents thus billed to Elghanayan were made by checks of the Seller Corporation, except for the maintenance charges of the 21 apartments during September 1958, the month of closing, which were paid by Elghanayan’s check. However, Elghanayan subsequently received reimbursement from the Seller Corporation of such amount.

12. Of the proceeds of the sale of stock, the par value of $1.00 per share was credited on the books of the Cooperative Corporation to capital stock, and the remaining $58 per share was credited to “additional paid-in capital.” Upon closing of title on September 22,1958, the “additional paid-in capital” account stood at $2,320,000 (40,000 shares X $58 per share).

13. (a) Each tenant signed a proprietary lease which, in addition to entitling the tenant to live in a specific apartment, set forth in certain respects the manner in which the Cooperative Corporation would be operated and the rent under the lease would be determined. Under the provisions of this lease the tenant was entitled “to have and to hold the apartment, with the appurtenances * * * at a rent for each year or portion of year during said term equal to the Lessee’s proportionate share, as hereinafter provided, of the aggregate amount of the cash requirements of the Lessor, as hereinafter defined, for such year or portion of year, together with additional rent as hereinafter provided.” The lease went on to provide:

The cash requirements above referred to for each year or portion of year axe hereby defined and shall be deemed to be such aggregate sum as the Board of Directors of the Lessor from time to time, by a resolution or resolutions adopted during such year or portion of year or the preceding year, shall determine, in its judgment, is to be paid by all the lessees under proprietary leases then in force (after deducting any estimated rents or income to be received during such year other than rents under proprietary leases and any available surplus which the Board of Directors may in its discretion deem it for the best interests of the Lessor so to deduct) to enable the Lessor to pay all estimated expenses mid outlays of the Lessor to the close of such year, growing-out of or connected with the ownership, maintenance and operation of such land and building, which sum may include among other things taxes, assessments, water rents, insurance premiums, operating expenses, legal and accounting fees, management fees, employees’ gratuity fund, alterations, replacements and repairs, expenses and liabilities incurred by the Lessor under or by reason of this or other leases, interest on mortgage or other indebtedness, mortgage amortization payments, the payment of any other liens or charges, the payment of any deficit remaining from a previous period, the creation of a reasonable contingency or other reserve or surplus fund and expenses for other corporate purposes; provided, however, that any sum included in such cash requirements for payment of mortgage principal and mortgage interest shall not exceed $208,000 for any such year, unless expressly authorized by the affirmative vote, taken at a meeting called for that purpose, or by the written consent, of lessees owning at least two-thirds in amount of the Lessor’s capital stock owned at the time of such authorization by all proprietary lessees under proprietary leases then in force. The Board of Directors of the Lessor may, from time to time, by resolution or resolutions duly adopted up to the close of the year for which such cash requirements have been so fixed or determined, increase or diminish (within the limits and on the conditions herein provided) the amount previously fixed or determined for such year. The Board of Directors may include in the cash requirements for any year any liabilities or items of expense which accrued or became payable in a previous year, or which might have been included in the cash requirements for a previous year but were not included therein, and also any sums which the Board of Directors may deem it necessary or prudent to provide as a reserve against liabilities or expenses then accrued or thereafter to accrue although not payable in that year. Any sums which the Lessee may pay hereunder which are allocated, used or to be used to meet cash requirements of the Lessor for mortgage amortization payments, or any other mortgage principal payments or for capital improvements or any other capital expenditure, shall not be deemed income to the Lessor but shall be credited by the Lessor upon its books as “Paid in Surplus.”
The rent payable by the Lessee in and for each year or portion of year of said term shall be a sum (within the limits and on the conditions hereinabove provided) bearing to the aggregate amount of such cash requirements for such year or portion of year, determined as aforesaid, the same ratio as that which the number of shares of stock of the Lessor, owned by the Lessee at the time of the execution hereof as stated in the recitals of this proprietary lease, bears to the aggregate of the shares similarly specified in all proprietary leases in effect at the time of the fixing and determination of such cash requirements, and such rent, together with any additional rent accruing under this lease, shall be payable monthly in advance or in such payments or installments as shall be required by resolutions of tlie Board of Directors of the Lessor, and at such times as shall be provided in such resolution.
The Board of Directors of the Lessor shall have discretionary power to prescribe the manner of maintaining and operating the building, and to determine the cash requirements of the Lessor to be paid as aforesaid by; the lessees under proprietary leases. Every such determination by the Board of Directors, within the bounds of this agreement of lease, shall be final and conclusive as to all lessees, and any expenditures made by the Lessor’s officers or managing agent, under the direction or with the approval of the Lessor’s Board of Directors, within the bounds of this agreement of lease, shall, as against the Lessee, be deemed necessarily and properly made for such purposes.
* * *

(b) The Plan contained the following provisions with respect to the leases:

PROPRIETARY LEASE
The form of the proprietary lease issued herewith is part of this Plan of Organization. All proprietary leases of apartments in the building will be in that form * * *. * * * Rent under the proprietary leases will be determined by apportioning among the'proprietary lessees the cash requirements of the Apartment Corporation in amounts proportionate to the number of shares held. Reference should, of course, be made to the printed form of the proprietary lease for the details of the features above mentioned and the other provisions of the proprietary lease.

The form of proprietary lease was issued the same date as the Plan, i.e., July 1, 1957.

