MAJOR REALTY CORPORATION & SUBSIDIARIES v. Commissioner

• Decision Date: 13 July 1981
• Docket Number: Docket No. 4871-75.
• Parties: Major Realty Corporation & Subsidiaries v. Commissioner.
• Court: U.S. Tax Court

42 TCM (CCH) 373

1981 TC Memo 361

T.C. Memo. 1981-361.

Major Realty Corporation & Subsidiaries v. Commissioner.

Docket No. 4871-75.

United States Tax Court.

Filed July 13, 1981.

James A. Urban and Bradley J. Davis, 1601 C.N.A. Tower, Orlando, Fla., for petitioners. Thomas K. Purcell, for respondent.

Memorandum Opinion

IRWIN, Judge:

Respondent determined a deficiency of $141,953 in petitioners' consolidated Federal income tax for the taxable year ending May 31, 1972.

Due to concessions by both sides, the only issues presented for our consideration are: (1) Whether the transactions herein described between petitioners and the Edward J. DeBartolo Corporation for the transfer of 175 acres of land constituted a completed sale or was, in substance, an executory contract for the sale of land or an option; (2) whether property was held by petitioner for investment or for sale to customers in the ordinary course of petitioners' trade or business.

All of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

Petitioners Major Realty Corporation (hereafter Major or petitioner) and its wholly owned subsidiaries are corporations with their principal place of business in Orlando, Florida at all relevant times. Petitioners timely filed a consolidated income tax return for the taxable year ending May 31, 1972 with the Internal Revenue Service Center, Chamblee, Georgia. Petitioners filed their return using the accrual method of accounting and the fiscal year ending May 31. References to petitioner hereafter are solely to Major.

Major is a publicly held corporation incorporated in Delaware on July 27, 1959. It was formed for the purpose of engaging in a general real estate business, including purchasing, leasing or otherwise acquiring, owning, developing, using, holding, selling, conveying, exchanging, mortgaging and financing real property. Major initially intended to focus primarily on the acquisition and sale of large, unimproved tracts of real estate and the development of tracts with others for residential or other purposes. By February 1960 Major had acquired 87 unimproved tracts of land in Florida totaling approximately 65,000 acres. Major had property held for sale with a cost basis of $21,819,008 and $15,032,438 at its fiscal years ending May 31, 1962 and 1965, respectively.

In early 1967 Major hired R.F. Raidle as its new president. His initial objectives were to dispose of properties other than the Orlando properties (a 2,500 acre tract, hereafter referred to as the Major Center property), to improve Major's financial condition, and to prepare a master land use plan for the development of the Major Center property, based in large part upon the expected impact of Disneyworld. This land was part of Major's original 65,000 acre holding and was its principal asset as of 1971. The plan called for construction of a regional retail shopping center (hereafter the Mall), with approximately 1.5 million feet of retail floor space, office buildings, industrial parks, high density residential units and major accommodations for travelers.

Discussions concerning the Mall were begun with the Edward J. DeBartolo Corporation (hereafter DeBartolo)¹ by October 1967.² DeBartolo's customary method of acquiring and developing shopping mall sites was through wholly-owned subsidiaries. Usually, DeBartolo would provide an initial capitalization of $5,000 to the subsidiary and the subsidiary would then execute a lease or contract for the lease or purchase of a shopping mall site and take title to or possession of the property. At other times, the leases or contracts would initially be executed by DeBartolo and assigned to the subsidiary. Neither DeBartolo nor any of its subsidiaries has ever defaulted on any contract for the purchase of a mall site.

On March 31, 1968, Major, as transferor, and DeBartolo, as transferee, entered into a Contract of Sale and Purchase for:

A tract of land of not less than 100 acres and not more than 175 acres located at the Southwest corner of the intersection of Kirkman Road and Orlando-Vineland Road. The exact dimensions of the tract shall be selected by Buyer, and approved by Seller, prior to closing, and verified by survey furnished by Seller. The Eastern boundary shall be the West right-of-way line on Kirkman Road, the Northern boundary shall be the South right-of-way of Orlando-Vineland Road, and the West boundary shall be parallel to Orlando-Vineland Road.

The purchase price was $20,000 per acre, based upon the final number of acres as determined by the Buyer and approved by the Seller. A sum of $25,000 was deposited in escrow as earnest money.

