00-3946 Krukowski v. Commissioner of Internal Revenue

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“The Krukowskis contend that the 1987 Law Firm Building lease was extended by the agreement signed in 1991.

Because the 1991 agreement is merely an extension of the 1987 lease, the Krukowskis argue that they are entitled to transitional relief under Treasury Regulation sec. 1.469- 11(c)(1)(ii). Section 1.469-11(c)(1)(ii) allows taxpayers to characterize leasing agreements as passive when the agreement was a ‘written binding contract entered into before February 19, 1988.’ See Treas. Reg. sec. 1.469-11(c)(1)(ii). We disagree with the Krukowskis’ characterization of the 1991 agreement. We conclude that in 1991, when the Krukowskis exercised the renewal option contained in the 1987 lease, they entered into a new leasing agreement, and did not merely extend the original 1987 lease.

“Under Wisconsin law, a new lease agreement is required in order to validly exercise an option to renew a lease agreement. See Seefeldt v. Keske, 111 N.W.2d 574, 575 (Wis. 1961). Conversely, a new lease agreement is not required where the option being exercised merely extends the original lease. See Connor, 218 F.3d at 740; Seefeldt, 111 N.W.2d at 576.

“The 1987 lease was a five-year lease, expiring in 1992. The renewal option in the 1987 lease provided the lessee with ‘three (3) consecutive options to renew [the 1987] Lease, each for a term of three (3) years, at a rental to be mutually agreed to by Lessor and Lessee prior to the commencement of a renewal term with respect to that renewal term.’ (Emphasis added). This provision is unambiguous and is plainly referred to by the parties as an option to renew. Furthermore, since both parties had to ‘mutually agree’ on a new rental price, the 1991 agreement was a new agreement and not merely an extension of the original agreement… Here, the lessee did not possess a unilateral right to bind the lessor to an extension of the original lease. Cf. Milwaukee Hotel Wis. Co., 62 N.W.2d at 16. Rather, the parties had to mutually agree on the rental amount before the lease would be renewed. The fact that the parties chose to maintain the same rental price does not alter the fact that the parties were free to agree to a different amount. Thus, in 1994, the Krukowskis received rental income from the Law Firm Building pursuant to a lease agreement entered into in 1991. Consequently, the Krukowskis are not entitled to transitional relief under Treasury Regulation sec. 1.469-11(c)(1)(ii).”

Affirmed.

Appeal from the United States Tax Court, Laro, J., Kanne, J.