*244 Decisions will be entered under Rule 50.
The petitioners, as owners in fee simple of unimproved land situated in Maryland, subdivided it into lots upon each of which they built a dwelling house. At or about the time of the completion of the houses on a group of lots the petitioners entered into, with a straw corporation, a ground rental arrangement for a period of 99 years, renewable forever, covering the lots and providing for the payment to petitioners of specified annual ground rents with respect to the lots. Upon finding a purchaser for a house, petitioners entered into a contract of sale with him. The contract specified that the sale was subject to a ground rent on the lot. At the time of settlement petitioners caused the straw corporation to assign to the purchaser of the house its leasehold interest in the lot. By contract, as well as by the laws of Maryland, the purchaser of the house, at any time after 5 years, could redeem the ground rent but was not obligated to do so. The purchaser of the house made no downpayment on the appurtenant lot nor obligated himself to pay any amount with respect to the lot other than the ground rents, taxes, and assessments relating*245 thereto. Held, that the ground rental arrangements in controversy were leases and that there was no sale or exchange of the lots either at the time the leases were created or at the time the houses thereon were sold.
*870 The respondent determined deficiencies in petitioners' income tax and income and excess profits tax as follows:
| Petitioner | Docket No. | Year | Tax | Deficiency |
| Estate of Ralph W. Simmers et al | 44724 | 1946 | Income | $ 3,603.60 |
| 1947 | 45,249.95 | |||
| 1948 | 56,615.90 | |||
| 1949 | 47,545.48 | |||
| Ralph W. Simmers and Son, Inc | 44725 | 1950 | Income and | |
| excess profits | 41,105.82 |
The issues presented are (1) whether the creation by petitioners*246 of certain ground rental arrangements of land providing for what is known as ground rents under Maryland law constituted a sale or exchange of the land and (2), in the alternative, in the event issue (1) is decided in the negative, whether the arrangements under which petitioners sold the houses erected on the land subject to the aforementioned ground rents constituted a sale or exchange of the appurtenant land. Issue (2) was raised by respondent by amended answers in which he asks that in the event he is sustained on this issue we find the deficiencies to be as follows:
| Petitioner | Docket No. | Year | Tax | Deficiency |
| Estate of Ralph W. Simmers et al | 44724 | 1946 | Income | $ 3,603.60 |
| 1947 | 37,490.63 | |||
| 1948 | 63,024.84 | |||
| 1949 | 42,535.28 | |||
| Ralph W. Simmers and Son, Inc | 44725 | 1950 | Income and | |
| excess profits | 34,026.88 |
*871 FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
Ralph W. Simmers died May 23, 1951, leaving surviving him Mary E. Simmers, his wife, who is the duly qualified executrix of his estate. At the time of his death, he and his wife were residing in Baltimore, Maryland. Their income tax returns for the calendar *247 years 1946, 1947, 1948, and 1949 were filed with the collector of internal revenue for the district of Maryland.
During the years 1946 through 1949 Ralph and Mary were engaged in the business of constructing and selling group houses in and about Baltimore.
Ralph W. Simmers and Son, Inc., sometimes referred to herein as the corporation, is a Maryland corporation which was organized on March 4, 1948, under the name of Plymouth Building Co., Inc. On March 23, 1950, its name was changed to its present name. The corporation's income tax return for 1950 was filed with the collector of internal revenue for the district of Maryland.
In 1950 the corporation acquired from Ralph and Mary certain land in fee simple and certain equipment. Thereupon the corporation engaged in the business of constructing and selling group houses in Baltimore County, Maryland, on the outskirts of the city of Baltimore, employing the same method of conducting its operations as that theretofore employed by Ralph and Mary.
In connection with the construction and sale of houses by Ralph and Mary during 1946 through 1949, and by the corporation during 1950, they entered into certain transactions and executed certain*248 instruments of which the following were typical:
In their operations, Ralph and Mary and the corporation acquired unimproved land in fee simple and subdivided it into lots upon each of which they built a dwelling house. At or about the time of the completion of the houses on a group of lots, the petitioners, as lessor, entered into a lease with a straw corporation, as lessee, covering the lots and the improvements thereon for a term of 99 years, renewable forever, and providing for a specified annual rental. This transaction was effected by an instrument which provided, in part, as follows:
Witnesseth, that the said Lessor in consideration of the rents hereinafter expressed to be paid, does demise and lease unto the said Lessee, its successors and assigns, all those * * * lots * * * severally described as follows, that is to say:
[Here appears a legal description of the property.]
