*2010 Petitioner entered into an agreement to lease certain property in which he and his wife owned a three-fourths interest for a term of 99 years, with option to renew, and to sell to the lessee the buildings standing on the property for a cash consideration of $100,000. Pursuant to such agreement petitioner executed a lease providing that the lessee would keep the buildings insured for the benefit of the lessor, pay all taxes and assessments levied on the land and buildings, maintain buildings on the property of a replacement value of not less than $200,000, and pay to the lessor stipulated annual rentals. The lessor held a lien on the buildings for the payment of rent and at the end of the lessee's occupancy the buildings on the premises were to revert to the lessor. Held that the petitioner did not sustain a deductible loss upon the sale of the buildings but that the purported sale of the buildings and the execution of the lease constituted a single transaction. Held, further, that, upon the evidence, $75,000 of the $100,000 received from the lessee in 1923 is taxable income to the petitioner and his wife in that year.
*588 The respondent has determined a deficiency in the joint return filed by petitioner and his wife for the calendar year 1923 in the amount of $59,981.09. The petitioner alleges that the respondent erred in disallowing a loss claimed upon the sale of certain buildings and including in gross income the amount of $100,000 representing, as the petitioner claims, the consideration received upon the sale of the buildings.
FINDINGS OF FACT.
The petitioner is an individual residing at Cleveland Heights, near Cleveland, Ohio.
During the year 1923 the petitioner, through his attorney, John D. Fackler, began negotiations for the disposition of certain real estate in the City of Cleveland, known as the Kensington property, *589 in which the petitioner and his wife owned a three-fourth's interest. The property in question was located at East 63rd Street and Euclid Avenue. It had a frontage of approximately 113 feet on Euclid Avenue and a depth of 300 feet. On the front there was a three-story mercantile building with stores*2012 on the ground floor and hotel accommodations on the other floors. It had been constructed in the year 1917. In the rear there was another old house and a garage.
In April, 1923, the petitioner's attorney sent out a number of letters, identical in form, to the leading real estate dealers in Cleveland authorizing them to dispose of the Kensington property upon certain terms therein named. The letter reads as follows:
Confirming our conversation of to-day, you are authorized to dispose of the Kensington property, which consists of slightly more than one hundred and thirteen (113) feet on Euclid Avenue with a depth of three hundred (300) feet on the following terms:
1. The building to be sold for One Hundred and Seventy-five Thousand Dollars ($175,000.00) cash.
2. The land to be leased for ninety-nine (99) years, upon the following terms:
a. For the first three (3) years, Ten Thousand Dollars ($10,000.00) per year;
For the next two (2) years, Fifteen Thousand Dollars ($15,000.00) per year;
For the next five (5) years, Twenty Thousand Dollars ($20,000.00) per year, and for the balance of the term, Twenty-five Thousand Dollars ($25,000.00) per year; all of said rents*2013 to be payable quarterly in advance and in gold coin of the United States of America of the present standard of weight and fineness at Lessor's option.
b. Lessee agrees to pay all taxes and assessments on the land and building during the term of the lease and in case the State of Ohio or any of its political sub-divisions shall during the term of the lease enact legislation making the income of the Lessors subject to taxation, the Lessee shall, as additional rent, pay Lessors the amount of any such income tax computed as though the income derived from this property were the only income of Lessors but without credit thereon for exemptions, deductions or other allowances provided by law.
c. Lessee to keep property insured for the benefit of the Lessors. Lessors to have a lien on the buildings for the payment of rents and additional rents and the lease to contain the other convenants usual in ninety-nine (99) year lease. Lessee to take subject to present outstanding sub-leases.
d. Lease to be renewable at the end of ninety-nine (99) years for a further period of ninety-nine (99) years on a four per cent. (4%) appraisal of the land only but with a minimum rent of Twenty-five*2014 Thousand Dollars ($25,000.00) per year.
