*1290 The petitioner and his associate leased certain real estate in 1914 for a period of 99 years, the lease contract being executed in the name of the petitioner's associate, with an option to purchase the fee title at any time within 20 years for $95,000. In 1923 the lessees entered into a contract to sell the property for $313,000. They then exercised the option to purchase the fee title in accordance with the terms of the lease. Petitioner's associate, acting for himself and the petitioner, took the fee title and conveyed same to the purchaser. Held, the leasehold estate merged in the fee when the fee title was acquired by the petitioner and his associate in 1923, and since the fee was sold and transferred by them within the year of purchase it did not constitute a capital asset within the meaning of section 206(a), Revenue Act of 1921. The gain derived therefrom is, therefore, taxable as ordinary income.
*889 This is a proceeding for the redetermination of a deficiency in income tax for 1923 in the amount of $13,702.75. The issue is *890 *1291 whether the profit derived by the petitioner in the taxable year from a certain real estate transaction constituted ordinary income or capital net gain.
FINDINGS OF FACT.
The parties stipulated the following facts:
1. On March 4, 1914, Jacob J. Kern executed a ninety-nine year lease to Sam A. Marx, of the City of Chicago, to the following described property: [Description omitted as not material.]
2. This lease provided that the lessee was to erect a building on the premises above described to cost not less than $75,000.
3. This lease also provided that the lessee might have the right to purchase the premises at any time within twenty years from March 4, 1914, for the sum of $95,000 upon the lessee giving to the lessor thirty (30) days notice of his intention so to purchase the same.
4. M. Ernest Greenebaum, Jr., the petitioner herein, was the equitable owner of one-half interest in said lease, the other half being owned by said Sam A. Marx, and his interest was evidenced by an agreement or beneficial certificate. Petitioner's name did not appear in the lease nor in any subsequent conveyances of the property herein referred to, but only in a written agreement between*1292 himself and the said Sam A. Marx. This agreement was never recorded.
5. Shortly after March 4, 1914, a building was constructed upon the premises in question worth approximately $125,000. Sam A. Marx, lessee, retained the leasehold estate and the petitioner retained his interest in the joint venture until they sold the premises to Samuel Rosen.
6. On February 2, 1923 the said Sam A. Marx entered into a contract with one Samuel Rosen, whereby said Marx agreed to sell the said property to Rosen for $313,000, a copy of which contract is attached hereto and made a part hereof.
7. Marx, acting for himself and petitioner, then exercised the option to purchase the fee title for $95,000, in accordance with the terms of the lease. The owner of the fee title then conveyed title in the fee to Marx, who in turn conveyed title to Rosen, pursuant to said contract of purpose.
8. The petitioner Greenebaum, being an equal partner with said Sam A. Marx in the venture reported on his income tax return for the year 1923, a profit of $48,459.98 received by him as a result of said transaction. He computed the profit earned by him as follows:
| Received as purchase price | $313,000.00 | |
| Received as rebates on insurance, etc | 2,494.37 | |
| Depreciation for 9 1/3 years | 35,000.00 | |
| Total | $350,494.37 | |
| Cost of fee title | $95,000.00 | |
| Cost of improvement | 125,000.00 | |
| Expenses, commissions, etc | 33,574.41 | |
| Total cost | $253,574.41 | $253,574.41 |
| Profit | $96,919.96 | |
| My share of 1/2 | 48,459.98 |
*1293 *891 The petitioner reported said profit as Capital Net Gain and computed his income tax liability accordingly. The Commissioner, in determining the deficiency herein computed said profit as ordinary income.