* * * *
Together with the improvements thereon, and the rights and appurtenances thereto belonging or appertaining.
To Have and to Hold the said lots of ground unto and to the use of the said Lessee, its successors and assigns, for the term of ninety-nine years, beginning *872 on the day of the date*249 of these presents, it the said Lessee, its succesors or assigns, yielding and paying therefor unto the said Lessor, its successors and assigns, the rent or yearly sum of * * * Dollars ( * *), on each of the lots * * * [described]; in every year during the continuance of this demise and that in even and equal half-yearly installments accounting for the same from the * * * day of * * * over and above all deductions for taxes and assessments of every kind levied or assessed, or to be levied or assessed, on said demised premises or the rents issuing therefrom, and that in such manner as that each one of the aforesaid lots of ground shall be liable only for its own rent.
Provided that if any one or more of said rents shall be in arrear, in whole or in part, at any time then it shall be lawful for said Lessor, its successors or assigns, to make distress therefor upon the premises so in arrear.
And provided also, that if any one or more of said rents shall be in arrear, in whole or in part, for sixty days, then it shall be lawful for the said Lessor, its successors or assigns, to re-enter upon the premises so in arrear and hold the same until all arrearage of rent and all expenses incurred*250 by reason of such non-payment shall be fully paid.
And provided further, that if any one or more of said rents, in whole or in part, shall be in arrear for six months, then the said Lessor, its successors or assigns, may re-enter upon the premises so in arrear and hold the same as if this lease had never been made.
And the said Lessee, for itself, its successors and assigns, covenants with the said Lessor, its successors and assigns, to pay the aforesaid rents, taxes and assessments when legally demandable.
And the said Lessor, for itself, its successors and assigns covenants with the said Lessee, its successors and assigns, that on the payment by it or them of said rents and performance of all covenants herein on the part of the said Lessee, its successors and assigns, to be performed, it, the said Lessor, its successors or assigns, will warrant the property hereby leased against all persons claiming or to claim anything therein, by, through, or under them, or any of them, and that at any time during this demise the said Lessor, its successors or assigns, shall on payment to it of One Dollar as renewal fine, execute and deliver to the said Lessee, its successors or assigns, at its*251 request and cost, a new lease for each one of the above demised lots of ground, which shall not be forfeited for non-payment of the rent thereof as hereinbefore expressed, for another term of ninety-nine years to commence on the expiration of this lease, subject to the same rent and with the same covenants, so that the demise hereby created may be renewable and renewed as to such lot or lots respectively from time to time forever.
In Maryland the rents payable under leases of the character of the foregoing are referred to as "ground rents," the party who owns the legal title to the property and to whom the rents are payable as the "owner of the ground rents," and the party liable for the payment as the "owner of the leasehold." Hereinafter those terms will be used with the foregoing meanings.
Individual houses were sold by the petitioners pursuant to individual contracts of sale. Pertinent portions of a typical contract of sale are as follows:
This Agreement of Sale, made this 21st day of May nineteen hundred and Fifty, between RALPH W. SIMMERS & SON INC. Seller, and JOHN DOE AND JANE DOE, his wife, Buyer.
*873 Witness that the said Seller does hereby bargain and sell unto the*252 said Buyer, and the latter does hereby purchase from the former the following described property, situate and lying in Baltimore County, Maryland. Known as * * * Hardwick Road, improved by two story brick row dwelling. Lot 17 x 100 (more or less.) Subject to an annual ground rent of $ 96.00 for a term of 99 years, renewable forever to be reserved in a lease to be recorded prior to transfer of the property herein described, said rent to be payable in equal semi-annual installments of $ 48.00 each, accounting from the date of the execution of the lease in which said rent is reserved. at and for the price of EIGHT THOUSAND FIVE HUNDRED AND NINETY Dollars ($ 8590.00) of which TWO HUNDRED AND NINETY Dollars ($ 290.00) have been paid prior to the signing hereof, and the balance to be paid as follows:
Eight thousand and five hundred dollars ($ 8500.00) to be financed G. I. Loan.
Two hundred dollars ($ 200.00) of the deposit shall be applied to settlement cost. Any adjustment shall be made at time of settlement. Settlement on or before September fifteenth (15th), 1950.
Window shades, gas range, stationary wash trays and flush in basement included in sale price.
Completion subject to labor*253 conditions and strikes.
Ground rent redeemable in five (5) years.
