Thompson v. CIR, 20074.

• Citation: 322 F.2d 122
• Decision Date: 26 September 1963
• Docket Number: No. 20074.,20074.
• Parties: Fritz THOMPSON and Dora M. Thompson, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

322 F.2d 122 (1963)

Fritz THOMPSON and Dora M. Thompson, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 20074.

United States Court of Appeals Fifth Circuit.

August 20, 1963.

Rehearing Denied September 26, 1963.

Robert Edwin Davis, Wentworth T. Durant, Dallas, Tex., for petitioners.

Michael I. Smith, Atty., Dept. of Justice, Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Crane C. Hauser, Chief Counsel, Rollin H. Transue, Atty., I.R.S., Washington, D. C., for respondent.

Before HUTCHESON, Circuit Judge, LUMBARD, Chief Judge,^* and BROWN, Circuit Judge.

JOHN R. BROWN, Circuit Judge.

On Taxpayer's¹ appeal from an adverse judgment of the Tax Court, two questions are presented. The first is the old, familiar, recurring, vexing and ofttimes elusive² problem of the treatment of proceeds of sales of subdivided lots as capital gains or ordinary income. Second, a completely novel problem never before presented and unlikely ever to arise again has to do with the treatment of a parity price support loan as income in the year received even though the loan is redeemed prior to the expiration of the tax year, and the wheat is not sold by the Taxpayer-farmer until the following year. 26 U.S.C.A. § 77.

I.

As to the capital gains issue, the tax years involved are 1957 and 1958. The lots sold were the near tail end residue of a 100-acre tract in Borger, Texas, which Taxpayer admittedly bought as an investment in 1942 for the sum of $5,000.00. We are spared the necessity of discussing in any detail the background of this purchase or his extensive activities in the sale of a large number of lots up through 1949 since this is set out with factual accuracy in the Court of Claims' adverse decision covering the years 1946-1949. Thompson v. United States, 1956, 136 Ct.Cl. 671, 145 F.Supp. 534.³

Borger, Texas, was an oil boom town, perhaps on the wane. But it was hemmed in by four substantial landowners. Taxpayer through a judicious purchase got a 100-acre tract from one of them in 1942. Though concededly purchased as an investment, including the prospect of ground rents from a large number of squatters living in shanties, it was not long until Taxpayer commenced to sell lots. In the meantime with the ill wind of war, fortune struck Borger. In August 1942 the Government began construction of the synthetic rubber plant operated by Phillips Petroleum Company. By 1943 there was an influx of construction workers and an unexpected housing shortage. Anticipating the imminent enactment of a city ordinance requiring the filing of dedication plats for all property within the city being sold or leased for residential purposes, Taxpayer filed the first one as to Unit 1 in 1944.⁴

Thus began what Taxpayer now describes in conclusory terms as the "liquidation" of his investment. Among the early purchasers in Unit 1 were many of the so-called squatters. Within a year or so, Taxpayer was besieged by a representative group of respectable business leaders who importuned him to open up much needed residential areas for homesites suitable to their station. Taxpayer left it to this group to indicate the area preferred by them, and this resulted in the dedication of Unit 2 (see note 4, supra). Without a doubt, disposing of the lots was a simple matter for more than one-half of the lots in Unit 2 were subscribed to before the plat was filed. But parenthetically it warrants a comment that merely because business was good, indeed brisk, does not make it any less in the ordinary course of such a good business. Unit 3, platted and dedicated in 1947 (see note 4, supra) likewise resulted from circumstances similar to those surrounding Unit 2. In March 1948, the southern-most 1/6 of the tract was platted as Unit 4.

These instruments of dedication (note 4, supra) also contained extensive restrictions as covenants running with the land, and showed in precise detail the areas covered by each Unit, the blocks and lots by number dedicated streets, utilities and so forth. As to Units 1, 2 and 3, Taxpayer spent a considerable sum on improvements.⁵

However characterized as capital gains versus ordinary income, the sales were frequent both in numbers⁶ and equally so in the generation of income and net profits.⁷ As to the two tax years in question, they were also substantial.⁸ That they were smaller in number but larger in dollar value was due to at least two factors. The first, and foremost, was that the land was nearly all gone. As dawn broke on 1957, only 37½ lots were left. By 1958, out of the 387 lots originally platted, 376½ had been sold. Second, Unit 4 was dedicated almost exclusively to commercial business properties. On the other hand, Unit 4 from the standpoint of topography required more extensive (and expensive) filling in and grading, all of which was done by purchasers, not Taxpayer. In contrast, Taxpayer had paid for grading of Units 1, 2 and 3, plus sidewalks. Improvements to Unit 4 were confined principally to abutting paved streets, assessments for which had been paid by Taxpayer.

