M.E. Blatt Co. v. United States

M.E. Blatt Co. (Blatt) (plaintiff) purchased real estate and leased the property for use as a movie theater for a 10-year term. The lease term was scheduled to begin upon the completion of improvements to the property made by Blatt and the lessee. The lease did not indicate that Blatt and the lessee considered the improvements to be part of the lessee’s rent. Blatt agreed to make certain architectural alterations to the property. The lessee agreed to install technology, furniture, and fixtures necessary for a modern movie theater, all of which would become Blatt’s property upon the expiration or termination of the lease. The Commissioner of Internal Revenue (the commissioner) (defendant) determined that Blatt’s gross income in the taxable year in which the lessee’s improvements were completed should include the cost of the lessee’s improvements, reduced by 10 years of future depreciation charges. Items that the commissioner believed would have no value at the end of the 10-year lease term were excluded. The commissioner’s findings did not disclose any basis of value in Blatt’s property on which to calculate income tax or the realization of any taxable gain. Blatt paid the additional income tax required by the commissioner’s approach but then sought a refund. Blatt asserted that the lessee’s improvements were capital additions to the value of the property, rather than income to Blatt. The commissioner declined Blatt’s refund petition, and the court of claims affirmed. The court held that once the lessee’s improvements were completed, those improvements became Blatt’s property and constituted additional compensation paid by the lessee for the property rental. The United States Supreme Court granted certiorari.