3. Rents, taxes, insurance and operating charges to be adjusted on pro rata basis as of date of lease.
A commission of Twelve Thousand Five Hundred Dollars ($12,500.00) will be paid in case you secure a purchaser and lessee on the terms as herein outlined, the first ground rents received by the Lessors to be applied to the payment of the commission. Dr. Crile reserves the right to terminate this agency at any time; to employ other brokers; or to change the price and terms on thirty (30) days' notice. No preliminary contract shall be entered into nor shall any down payment be taken on the property without the written approval of Dr. Crile.
*590 Under date of June 16, 1923, the petitioner received a letter in the nature of an offer from the East Sixty-Third Euclid Co., an Ohio corporation, reading as follows:
The undersigned hereby offers to enter into a ninety-nine year lease for the property owned and controlled by you at the corner of East 63rd Street and Euclid Avenue upon the terms and conditions of the lease hereto attached. In addition to the rents therein specified we agree to pay you the sum of One Hundred Thousand*2015 Dollars ($100,000) for the buildings now on said premises, Five Thousand Dollars ($5,000) of which is handed you herewith, and the balance of Ninety-five Thousand Dollars ($95,000) is to be payable on or before August 1st, 1923, with interest at the rate of six per cent (6%) per annum thereon from July 1st, 1923.
We understand said premises are subject at the present time to a first mortgage to The State Mutual Life Insurance Company and we require that said mortgage shall either be paid or its priority waived in favor of our lease. All rents, prepaid rents, deposits as security for rents, water rents and deposits, insurance, taxes, assessments and other operating expenses are to be adjusted as of July 1st, 1923, on a pro rata basis, the undersigned agreeing to take over all unexpired fire insurance and other insurance covering the premises as of July 1st, 1923. The taxes and assessments payable for the last half of the year 1922 shall be paid by the lessor at or prior to August 1st, 1923. An amount equal to one-half of the taxes and assessments payable for the year 1922 shall be deducted from the first quarter's rent payable under said lease, in consideration of the assumption*2016 by the lessee of the payment of the taxes and assessments for the year 1923 and thereafter. We agree in case of our failure to pay the balance of the purchase price herein provided for the buildings now on said premises within the time herein provided that the Five Thousand Dollars ($5,000) deposited with you herewith to apply on the purchase price shall be absolutely forfeited to you as liquidated damages.
In the event of your acceptance of this offer we desire that you deposit in escrow with the Central National Bank Savings and Trust Company of Cleveland two original executed copies of said lease to be delivered to the undersigned upon our execution of the same and upon payment of the balance of the purchase price for the buildings and upon payment of the first quarter's rent with such additions or deductions as may be made by reason of the adjustment of income, taxes and insurance as herein provided. You will also deposit with said Bank in escrow the original tenants' leases for said premises assigned to this Company to be delivered at the time of closing the transactions, said leases and the dates of expiration thereof being as follows:
1. The Automotive Gear Works, expires*2017 February 28, 1925.
2. Joseph Feldman, expires December 31, 1926.
3. The Wills Sainte Claire Company of Ohio, expires March 31, 1926.
4. W. A. Harshaw, d.b.a. The Motor Accessories Company, expires December 31, 1926.
5. John J. Turner, d.b.a. Alemite Lubricator Company, expires December 31, 1926.
6. S. & B. Friedman, expires December 31, 1926.
7. Morris Follman, expires December 31, 1926.
Attached hereto is a duly certified copy of a resolution of the Board of Directors of this Company.
This offer of lease is based upon our understanding that at the time of the execution of the lease the title to the property is to be good in you and free of encumbrances of every kind except current taxes for which provision is *591 heretofore made in this offer, and at the time of the delivery of the executed copies of the lease by you, there is to be furnished to us an abstract of title or statement of title, made by either The Guarantee Title and Trust Company or The Land Title Abstract & Trust Company, showing the title to be good in you and free and clear of encumbrances except said taxes, it being understood that if the mortgage to the State Mutual Life Insurance*2018 Company has not been cancelled, it will be satisfactory if the same is duly waived in favor of said lease by proper instrument of waiver executed by the State Mutual Life Insurance Company.
