*296 Decisions will be entered for the respondent.
Advance Rental or Security Deposit. -- Successive leases, covering the same property, were executed within one calendar year. Held, that the first lease expressed the intent of the parties and that under it a sum paid by the lessee was advance rental and is includible in gross income of the lessors at the time of payment.
*1165 The respondent determined deficiencies in petitioners' income tax for the calendar year 1946 as follows:
| Petitioner | Docket No. | Amount |
| Jack August | 24700 | $ 5,448.70 |
| Charles Beatty | 24701 | 4,414.39 |
| Harry Kramer | 24702 | 4,222.96 |
The deficiencies result from the inclusion of the sum of $ 28,000 in income of a partnership, in which the petitioners were members, for the fiscal year ended March 31, 1946. The issue is whether the sum of $ 28,000, which was paid to the partnership by a lessee of partnership property, constituted advance rental under the original lease or was a security deposit under a second lease covering the same property.
The*297 cases were consolidated for hearing and opinion.
FINDINGS OF FACT.
The petitioners are individuals residing in Miami Beach, Florida. Their income tax returns for the year 1946 were filed with the collector of internal revenue at Jacksonville, Florida. They used the cash receipts and disbursements method of computing and reporting income, and filed their returns on a calendar year basis.
The petitioners each had a one-third interest in a partnership trading as Clay Hotel. The partnership used the accrual method of computing and reporting income and filed its returns on the basis of a fiscal year ending March 31.
On March 27, 1945, the petitioners leased part of the premises known as Clay Hotel and Clay Apartments in Miami Beach, Florida, *1166 to Morris Siegel, hereinafter referred to as Siegel, for a term beginning May 1, 1945, and ending April 31, 1950, [sic] at a total rental of $ 140,000. The lease provided for a payment of $ 28,000 in two installments, $ 5,000 on the execution of the lease, and $ 23,000 on April 2, 1945. The parties agreed, and the lease provided, that these two installments and other periodic payments to be made by the lessee were to constitute *298 parts of "the term rental" of $ 140,000. The first two rental installments, aggregating $ 28,000, were paid by the lessee on the due dates.
A section of the lease entitled "Security Payment" provided for a $ 4,000 sum to be paid by the lessee to the lessors as security for the lessee's performance of the terms of the lease. It was to be paid in two equal installments on May 1 and December 1, 1949.
The lease was signed by the three petitioners as lessors and by the lessee, Siegel, and witnessed by the attorneys for the lessors and the lessee. Several weeks of consultation preceded the execution of the lease.
On numerous occasions commencing in the fall of 1945, the petitioner Harry Kramer, hereinafter referred to as Kramer, asked Siegel to consent to change the lease, for the reason that the requested change would reduce his (Kramer's) income tax. Siegel was satisfied with the lease and desired no change, but after numerous repetitions of Kramer's request he referred the matter to his attorney. The attorney explained to Siegel that the change would not affect his rights and would help Kramer. The attorney advised him to consent to the change. Siegel did not understand the nature*299 of the change but upon this advice signed a new lease agreement with the same lessors, dated December 3, 1945. The term of the new lease was from December 3, 1945, to May 31, 1950.
The new lease stated that simultaneously with its execution the lessee had paid to the lessors $ 28,000 and would pay an additional $ 4,000 in two equal installments on May 1 and December 1, 1949, and that this total sum of $ 32,000 was security for the lessee's performance of the terms of the lease.
Each of the leases provided that the sum designated therein as security ($ 4,000 in the original lease; $ 32,000 in the new lease) was not to be applied as rent but if the lessee defaulted, it then became the absolute property of the lessors; that the sum need not be segregated by the lessors; and that no interest was due on the sum. Both leases provided that $ 4,000 was to be returned to the lessee simultaneously with the return of the leased property to the lessors if the lessee had complied with the terms of the lease.
Under both the original and the new lease, the lessee was to pay yearly rental installments in the amount of $ 28,000, prorated monthly *1167 from August in each year to March of the*300 following year. Under the original lease, the last rental installment was due March 1, 1949, and no rental was due for the period August 1949 to March 1950. Under the new lease, there was due in that period rental installments totaling $ 28,000. The new lease also provided that there was to be returned during the same period the $ 28,000 sum referred to as security if the lessee had not breached the lease. The due dates and the amounts of both the rental installments and the repayments of the $ 28,000 sum designated as security were as follows:
| Rental installment | Amount | Repayment of $ 28,000 sum | Amount |
| Aug. 1, 1949 | $ 500 | Aug. 7, 1949 | $ 500 |
| Sept. 1, 1949 | 1,000 | Sept. 7, 1949 | 1,000 |
| Oct. 1, 1949 | 1,000 | Oct. 7, 1949 | 1,000 |
| Nov. 1, 1949 | 2,000 | Nov. 7, 1949 | 2,000 |
| Dec. 1, 1949 | 2,000 | Dec. 7, 1949 | 2,000 |
| Jan. 1, 1950 | 3,000 | Jan. 7, 1950 | 3,000 |
| Jan. 15, 1950 | 4,000 | Jan. 22, 1950 | 4,000 |
| Feb. 1, 1950 | 6,500 | Feb. 7, 1950 | 6,500 |
| Feb. 15, 1950 | 6,000 | Feb. 22, 1950 | 6,000 |
| Mar. 1, 1950 | 2,000 | Mar. 7, 1950 | 2,000 |
At the time the new lease was executed, Siegel and the lessors exchanged checks for $ 28,000. Siegel delivered to his attorney a check for $ 28,000 and received from*301 him a check for the same amount which the attorney had received from the lessors. Siegel did not regard the check he received as a return of the $ 28,000 he had paid as prepaid rental, nor did he regard the check he delivered as the payment of a security deposit. Siegel did not understand the purpose of the exchange but participated in it because his attorney advised him that this was necessary "to make it legal."
