*2212 1. A partnership of which the decedent Smith was a member transferred real estate to the petitioner Shannon under an agreement providing that the latter, upon payment of $10 on the date thereof, $1,000 monthly for a term of 20 years, and $10 at the end of such term, in addition to paying the taxes and insurance, would be entitled to a fee simple deed to the premises. Contemporaneously with the agreement the decedent and his partner executed a joint fee simple deed to the property and delivered the same to a third party to be held in escrow. Although the agreement was called a "lease" and the payments to be made thereunder were referred to as "rent," the contract was a conditional sale, and the payments were payments of purchase price.
2. Under a partnership agreement the estate of a deceased member was entitled to receive one-fourth of the net earnings of the firm for twelve months from the first day of the month succeeding death, such payments to be "in full of all interest of the decedent's estate in the business of the firm." The evidence is insufficient to overcome the determination of the Commissioner that the amount received by the estate of a deceased member under this*2213 provision was taxable income.
*28 The Commissioner determined deficiencies in income tax as follows:
| Year | Alexander W. | Alexander W. | D. L. Shannon |
| Smith, Estate | Smith | ||
| 1922 | $ 1,146.13 | $ 439.03 | |
| 1923 | 764.27 | 78.29 | |
| 1924 | 404.20 | 95.07 | |
| 1925 (period Jan. 13 to Dec. 31) | $ 370.43 | 61.71 |
The petitioners allege that the respondent erred in construing an agreement entered into between the petitioner, Shannon, and a partnership, of which the decedent Smith was a member.
It is further alleged that the respondent erred in including in the income of the estate of Alexander W. Smith for the year 1925 an amount of $8,545.52 received by the estate in that year pursuant to the articles of copartnership, which provided that the estate of a deceased member would be entitled to receive one-fourth of the net earnings of the firm for 12 months from the first day of the month succeeding death, such amount to be in full of all interest of the decedent's estate in the business of the firm.
The facts have been taken practically*2214 verbatim from a stipulation of the parties, except that the provisions of the agreement of June 27, 1919, have been paraphrased. The cases were consolidated.
FINDINGS OF FACT.
The petitioners are residents of Atlanta, Ga. Alexander W. Smith died a resident of Atlanta on January 12, 1925, and Alexander W. Smith, Jr., was in due course appointed executor of his estate and is still executor.
In the year 1914 Alexander W. Smith and W. D. Manley, doing business as a partnership under the name of Smith & Manley, purchased certain premises in Atlanta in consideration of $120,000, and *29 assumed a mortgage in the amount of $50,000 as a part of the purchase price, which mortgage was later increased in amount by $10,000.
On June 27, 1919, Alexander W. Smith and W. D. Manley, as parties of the first part, and the petitioner Shannon, as party of the second part, entered into an agreement which provided that the parties of the first part "do hereby grant, demise and let" the above property to the party of the second part, the "lease" to begin on November 1, 1919, and continue until October 31, 1939, unless sooner terminated under other provisions. Shannon agreed to pay to*2215 Smith & Manley $1,000 per month during the full term of 20 years. He also agreed to assume and pay as "additional rental" the interest on the existing loan of $60,000 on the property. The instrument provided that he might at his option reduce or pay off this loan at any time and take transfer thereof to himself. All taxes accruing against the property after November 1, 1919, and the premiums on the fire insurance policies covering the building situated on the property were to be paid as "additional rental" by Shannon. He agreed to keep the building in good repair and to comply with all improvements and changes recommended by the insurance associations. If the property was damaged or destroyed by fire, the insurance collected by the parties of the first part "as owners thereof" was to be applied to the purpose of rebuilding, but no deduction from the payments to be made by Shannon was to be allowed. He, however, was entitled to any recovery for such damage which the parties of the first part might obtain. He was given the right to make such improvements in the building and premises as in his judgment he deemed necessary to the full enjoyment thereof.