THE EAST SIXTY-THIRD EUCLID COMPANY,
By (Signed) IRA J. WARNER, Pres.
FRANK G. MOONEY, Secretary.
[SEAL.]
CLEVELAND, OHIO, June 16, 1923.
In the event of the acceptance of this offer I hereby unconditionally guarantee the execution of the aforesaid lease by said The East Sixty-Third Euclid Company and the payment of the balance of the purchase price for the buildings as in the above offer provided within the time therein provided.
(Signed) JOSEPH LARONGE
The petitioner's acceptance of this offer is noted at the bottom of the letter in the following words:
I hereby accept the foregoing offer.
(Signed) GEORGE W. CRILE
Pursuant to the above agreement the petitioner, as lossor, and the East Sixty-Third Euclid Co., as lessee, executed a lease effective July 1, 1923, which provided in part as follows:
1. ON BEHALF OF THE LESSOR.
That the Lessor has let and leased and does hereby lease to the said Lessee, the following described premises, to-wit: [Follows a*2019 description of the plat.]
TO HAVE AND TO HOLD the above described premises, together with the privileges and appurtenances thereunto belonging, subject, however, to the terms conditions and covenants hereinafter expressed and declared, unto the said Lessee for and during the full term of ninety-nine (99) years, commencing on the first day of July, A.D. 1923, and ending on the thirtieth day of June, A.D. 2022.
* * *
2. ON BEHALF OF THE LESSEE.
a. That during the term of this lease Lessee will at such bank or trust company in the City of Cleveland, Ohio, as may from time to time be designated by ten (10) days' written notice from the Lessor pay to the Lessor by way of rent for said premises for the first three (3) years of said term, the sum of Ten Thousand Dollars ($10,000.00) per year;
For the next two (2) years of said term the sum of Fifteen Thousand Dollars ($15,000.00) per year;
For the next five (5) years of said term the sum of Twenty-one Thousand Five Hundred Dollars ($21,500.00) per year and for the balance of said term the sum of Twenty-five Thousand Dollars ($25,000.00) per year. * * *
* * *
c. Lessee agrees at all times during the term hereof, except*2020 during any period required for reconstruction of buildings as herein provided, to keep the *592 buildings now on said premises as well as any building or buildings hereafter erected thereon, in constant good condition and repair and insured against loss or damage by fire with responsible insurance companies, duly authorized to transact business in Ohio, and satisfactory to the Lessor, in an amount not less than eighty per cent. (80%) of the insurable value thereof, but Lessee shall not be required in any event to carry for the benefit of the Lessor more than Two Hundred Thousand Dollars ($200,000.00) of fire insurance on any such building. * * *
* * *
It is however, expressly agreed that the Lessee may at any time by mortgage or deed of trust (or other proper instrument of similar nature) mortgage, encumber or hypothecate its interest in the premises and in this lease to secure any actual debt or to meet any contractual right, claim or liability, but such mortgage or deed of trust or other instrument shall in every case be subject to the first and paramount lien of the Lessor herein provided, and further subject to the rights of the Lessor in case of default by the Lessee*2021 in the manner in this lease provided to forfeit and terminate this lease and the rights and interest of the Lessee hereunder and in the buildings and improvements upon the demised premises.