14. (a) On September 4, 1958, the stockholders and directors of the Cooperative Corporation (they were the same persons), in preparation for the closing of title on September 22, 1958, held a special meeting and adopted various resolutions. By one resolution, all Purchase Agreements signed by prospective tenant-stockholders and purchasers of stock pursuant to the Plan were accepted. Another resolution approved the permanent first mortgage which the Corporation would execute, as follows:

RESOLVED that the Corporation hereby consents to and approves the proposed Consolidation and Extension Agreement to be executed by 1186 Lex Corp., relating to the permanent first mortgage, as the same has been approved by counsel for the Corporation, and.which provides, among other provisions for mortgage principal of $2,600,000., interest at 4%% per annum payable in the following instalments: interest at said rate from date of execution, accrued and due on October 1,1958, and thereafter combined interest and amortization payments of $52,000., quarterly commencing January 1, 1959, to October 1,1968, and thereafter of $48,750. quarterly commencing January 1, 1969 to. July 1, 1973, and a final instalment covering the entire balance on October 1, 1973; * * *

The following resolutions were also adopted:

RESOLVED that WHEREAS, it is necessary to fix the cash requirements of the Corporation and the rentals payable under the proprietary leases for the first year of operation of the premises by the Corporation, and in the Plan the total net annual expenses, including mortgage amortization payments, and after allowing for commercial income, were estimated to be $400,000. for said year, and the required total of annual income from stockholders-proprietary lessees to meet such net expenses was estimated to be $400,000. calculated upon the basis of $10. per share per annum for the 40,000 shares to be issued; therefore.
The Board of Directors hereby determines the cash requirements of the Corporation for the first year to be $400,000., equal to $10. per share for 40,000 shares and hereby fixes an amount equal to one-twelfth of said annual amount of $10. per share, or $0.8384 per share per month, as the monthly rental charge to be made by the Corporation of all proprietary lessees during said year, same to be payable on the first day of each month following the date of conveyance of title to the Corporation; and said monthly rental charge is to be adjusted for the month in which title closes from and including the date of title closing to and including the last day of said month; and said adjusted amount shall be payable within five days after the Managing Agents’ demand therefor, and
RESOLVED that the portion of the amount of money paid by the Corporation and needed to make payments on account of or for amortization of the principal of the mortgage indebtedness under the aforesaid mortgage (or any renewal, extension or replacement thereof) is to be deemed a contribution to capital and shall be added to the paid-in surplus of the Corporation; * * *

The determinations of the rate of rent and the rate of assessment to be paid by the tenant-stockholders were continued through 1959 and 1960, so that the total assessment on all the tenant-stockholders for each of those years brought in $400,000 per year to the Cooperative Corporation.

(b) Upon the closing of title on September 22, 1958, the Cooperative Corporation assumed payment of the mortgage indebtedness, with the provisions for amortization of the mortgage as set forth above. Under the terms of the Consolidation and Extension Agreement, the quarterly payments were to be applied first to payment of interest with the remainder (which varied with the changing mortgage balance) applied to mortgage amortization.

15. Under the Plan, 285 shares of the Cooperative Corporation’s stock were assigned to Apartment 8G, of which plaintiff was the tenant-stockholder in 1959 and 1960. The rent paid by plaintiff under her proprietary lease covering such apartment therefore came to $2,850 per year ($10 per share) or $237.50 per month in 1959 and 1960.

16. The form of proprietary lease between the Cooperative Corporation and its stockholder-tenants provided that upon paying the rent determined pursuant to the provisions of the lease, the tenant was entitled to the possession and use of the apartment covered by such lease.

17. (a) Pursuant to an agreement dated December 29,1958, between plaintiff and Elghanayan, plaintiff paid $15,7'50 for (a) the 285 shares of capital stock of the Cooperative Corporation allocated to Apartment 8G, and (b) the lease to such apartment. Under the agreement she also incurred the duty to pay $2,850 per annum as “annual maintenance for said apartment” ($237.50 monthly), such sale of stock and obligations of the lease to become effective February 1,1959. The shares allocated to Apartment 8G were among those allocated to the 21 apartments which had not been sold to tenant-stockholders at the time of the closing of title on September 22, 1958, and which, as set forth in finding 10, were accordingly registered in the name of Elghanayan, who was also designated as the proprietary lessee of such 21 apartments. The rental charges of $2,850 per year paid by plaintiff in 1959 and 1960 for the occupancy of Apartment 8G were not more than the rental charges then obtaining for equivalent apartment space in noncooperative rental buildings in the area of 120 East 81st Street, New York City.

(b) After the closing of title on September 22, 1958, the sales and transfers of the capital stock and the assignments of the leases, allocated to the 21 apartments, were executed by Elghanayan in his own name. The purchasers of the stock issued checks for the purchase price to Elghanayan individually or utilized checks drawn to their own order which they endorsed to Elghanayan at the closing.

Between September 22 and December 31, 1958, Elghanayan, in his own name, executed assignments of the proprietary leases and transfers of the shares of capital stock allocated to seven apartments to new tenant-stockholders and during 1959 he so executed assignments and transfers of the leases and stock pertaining to an additional 13 apartments, so that on January 1, 1959, 14 apartments were registered in his name and on January 1, 1960, only one apartment remained so registered.

(c) All sales contracts executed by Elghanayan transferring the proprietary leases and shares of stock pertaining to the 21 apartments, including the sale of Apartment 8G to plaintiff, were identical in form, except for differences as to closing date, name of purchaser, etc. Such contracts were executed by Elghanayan and the purchaser; the contract represented and warranted that the transferor owned the stock allocated to the apartment sold and was the proprietary lessee thereof. The closing papers included (a) an assignment of lease whereby Elghanayan assigned the proprietary lease to the purchaser; (b) the stock certificate registered in Elghanayan’s name, which he transferred to the purchaser by endorsement; (c) a letter agreement whereby Elghanayan and the purchaser agreed upon the date which divided the respective responsibilities for the maintenance charges; and

(d)a letter agreement whereby Elghanayan accepted the purchaser’s offer to purchase, and wherein it was recited as follows:

* * * As provided in the Plan, the stock and lease allocated to said apartment were purchased as “unsold stock” by Mr. Nourollah Elghanayan, the individual provided by the Seller for such purpose.