And upon payment as above provided of the unpaid purchase money, a deed for the property containing covenants of special warranty and further assurance shall be executed at the Buyer's expense by the Seller, which shall convey the property to the Buyer. * * *
Ground rent, * * * water rent, taxes and other public charges against the premises shall be apportioned as of date of settlement, at which time possession shall be given; * * *
Pursuant to the contract of sale, the purchaser made the specified downpayment. At the time of settlement the petitioners caused the straw corporation to assign to the purchaser its leasehold interest in the premises described in the contract of sale. The instrument of assignment recited that the premises were:
one of the lots of ground described in a Lease from * * * [petitioner or petitioners] to the within named Grantor [straw corporation], dated [a stated date] and recorded among the Land Records of Baltimore County, prior hereto.
Together with the buildings and improvements thereupon; * * *
To Have and to Hold the said described lot of ground and premises, unto and to the use of*254 the said parties of the second part [purchasers] * * * their * * * personal representatives and assigns, for all the residue of the term of years yet to come and unexpired therein, with the benefit of renewal forever; subject to the payment of the annual rent of * * * [stated amount] * * * in each and every year.
Simultaneously with the execution of the assignment by the straw corporation the purchaser of the premises executed a mortgage to cover the balance of the purchase price of the premises. The mortgage provided, in part, as follows:
Now, Therefore, This Mortgage Witnesseth, That in consideration of the premises and the sum of One Dollar ($ 1) this day paid, the receipt whereof is hereby acknowledged, the Mortgagor does hereby grant, convey, and assign unto *874 the Mortgagee, its successors and assigns, all the following described property in Baltimore County, in the State of Maryland, to wit:
[Here follows a legal description of the lot.]
Being the same lot of ground described in an Assignment from * * * [straw corporation] to the within named Mortgagor, dated of even date herewith, and recorded or intended to be recorded among the Land Records of Baltimore County, immediately*255 prior hereto.
Together with all buildings and improvements now and hereafter on said land * * *
To Have and to Hold the above described property and improvements unto the said Mortgagee, its successors and assigns, for all the residue of the term of years yet to come and unexpired therein, with the benefit of renewal forever; subject to the payment of the annual rent * * * [stated amount which was identical with the amount stated in the assignment by the straw corporation to the purchaser] in each and every year.
* * * *
The Mortgagor, in order more fully to protect the security of this mortgage, covenants and agrees as follows:
1. Together with, and in addition to, the monthly payments of principal and interest payable under the terms of the mortgage note hereby secured, the Mortgagor will pay to the Mortgagee, on the first day of each month until the said note is fully paid the following sums:
(a) A sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other hazard insurance covering the mortgaged property, plus taxes and assessments next due on the mortgaged property * * *.
In conducting their operations*256 the petitioners in some instances obtained bank loans in order to finance the construction of the houses. In order to secure the repayment of such loans the bank obtained from petitioners a mortgage on the entire tract of land to be improved, together with all improvements made or to be made thereon. As and when houses were sold, the bank, upon repayment of the amount advanced by it with respect to a house, would release from the mortgage the house and the lot on which it stood.
In some instances the petitioners made sales of the ground rents reserved by them in the leases entered into with the straw corporation and later assigned by it to the purchasers of the respective houses which had been built on lots covered by the leases. In making these sales petitioners executed instruments which provided as follows:
This Deed, Made this * * * [date] by and between * * * [petitioners], party of the first part; and * * * [purchaser], party of the second part; ** *
Witnesseth, that in consideration of the sum of Five Dollars ($ 5.00) and other good and valuable considerations, the receipt whereof is hereby acknowledged, the said party of the first part doth hereby grant and convey unto *257 the said party of the second part, its successors, heirs and assigns, in fee simple, all * * * [stated number of] lots of ground situate in Baltimore County, in the State of Maryland, and described as follows, that is to say:
* * * The improvements whereon are known as Nos. * * * Road, and being more particularly * * * described in a Lease from * * * [petitioners] to *875 * * * [straw corporation], dated * * * and recorded among the Land Records of Baltimore County in Liber * * *, Folio * * *, reserving annual ground rents of $ * * *; all payable half-yearly on the * * * [dates], in each and every year; and reference is made to said Lease for the purpose of incorporating herein the * * * descriptions fully set out therein.
* * * *
Together with the buildings and improvements thereupon; and the rights, alleys, ways, waters, privileges, appurtenances and advantages to the same belonging or in anywise appertaining; and particularly the aforesaid rents issuing out of the said lots of ground as aforesaid, payable as aforesaid.