* * *
b. That in case the Lessee shall at any time desire to remove any building or buildings constructed thereon, for the purpose of replacing the same by the construction of another building or buildings, it may do so after having first delivered to the Lessor a good and sufficient bond with sureties to the satisfaction of the Lessor in the penal sum of One Hundred and Fifty Thousand Dollars ($150,000.00), conditioned for the construction of a new building upon said premises suitable to the class and nature of business carried on in the vicinity and at a cost of not less than Two Hundred Thousand Dollars ($200,000.00), and within the time herein provided for the reconstruction of any building destroyed by fire, and having done so, the Lessee may thereupon remove any building or buildings and convert the material thereof to its own use. Lessee agrees at all times thereafter to keep and maintain on said premises in constant good condition and repair building or buildings having a fair replacement*2022 value of not less than Two Hundred Thousand Dollars ($200,000.00). It is understood and agreed, however, that should the Lessee desire to remove that portion of the building now on said premises consisting of the brick building originally used as a dwelling house and located about one hundred (100) feet North of Euclid Avenue for the purpose of replacing the same with another building, it shall have the right to do so after having first delivered to the Lessor a good and sufficient bond with sureties to the satisfaction of the Lessor in the penal sum of Five Thousand Dollars ($5,000.00), conditioned for the construction of a new building in place of the building removed, having a value of not less than Twenty-five Thousand Dollars, ($25,000.) and within the time herein provided for the reconstruction of any building destroyed by fire, and having done so, the Lessee may thereupon remove such old dwelling house and convert the material thereof to its own use.
* * *
d. The Lessor shall at all times during such term have a lien upon the leasehold estate hereby created, and all buildings and improvements upon said premises for the payment of all amounts of rents, taxes and public*2023 charges hereby provided for, as well as for the due performance and observance of all of the Lessee's covenants and obligations hereunder.
* * *
f. *593 This lease is expressly made subject to the condition that the Lessee shall perform all covenants and agreements herein set forth to be performed by it and if at any time the rent, taxes, assessments or public charges aforesaid shall become in arrears and unpaid for a period of ninety (90) days after becoming due or other time of default herein fixed, or if any of the remaining covenants hereof devolving upon the Lessee shall not be performed as herein agreed within such period of ninety (90) days after the time as herein stipulated, the Lessor may at any time thereafter on his election and after thirty (30) days' written notice to the Lessee (which notice may be given during such ninety day period), enter upon said premises and take immediate possession thereof and bring suit for and recover all rents, taxes, assessments, public charges, payments or other amounts to become due and payable under the terms hereof which shall have accrued up to the time of such entry and thenceforth from the time of such entry this lease*2024 shall become void to all intents and purposes whatsoever, and all interest of the Lessee shall cease, and all improvements upon the premises shall be forfeited to the Lessor without compensation therefor to the Lessee.
* * *
h. Conditional upon the faithful performance by Lessee of all of the covenants and agreements herein contained, Lessee shall have the option to extend this lease at the expiration hereof for a further period of One Hundred and Ninety-nine (199) years upon the same terms and conditions herein enumerated, except that the ground rent for such extended period shall be the sum of Twenty-five Thousand Dollars ($25,000.00) per annum, payable in quarterly instalments in advance, but notice of the exercise of said option shall be given in writing by the Lessee to Lessor not less than one year prior to the expiration of the term thereof.
i. Conditional upon the Lessee not being in default hereunder, and conditional upon this lease being in full force and effect, the Lessor hereby grants to the Lessee the option to purchase the demised premises at any time between July first, 1938, and June thirtieth, 1948, at and for the sum of Five Hundred Thousand Dollars ($500,000.00) *2025 * * *.
Subsequent to the execution of the lease the lessee issued a series of bonds which were guaranteed by the Guardian Savings & Trust Co., an Ohio corporation, as trustee. It gave to the trustee on July 1, 1923, as security for the bond issue, a trust deed of all of its rights and interest in and to the leasehold and all improvements on the premises.
During the year 1923 the lessee paid to the petitioner and other owners of the Kensington property $100,000 in cash, the amount named as the purchase price of the buildings in the above agreement of June 16, 1923.
During the year 1928 the lessee defaulted in the payment of annual rent, whereupon, under the provisions of the lease, all of its rights and interests in the leasehold ceased and all improvements upon the premises were forfeited to the lessor.