The parties of the first*2216 part reserved the right of entry upon the premises. Shannon was given the right to "sublet" the property or any portion thereof during the term of 20 years. The purpose and intent of the agreement was recited to be that Shannon pay all amounts necessary to yield $1,000 per month net to the parties of the first part "as rental." It was further provided that time was of the essence of the agreement and that, in case of Shannon's failure to comply with any of its terms, the contract might be terminated at the option of the parties of the first part "as owners against tenants holding over," and that all rights of the party of the second part would thereupon cease and the contract be void except that it would remain in force after such default to enable the parties of the first part to recover any amounts due and unpaid under its provisions. Upon such default Shannon was obligated to restore the possession of the premises to the parties of the first part in as good condition as when received, ordinary wear and tear excepted. In case Shannon *30 performed all of the obligations of the agreement and in addition thereto paid the additional sum of $10 to the parties of the first*2217 part on October 31, 1939, then they obligated themselves to execute and deliver to him a fee simple deed to the property, subject only to the $60,000 indebtedness or that part thereof which he had not previously paid. The parties of the first part also obligated themselves to execute contemporaneously with the agreement a joint fee simple deed to the property and deposit it in escrow with the Banker Trust Co. of Atlanta to be held by that company for delivery when the agreement had been fully compiled with. In case of the assignment of the contract by Shannon the parties of the first part upon written approval of such assignment obligated themselves to substitute a new escrow deed for delivery to the assignee upon compliance with the conditions of the agreement. Shannon agreed to execute to the parties of the first part his promissory notes, payable to his own order and endorsed in blank, covering the $1,000 payments provided for in the agreement, and he further agreed to deliver such notes to the Bankers Trust Co. so that they might be surrendered and canceled as they were paid in regular course. Attached to the agreement was the following acknowledgment:
The Bankers Trust Company*2218 acknowledges receipt of a duplicate copy of this agreement and of the deed in escrow therein referred to and agrees to receive and account for all payments made to it hereunder, and to hold and deliver said escrow deed in accordance with the terms hereof.
BANKERS TRUST COMPANY,
By L. R. ADAMS, Secty.
In determining the income of the decedent, Alexander W. Smith, for the years 1922, 1923, and 1924 and of his estate for the year 1925, the respondent included therein his share of the monthly payments of $1,000 made by the petitioner Shannon to Smith & Manley. In determining the income of Shannon the respondent disallowed the $1,000 monthly payments to be deducted as rent, but did allow deductions for depreciation of the property.
It was agreed that if the Board should hold that the agreement was a sale, the tax liability of the decedent Smith and of his estate for the years involved, except for the additional issue in the year 1925, would be settled on an installment sale basis under Rule 50, and that the deficiencies asserted against Shannon are correct. If, on the other hand, the Board should hold that the agreement constituted a lease, it was agreed that the income*2219 of Smith & Manley should be redetermined on the basis of an allowance for depreciation to the partnership by allocating $90,000 to the cost of the building to be depreciated at the annual rate of 3 1/2 per cent; and that there are no deficiencies in Shannon's income tax for any of the years in question.
*31 On June 2, 1924, articles of partnership were entered into by Alexander W. Smith, T. A. Hammond, Victor A. Smith, and Alexander W. Smith, Jr., members of the law firm of Smith, Hammond & Smith. Their agreement contained the following provision:
The death of member of said firm shall not require a dissolution between the survivors, but the firm name and business may be coninued by the survivors without interruption, and the estate of the deceased member shall be entitled to receive one-fourth of all the net earnings of said firm as distributed under its current accounts for the period of twelve months from the first day of the month succeeding the date of said death. Payment of said one-fourth of said net earnings as aforesaid shall be in full of all interest of the decedent's estate in the business of said firm.
During the calendar year 1925 and pursuant to said*2220 articles of partnership aforesaid there was paid by the said partnership of Smith, Hammond & Smith to the estate of Alexander W. Smith the sum of $8,545.52. The respondent included this amount in the taxable income of the estate for the year 1925.
During the years in question the petitioners were on the cash receipts and disbursements basis.
OPINION.
MURDOCK: Counsel for the respondent stated that the position of the respondent could not be upheld both in regard to the deficiencies asserted against the decedent Smith and his estate, and the petitioner, Shannon, since in the first instance the agreement was treated as a lease and payments thereunder treated as rent, and in the latter instance it was treated as a sale and the payments made by Shannon were disallowed as deductions for rent. Furthermore, neither Shannon nor the respondent contended that the payments made by Shannon could or should be allocated on the basis of a certain percentage for rent and the balance for purchase price. No evidence was offered to support any such allocation. The case was submitted on the question of wheher the agreement of June 27, 1919, between Smith, Manley, and Shannon constituted a*2221 sale or a lease.