In none of the above-described papers did the Seller Corporation appear as a party to the transaction.

18. The funds available to the Cooperative Corporation for expenditure in 1959 and 1960 were derived from the following sources:

1959
Cash balance at Dee. 31, 1958_.$69, 526. 83
Receipts from tenant-stockholders- 409,000.08
Receipts from other sources- 80, 806. 28
$550,333.19
1960
Cash balance at Dee. 31,1959_ 94,214.40
Receipts from tenant-stockholders- 400, 000. 08
Receipts from other sources_ 78,106.00
$572,320. 48

19. The Plan which was distributed to plaintiff and all other prospective tenant-stockholders prior to their stock purchases and lease executions provided as follows:

INCOME TAX deductions
The Seller has been advised by counsel that if the cooperative plan, as herein outlined, is consummated, the Apartment Corporation will be a cooperative apartment corporation within the meaning of § 216 of the Internal Revenue Code and § 360 of the Tax Law of New York, and that when 80% of the income of the Apartment Corporation consists of rent received from tenant-stockholders, the tenant-stockholders will be entitled to deduct from their gross income for federal and New York State income tax purposes their proportionate share of taxes and interest paid by the Apartment Corporation. The actual tax saving to each individual will depend on his own income tax bracket. The Seller, the Apartment Corporation and the Selling Agent make no warranty or representation that the United States Treasury Department or the Tax Department of New York will so hold and they shall not be liable if for any reason it be held that the Apartment Corporation does not meet, or at any future time ceases to meet, tbe requirements of suck sections.

20. Of the Cooperative Corporation’s payments under the mortgage on its real property, the sums of $93,588.33 in 1959 and $97,871.41 in 1960 constituted principal amortization. Such amounts were allocated to such amortization payments from the $400,000.08 received in such years from the tenant-stockholders as their rent assessments.

21. (a) Paragraph 11 of the Seller’s Agreement provided in part as follows:

11. At the time of closing title the Seller will deliver to the Apartment Corporation [the Cooperative Corporation] leases, together with rent securities received thereunder, of garage and store space executed by bona fide lessees for terms of not less than three years from date of closing title, which leases will provide for an average aggregate rental of not less than $80,000. per annum over the three year period or a total of not less than $240,000. over said three year period. If leases providing for such rentals are not delivered to the Apartment Corporation at the closing, the Seller hereby agrees that until there have been delivered or tendered to the Apartment Corporation leases for terms extending not less than three years after closing of title, with average annual rentals aggregating at least $80,000., it will, for a period not exceeding three years after closing of title, pay to the Apartment Corporation the difference between the average annual rentals provided in such leases and $80,000.; that is to say, if in any of said three years such leases provide for aggregate rentals of less than $80,000., the Seller will within two months after the close of such year pay to the Apartment Corporation the difference between the aggregate rentals provided in such leases for said year and the sum of $80,000. However, if in any year, the Seller is required to make any payment as hereinberore provided and in any of the subsequent years of said three year period the aggregate rentals provided in such leases exceed the sum of $80,000., the Apartment Corporation hereby agrees that it will, within two months thereafter repay to the Seller a sum equal to such excess, but not greater than the amounts paid by the Seller in prior years to the Apartment Corporation as hereinabove provided. The Apartment Corporation agrees that so long as the Seller has not delivered or tendered_ to it, during said three year period, leases of commercial space providing for average aggregate ren-ta]s of not .less than $80,000. per annum, it will not, without the prior written consent of the Seller, enter into any lease of commercial space in the building. * * *

(b) The figure of $80,000 in the foregoing paragraph was later reduced by agreement to $70,299 for 1959 and $74,399 for 1960, with corresponding reduction of the aggregate. The three annual guarantee periods ran from September 22,1958 to September 21,1961. At the closing the Seller Corporation produced two commercial leases yielding an aggregate annual rental of only $55,200.

22. For the period September 22, 1958 (the closing date) to December 31,1958, the Cooperative Corporation’s accountants computed a deficiency in the garage and store rentals amounting to $21,600. For the calendar year 1959, the deficiency was computed at $14,675. No part of these amounts was received by the Cooperative Corporation prior to the end of 1959. Accordingly, as of December 31, 1959, the accountants reflected that the Seller Corporation owed the Cooperative Corporation $36,275 under Paragraph 11 of the Seller’s Agreement. However, because the Cooperative Corporation was on the accrual basis of accounting, the rental guarantee income was accounted for in each year. In 1959, the Cooperative Corporation’s books of account showed rental income in the amount of $14,675 as “Minimum average rental guarantee of Sellers.”

23. For the calendar year 1960 the Cooperative Corporation’s accountants computed the deficiency under the minimum commercial rentals provision to be $2,587.50 and similarly reflected such amounts in the books of account as income under the same heading. As of December 31, 1960, this amount had not been collected by the Cooperative Corporation. In addition, of the amount of $36,275 previously accrued as of December 31,1959, there still remained unpaid $1,170 at December 31, 1960, so that the aggregate amount owing by the Seller Corporation as of. December 31, 1960 was $3,757.50.

24. (a) The “commercial rental guarantee” was made by the Seller Corporation in its corporate capacity.

(b) The Cooperative Corporation sent bills each year to the Seller Corporation demanding payment of the minimum amounts. These bills were made out in the name of “N. Elghanayan, c/o Elmore Mgt. Corp.” The payment of the commercial rental guarantee was made by means of a note signed by Mr. Elghanayan individually.