The contract referred to in paragraph 6 of the above stipulation, in so far as material here, reads as follows:
THIS MEMORANDUM WITNESSETH: That SAM A. MARX and MARGARET S. MARX, his wife, hereby agree to sell, and SAMUEL ROSEN agrees to purchase, at the price of Three Hundred and Thirteen Thousand Dollars ($313,000.00), the following described real estate situate in the City of Chicago, County of Cook and State of Illinois, to wit:
* * *
Said purchaser has paid Twenty-five Thousand Dollars ($25,000.00) as earnest money to be applied on said purchase when consummated and agrees to pay within five (5) days after the title has been examined and found good, the further sum of Sixty-three Thousand Dollars ($63,000.00) at the office of Joseph S. Samuels, Chicago, Illinois, provided a good and sufficient statutory warranty deed with release of dower and homestead rights conveying to said purchaser a good and merchantable title to said premises (subject as aforesaid) *1294 shall then be ready for delivery. The balance in the sum of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) to be paid as follows:
Seventy-five Hundred Dollars ($7500.00) one year after date of delivery of deed;
Eighty-five Hundred Dollars ($8500.00) two years after date of delivery of deed;
Ten Thousand Dollars ($10,000.00) three years after date of delivery of deed;
Twelve Thousand Dollars ($12,000.00) four years after date of delivery of deed;
Twelve Thousand Five Hundred Dollars ($12,500.00) five years after date of delivery of deed;
Twelve Thousand Five Hundred Dollars ($12,500.00) five years after date of delivery of deed;
One Hundred and Sixty-two Thousand Dollars ($162,000.00) seven years after date of delivery of deed;
with interest thereon from date of delivery of deed at the rate of six and one-half percent. (6 1/2) per annum, payable semiannually, to be secured by notes or bonds in amounts agreeable to the sellers, but not to exceed the said yearly payments, secured by trust deed of even date therewith on the above described premises, said notes or bonds and trust deed to be in the form ordinarily used by Greenebaum Sons Investment Company, of*1295 Chicago, Illinois, and are to be a first lien on said premises. Said bonds and trust deed, if signed, to be returned to said purchaser duly cancelled in the event this agreement is not consummated, without any expense to purchaser.
* * *
It is further understood and agreed by and between the parties hereto that the said sellers are not the owners in fee simple absolute of the above described premises, but that the said Sam A. Marx is the lessee under a certain lease with one Jacob J. Kern, dated March 4, 1914, leasing the above described premises for a period of ninety-nine (99) years and that it is provided in and by said lease that the said lessee shall have the right to purchase from the said lessor the said demised premises at any time within twenty (20) years from the date of said lease, provided said lessee shall have *892 given to said lessor thirty days' notice in writing of his intention so to purchase, and that the consummation of this agreement is contingent upon the said Jacob J. Kern and wife conveying to the said Sam. A. Marx title in fee simple absolute to the above described premises under and by virtue of the provisions of said lease.
* * *
IN WITNESS*1296 WHEREOF, the parties hereto have hereunto set their hands and seals this second (2nd) day of February, A.D. 1923.
In addition to the foregoing facts stipulated by the parties, the petitioner offered evidence which established the following facts.
The original negotiations had with Rosen concerned only the acquisition of the leasehold owned by the petitioner and Marx, but later Rosen decided that he wished to acquire the fee under the terms of the option provided in the lease contract. The petitioner and Marx then informed Rosen that the purchase of the fee could be made a part of the transaction provided he, Rosen, financed such purchase. Rosen thereupon made arrangements to borrow $225,000 to be secured by a first mortgage against the property.
Neither the petitioner nor Marx theretofore had had any negotiations with the owner of the property in regard to acquiring the fee. The petitioner and Marx did not desire to acquire the fee for themselves because the property was held under a lease contract on terms which they considered more favorable than acquiring the fee title.
The land was worth around $95,000 at the time of the transaction in question, although the petitioner*1297 and Marx did not desire to purchase it for themselves at that price. Rosen borrowed the $225,000 above mentioned from Greenebaum Sons Bank & Trust Company or Investment Company, of which the petitioner was vice president. In addition to the loan of $225,000, Rosen put into the transaction $88,000 of his own money, to make up the contract price of $313,000.
OPINION.
TRAMMELL: The sole issue in this proceeding is whether the profit realized by the petitioner from a certain real estate transaction in 1923, under the circumstances detailed in our findings of fact, is taxable as ordinary income or as capital gain.
The Revenue Act of 1921, in section 206(a), provides that:
(1) The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.
* * *
(6) The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business) * * *.