The depreciated cost to the owners at July 1, 1923, of the buildings and improvements on the Kensington property was $159,960.89. In the joint return filed by them for the calendar year 1923, the petitioner and his wife claimed the deduction of an amount representing *594 their loss upon the sale of their interests in the buildings. The respondent has disallowed*2026 the deduction claimed and has included the $100,000 received by the owners of the property in the year 1923 in their income of that year.
OPINION.
SMITH: The petitioner alleges that the respondent erred in computing his tax liability for the year 1923 in disallowing the deduction claimed on account of a loss upon the sale of buildings, and in including in taxable income the amount of $100,000 received in that year as consideration for the sale of the buildings.
The respondent contends that there was not in fact a sale of the buildings in question which, for income-tax purposes, may be considered a separate and closed transaction resulting in a profit or loss to the owners, but that the purported sale of the buildings and the lease of the premises must be considered as a single transaction. He contends that the $100,000 received from the lessee in the year 1923 is in the nature of a cash bonus paid for the leasehold.
We think that the respondent's contention must prevail to the extent that the sale of the buildings was not a separate transaction resulting in a loss to the petitioner. The evidence indicates that the parties themselves, the petitioner and the East Sixty-Third*2027 Euclid Co., did not intend a sale of the buildings as a separate transaction from the rental of the land.
In the agreement under which the transaction was completed, that is, the offer and acceptance of June 16, 1923, the East Sixty-Third Euclid Co. offered first "to enter into a ninety-nine year lease for the property owned and controlled by you at the corner of East 63rd Street and Euclid Avenue upon the terms and conditions of the lease hereto attached," and to pay in addition to the rents specified in the lease $100,000 for the buildings on the premises. The lease referred to, parts of which are shown above, provided that the lessor should have a lien on the buildings for the payment of rents and that the lessee would keep the buildings insured for the benefit of the lessor, and that at the expiration of the lease the buildings would revert to the lessor. The lessee was not privileged to remove the buildings without giving bond to the lessor in the amount of $150,000 to guarantee the construction of other buildings upon the premises at a cost of not less than $200,000. In other respects the lease appears to conform to the usual and ordinary type of long-term lease of similar*2028 property. It is not shown that any deed or other instrument of conveyance was ever executed in respect to the buildings.
The facts here seem indistinguishable from those in . In that case the petitioner owned certain real estate in Minneapolis, Minn., and -
On *595 December 27, 1906, petitioner executed and delivered to Richard M. Bradley, Arthur Lyman and Russell Tyson, trustees, a warranty deed in regular form to the improvements known as the Syndicate Block and situated on the westerly half of block 87 of the City of Minneapolis. This deed evidenced receipt of "one dollar and other good and valuable considerations." One recital of this deed was:
This deed is made contemporaneously, and as a part of one transaction, with the execution and delivery by the party of the first part to the parties of the second part of a ground-lease of the lands above described for a term of one hundred and thirty (130) years, from the first day of January, 1907, to and including the 31st day of December, 2036.
On the same date petitioner, as lessor, and these three trustees mentioned, as lessees, executed an indenture whereby the*2029 use of the westerly one-half of block 87, referred to above, was demised to the lessees for a period of 130 years from that date, in return for considerations stated to be (a) the purchase of the building by the lessees under the deed referred to, (b) an agreement to pay a yearly rental of $61,000 during the term of the lease, and (c) various covernants binding the lessees to pay all taxes and public charges; to keep the property free of liens; to keep the building fully insured for the benefit of the lessor, the proceeds in case of destruction to be used for replacing it; to keep the premises in repair, and if demolished by lessee, then to replace with a building of a value of not less than $500,000; and, finally, to return the premises at the conclusion of the lease term with improvements maintained, or reconstructed as agreed upon, and with a then value of not less than $500,000, these improvements to be the absolute property of the lessor.