In 1949 Siegel did not pay the rental installments that were due under the terms of the new lease for the period commencing August 1, 1949. He was of the opinion that the $ 28,000 he had paid in 1945 constituted a prepayment of the rental for this period. In December 1949, the lessors served a written notice on Siegel in which they proposed legal action to collect alleged arrears in rental payments and also to terminate the lease.
Siegel's attorney advised him that under the terms of the second lease he was obligated to pay the rental installments, and explained that he would at the same time receive from the lessors a sum equal to each installment. Pursuant to the attorney's suggestion, Siegel and one of the lessors met on several occasions at a bank during 1950 and*302 exchanged checks totaling $ 28,000.
The sum of $ 28,000 paid to the lessors in two installments on March 27 and April 2, 1945, constituted prepaid rental.
*1168 OPINION.
The question for decision in these proceedings is whether the amount of $ 28,000 (consisting of the sums of $ 5,000 and $ 23,000) was rental income as determined by the respondent, or was a security deposit as contended by the petitioners. The parties appear to be agreed upon the proposition that the foundation for the disposition of the question is the effect that is to be given to the second lease agreement that was entered into between the petitioners and their lessee in the year 1945.
The first lease, dated March 27, 1945, provided for payment for "rental" payable in specified installments, the first two of which aggregated the $ 28,000 that is here involved. It also provided that the "sums of rent" prescribed "shall be earned on their respective maturity dates" and "in addition to representing rent, represent security for the performance by the lessee." The petitioners acknowledge on brief that under that agreement the $ 28,000 of initial payments would constitute advance rental. But, they say, that because*303 of a mistake made in drafting the March 27th lease, a revision was necessary to set forth correctly the agreement between the lessors and the lessee, which was accomplished by the lease of December 3, 1945, which sets forth the actual agreement of the parties.
The evidence does not convince us that the lease agreement of March 27, 1945, did not express the intent and agreement of the parties at that time and at the time the $ 28,000 was paid. There is evidence that considerable time, perhaps two weeks, was spent in drafting the first lease. The petitioners had conferences with their attorney concerning the provisions of that lease. The petitioners discussed the terms of that lease with the lessee in the office of their attorney. The lessee read the lease thoroughly and he understood that the $ 28,000 was in payment of the last year's rent. It was signed by all parties and witnessed by their attorneys. Moreover, on the evidence, it is difficult to ascribe error to the attorney in drafting the lease, as contended by the petitioners. He apparently was fully aware of the difference in legal consequences of an advance rental payment and a security deposit. Payments aggregating *304 $ 4,000 to be made in 1949 were provided for under a separate provision in the lease which bore the caption "Security Payment." The purpose, and use to be made, of such payments are described in detail, and among which are that they "shall never be applied as rent," and that upon performance of the terms of the lease "the Lessors will return to the Lessee the said security payments." In contrast to such specific treatment of what the parties obviously intended to be security payments, the $ 28,000 involved constituted part of the payments which, according to the lease terms "in addition to representing rent, represent security for the performance by the *1169 lessee." The lessee had the very definite conviction that the $ 28,000 that he paid was on account of rent. Consequently, it cannot be said that there was a mutual mistake on the part of the parties to the first lease which would warrant a reformation of the original agreement so as to express an intent other than set forth in that agreement.
In the practical aspects of the case, the parties to the lease disregarded the terms of the second agreement as to the return to the lessee of the $ 28,000. The lessors and the lessee*305 merely made simultaneous exchanges of checks. For all practical purposes, the $ 28,000 was applied upon rentals for the last few months of the lease term.
Upon consideration of all of the evidence, we conclude that the first agreement, dated March 27, 1945, expressed the real intent of the parties to it. Under that agreement, these proceedings come within the rule, as expressed in , affd. , that "where payments are made merely as rent and made at the beginning of the lease, though for the final period thereof, they are, there being no other conditions, taxable as income at the time they are received."
The present case is distinguishable from the case of , decided this day. In the Mantell case, the amount deposited by the lessee was initially regarded by the parties to the lease as a security deposit, was so described in the lease, was so treated by the lessor in his accounts, and in all subsequent transactions, including litigation, it was described and treated as a security deposit. While there was in that case an*306 amended lease, the amendments effected no change in the purpose for which the security deposit was originally made by the lessees. Consequently, the decision in the Mantell case, resting as it does on entirely different facts, is not controlling in the present case.
Decisions will be entered for the respondent.