## Facts

- New Capital Hotel, Inc., a Kentucky corporation, operated a real-estate rental business and used the accrual method of accounting in 1949.
- In 1949, it leased a hotel property for a 10-year term (1950–1959) at $30,000 per year.
- The lease required the lessee to pay the final year’s rent in advance; the lessee paid $30,000 to the lessor in 1949 to be applied to 1959 rent.
- The lessor had unrestricted dominion over the $30,000 and was not required to hold it in trust, escrow, or a segregated account; it could use or invest the funds freely.
- The lessor excluded the $30,000 from 1949 income, asserting the amount should be recognized in 1959 when the rent would be “earned.”
- The Commissioner determined a 1949 income-tax deficiency of $11,724.50, treating the $30,000 as 1949 gross income.

## Issues

1. Whether an accrual-basis lessor must include in 1949 gross income a $30,000 advance payment received in 1949 for rent attributable to the lease’s final year (1959), where the lessor has unrestricted use of the funds.

## Decision

- The Tax Court sustained the deficiency, holding the $30,000 was includible in gross income in 1949.
- The court characterized the $30,000 as advance rent, not a security deposit or conditional payment.
- The court reasoned that the payment was unconditional and the taxpayer had unrestricted control over the funds, making it taxable upon receipt despite the taxpayer’s accrual method.
- On review, the Sixth Circuit affirmed, emphasizing the taxpayer’s unrestricted use of the funds and rejecting deferral to 1959.

## Legal Principles

- Advance rental payments are includible in gross income in the year of receipt when the recipient has an unconditional right to the funds and unrestricted control over their use, even if the taxpayer reports on an accrual basis.
- A payment labeled and structured as rent for a future period is treated as current income upon receipt when it is not subject to trust, escrow, segregation, or refund conditions typical of security deposits.
- Estimated future expenses connected to earning income in a later year generally may not be deducted in the year of receipt to offset advance income, consistent with annual accounting.

## Conclusion

The courts held that a lessor using the accrual method must include an unrestricted, unconditional advance rent payment in gross income in the year received, rather than deferring recognition until the lease year to which the rent is applied.


New Capital Hotel, Inc. v. Commissioner, 28 T.C. 706 (1957)