Smith v. Dunn, 15368.

• Decision Date: 30 June 1955
• Docket Number: No. 15368.,15368.
• Citation: 224 F.2d 353
• Parties: Arthur W. SMITH and Mrs. Arthur W. Smith, v. Charles H. DUNN, formerly Acting Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Fifth Circuit

224 F.2d 353 (1955)

Arthur W. SMITH and Mrs. Arthur W. Smith, v. Charles H. DUNN, formerly Acting Collector of Internal Revenue.

No. 15368.

United States Court of Appeals Fifth Circuit.

June 30, 1955.

Harold E. Smith, A. H. Benton, Atlanta, Ga., Smith & Webb, Atlanta, Ga., of counsel for appellants.

C. Guy Tadlock, Ellis N. Slack, Sp. Assts. to Atty. Gen., H. Brian Holland, Asst. Atty. Gen., A. F. Prescott, Sp. Asst. to the Atty. Gen., James W. Dorsey, U. S. Atty., Slaton Clemmons, Asst. U. S. Atty., Atlanta, Ga., for appellee.

Before HUTCHESON, Chief Judge, and TUTTLE and CAMERON, Circuit Judges.

CAMERON, Circuit Judge.

Income taxes for the years 1949 and 1950 are in dispute here, and the particular question is whether gain realized during those years on the sale of fifty-one subdivided lots is taxable as long term capital or ordinary gain. The case was tried before judge and jury, and each party moved for a directed verdict. The district court sustained the motion of the defendant collector and directed the jury to find a verdict for him. The appeal is from the judgment entered on that verdict.

Appellants, taxpayers, on joint federal income tax returns, reported income from the sale of these lots as long term capital gain. The collector determined that this was improper and that the income was derived from sales made in the ordinary course of appellants' business and was therefore subject to full tax liability.¹

Appellant, Arthur W. Smith, alone was actively engaged in business, and he will be referred to as appellant inasmuch as his wife was joined only because the two filed joint returns. At the time of the sales and of the trial and for over fifty years he had been a practicing architect. He had never engaged in the real estate business. He had no office except that in which he practiced his profession.

The land in question originally comprised approximately ninety-five acres inherited by appellant from his father, his sister and his brother. It had been in the family more than fifty years. In 1946, while the appellant and his brother each had a one-half interest in the land, it was decided that this real estate holding should be liquidated. At that time the tract was undeveloped except for two roads running through it. With the intent of liquidating the property by an economically advantageous sale, the brothers decided that it should be subdivided into lots and they employed an engineer, who made the surveys and the subdivision and his plat is in evidence.

After consulting with one or more real estate brokers the two brothers finally contracted with Mr. Grady Duffee of Decatur, Georgia to handle the sale of the lots. He made suggestions concerning the size of the lots and the best manner for making the subdivision. A sale price of the lots was discussed and tentatively agreed upon, and the evidence fails to disclose that the matter of price was ever discussed thereafter.

Lots adjacent to existing roads were first sold and thereafter two additional streets were opened, water mains installed and other improvements made, the total cost of which was approximately $32,000.00. That figure was comparable to the value at which the taxpayer took the lots over from the tax returns of his father, who died in 1923, and his brother, who died in 1947, but not to the actual value of the lots. There were originally one hundred forty-four lots, and ninety-two of them had been disposed of prior to 1949 and the taxpayer had treated the profits realized as capital gain and the government had not challenged his action.

Except for a compilation introduced by a revenue agent and a stipulation of counsel, the evidence consisted of testimony given by appellant and the real estate agent, Mr. Duffee.

That uncontradicted evidence showed that the entire property was turned over to Duffee in 1946 to sell according to his own plans. He was to have ten percent commission, to advertise according to his own ideas, to fix his own prices in line with the general agreement had at the outset, to pay all expenses and to remit to the taxpayer the net balance. This plan was followed throughout the connection thus made and including the tax years in controversy here. Duffee employed his own salesmen, decided upon and arranged for his own advertisements in his own name, developed his own clientele, made sales to customers sought out and chosen by him alone. While the taxpayer had the general right to pass upon sales prices, the evidence fails to show that he ever challenged the actions of the real estate broker.

The broker conducted a continuous advertising campaign, advertising taxpayer's property along with other property handled by the broker. The taxpayer engaged in no activity during the period involved except to sign the deeds prepared by Duffee and presented to him for signature.

At the conclusion of the evidence and after an extended colloquy with counsel, the district court sustained the collector's motion for a directed verdict, holding that the facts established that the taxpayer was in the real estate business, so that the income from the sale of the lots was ordinary income rather than capital gain².

We do not agree with the concept of the law as set forth by the court in this charge and in what the court said in the extended colloquy with counsel preceding it. We think that the court below failed to grasp the import of the holdings of this court and laid too much stress on some of the phases of the evidence and left out of view other important principles established in our holdings.

The land involved here was a capital asset unless, under the exclusions defined in the Internal Revenue Code, it was "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business". If we should consider the words of this exclusion alone, the problem would be relatively simple because appellant held this property solely by reason of the fact that he inherited it, and not primarily for sale to customers, his trade and business was architecture and its ordinary course related alone to that profession. But the decided cases have invested the quoted language with complexity in a process dedicated to searching out and defining the purposes of Congress, but resulting in ascribing to the exclusion a breadth and scope not inhering in the words used.

We have been called upon to construe that language in a large number of cases dealing mostly with lands, and have laid down general principles governing the decision of each individual case according to its own facts.³ The ingredients of the tests as evolved and defined in our decisions are these:

What was the nature and character of the taxpayer's title to the property, the reason, purpose and intent of the acquisition and ownership and the period of its duration; and whether the property was held primarily for investment or as a part of the taxpayer's "stock in trade", i. e., as property bought, held and sold for profit?

What was the vocation of the taxpayer at the time of the sales and prior thereto, whether a real estate broker or engaged in some similar or allied business, having in mind that he may have more than one business; and considering whether the taxpayer maintained only one office and that for his main vocation, and whether his engagement in the additional business was separable from his investment in the property?

What was the extent of the taxpayer's activity and "busyness", and whether the additional business was an occupational undertaking to which he habitually devoted time, attention or effort with substantial regularity; and, if the activities were conducted through a representative, whether those activities were carried on by the representative as a part of his own business and at his own expense or primarily in behalf of the taxpayer, and particularly the character and degree of supervision or control exercised by the taxpayer over the representative?

What were the extent and nature of the efforts to sell the property with the view of determining whether, in their fundamental aspects, these efforts amounted merely to rendering the investment assets more attractive and hence more salable or to an engaging in the business of developing unimproved real estate for income-producing purposes? In making this determination it is proper to consider the number, extent, continuity and substantiality of sales, and whether such sales were in the ordinary course of the taxpayer's business or were carried on independently of the taxpayer's business; the extent of subdividing, developing and advertising to increase sales, and the pressure exerted upon prospective purchases, and whether those activities smacked more of a legitimate liquidation of capital assets or active sales promotion for profit, having in mind that the mere fact of liquidation or the intent of the taxpayer alone are not determinative.

The statements appearing in the record indicated, as we have pointed out, that the district court considered some of these ingredients but left out others entirely. A consideration of the testimony begins with the conceded fact that the taxpayer found himself with an inherited asset which he decided to liquidate, and set about to liquidate according to his ideas of the best method for bringing in the greatest return. His profession took all of his time, in fact, was so exacting that his health was depleted and he was forced to give less time to it and to receive less income. He had no experience in the real estate business, never intended to enter such a business and never...