The foregoing is taken from our findings of fact in that case. The respondent was there contending that the sale of the building and the lease of the land were separate and distinct transactions and that since the petitioner sold the building, *2030 which on its books represented a cost of $640,000, for $250,000 cash, it thereby sustained a loss of $390,000, and invested capital was accordingly reduced by that amount. We held that the transaction was in fact, in so far as it affected the petitioner's liability, a lease of the entire property, including the land and building, for a cash consideration of $250,000 and a yearly rental of $61,000. In our opinion we said:
However, on examination of the deed and lease executed on December 27, 1906, and consideration of all the circumstances of the transaction carried into effect thereby, we are convinced that these can not be considered as two transactions with a separate and individual loss or gain in each as the case may be. We are unable to accept respondent's theory of a loss incurred when the transaction shows a result entirely inconsistent with such conclusion. * * *
In the transaction in question this petitioner received $250,000 in cash, a fixed net income of $61,000 per year for a term of 130 years, and a reversion of the property at the end of that time, and the total cost to petitioner of the property involved was $836,229.04. The value alone of the net income contracted*2031 for, capitalized at 6 per cent, was in excess of $1,000,000, and yet we are asked to conclude that a loss of $390,000 was sustained.
*596 Petitioner insists that the deed and lease executed on December 27, 1906, were merely incidents of one transaction in which it disposed of the use of its property for the term of 130 years for a cash payment of $250,000 and an annual rental of $61,000 per year.
It is an unquestioned rule of construction that two instruments executed in carrying out the same transaction must be read and construed together in determining the intent of the parties, and that such intent will be given effect irrespective of the particular names given the individual instruments by the parties or the particular form in which they are drawn. ; ; ; ; ; *2032 ; ; ; ; ; .
* * *
In the case before us it can not be questioned that these two instruments were executed as parts of one single transaction. Both instruments by express recital bear witness to this fact. The execution of the deed and the payment of $250,000 cash is expressly stated by the lease to be one of the considerations for its execution. We must, under the rule of construction laid down, construe these instruments as if they were one, and the ultimate interest received by the grantees under both, so construed, must be considered as represented by the total of the considerations received under each by petitioner.
* * *
By this transaction petitioner has, in fact, only surrendered the use and occupancy of its property for a term of 130 years, at the end of which time it will stand possessed of it again. The total consideration to it for this transaction was $250,000 cash and a yearly rental of $61,000. The*2033 identical result, in so far as benefits and ultimate interest received are concerned, would have been effected by the execution of a lease to land and buildings, with the same privileges and restrictions stated, for a cash bonus of $250,000 and a yearly rental of $61,000 * * *.
In the instant case the petitioner's beneficial interest resulting from the transaction was substantially the same as if he had executed a similar lease of the entire property for a term of 99 years for a cash consideration of $100,000 and yearly rentals as stipulated in the lease. We conclude, therefore, that the petitioner did not sustain a deductible loss upon the sale of his interest in the buildings in question in the taxable year 1923. Nor is there evidence upon which we can determine that a loss was sustained upon the transaction as a whole. We do not know the cost to the petitioner of his interest in the land exclusive of the buildings or the fair rental value of the land at the time the transaction was made.
In , we did not decide the question of the taxpayer's liability for income tax upon the cash consideration for the lease in the year when received, *2034 since the transaction occurred in a year prior to any taxable period under consideration. In the case at bar the cash consideration was received by the petitioner during the taxable year under consideration and the petitioner alleges *597 that the respondent has erroneously included the amount thereof in his income of that year. Section 213(a) of the Revenue Act of 1921 provides in part that gross income -
includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items (except as provided in subdivision (e) of section 201) shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section*2035 212, any such amounts are to be properly accounted for as of a different period * * *.
Regardless of the method of accounting employed by the petitioner, which is not shown in the evidence before us, we think that $75,000 (three-fourths) of the $100,000 received by him from the lessee in the year 1923 is taxable income to him and his wife in that year.
Judgment will be entered under Rule 50.