Paragraphs 3.A. and 3.B. of the contract contained the following covenants:

A. Of Seller. Seller covenants that it is vested with fee simple title to the subject property and has power to sell the same. Seller further covenants that the said property has been duly annexed to the City of Orlando, that City utilities, including City sanitary sewerage and water, are or will be available to the site without cost to the developer (other than on-site improvements and standard connection charges) and that the property, by closing or within one hundred twenty (120) days thereafter, will be zoned so as to permit the use of the property as a retail shopping center.

B. Of Buyer. Buyer covenants that it is acquiring the property for development and use primarily as a regional mall type retail shopping center. It further covenants that it will commence construction of a retail shopping center on said property no later than June 1, 1969; provided, however, that said date can be extended until a date not later than June 1, 1970, if, prior to June 1, 1969, Buyer furnishes to Seller evidence that it has secured leases or letters of intent from at least one major department store for stores in said shopping center, and a construction schedule providing for construction to commence not later than June 1, 1970.

Paragraph 7 of the contract dealing with defaults provides in part:

If, prior to closing, the Seller fails to perform any of the covenants of this Contract, the aforesaid deposit shall be returned to the Buyer, on demand. If the Seller fails to perform any of the covenants of this Contract required to be performed after closing, the Buyer may elect to rescind this transaction and to receive back from the Seller all sums previously paid to the Seller. * * * If Buyer fails to perform its covenant to commence construction on or before June 1, 1969 (or June 1, 1970), Seller shall have sixty (60) days thereafter in which to elect to rescind this transaction, in which event Buyer agrees to reconvey the property to Seller and to turn over to Seller all feasibility studies, engineering studies and architectural plans obtained by Buyer up to that time, in consideration of which Seller will return to Buyer all sums previously paid by Buyer to Seller, and cause Buyer's note and mortgage to be satisfied and discharged.

At the time the contract of sale and purchase was executed, DeBartolo considered the covenants imposed upon it under paragraph 3.B. to be acceptable. While Edward J. DeBartolo, the President of DeBartolo, thought that the initial deadline was optimistic, based upon his personal relationship with one of the directors of Major Realty Corporation, he never thought that there would be a problem in getting an extension of the time requirements under the contract if DeBartolo could not comply with the covenants within the time stated.

Following the execution of the contract on March 31, 1968, representatives of DeBartolo made extensive efforts to secure tenants for the shopping mall through personal contact and correspondence and by accompanying prospective tenants to the site. Such prospective tenants included, among others, Jordon Marsh, Iveys, Sears, Penneys, Montgomery Ward and Woolworth. In addition, numerous businesses and individuals wrote to Major expressing an interest in acquiring space as tenants in the proposed Mall. These inquiries were forwarded to DeBartolo. At all times up to eventual reconveyance of the property by DeBartolo to Major, DeBartolo intended to use the property to construct a shopping mall, and from March 1969 up to the reconveyance of the property, DeBartolo was actively seeking an extension of time within which to comply with the covenants of paragraph 3.B. of the contract of sale and purchase.

The contract between DeBartolo and Major also gave DeBartolo the right to assign its interest in the contract to a subsidiary or affiliated corporation. The assignment would release DeBartolo from all its further obligations under the sales contract. On April 16, 1968, DeBartolo assigned the contract to its wholly-owned subsidiary, Florida Mall Corporation (hereafter Florida Mall). Florida Mall then released DeBartolo from all further obligations under the contract. At this time, Florida Mall had a capitalization of $5,000.

The March 31 contract further provided that the seller "shall also pay the cost of Owner's Title Policy in the amount of the purchase price if the amount of the purchase price (including the purchase money note) is paid in full by June 1, 1970."

On April 22, 1968, counsel for DeBartolo and Florida Mall wrote to Lawyers Title Insurance Corporation requesting a title insurance binder on the property to be purchased from Major. The letter further advised that although Florida Mall planned to have title to the property transferred to it from Major, the title policy would not be purchased or issued until the purchase price was paid. Because the commencement of construction had not been definitely determined, no reliable estimate of when the policy would actually be issued could be given. On May 21, 1968, Lawyers Title Insurance Corporation issued its interim title insurance binder and on May 22 forwarded the binder to DeBartolo. Two...