Austin v. CIR, 16097.

• Decision Date: 09 February 1959
• Docket Number: No. 16097.,16097.
• Citation: 263 F.2d 460
• Parties: Robert E. AUSTIN and Marian H. Austin, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

263 F.2d 460 (1959)

Robert E. AUSTIN and Marian H. Austin, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16097.

United States Court of Appeals Ninth Circuit.

February 9, 1959.

Robert E. Austin, Wendell H. Davis, Los Angeles, Cal., for petitioners.

Charles K. Rice, Asst. Atty. Gen., Loring W. Post, Lee A. Jackson, Melva M. Graney, C. Guy Tadlock, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before BARNES, HAMLIN and JERTBERG, Circuit Judges.

JERTBERG, Circuit Judge.

This case involves deficiencies in income tax returns of petitioners assessed for the years 1950, 1951 and 1952.

The sole question on this appeal is whether certain real estate (vacant unimproved lots) sold by petitioners during the years above stated was held by petitioners primarily for sale to customers in the ordinary course of petitioners' trade or business.

The Tax Court answered the question in the affirmative, holding that petitioners were engaged in the business of selling real estate, and that the gains realized from the sale of such property was subject to taxation as ordinary income. The petitioners contend that the decision of the Tax Court is clearly erroneous, and that the gains realized from the sale of such property are entitled to capital gain treatment under the provisions of Section 117 of the Internal Revenue Code of 1939, as amended. 26 U.S.C. 1952 Edition, § 117. Section 117(a)(1) excludes from the term "capital assets" held by a taxpayer property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Section 117(j) excludes from the definition of property used in the trade or business property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

Ordinarily, whether specified property is held by the taxpayer primarily for sale to customers in the course of his trade or business is a question of fact. Many decisions of this Circuit so testify. Bistline v. United States, 9 Cir., 260 F.2d 77; Bistline v. United States, 9 Cir., 260 F.2d 80; United States v. Beard, 9 Cir., 260 F.2d 81; Pool v. Commissioner, 9 Cir., 251 F.2d 233; Achong v. Commissioner, 9 Cir., 246 F.2d 445; Stockton Harbor Industrial Co. v. Commissioner, 9 Cir., 216 F.2d 638; Rollingwood Corp. v. Commissioner, 9 Cir., 190 F.2d 263.

The conclusion, however, that certain property is held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business is subject to reversal if the conclusion is clearly erroneous, or where, on the record as a whole, it is clear that a mistake has been made. Bistline cases, supra; United States v. Beard, supra; Curtis Co. v. Commissioner, 3 Cir., 232 F.2d 167. This Court has never set up formulas of fact as rules of law for this type of case. Several tests or factors have been considered by the courts to indicate whether certain properties were held by a taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business, such as the nature of the acquisition of the property, the frequency and continuity of sales over an extended period, the nature and the extent of the taxpayer's business, the activity of the seller about the property, and the extent and substantiality of the transactions. In final analysis, however, each case must be decided upon its particular facts, and the presence of any one or more of these factors may or may not be determinative of a particular case. It is rare indeed that one will find any precedent value in applying the decision of one case to the facts of another case. At the most, other cases decided by the courts on this subject may be persuasive or suggestive of the approach of the courts to cases where the facts may be somewhat similar.

The facts before the Tax Court in this case are not in dispute. The controversy arises as to the proper conclusion which should be drawn from the admitted facts. Under such circumstances, it is the duty of this Court to examine the entire record in order to determine whether the conclusion of the Tax Court is clearly erroneous.