While sales were brisk, it is unquestioned that there was no organized sales program. There was never any advertising. No signs were posted. No real estate agents were used or paid. Taxpayer had no other real estate which he was selling (or purchasing for resale). Prices were fixed for lots generally on a pretty uniform price per front foot. He never haggled. He stated his price. If the price was agreed to, he sold; otherwise not. These real estate activities took little of his time.⁹

The record, however, hardly bears out the insistence of the brief that Taxpayer was just a farmer. He was a man of many parts, obviously an important figure in the community with a sense of civic responsibility as the very dealings in these lots reflected. Equally obvious, he was a good businessman who had a variety of business interests. Income came from such activities as County Commissioner for a number of years, a farmer, owner of rental apartments, cattle purchases and sales, oil and gas rentals, and the like. In the fifteen-year span (1944-1958) out of gross income of nearly one million dollars, nearly 50% came from these real estate transactions, less than 15% came from farming.¹⁰ We emphasize this not because his fortuitous 1942 purchase of this tract for $5,000 penalizes his right to claim capital gains. Rather, it is to point out that he was a man of many (and successful) businesses. One may well have been that of real estate sales whether he thought himself in it or not.

On these facts which we have severely capsulated, the Taxpayer asserts that under the standards laid down in our cases, not the least of which is Cole v. Usry, 5 Cir., 1961, 294 F.2d 426, and Barrios' Estate v. Commissioner, 5 Cir., 1959, 265 F.2d 517, the Tax Court decision is not merely clearly erroneous, but positively wrong as a matter of law. Taking these decisions and the factors set forth with much precision in Smith v. Dunn, 5 Cir., 1955, 224 F.2d 353, Taxpayer applies a color test to match element by element against the record of this case. Absence of advertising, solicitation, high pressure sales methods, or improvements such as installation of streets, plus an awesome record of sales continuity in some are emphasized. After the completion of this countdown, Taxpayer urges that, as in those decisions, we must hold these sales to be capital gains as a matter of law.

In this prolific field, it would be bootless to attempt a case-by-case distinction. It would be foreboding and unrewarding.¹¹ We described this process in these words. "We are aware of the decisions holding that various factors here present did not require a determination that property was held primarily for sale to customers in the ordinary course of trade or business. But each case must be decided on its own peculiar facts. * * * Specific factors, or combinations of them are not necessarily controlling." Wood v. Commissioner, 5 Cir., 1960, 276 F.2d 586, 590.

We think it fraught with less hazards for us to emphasize affirmatively the things we regard as significant. The first of these is that while technically only the tax years 1957-1958 are involved an understanding of the transactions in those years not only permits, but demands, an understanding of all that went on before. The Government overwhelmingly proved out of the mouth of Taxpayer himself that except for insignificant differences, such as sidewalks in Units 1, 2 and 3 and no sidewalks in 4, grading in the former but none in the latter, what the Taxpayer was doing in 1957-1958 was exactly the same as he had been doing for the previous 13 years. It is true that the number of sales was small in 1957 and 1958, but the reason is equally plain — either the "liquidation" program or the "sales" program was so successful that the shelves were nearly empty.

With 1957-1958 tied into 1945, into 1947, or to any of the other years, Taxpayer's own testimony was more than sufficient for the Tax Court to draw the critical inference, legal, factual or both. By his own words, he reaffirmed what his conduct had already demonstrated that he never "refused to sell" any lots, was "always willing to quote a price," was "always willing to sell if the applicant met" his price, and his "whole purpose of ever subdividing was to sell * * * what I could sell."

Essential as they are in the adjudication of cases, we must take guard lest we be so carried away by the proliferation of tests that we forget that the statute excludes from capital assets "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." 26 U.S.C.A. § 1221. Describing his activities in 1944 through 1958 and characterizing this mode of selling as substantially unchanged over the years, the Taxpayer left no doubt about his activities. He candidly testified that "after the subdividing of any of the property, naturally it was...