Boomhower v. United States

• Decision Date: 23 December 1947
• Docket Number: Civ. No. 329.
• Citation: 74 F. Supp. 997
• Parties: BOOMHOWER v. UNITED STATES.
• Court: U.S. District Court — Northern District of Iowa

74 F. Supp. 997

BOOMHOWER v. UNITED STATES.

Civ. No. 329.

District Court, N. D. Iowa, Central Division.

December 23, 1947.

Leslie L. Boomhower and N. Levinson, both of Mason City, Iowa, for plaintiff.

T. E. Diamond, U. S. Dist. Atty., of Sioux City, Iowa, Wm. B. Danforth, Asst. U. S. Dist. Atty., of Mason City, Iowa, and Ruppert Bingham, Sp. Asst. to the Atty. Gen., for defendant.

GRAVEN, District Judge.

Case involving question as to whether profit made by a lawyer from the sale of lots is taxable as ordinary income resulting from the conducting of a real estate business. The plaintiff, Leslie R. Boomhower, in this action seeks to recover additional income tax assessments made upon him for the years of 1941 and 1943 and paid by him under protest. The transactions involved are sales of lots of land owned by the plaintiff which he claims brought him only profits gained from the conversion of capital assets and are hence taxable only as defined in 26 U.S.C.A. Int.Rev.Code, § 117. That Section provides in part as follows: "Capital assets. The term `capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23(l), or an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, or real property used in the trade or business of the taxpayer; * * *"

The United States claims these profits to be ordinary income from the conducting of a real estate business by the plaintiff and hence are taxable as provided in 26 U.S.C.A. Int.Rev.Code, § 22. That Section provides as follows: "`Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever."

The plaintiff denies that he has ever conducted such a business, alleging that he has, since graduating from Drake University Law College in 1914, been engaged solely in the practice of law.

At all times since 1920 the plaintiff has been the trustee of a trust which has been within the probate jurisdiction of the District Court of Iowa in and for Cerro Gordo County. One George W. Hanks was beneficiary of the trust during his lifetime with remainder to certain other beneficiaries. As trustee the plaintiff had the duty of investing the funds of the trust. In May 1928 he invested a portion of the funds of the trust in a first mortgage on a twenty-acre tract of unimproved pasture land located within the corporate limits of Mason City, Iowa. The 1940 population of Mason City, Iowa, was 27,080. Subsequently the owners of the tract defaulted in the payment of the mortgage. The plaintiff as trustee foreclosed the mortgage. No redemption was made and in 1932 a sheriff's deed was issued to the plaintiff as trustee. The tract so acquired produced very little income and was an undesirable asset for the trust. The plaintiff tried to find a buyer for the tract owned by the trust but his efforts were unsuccessful. Upon the request of those beneficially interested in the trust and pursuant to court authorization the plaintiff paid the trust the full amount of its investment in the tract and in May, 1936, became the owner of the tract individually.

After acquiring title to the tract individually, the plaintiff continued to try to find a purchaser for it but his efforts were again unsuccessful. The plaintiff then attempted to liquidate his investment by selling off parts of the tract without platting or subdividing it. He sold two lots by a metes and bounds description when he learned that a city ordinance prohibited further sales without platting. A concern known as the Fullerton Lumber Company was then engaged in the retail lumber business in Mason City and was desirous of stimulating the building of houses. The Fullerton Lumber Company and a local contractor made arrangements under which the Fullerton Lumber Company would furnish the materials for houses and the contractor would build them for sale. The Fullerton Lumber Company and the contractor were of the view that the tract owned by the plaintiff would be a good site for their building operations. Some time prior to 1939 the Fullerton Lumber Company and the contractor proposed to the plaintiff that they would build some houses on the tract and that as each house was sold the plaintiff would be paid for the lot upon which it was built. The Fullerton Lumber Company and the contractor were acting independently and the plaintiff had no interest in their operations. The only interest of the plaintiff was to receive the purchase price of the lot involved. The record is not clear as to how many homes were built by the Fullerton Lumber Company and the contractor on the tract or how many of the lots involved in the present case were sold in connection with the operations of the local contractor and the Fullerton Company. The Fullerton Lumber Company and the contractor had no option on any lots or particular number of lots. In certain cases the plaintiff sold lots directly to parties who then made their own arrangements with builders and lumber companies.

Because of the city ordinance the plaintiff could not sell any more lots either to customers of the Fullerton Lumber Company and the contractor or to anyone else without platting. In 1939 the plaintiff platted a five-acre section of the tract known as Broadlawns Addition which was accepted by the City of Mason City on May 1st, 1939. In 1940 he platted a second five-acre section known as Broadlawn Second Addition which was accepted by the City of Mason City on June 30, 1940. In 1946 he platted a third ten-acre section known as Broadlawn Third Addition which was accepted by the City of Mason City on July 15, 1946. The last plat was made subsequent to the tax periods now under consideration. The ground included in this last plat was subsequently conveyed by the plaintiff to his children and he no longer has any interest in it. It was a requisite to the acceptance of the plats by the City of Mason City that streets be laid out, brought to grade and improved and that sewage, water and other facilities be made available. In Iowa such improvements may be made by a city and the costs assessed specially against the benefited property or a property owner may arrange for such improvements himself and pay the cost directly. The plaintiff paid for such improvements directly and added to the purchase price of each lot its proportionate share of the actual costs of the improvements. The lots involved in this case were in Broadlawns Addition and Broadlawns Second Addition. These two additions comprised thirty-six lots, two of which had been sold prior to platting. All of the lots in those additions have now been sold except four and one-half which are still owned by the plaintiff. The present case has to do with the sale of seven of the lots sold in 1941 and one lot sold in 1943. No sales of lots were made in 1942. Apparently some of the lots involved in this case were sold in connection with the housebuilding operations of the Fullerton Lumber Company and the contractor. Some of the lots involved were sold for cash and some on the installment plan. The profit on the sale of the lots in question constituted only a small part of the taxpayer's income for the year 1941 and an insignificant part of the taxpayer's income for the year 1943.

Some two or three years ago a sign was placed upon the section known as Broadlawns Third Addition stating that lots were for sale and giving the telephone number of the plaintiff. No lots had been sold in Broadlawns Third Addition up to the time it was conveyed to the plaintiff's children. The local daily paper from time to time carried on what is referred to as "booster" campaigns for the purpose of acquainting the public with the industries of Mason City. One of the industries which was publicized from time to time along with others was the building industry. The plaintiff was solicited to purchase and did purchase a one-half page advertisement in the edition of the local daily for October 31, 1939, advertising lots for sale in Broadlawns Addition. That advertisement was run in a so-called booster edition of the paper in the section related to home building activities. In 1941 the local daily solicited the plaintiff to purchase space in the page of the paper known as the industrial page. Under the arrangement the paper was to run a write-up of Broadlawns Addition on the industrial page, and, in addition would run a smaller advertisement for thirty-five weeks. In accordance with the agreement the paper published a write-up of Broadlawns Addition in its issue of May 12, 1941, and carried a small advertisement in regard to the lots on the industrial page of the paper for thirty-five weeks commencing with the issue of February 10, 1941. In the issue of the paper of June 13, 1941, in the section relating to the building industry, there was a quarter page advertisement publicizing...