25. (a) The forms of commercial leases, whereunder the Cooperative Corporation leased its garage and stores to the operators thereof, made no mention of mortgage amortization.

(b) As is uniformly true with respect to New York cooperative housing corporations, no shares of the Cooperative Corporation’s stock were ever authorized or issued to represent the garage or stores on the Corporation’s premises. The occupants of those facilities were at all times commercial lessees, not tenant-stockholders.

26. (a) In their certified financial report for the year 1959, dated January 26,1960, the accountants for the Cooperative Corporation computed “Total income available for expenses” as follows:

Income:
Assessments on tenant-stockholders_$400, 000. 08
Less portion appropriated for the redaction of the mortgage principal (credited to additional paid-in capital) _ 93, 588. 33
306,411. 75
Rental income:
Store space_$64, 624. 99
Minimum average rental guarantee of Sellers * * * _ 14,675. 00
- 79,299. 99
Interest earned on savings accounts_ 1, 506.29
Total income available for expenses-$387, 218. 03

(b) The accountants’ certification covering such report stated that the “* * * statement of income and expenses present [s] fairly * * * the results of its operations for the year * * * in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding period.”

(c) The accountants’ reports dated January 19, 1959, for the year 1958 for the period September 22, 1958, the date operations commenced, to December 31, 1958), and July 13, 1959, covering the six-month period January 1 to June 30, 1959, respectively, had set forth the portion of assessments on tenant-stockholders appropriated for the reduction of the mortgage principal in the identical manner. These reports were approved by meetings of the stockholders held on March 16, 1959, and of the directors on July 16, 1959, respectively.

27. The Cooperative Corporation’s federal income tax return for the year 1959, which was filed on March 14,1960, was prepared by Mr. Eric Paige, an employee of the Cooperative Corporation’s managing agent, Pease & Elliman, Inc. As the “Gross Receipts” of the Cooperative Corporation on line 1 of the return (and the Corporation’s “Total income”), Mr. Paige reported the above-mentioned figure of $387,218.03.

28. Sometime in 1960, a Revenue Agent audited the 1958 tax return of Mr. Jacques Posner, a shareholder-tenant and a member of the board of directors of the Cooperative Corporation. On such return, Mr. Posner claimed deductions as a tenant-stockholder of his proportionate share of real estate taxes and mortgage interest paid in 1958 by the Cooperative Corporation. The Agent requested Mr. Posner to submit a financial statement of the Cooperative Corporation for 1958 and 1959. Thereupon, the Agent concluded that the Cooperative Corporation did not, in 1958, qualify under Section 216 of the Internal Revenue Code as a cooperative housing corporation because less than 80 percent of its gross income was derived from tenant-stockholders. The Agent therefore disallowed the interest and real estate tax deductions claimed by Mr. Posner as a tenant-stockholder. The adjustments made in the return were fully discussed with and explained to Mr. Posner. At that time, the Agent, upon the basis of the Cooperative Corporation’s financial report for 1959, also concluded that the Corporation did not qualify for that year either.

29. (a) In its certified financial report for 1960, dated January 31,1961, the same firm of accountants for the Cooperative Corporation computed the “Total income available for corporate purposes” as follows:

Income: 1960
Assessments on tenant-stockholders-$400( 000.08
Rents:
Garage and store space- 71, 812.46
Minimum average rental guarantee of Sellers * * *_ 2, 687. 60
74,399.96
Interest:
Investments_ 1, 067. 62
Savings accounts- 2,369. 28
Note receivable (Sellers)- 269.14
3, 706. 04
Total income available for corporate purposes- $478,106. 08

(b) Instead of deducting the portion of the “Assessments on tenant-stockholders” which was appropriated for the reduction of the mortgage principal from such “Assessments” figure under “Income,” as they had in their 1959 report, the accountants, in the 1960 report, included such item, in the amount of $97,871.41, at a later point in the statement under the heading “Financial expenditures.” The item was described as “Portion of assessments on tenant-stockholders allocated for mortgage amortization payments — credited to paid-in capital.”

(c) In such report for 1960, the accountants likewise restated and changed the figures for 1959 so as to present them, in a column adjacent to the comparable figures for 1960, as follows:

Income: 1959
Assessments on tenant-stockholders_$400, 000. 08
Rents:
Garage and store space_ 64, 624. 99
Minimum average rental guarantee of Sellers * * *_ 14, 676. 00
79,299. 99
Interest:
Investments_ _
Savings accounts_ 1, 606. 29
Note receivable (Sellers)_ _
1, 606. 29
Total income available for corporate purposes -$480,806.36

The portion of the assessments on tenant-stockholders appropriated in 1959 for the reduction of the mortgage principal ($93,588.83) was similarly set forth under the new “Financial expenditures” heading.

(d) The accountants’ certification covering such 1960 financial report certified that the “* * * statement of income and expenses present fairly * * * the results of its operations for the year * * * in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year.”

30. Mr. Paige likewise prepared the Cooperative Corporation’s federal income tax return for 1960, which was filed February 26, 1961. The return reported as “Gross Receipts” on line 1 of the return (as well as “Total income” on line 10) the sum of $380,234.67. This amount rejnesented the sum of $478,106.08 certified by the accountants as the Corporation’s total income, reduced by the sum of $97,871.41 paid for amortization of mortgage principal during the year. In this manner, the 1960 return conformed to the 1959 return.

