Rollingwood Corp. v. Commissioner of Internal Revenue

• Decision Date: 21 June 1951
• Docket Number: No. 12728,12729.,12728
• Citation: 190 F.2d 263
• Parties: ROLLINGWOOD CORP. v. COMMISSIONER OF INTERNAL REVENUE. BOHANNON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

190 F.2d 263 (1951)

ROLLINGWOOD CORP. v. COMMISSIONER OF INTERNAL REVENUE.

BOHANNON v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 12728, 12729.

United States Court of Appeals Ninth Circuit.

June 21, 1951.

Justin M. Jacobs, Garret McEnerney II, James Shaughnessy, San Francisco, Cal., for petitioner.

Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, A. F. Prescott, Carlton

Fox and Hilbert P. Zarky, Sp. Assts. to the Atty. Gen. for respondent.

Before BONE and ORR, Circuit Judges, and FEE, District Judge.

BONE, Circuit Judge.

The question to be determined by the petitions for review of a decision of the Tax Court is whether that court erred in determining that the proceeds from the sale of certain houses by the Rollingwood Corporation should be taxed as ordinary income instead of gains from the sale of capital assets. The applicable statutory provision is Section 117(j) of Title 26 U.S.C.A., as added by Section 151(b) of the Revenue Act of 1942, which provides in part:

"(j) Gains and losses from involuntary conversion and from the sale or exchange of certain property used in the trade or business

"(1) Definition of property used in the trade or business. For the purposes of this subsection, the term `property used in the trade or business' means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(1), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Such term also includes timber with respect to which subsection (k) (1) or (2) is applicable."

The case was presented to the Tax Court on stipulated facts, a summary of which follows:

Prior to December 7, 1941 David Bohannon, one of the petitioners, was engaged in the real estate business; the business of subdividing and selling real property; and in the business of constructing homes. After the outbreak of World War II he disbanded his sales force and devoted his time and attention to war housing projects including the Rollingwood Project. Prior to the incorporation of the Rollingwood Corporation (referred to herein as Rollingwood) Bohannon was induced by the General Manager of the Richmond shipyards to sponsor a single family dwelling project in Richmond, California. Richmond and the surrounding area was a critical war effort area and suffered from a manpower shortage and inadequate housing. Bohannon was aware of the policy of the United States to provide low-cost rental housing so that war workers would not have to buy homes to stay on the job. Bohannon made two applications to the National Housing Administration and to the War Production Board for priorities and commitments to construct a total of 700 houses in Richmond. The Rollingwood Corporation was incorporated on January 9, 1943 as a California Corporation to undertake the construction and management of this project. The corporation issued fifty shares of common capital stock of a par value of $100 per share. Twenty-six of these shares were issued to Bohannon and twenty-four to Ross Chamberlain, Bohannon's partner in other ventures. On May 10, 1945 Rollingwood re-acquired the twenty-four shares issued to Chamberlain.

Rollingwood acquired a tract of land in Richmond and the construction of the project was commenced in the spring of 1943. The applications for commitments and priorities made by Bohannon were assigned to Rollingwood. Certain conditions were imposed on Rollingwood by virtue of these commitments and priorities. Among them were the following: All of the houses had to be rented with an option to the tenant to purchase; the option was to extend for a period of thirty months; no initial payment could be required other than the first month's rent; the tenant could not be obligated to purchase; the houses could not be disposed of other than in accordance with the required lease without the approval of the Director of Industry Operations of the War Production Board.

The work of subdividing and improving the tract and the construction of the 700 houses was performed for Rollingwood by the limited partnership of Bohannon and Chamberlain of which Bohannon and Chamberlain were the only general partners. Each of the houses was constructed under a separate Federal Housing Administration Title VI loan made by the Bank of America National Trust & Savings Association to Rollingwood Corporation. As a condition to making the loans Chamberlain and Bohannon were required individually to personally guarantee each loan until the houses were fully completed and fully insured by the Federal Housing Administration.

The 700 houses were completed by August 14, 1943 and were advertised for rent for $50.00 per month. All the houses, upon completion, were rented to war workers under rent-option agreements which agreements were in accordance with the conditions imposed by the United States. Rollingwood never employed any sales force other than general office employees to sell the houses. No "for sale" signs were ever displayed on the houses or on the Rollingwood Tract. By May 31, 1947 Rollingwood had sold 801 houses at a gross profit of $587,234.36. The total number of houses sold exceeded the number constructed because Rollingwood had re-acquired 81 by "repossession" and 24 by "repurchase." It still owned four houses on May 31, 1947. About the latter date the Rollingwood Corporation was dissolved and all its assets distributed to Bohannon. Bohannon, as transferee of the assets, is liable for whatever deficiencies are found to be due.

The Commissioner treated the gains from the sale of the houses as ordinary income and assessed a deficiency in Rollingwood's income tax for the fiscal years ending in May, 1944, May, 1945 and May, 1947; and an excess profits tax deficiency for the fiscal years ending in May, 1945 and May, 1946. The Tax Court sustained the Commissioner and Bohannon and Rollingwood filed separate petitions for review in this court. The petitions were consolidated on this appeal. Our sole inquiry is whether Rollingwood held these houses primarily for sale to customers in the ordinary course of its trade or business.

The first matter to be considered is the scope of review to be given the question by this court. Petitioners contend that as all of the facts are stipulated this court should reach its own conclusions without regard to the findings and conclusions of the Tax Court. We cannot agree. Rule 52(a) of the Federal Rules of Civil Procedure, 28 U.S.C.A., is plain in its requirement that findings of fact shall not be set aside unless clearly erroneous. It is true that where the facts are not in dispute this court may draw inferences of its own. But the ultimate question is whether the findings are supported by the record. In Pacific Portland Cement Co. v. Food Machinery & Chemical Corporation, 9 Cir., 178 F.2d 541, (a case on which petitioners rely) this court said at page 548: "And the question before us, in this — as in all other cases in which findings are required — is whether they are supported in the record."¹

Coming to the merits the first contention of the petitioners is that the facts necessitate a finding that the houses were constructed primarily for rental purposes. In support of this contention they rely on the facts which show that Bohannon was aware of the "policy" of the United States to provide rental housing for war-workers; that many conditions were imposed on Rollingwood by the United States; that the houses were advertised for rent and actually rented for an average time of twenty-two months under a rental-option agreement which restricted the possibility of sale.

But these facts are not inconsistent with a purpose to sell. It is a logical inference from the above facts that Bohannon and his associate realized that to stay in the building and selling business they would have to engage in housing construction under government priorities and commitments which contained some restrictions. Nor are we convinced that they felt that the rental option agreements would tend...