Commissioner of Internal Revenue v. Grace H. Cunningham, Eugene F. Cunningham and Grace H. Cunningham

The Tax Court refused to sustain income tax deficiencies assessed by the Commissioner against Grace Cunningham for the year 1946 and, alternatively, against Grace Cunningham and her husband, Eugene F. Cunningham, as a community, for the year 1952. The Commissioner appeals.

Pursuant to an oral agreement, in 1946 the American Manufacturing Company, Inc., a heavy machinery manufacturing concern owned by taxpayers' family and in which Mrs. Cunningham was the major stockholder, erected improvements upon land owned by her at a cost of approximately $20,000. By this same agreement she leased the land to the Company for six years without payment of rent, the Company agreeing to pay taxes on the land, with title to the improvements erected by the Company to vest in her at the end of the term. The agreement was reduced to writing in 1947, and upon its expiration in 1952 a new written lease for 10 years was executed, providing for payment of rent of $10 per month.

Contending that the erection of the building and provision for its transfer to taxpayer was a form of rental payment for the use of the land, the Commissioner assessed its value as ordinary income to taxpayers in the year of…