31. (a) On August 8,1961, a special meeting of the board of directors of the Cooperative Corporation was held. Mr. Posner was among the directors present. Also present were representatives of the Corporation’s accounting firm. The discussion at the meeting included matters relating to the financial situation of the Corporation, such as the amount of an arbitration award and of an additional assessment on tenant-stockholders to meet cash requirements for 1961. A long discussion also ensued with respect to the provision of the proprietary lease providing that sums paid by the lessees which were allocated for mortgage amortization payments should not be deemed income to the Corporation, and the relationship of such provision to Section 216 of the Internal Revenue Code. The question was raised concerning the propriety of applying only that part of the moneys use'd toward mortgage amortization payments which represented the proportion of the income of the Corporation which the funds received from stockholders bore to the entire gross income; and it was further felt that consideration should be given to making appropriate corrections in the books of account, since the Corporation’s former managing agent’s method of bookkeeping was one of the matters concerning which the board of directors had expressed dissatisfaction.

(b) On August 30,1961, the board of directors of the Cooperative Corporation adopted resolutions setting forth the basis for determining the portion of tenant-stockholder assessments to be credited to additional paid-in capital, representing the cash requirement allocated for mortgage amortization payments. Such resolutions covered assessments received since September 22, 1958, the effective date of the Plan. The resolutions provided for an allocation in an amount representing that percentage of the mortgage amortization payments which the total tenant-stockholder assessments bore to the total income for the period.

(c) On September 1, 1961, the Corporation’s accountants issued another report with respect to the year 1960. The report revised certain figures in the previous report dated January 31, 1961, including the amount of paid-in capital, although it did not change the method of computing the item of “Total income available for corporate purposes,” that was used in the original report for the year 1960. The additional paid-in capital during 1960 was reduced from the previous figure of $97,871.41, to the new figure of $82,270.71 to reflect the formula adopted by the board of directors concerning the portion of the tenant-stockholder assessments which were allocated to mortgage amortization payments. This report carried the accountants’ statement that their examination “was made in accordance with generally accepted auditing standards * * and that the “statement of income and expenses present fairly the financial position of 120 East 81st Street Corporation at December 31,1960 and the results of its operations for the year then ended after giving retroactive effect to certain actions of the Board of Directors in August 1961, in conformity with generally accepted accounting principles which, except for the change (which we approve) in the method of allocating tenant-stockholder assessments to additional paid-in capital * * * have been applied on a basis consistent with that of the preceding year.”

32. The Bevenue Agent who audited the Cooperative Corporation’s tax returns for 1959 and 1960 accepted without change the amount of gross receipts (and total income) set forth >on the tax returns.

33. (a) The Revenue Agent’s acceptance of the returns, including the exclusions from gross income reflected therein, served to disqualify the Cooperative Corporation as a “cooperative housing corporation” under Section 216(h)(1) and thus adversely affected the income tax positions of the tenant-stockholders.

(b) The Cooperative Corporation’s income tax returns for 1959 and 1960 each showed an operating loss with no income tax due. Had the amounts paid for amortization of mortgage principal during those years not been excluded from the Corporation’s gross receipts (and total income), the increases in the amounts of $93,588.33 and $97,871.41 for 1959 and 1960, respectively, would have given the Corporation a taxable income of $61,726.26 for 1959 (instead of a loss of $31,862.07), but for 1960, a loss would still have been incurred (i.e., $9,089.22 instead of $106,960.63).

34. (a) Although, as hereinabove set forth, the rental payments made by the tenant-stockholders were separately allocated by the Cooperative Corporation to maintenance and to mortgage principal amortization, with the amount of the latter allocation excluded from the Cooperative Corporation’s income pursuant to the provisions of the proprietary lease, the tenants received a single bill for the entire monthly rental charge. The 'Corporation’s managing agent received the payments of assessments upon tenant-stockholders and deposited them in the Corporation’s bank account.

(b) In its periodic reports to meetings of the Cooperative Corporations’ board of directors concerning the status of payments of assessments upon tenant-stockholders, the managing agent did not refer to the means or mechanics by which such payments were made, or the form in which funds were received, but merely summarized the extent of payments received and the extent of existing delinquencies.

35. At no time during 1959 or 1960 did the board of directors purport to segregate cash collections so that only moneys received by the Cooperative Corporation from its tenant-stockholders (and not moneys received by the Cooperative Corporation from other sources) were to be utilized for the payment of mortgage principal amortization. At all relevant times, the Cooperative Corporation maintained a single checking account and commingled therein existing balances with, commercial rents, the initial working capital arising from its sale of stock, and receipts of all kinds. It paid all obligations of the Cooperative Corporation from such checking account, including the fixed quarterly payments under the mortgage. Because receipts of all kinds were intermingled, the source of the actual funds used to make particular payments could not be traced to particular receipts.

36. In auditing the Cooperative Corporation’s tax returns for 1959 and 1960, the Revenue Agent made a basic factual assumption that all sums utilized by the Corporation for mortgage principal amortization in those years ($93,588.33 and $97,871.41, respectively) had been received by it from its tenant-stockholders.

37. Although throughout 1959 and 1960 plaintiff paid $237.50 per month rent under her proprietary lease, the exclusion of mortgage amortization from the Cooperative Corporation’s income resulted in its reporting on its tax return as rental income from plaintiff’s Apartment 8G, proportionally, only $179.32 per month.

38. In 1959 and 1960 a cooperative housing corporation under Section 216 of the Code filed its income tax return on Form 1120, the same tax form as was used by commercial and industrial corporations.

39. In 1959 and 1960, the instructions issued by the Internal Revenue Service to accompany Form 1120 required the inclusion on line 7(a), as a component of gross income, “* * * the gross amount received from the rent of property.”

40. On his personal income tax return for the years 1959, 1960, and 1961, Elghanayan did not report any of the sales of the 21 apartments which were registered in his name. In addition, he did not take any deductions for any of the maintenance charges, including the real estate taxes or mortgage interest payments allocable to any of the 21 apartments. The handling of these matters in Elghanayan’s tax returns was outside the knowledge and beyond the control of the Cooperative Corporation or its stockholders other than Elghanayan.