To Have and to Hold, the said lots of ground and premises, and particularly the aforesaid rents, issuing and payable thereout as aforesaid, and the reversions*258 thereto, unto and to the use of the said party of the second part, its successors and assigns, in fee simple, forever; subject, however, to the estate, terms and interest of the said Lessees, their successors and assigns under the aforesaid Leases.
And the said Grantor hereby covenants that it has not done nor suffered to be done any act, matter or thing whatsoever to encumber the property hereby granted; that it will warrant specially the property hereby granted and conveyed, and it will execute such further assurances of said land as may be requisite.
At any time after 5 years from the date of the creation of a ground rent the owner of the leasehold could redeem the ground rent by paying to the owner of the ground rent an amount equal to the annual ground rent capitalized at 6 per cent. Not all ground rents are redeemed upon the expiration of the 5-year period and the owner of the ground rent cannot compel the owner of the leasehold to redeem.
In the event the owner of a leasehold redeemed the ground rent, the owner of the ground rent by a "Deed in Fee" granted and conveyed to the owner of the leasehold, his heirs and assigns, in fee simple, the land therein described with the *259 improvements thereon and the ground rent relating thereto. The habendum clause of such deed reads as follows:
To Have and to Hold, the said lot of ground and premises, and particularly the aforesaid rent, issuing and payable thereout, and the reversion thereto, unto and to the use of the * * * [owner of the leasehold], his * * * heirs and assigns, in fee simple forever; to the end and intent that the leasehold be merged in the fee and the annual ground rent hereby intended to be conveyed be forever extinguished.
None of the ground rents in controversy were redeemed during the years here involved.
The terms of one bank loan to Ralph W. Simmers in February 1947 for construction purposes included a provision that the first 30 ground rents sold from the development should be sold to the bank at the market price. The terms of another loan from the same bank to him in March 1949 for construction purposes included a provision that all ground rents which he might desire to sell were to be offered first to the bank and that the parties were in agreement that the then *876 market price of ground rents was over and above their redemption value.
During the taxable years here involved *260 the petitioners sold certain ground rents, in each instance at prices over and above their redemption value. The profits on these sales were duly reported by petitioners, and respondent has properly reflected in his notices of deficiency the reporting of such income resulting from such sale. Although ground rents are readily salable in and about the city of Baltimore and it would have been possible for the petitioners to have sold all of the ground rents created by them had they desired to do so, nevertheless some of such ground rents so created were not sold or otherwise disposed of during the years in question.
In determining the deficiencies in controversy, the respondent determined that for Federal income tax purposes the creation of a 99-year lease, renewable forever, under Maryland law, in connection with the construction and sale of personal residences, constituted a sale or exchange of the appurtenant lot at the time of the creation of the lease and resulted in taxable gain or deductible loss. He also determined that the value of the ground rents payable under the lease was not less than the capitalized value when created. Accordingly, he determined that petitioners realized*261 gain on all of the ground rents, created by them during the years here involved, at the time of their creation. In each instance, the amount of gain so determined was arrived at by capitalizing the annual ground rent at 6 per cent.
OPINION.
The respondent's position is that his determination is correct and should be sustained. In support of his position he contends that, under the arrangements employed by petitioners in making sale of the houses, they not only sold the houses but intended to, and did, sell the land on which the houses stood; that the ground rent leases by which the petitioners reserved annual ground rents were in substance mortgages to secure the payment of the purchase price of the land and improvements so sold; and that since the ground rents were readily marketable at their capitalized value, the petitioners were in receipt of recognizable taxable gain in the respective amounts and for the years as determined by him. The petitioners take the position that by the contracts of sale entered into by them they did not intend to, and did not, sell the land on which the houses stood, but intended to, and did, sell the houses and at the price specified in the contracts; *262 that the ground rent leases under which they reserved stipulated annual rents were intended to be, and were, what they purport to be, namely, leases, and not mortgages; and that, consequently, during the years in controversy they realized no income other than rents from *877 ground rental arrangements not sold or otherwise disposed of during the respective taxable years.
Where the factual situation of the transactions involved warranted, Maryland ground rental arrangements variously have been held to be security for the unpaid portion of the purchase price of land, , or security for the repayment of a loan or of other indebtedness, , . Likewise, in , affd. , a certain Pennsylvania ground rental arrangement was regarded as security for the unpaid portion of the purchase price of real estate. In *263 (on appeal, C. A. 4), the Maryland ground rental arrangements there involved were held to be leases. The decision in each instance was reached on the basis of the particular facts presented. Despite the suggestion, contained in certain arguments advanced here, as to the desirability of such a rule, there appears to be no uniform rule, or authority therefor, which classifies all ground rental arrangements as leases, or classifies all of them as mortgages, or classifies them as something else. The character of any given arrangement must be determined on the basis of the facts relating thereto.
