Before KERNER, DUFFY and FINNEGAN, Circuit Judges.
This appeal involves the income tax of the taxpayer, Emanuel Schwartz, for the year 1943. The Commissioner of Internal Revenue, on August 22, 1946, claimed a deficiency of $26,175.42 in the income tax liability of Schwartz for the year ending 1943.
The taxpayer on November 14, 1946, sought a redetermination of said deficiency in the Tax Court of the United States. Such redetermination was had and by its order of June 2, 1949 the Tax Court decided that there is a deficiency in income tax for the year 1943 in the amount of $24,014.92. This proceeding seeks a review of the Tax Court's decision.
The record discloses that prior to June 9, 1934, Moses H. Rosenblum owned fee simple title to the real estate known as 206 Washington Street, and 6 and 8 Genesee Street, in Waukegan, Illinois, (commonly called the Neisner Building) leased for a term of twenty-five years from February 4, 1928 to Neisner Brothers, Inc., at an annual rental of $24,000. The property was encumbered with four mortgages.
On April 30, 1931, the lessors of the property, Moses H. Rosenblum and his wife Rose, with the written consent of the lessee, assigned all their interest in the lease to the taxpayer as security for the payment of a note originally in the amount of $50,000, secured by a second mortgage on the Neisner property.
This second mortgage had previously been assigned to taxpayer by Neisner Brothers, and the principal amount due at the time of assignment was $19,000. The assignment provided that "upon payment of the said note and compliance with the terms and conditions of said mortgage, this assignment shall become null and void."
It further provided that the said Moses H. Rosenblum and his wife Rose were to retain possession of said premises unless and until default was made in the payment of said note and interest, or until failure to comply with the terms and conditions of said mortgage.
This assignment was filed and recorded in the office of the Recorder of Deeds in and for Lake County, Illinois.
On July 22, 1931, said lessors executed another assignment of the lease, without the consent of the lessee, which was not recorded. This additional assignment herein referred to as "Supplemental Agreement" was given to secure certain notes aggregating $34,330, and a check dated May 16, 1931, for $250, a total of $34,580.
The assignment of July 22, 1931, known as the "Supplemental Agreement," provided that the assignment of April 30, 1931, should also serve as collateral security for the payment of the notes, interest and commission, mentioned in the said agreement.
On August 25, 1933, the holders of the fourth mortgage started foreclosure proceedings in the Circuit Court of Lake County, Illinois. They asked for a foreclosure of their mortgage and an accounting of rents. The court appointed a receiver. The holders of the first and third mortgages also became parties to the foreclosure and receivership litigation for the purpose of asserting rights claimed by them under their respective mortgages.
The lessee of the premises, Neisner Brothers, Inc., refused to pay taxpayer rents accruing after September 1, 1933, and suit was instituted by him on September 22, 1933 to recover such rents. By order of the Lake County Circuit Court the suit for rent and the suit to foreclose were consolidated and referred to a Special Master.
In his report the Special Master fixed the liens against the property in their order of priority. The court approved the report and found, among other things, that the taxpayer, by virtue of his second mortgage and assignment of the lease, was entitled to a second lien on the property in the amount of $21,876.59 with interest at 7% per annum from October 1, 1934, and also entitled to the rents from the property, and they should be applied to the second mortgage indebtedness.
The Special Master and the court also held that the sum of $16,000 was due from the lessee for rent, and recommended that the lessee be directed to pay the amount for application on the balance of $21,876.59 due on the second mortgage held by taxpayer, and have the right to pay the balance of $5,876.59, with interest, to taxpayer, for application on the balance due on the mortgage, and to deduct the amount from rents thereafter accruing, subject to the order of the court, with reference to the application of rents due under the lease on and after September 1, 1933, and that the $9,000 being ...