41. In its books and records .and on its corporate income tax returns for the years 1959, 1960, and 1961, the Seller Corporation reported gains and losses upon the sales of the 21 apartments registered in Elghanayan’s name. In addition, the Corporation took deductions for the maintenance charges and the property taxes and mortgage interest payments allocable to such apartments. The handling of these matters in the Seller Corporation’s tax returns, books and records was outside the knowledge and beyond the control of the Cooperative Corporation or its stockholders (other than Elghanayan).

42. (a) After'an examination of Elghanayan’s tax returns and the books and records of the Seller Corporation, the Revenue Agent determined that Elghanayan had not in fact made any payment to such corporation for the shares allocated to the 21 apartments in Elghanayan’s name. The Agent therefore concluded that the Seller Corporation was actually the real owner of such shares. Whether or not such payment was ever made by Elghanayan to the Seller Corporation was outside the control of the Cooperative Corporation or its tenant-stockholders, including plaintiff.

(b) The Revenue Agent, in his adjustments, excluded from the Cooperative Corporation’s gross income received from stockholders all sums received from Elghanayan under proprietary leases with him. These exclusions amounted to $15,-962.54 for 1959 and $3,200.04 for 1960. The amounts so excluded were added to the Corporation’s income from sources other than stockholders. The stated reason for the changes in the treatment of rents received from Elghanayan was that he held the leases as “nominee” of 1186 Lex Corporation. (Under Section 216(b) (2) of the Code a tenant-stockholder is required to be an “individual”.)

43. In his adjustments, the Revenue Agent adjusted the Cooperative Corporation’s gross income so as to include as “commercial rental income” the sums of $14,675 for 1959 and $2,587.50 for 1960, in each instance identifying the item as “Minimum average rental guarantee of seller.”

44. The Commissioner of Internal Revenue determined that the Cooperative Corporation did not qualify as a cooperative housing' corporation under Section 216 of the Code for the years 1959 and 1960 for the following reasons: (a) the amounts expended for mortgage principal amortization were not to be included in “gross income from tenant-stockholders” under Section 216; (b) payment of the “minimum average rental guarantee” of the Seller Corporation should be included in the Cooperative Corporation’s “commercial rental income”; and (c) rentals paid for the apartments owned in the name of Elghanayan should be included in “commercial rental income” (as apartments in reality owned by the Seller Corporation).

The following (constituting the adjustments made by the Revenue Agent) shows the arithmetical calculations of the Internal Revenue Service in determining that the Cooperative Corporation did not meet ¡the 80-percent requirement of the Section:

Year 1959
Assessments on tenant-stockholders... $400,000.08
Less:
Reduction of mortgage principal. $93,588.33
Nourollah Elghanayan (Nominee of 1186 hex Corp.)L. 15,962.54 109,550.87
Gross income from tentant-stockholders.._. $290,449.21 Commercial rental income:
Store spaco. $64,624.99
Minimum average rental guarantee of seller. 14,675.00 $79,299.99
Interest earned on savings accounts. 1,506.29
Nourollah Elghanayan. (Nominee of 1186 Lex Corp.)>. 15,962.54
Coinmachine Income (Washing Machines). 628.60
Total commercial rental income.’’. $97,397.42
Gross Income. 387,846.63
1 Based upon the above computation, taxpayer does not qualify under Section 216(b)(1)(D)
80% of gross income ($387,846.63)=.1. $310,277.30
Gross income from tenant-stockholders (above). 290,449.21
Excess over 20%..... $9,828.09
Year I960
Assessments to tenant stockholders..... $400,000.08
Less:
Reduction of mortgage principal. $97,871.41
Nourollah Elghanayan (Nominee of 1186 Lex Corp.). 3,200.04 101,071.45
Gross rental income from tenant-stockholders. $298,928.63
Commercial rental income:
Store space— Garage. $71,812.46
Minimum average rental guarantee of seller.- 2,687.60 $74,399.96
Interest earned-..-...-.— 3,706.04
Nourollah Elghanayan (Nominee of 1186 Lex Corp.)__. 3,200.04
Coinmachine Inc. (Washing Machines).-. 789.37 $82,095.41
Gross Income__-_ $381,024.04
Based upon the above computation, taxpayer does not qualify under Section 216(b) (1) (D)
80% of gross income ($361,024.04)«. $304,819.23
Gross income from tenant-stockholders (above). 298,928.63
Excess over 20%.-. $5,890.60

Conclusion of Law

Upon tbe foregoing findings of fact and opinion, which, are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover and the petition is dismissed. 
      
       “SEC. 216. DEDUCTION OF TAXES, INTEREST, AND BUSINESS DEPRECIATION BY COOPERATIVE HOUSING CORPORATION TENANT-STOCKHOLDER.
      “(a) Allowance of deduction.
      
      “In the case of a tenant-stockholder (as defined In subsection (b) (2)), there shall be allowed as a deduction amounts (not otherwise deductible) paid or accrued to a cooperative housing corporation- within the taxable year, but only to the extent that such amounts represent the tenant-stockholder's proportionate share of — -
      “(1) the real estate taxes allowable as a deduction to the corporation * * * on the * * * apartment building and on the land on which such * * * building * * * [Is] situated, or
      “(2) the Interest allowable as a deduction to the corporation * * * paid or incurred by the corporation on Its indebtedness contracted—
      “(A) in the acquisition * * » of the * * * apartment building, or
      “(B) In the acquisition of the land on which the * * * building * * * [Is] situated.
      “(b) Definitions.
      
      “For purposes of this section—
      “(1) Cooperative housing corporation.
      
