The opinion of the court was delivered by: CAMPBELL
CAMPBELL, District Judge.
This is an action to recover the sum of $1,950.26 deficiency assessment of $1,797.20 federal income tax for the year 1933, with interest of $153.06.
The complainants occupy the ninth floor of the Co-operative apartment building, title to which is in the 136 E. 79th Street Corporation, a corporation organized under the laws of the state of New York and authorized by its charter to hold, operate, manage, sell, exchange, and lease the several parts and apartments in any building thereon and in any replacement thereof or addition thereto. It is not the purpose of the corporation to make profits, but to provide and lease homes to its stockholders, in the building owned by it. The authorized capital of the corporation is $975,000, which consists of 9,750 shares of stock of a par value of $100 per share. The corporation owns the land and the building thereon, and it leased apartments to its stockholders for a term of 99 years and to all "Renters of Apartments" it gave what it termed to be a "proprietary lease," and in addition thereto shares of stock as consideration for the cash paid by the stockholders for each lease. The stockholders, in return, paid to the corporation each year the proportionate amount of expenses, taxes, maintenance, interest, and other overhead expenses, as was represented by the amount of stock which each "proprietary leasee" held in the corporation.
Caryl H. Wood, one of the complainants herein, subscribed for 735 shares of the common stock of the 136 E. 79th Street Corporation, and for a "proprietary lease" of the entire ninth floor of the building, located at 136 East Seventy-Ninth street, New York, and paid therefor the sum of $73,500.
She received 735 shares of the common stock of the corporation and a "proprietary lease" of the entire ninth floor of the said premises running until the 30th day of January, 2027.
By the terms of that lease, she was obligated to pay, in lieu of and as rent, her proportionate share of the aggregate amount of the cash requirements of the lease for each year, including the year 1933, and including, among other things, taxes and interest on the mortgage covering 136 East Seventy-Ninth street.
During the year 1933, her share of the interest on the mortgage, that was given by the corporation to secure its own indebtedness, was the sum of $3,574.48, and for the same year her share of the taxes, due to the city of New York, by the corporation, amounted to $2,372.30. Also, during the year 1933, she received a refund from the corporation, in the amount of $300.90, which represented an excessive payment for other maintenance and special charges that were assessed by the corporation against her.
In a joint income tax report, filed on or about the 15th day of March, 1934, the complainants took as a deduction, the amount of $3,574.48, which constituted interest paid by the corporation, from funds advanced by the complainants, to pay the complainants' proportionate share of the total interest that the corporation owed on its indebtedness. The return also included as a deduction the sum of $2,372.30, which constituted the complainants' proportionate share of the taxes that the corporation owed the city of New York. The return, as filed, also disclosed that the sum of $300.90, which represented the excessive payment made by the complainants to the corporation, was returned by them as income.
The above three items were disallowed by the Commissioner of Internal Revenue, which resulted in an additional tax of $1,797.20, together with interest in the sum of $153.06, which was paid on August 23, 1935. Complainants caused a claim for refund to be filed on August 23, 1935, which claim was rejected on November 19, 1935.
The question presented in this case is whether the complainant, Caryl H. Wood, is entitled to a deduction for interest and taxes paid of amounts contributed by her to the 136 E. 79th Street Corporation on its obligation for interest and taxes for the year 1933?
The statute involved is the Revenue Act of 1932, ch. 209, 47 Stat. 169, so much of which as is necessary for consideration in this case reads as follows:
"§ 23. Deductions from Gross Income. In computing net income there shall be allowed as deductions: * * *
"(b) Interest. All interest paid or accrued within the taxable year on indebtedness, except (1) on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from the taxes imposed by this title, or (2) ...