The facts disclose that Robert E. Austin (hereinafter referred to as the petitioner) is a lawyer by profession, who has engaged in the private practice of the law continuously since 1912, and at all times relevant to this case has maintained his law offices in downtown Los Angeles, California, and where he spent his time in the practice of the law. Petitioner Marian H. Austin is the wife of the petitioner. Her occupation was that of a housewife, who had but little connection with the acquisition and sale of real property. Since 1929 petitioners have resided in Manhattan Beach, California, which is located nineteen miles south of Los Angeles. Petitioner maintained no office at Manhattan Beach, either in his home or elsewhere in that city, and the telephone number of petitioners' residence was always listed under the name of Marian H. Austin. Petitioner's name was never listed in the Manhattan Beach telephone directory. Neither petitioner was ever the holder of a license as a real estate agent or broker, nor the holder of any occupational license to engage in the real estate business. Since 1932, the petitioner has been active in the civic affairs of Manhattan Beach. He has been a member of the school board. He helped to organize the local water district, and has been a member of its board of directors. He represents his water district on the board of the Metropolitan Water District of Southern California.

In connection with the activities of petitioner in the acquisition of real property, the record discloses that petitioner first became the owner of property in Manhattan Beach in 1918, which was transferred to him in payment for legal services. From 1918, petitioners owned either a cabin or a home in Manhattan Beach, where they established their residence in 1929, at which time the population of Manhattan Beach was approximately 5,000.

Following World War II, people became interested in Manhattan Beach, and a large amount of real estate development there occurred after 1945. The next activity of petitioner in the acquisition of real property was in 1943, when petitioner and others caused the county tax collector to put on sale a substantial number of beach lots, then owned by the State of California, acquired for nonpayment of taxes. The tax collector would not then list the lots for sale unless the person requesting they be offered agreed to make opening bids. Under this arrangement, petitioner caused 30 or 40 lots to be on the list for sale. All of the lots were taken by other bidders except two. Petitioner acquired title to one lot, which he sold in 1953. At the same sale, petitioner bid in a lot for a friend, which five years later was sold by the tax collector again for non-payment of taxes.

In 1944 petitioner in two transactions acquired five lots. Three of them were received in payment for legal services, and were located in Riverside and San Bernardino Counties. Taxes were never paid by petitioner on these lots, and they were subsequently sold for non-payment of taxes. Two other lots acquired in that year were located across the street from where petitioners were then residing, and were purchased to protect the character of the neighborhood.

In 1945 and 1946, petitioners acquired 134 lots. 102 of the lots acquired during these two years were sold to petitioners by the City of Manhattan Beach. Certain property located in Manhattan Beach was owned by the State of California and was not on the city tax rolls. In order to list the property on the city's tax rolls it had to be privately owned, and the officials of the city were desirous of bringing about this result. Accordingly a plan was devised in 1944, whereby the city could acquire the property and then sell it to private parties. This plan entailed expenditures in amounts greater than the officials of the city were prepared to undertake. To aid in carrying out their plan, petitioner and three others agreed to pay the city any loss it might suffer as a result of this plan. The city tried and held unsuccessful auction sales, and called on the guarantors to make good their guarantee. In accordance with this agreement, petitioner purchased 102 lots. This arrangement was finalized in 1945, and deeds were delivered in 1945 and 1946. Nine of the 134 lots above mentioned were acquired in 1945. These purchases were connected with petitioner's membership in the Manhattan Beach Property Owners Association, and that association's interest in acquiring a park. Two of the lots acquired by petitioners in 1946 were located across the street from where they then resided and were purchased to protect the character of the neighborhood. Twenty-one of the lots were acquired in 1946. These acquisitions came about in the following manner: A client of petitioner was involved in a joint venture concerning real property. At the death of the client, petitioner was retained by the deceased's family to represent them in the disposition of the joint venture property. In the course of winding up the joint venture, while acting on behalf of the family, said petitioner entered the highest bid for the property. Petitioner paid the amount bid to the joint venture, and the property was sold to him.

In 1947 petitioner acquired 16 lots. The acquisitions of real estate in 1947 are as follows: Four lots which adjoined property already owned by them were acquired to provide automobile parking facilities if needed. In the same year, petitioners acquired two tracts of land which...