*893 The respondent contends that when Marx, acting for himself and the petitioner, purchased the fee title in 1923 to the real estate in question, the*1298 leasehold estate theretofore acquired in 1914 by Marx and the petitioner merged in the greater estate; hence, that what they sold to Rosen in 1923 was the fee and not the leasehold estate which had then become merged therein; that since they sold the fee title during the same year in which it was acquired by them, it did not constitute a capital asset within the meaning of the statute above quoted, and that the profit derived from such sale, not being capital net gain, is taxable as ordinary income. The deficiency in controversy was determined by the respondent on this theory.
The petitioner takes the position that the fee title was purchased by Marx for Rosen and was paid for with Rosen's money, which he had obtained as a loan to be secured by a mortgage on the property being purchased; that, therefore, the fee title never at any time belonged to Marx and the petitioner, and could not have been sold by them, since a resulting trust arose in favor of Rosen at the moment Marx took the title for him, and that Marx was merely the conduit through which the title was passed to Rosen. On this theory, the profit derived from the transaction by Marx and the petitioner could only have*1299 resulted from the sale of their leasehold estate, which constituted property held by them for more than two years. Said profit would, therefore, constitute capital net gain and be taxable as such.
The action of the respondent, in our opinion, must be approved. While the petitioner testified at the hearing that the fee title was purchased by Marx for Rosen, "with Rosen's money," which "money all came out of his (Rosen's) loan," it is not at all clear that the money used to purchase the fee was in any legal sense Rosen's money at that time, and we are unable so to find the fact to be.
It appears that Rosen had made some sort of arrangement to procure a loan from a trust or investment company of which the petitioner was vice president, to be secured by a mortgage on the property being purchased by Rosen. The petitioner's testimony seems to indicate that Marx, acting for himself and the petitioner under the terms of their contract with Rosen, purchased the fee title and after the property had been conveyed to Rosen and a mortgage was executed thereon by Rosen to the petitioner's corporation, Rosen then procured the loan and paid to Marx and the petitioner the total consideration*1300 of $313,000 agreed to be paid for the property, which amount consisted of the proceeds of the loan in the amount of $225,000 and $88,000 otherwise furnished by Rosen.
If the facts be as indicated, then the fee title purchased by Marx was not paid for with Rosen's money, since Rosen did not get the money from the loan until after the fee had been purchased by Marx *894 and transferred to Rosen under the contract of sale, and Rosen had executed and delivered the mortgage on the property to the mortgagee.
However that may be, it is not necessary for us to base our decision upon inferences or doubtful conclusions of fact. The parties stipulated in clear and unambiguous language (1) that on February 2, 1923, Marx entered into a contract with Rosen whereby Marx agreed to sell the property in question to Rosen for $313,000; (2) that Marx, acting for himself and the petitioner, then exercised the option to purchase the fee title for $95,000 in accordance with the terms of the lease; and (3) that the owner of the fee title then conveyed title in the fee to Marx, who in turn conveyed title to Rosen, pursuant to the contract of purchase. (See paragraphs 6 and 7 of the stipulation, *1301 set out in our findings of fact hereinabove.)
This stipulation of the parties, we think, is binding upon us, and its plain legal effect can not be avoided or modified by the ambiguous testimony of the petitioner, even if such testimony be construed to be in conflict with the stipulation.
On the other hand, Rosen did not obtain the $95,000 until he acquired the property. This was a part of the $225,000 loan procured by Rosen on the property as security. It is difficult to see how he could have used the property as security for a loan until he first acquired the property. In any event we think the testimony that the $95,000 was paid out of Rosen's money is a conclusion not warranted by this record.
Prior to the purchase of the fee by Marx, acting for himself and the petitioner, the legal title to the building erected by them on the leased premises was in the lessor. Upon the purchase of the fee, the legal title to the whole property vested in Marx, who held same for himself and the petitioner, and the leasehold merged in the fee. This is the generally recognized rule, *1302 , and authorities cited. The same rule prevails in Illinois. ; ; ; ; .
It follows that the profit derived by the petitioner from the transaction in question represents his share of the gain realized from the sale of the fee title, which was purchased and sold within the taxable year by Marx, acting for himself and the petitioner. Hence, said property, to wit, the fee title, did not constitute a "capital asset" within the meaning of the taxing statute, since it had not been held by Marx and the petitioner for more than two years prior to the sale, and the profit derived is not taxable as capital gain, but as ordinary income.
Reviewed by the Board.
Judgment will be entered for the respondent.