The respondent's position is grounded on the contention that, under the arrangements employed by petitioners in making sales of houses, the petitioners also sold the land upon which the houses stood. The evidence discloses that petitioners, as owners in fee simple of unimproved land, subdivided it into lots upon each of which they built a dwelling house. At or about the time of the completion of the houses on a group of lots, the petitioners entered into, with a straw corporation, a ground rental arrangement covering the lots and providing for the payment to the petitioners of specified annual*264 ground rents with respect to the lots. Upon finding a purchaser for a house, the petitioners entered into a contract of sale with him. The contract specifically stated that the sale was subject to a ground rent on the lot. Thereafter, at the time of settlement, the petitioners caused the straw corporation to assign to the purchaser of the house the straw corporation's leasehold interest in the lot. Simultaneously with the assignment by the straw corporation, the purchaser executed a mortgage on the premises to cover the unpaid portion of the purchase price of the house. Although payment in full of the mortgage note would relieve the purchaser of all his obligations under the mortgage, he would still be liable for the payment of the annual ground rent. Concededly, by the terms of the contract of sale, as well as under the laws of Maryland, the ground rent was redeemable after the expiration of 5 years. However, the purchaser had no obligation, contractual, *878 statutory, or otherwise, by which he was required to redeem, either upon the expiration of the 5-year period or at any other time thereafter. He had a right to redeem after 5 years but the right was one which he*265 might, or might not, exercise as he saw fit. In the event the purchaser elected to redeem, he was given a deed in fee to the land.
Respecting the relationship of an owner and of a lessee to land subject to a ground rent lease in Maryland, the Court of Appeals of Maryland in , said:
In a ground rent lease the owner of the land leases it to the lessee for a certain period, with a covenant for renewal upon payment of a small renewal fine, upon the condition that a certain sum of money shall be paid, and that if the payment is in default for a stipulated time the lessor may re-enter and avoid the lease. The estate of the lessee is considered as personal property, but in practical effect the relation of the lessee to the property is that of owner of the land and improvements thereon, subject to the payment of the annual rent and all taxes on the property. ; ; . Prior to 1884*266 the rents reserved by ground rent leases were not redeemable by the lessee unless expressly so stipulated in the original lease; but in that year and by later statutes the Legislature provided for the conditions upon which the lessee, in subsequently made ground rent leases, should have the right to redeem and thus become the owner of the property in fee simple. Code 1939, art. 21, §§ 110, 111, 115.
In view of the foregoing statement by the court, we think it is apparent that the purchasers of houses from petitioners did not acquire ownership in fee simple of the lots appurtenant to the houses prior to redemption. Prior to the time of redemption, they were, as to the lots, lessees whose leases were subject to being avoided in event of default in payment of the ground rent or other items for a period of 6 months. As was pointed out in , affd. , certiorari denied , a sale is a transfer of property for a fixed price in money or its equivalent and in a sale (as well as in an exchange) the title to the property is absolutely transferred. We have*267 not been pointed to any case in Maryland where ground rental arrangements like or similar to those involved here were held to be sales of the land. Nor have we found any.
In addition to the foregoing, we have been unable to find, after a careful examination of the record, that at any step in any of the various transactions here involved any purchaser of a house made any downpayment on the appurtenant lot or obligated himself to pay any amount with respect to the lot other than the ground rents, taxes, and assessments applicable thereto. Nor are we able to find that any purchaser of a house in any way treated the transactions, either separately or collectively, as constituting transactions looking toward the acquisition of the lot in such circumstances that the ground rental *879 arrangements are to be considered to be the equivalent of purchase money mortgages. In our opinion, the ground rental arrangements were no more than leases. As such, they were productive of income only to the extent that rents were received. Accordingly, we conclude that the respondent erred in determining that the creation of the ground rental arrangements in controversy constituted sales or exchanges*268 of the lots at the time of the creation of the leases and resulted in taxable gain or loss to the petitioners.
By amended answers, the respondent has asked, in the alternative, and in the event we hold that he erred in determining that a sale or exchange of land occurred at the time the ground rental arrangements were created, that we find that the arrangements under which the petitioners sold the houses erected on the land constituted a sale or exchange of land. In view of what has been said above with respect to the preceding issue, we think the alternative request of the respondent must be denied.
Decisions will be entered under Rule 50.