      “The term ‘cooperative housing corporation’ means a corporation—
      «* * *
      “(B) each of the stockholders of which is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes * * * an apartment in a building, owned or leased by such corporation,
      “(C) no stockholder of which is entitled * * * to receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corporation, and
      “(D) 80 percent or more of the gross income of which for the taxable year In which the taxes and interest described in subsection (a) are paid or incurred is derived from tenant-stockholders.
      “(2) Tenant-stockholder.
      
      “The term ‘tenant-stockholder’ means an individual who is a stockholder in a cooperative housing corporation * * *.
      “(3) The term ‘tenant-stockholder’s proportionate share’ .means that proportion which the stock of the cooperative housing corporation owned by the tenant-stockholder is of the total outstanding stock of the corporation * *
     
      
       Refund claims Rave been filed by 65 of tbe tenant-stockholders of the cooperative who have similarly paid deficiency assessments for 1959 and 1960. The Internal Revenue Service is withholding aetlon on said claims pending the determination of this ease.
     
      
       The cooperative’s returns for both years showed operating losses and no income tax due. Had the amounts paid for amortization of mortgage principal during those years not been excluded from the cooperative’s gross receipts (and total income), it would have had a taxable income of $61,726.26 for 1959, but for 1960 a loss would still have been incurred.
     
      
       All of the other stockholders were his relatives.
     
      
       It was further provided that “[a]ny such stock and leases so acquired by purchasers provided by the Seller may be sold or assigned or such apartments may be sublet * * *."
     
      
       “At the time of closing, any stock not theretofore sold -will be purchased by individual purchasers to be provided by the Seller and such stock and proprietary leases accompanying the same will be executed and delivered to such purchasers, who will at such time pay the purchase price therefor.”
     
      
       Plaintiff’s apartment was one of those which had not been leased as of the closing date. Plaintiff received an assignment of the lease for her apartment from Elghanayan, and on December 29, 1958, she purchased from him the 285 shares allocated thereto.
      When the Lex Corporation originally organized the cooperative, it appointed all seven members of the cooperative’s board of directors. Even after the closing, the cooperative’s board contained two members appointed by Elghanayan, In accordance with a provision in -the Plan that, as long as the individual purchasers provided by the Lex Corporation continued to own 2,000 or more shares, they would have the right to designate two of the seven directors.
     
      
       Between September 22 and December 31, 1958, Elghanayan executed assignments of leases and transfers of the allocated shares with respect to seven apartments. In 1959, he executed such assignments and share transfers with respect to 13 additional apartments. Thus, on January 1, 1959, 14 apartments were In his name and on January 1, 1960, only one apartment so remained.
     
      
       Added by the Rev. Act of 1942, c. 619, Sec. 128, 56 Stat. 798.
     
      
       It was further provided that, if the Lex Corporation made any such differential payment in any year but in a subsequent year of the three-year period the aggregate of such rentals exceeded $80,000, the cooperative would repay the excess, but not in an amount greater than had previously been paid by the Lex Corporation.
     
      
       “While testimony relative to accepted accounting practice may properly be considered by the court, it is not conclusive in determining the legal tar consequences of any transaction.” United Grocers, Ltd. v. United States, 308 F. 2d 634, 641 (9th Cir. 1962).
     
      
       The cooperative’s first accountant’s report, which was for the period September 22, 1958, the date operations commenced, to December 31, 1958, set forth the portion of the assessments on tenant-stockholders which was appropriated for the reduction of mortgage principal In the identical manner. This report was approved at a stockholders meeting held on March 16, 1959. The second accountant’s report, covering the interim period January 1 to June 30, 1959, was also identical In this respect. This report was approved at a directors meeting held on July 16, 1959.
     
      
      
         Por the year 1959, the accountants set forth the “Income” from the assessments on the tenant-stockholders as $306,411.75, being the net of the total $400,000.08 assessment figure less the $93,588.33 “portion appropriated for the reduction of the mortgage principal.” The two previous accountants’ reports (note 12) similarly set forth the assessments under “Income” in only a net amount. Por 1960, however, the accountants, for the first time, showed the entire $400,000.08 assessment figure under “income,” without any reduction. The “Portion of the assessmenits on tenant-stockholders allocated for mortgage amortization payments” was, Instead, set forth at a later point In the statement under the heading “Pinancial expenditures.” (In this report, the accountants, In setting forth the 1959 figures for “comparative” purposes, restated such figures to conform to the 1960 setup.) The reason for this sudden change In the statements Is not clear. Each report carried the usual certification that it was "in conformity with generally accepted accounting principles.” However, by January 31, 1961, the date of the accountants’ 1960 statement, the Issue Involved in this case had already arisen. Sometime In 1960, the deductions of a director tenant-stockholder’s proportionate share of real estate taxes and mortgage Interest paid In 1958 by the cooperative was disallowed by a Revenue Agent on the ground that less .than 80 percent of the cooperative’s gross Income during that year had been derived from tenant-stockholders. At the same time, the Revenue Agent similarly so concluded with respect to 1959.
     
      
       At the meeting on August 30, 1961, the board also adopted a resolution which applied the new formula retroactively to the tenant-stockholders’ assessments received since September 22, 1958, the date upon which the cooperative took title, and the accountants the following day issued a new report for 1960 applying the new formula and reducing the additional paid-in capital from 397,871.41 to $82,270.71. Manifestly, while the new formula might well be appropriate on a prospective basis, It could hardly, on a retroactive basis, serve to undo that which had already been dona Plaintiff herself agrees that no weight should be given to the board’s action in 1961 or to the accountants' statements following such action insofar as they were “designed to remedy retroactively for the record the [prior] situation * * (Pl. Objections to Def. Requested Additional Findings, p. 12) This new report stated that it “was made In accordance with generally accepted auditing standards,” and that it "fairly” presented the cooperative's “financial position” and “the results of its operations” for 1960 “after giving retroactive effect to certain actions of the Board of Directors in August 1961.”
     