In ; , it is said:
The first great essential in the interpretation of contracts is to arrive at what was the real intention of the parties. * * * It is true tht ther is some language employed in the written contract under review which would seem to indicate that the relation of landlord and tenant was intended to be established thereby, for, among other statements in it, will be found one: "I acknowledge renting from them, with the privilege of buying." Standing alone, this would seem to indicate that there was a contract of rental only between the parties, and that the relation of landlord and tenant was established thereby. * * * It is not every written contract, which uses the word "rent" by way of description of sums to be paid for use of the property, that creates * * * in the case of real estate a case of landlord and tenant.
*32 In ; , the plaintiff delivered a piano to the defendant, the latter executing notes "for value received for the rent." The agreement between the parties provided that the plaintiff*2222 was to retain title to the piano until the notes "given for the use of this piano" were paid. Title was then to pass to the "lessee." It was held that the transaction was a conditional sale and not a contract of rental. The court, quoting from , and citing , said:
It was evidently not the intention that this large sum should be paid as rent for the mere use of the engine for one year. If so, why agree to sell and convey the full title on the payment of the last installment? * * * No words employed by the parties can have the effect of changing the true nature of the contract.
The principle of this case was approved and made applicable to transactions involving real property in ; . In that case the mortgage company "demised, leased and rented" certain property to Mrs. Lytle in consideration of 10 annual payments aggregating $1,260, designated in the contract as purchase money, and 10 annual payments of $275, designated as rent. Mrs. Lytle also agreed to pay*2223 the taxes as "additional rental" during the 10-year term of the "contract of rent." The mortgage company agreed to convey the property to her in fee simple, when all such payments were fully made. Upon default in payments by Mrs. Lytle the mortgage company brought suit. The court held that what is called "rent" may be shown to have been really a part of the purchase money; the amount named as rent which was in excess of a fair and reasonable value for the use of the property could be recovered by Mrs. Lytle; and the relation of the parties under the contract was not that of lessor and lessee, but of vendor and vendee. Cf. ; .
In the instant case Shannon agreed to pay Smith & Manley $10 on the date of the contract and $1,000 per month for the full term of 20 years. He also agreed to pay the taxes and insurance on the property during that period. Upon his compliance with these and the other terms of the agreement and upon his payment of an additional $10 at the end of the term, Smith & Manley agreed that he should have title to the property in fee simple. They also contracted*2224 to execute a joint fee simple deed to the premises on the date of the agreement and deposit it in escrow with the Bankers Trust Co., which they did. On the authority of the above cases the relationship between the parties was not one of lessor and lessee, but of vendor and vendee; the transaction was a conditional sale; and the $1,000 payments made by Shannon were not rent, but purchase price. *33 Cf. S. L. Herold et al., supra;. The execution and deposit of the deed in escrow further strengthens this view, for the grantor has no control or power over the escrow deed and can no more countermand the delivery thereof than of an absolute deed, and it is always in the power of the grantee to entitle himself to the deed and o the estate by performing the stipulated conditions. .
The respondent erred in including the $1,000 monthly payments made by Shannon in the income of Smith & Manley as rent, and under the stipulation of the parties the tax liability of Smith and his estate will be redetermined on an installment sale basis.
In accordance with the above ruling, *2225 and with section 214(a)(1) of the Revenue Acts of 1921 and 1924, Shannon is not entitled to deduct the $1,000 monthly payments from his gross income. He has an equity in the property in question. In equity the vendor, as to land, is the trustee of the vendee, and the vendee is the trustee of the vendor as to the purchase money. . Cf. .
The executor alleges that the $8,545.52 which was received by the estate in 1925 pursuant to the articles of partnership did not represent income of the estate. To support this contention he contends, apparently, that such payment constituted a consideration for the purchase of the decedent's interest in the partnership by the surviving members, and therefore resulted in the receipt of no taxable income by the estate. But even if this be a correct construction of the contract, at least the amount received in excess of the value of the decedent's inerest in the firm at the time of his death would be income taxable to the estate. See *2226 . This amount can not be determined from the record. If, however, the contract may be construed in other ways, in any event, the proof is insufficient to overthrow the determination of the Commissioner. See . Cf. ; .
Judgment will be entered under Rule 50.