      
       The section Is as follows:
      “§ 1.118-1 Contributions to the capital of a corporation.
      
      “In the case of a corporation, section 118 provides an exclusion from gross Income with respect to any contribution of money or property to the capital of the taxpayer. Thus, if a corporation requires additional funds for conducting Its business and obtains such funds through voluntary pro rata payments by Its shareholders, the amounts so received being credited to Its surplus account or to a special account, such amounts do not constitute Income, although there is no increase in the outstanding shares of stock of the corporation. In such a case the payments are In the nature of assessments upon, and represent an additional price paid for, the shares of stock held by the individual shareholders, and will be treated as an addition to and as a part of the operating capital of the company. Section 118 also applies to contributions to capital made by persons other than shareholders. For example, the exclusion applies to the value of land or other property contributed to a corporation by a governmental unit or by a civic group for the purpose of inducing the corporation to locate Its business in a particular community, or for the purpose of enabling the corporation to expand its operating facilities. However, the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered, or to subsidies paid for the purpose of inducing the taxpayer to limit production. See section 362 for the basis of property acquired by a corporation through a contribution to its capital by its stockholders or by nonstockholders.’’ 26 CFR 1.118-1.
     
      
       Pl. Brief On Requested Findings, p. 6.
     
      
       In support, plaintiff cites 1 Mertens, Law of Federal Income Taxation, 5 5.09 (rev. 1969), which states: “Neither names nor labels are determinative * * *; * * * a transfer of funds from surplus to capital stock account will not change them from ‘earnings and profits’ to capital; * * *. A receipt is income, if its inherent characteristics show it to be such, regardless of the name it bears.”
     
      
       upon its organization, tiie cooperative allocated its 40,000 shares to the 101 apartments in the building, the selling price to the tenant-stockholders being $59 per share. There were 285 shares allocated to plaintiff’s apartment. The tenants executed stock purchase agreements for the stock allocated to the apartments they wished to rent. Thus, to occupy plaintiff’s apartment, a stock purchase in the amount of $16,815 would be required. Plaintiff’s apartment was one of those which remained vacant as of the date of closing. It was, therefore, taken over by Elghanayan as “nominee.” On December 29, 1958, plaintiff purchased the 285 shares from Elghanayan for $15,750.
     
      
       “The bill provides for a new deduction in section 23 (z) of taxes and interest paid or accrued by a tenant stockholder to a cooperative apartment corporation within the taxable year. The provision applies only to a cooperative apartment corporation which has one class of stock outstanding and all of the stockholders by reason of their ownership of stock are entitled to occupy for dwelling purposes apartments in a building owned or leased by the corporation. Eighty per cent or more of the gross income of the cooperative apartment corporation for the taxable year must be derived from the tenant stockholders, and the tenant stockholders who occupy the building must not be entitled to receive any distribution of the earnings or profits of the corporation except upon its complete or partial liquidation. The general purpose of this provision is to place the tenant stockholders of a cooperative apartment in the same position as the owner of a dwelling house so far as deductions for interest and taxes are concerned." (Emphasis supplied.)
     
      
       A person who owns his own home can deduct on his federal income tax return the amount of his property taxes and his mortgage interest. Int. Rev. Code of 1954, §§ 163, 164. On the other hand, a person who rents a house or apartment can take no tax deduction for any part of his rental payment, since this is a “personal, living, or family expense.” Id., $ 262.
     
      
       Including United Grocers, Ltd. v. United States, supra note 11, upon which plaintiff relies.
     
      
       1942-2 Cum. Bull. 577.
     
      
       “Plainly, this long-continued practice was devised and put Into effect In view of the requirement of Section 216(b)(2) that a tenant-stockholder of a Cooperative Housing Corporation be an ‘individual.’ The ‘nominee’ procedure satisfied that requirement in that the persons so nominated held the shares and proprietary leases in their individual names, sold and transferred them as individuals, gave individual warranties to the transferee, and, during the time they held the shares and leases, were individually liable for the rents assessed.” Pl. Brief On Requested Findings, p. 18.
     
      
       For the 285 shares allocated to plaintiff’s apartment, the cooperative received from the seller-corporation a credit on the purchase price of $16,815. (See note 18.) However, plaintiff purchased such shares for $15,750. Thus, a $1,065 loss was incurred.
     
      
       The parties have stipulated that “[a]lthough the aforesaid [nominee] practice has been in effect for many years, it is not known to what extent the Internal Revenue Service has had knowledge of, or has approved the practice. Nor has it ever been judicially determined whether the above-mentioned practice is valid under the terms of the Internal Revenue Code.”
     
      
       Mertens cites this ruling as the basis for his statement that “ [t] o qualify as a ‘tenant stockholder’ and thus be entitled to a deduction under Section 216 of Code for Interest and taxes, a person must satisfy four conditions. First, the person, must be an individual, thus excluding a partnership, a corporation, a trust or estate. Secondly, the individual must be the real owner of the stock and not merely a nominee or dummy. * * *” 4A Mertens, Law of federal Income Taxation, § 26.03c (Rev. 1966).
     
      
       Pl. Brief on Requested Findings, pp. 23-24.
     
      
       All references are to the Internal Revenue Code of 1954 unless otherwise noted.
     
      
       Rev. Act of 1942, c. 619, Sec. 128, 66 Stat. 798.
     
      
       Including payments on those apartments held in the name of Nourollah Elghanayan.
     
      
      
        Ibid.
      
     
      
       This figure should be $19,828.09.
     