Brown v. Comm'r of Internal Revenue
| Citation | 54 T.C. 1475 |
| Decision Date | 14 July 1970 |
| Docket Number | Docket No. 2841-68. |
| Parties | ROYCE W. BROWN AND PATTY L. BROWN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Charles B. Lutz, Jr., and John K. Speck, for the petitioners.
J. C. Linge, for the respondent.
T entered into two contracts to purchase separate undeveloped tracts of land. In each instance the contract of sale provided for conveyance of the property to a trustee. The trust agreement recited that it was the intention of the buyer to subdivide the property. The trustee undertook to advance funds for development of the property, and the sellers subordinated their liens for the unpaid purchase price to the trustee. Provision was made for delivery of deeds to T by the trustee of portions of the properties selected by T in proportion to payment of the purchase price and repayment of advances. Between 7 and 9 months after execution of the contracts of sale, T assigned his interest in the contracts to a corporation controlled by him. Held, gains realized by T as a result of payments received by him from the corporation were ordinary income rather than capital gain since the properties were held by him ‘primarily’ for sale to customers in the ordinary course of his trade or business' within the meaning of sec. 1221, I.R.C. 1954.
The Commissioner determined a deficiency in the income tax of petitioners for the year 1963 in the amount of $19,405.46. Petitioners claim an overpayment for that year in the amount of $3,663.65. At issue is whether amounts received in respect of petitioner Royce W. Brown's assignment of interests in certain real properties to a controlled corporation are capital gains or ordinary income.
Some of the facts have been stipulated and are incorporated herein by this reference.
Royce W. Brown and Patty L. Brown are husband and wife. They resided in Bethany, Okla., at the time they filed their petition herein. They filed their 1963 income tax return on the cash receipts and disbursements basis with the district director of internal revenue, Oklahoma City, Okla. Royce W. Brown will sometimes be referred to as Brown or petitioner.
During and prior to the year 1958 Brown was engaged in the real estate business; in particular, his activities consisted of buying developed lots, building houses thereon, and selling the lots and houses. In 1957 he formed two corporations, Royce Brown Homes, Inc., and Enchanted Homes, Inc., to engage in these activities. He and his wife each owned 50 percent of the stock in these corporations. Brown became the dominant officer of the corporations and was primarily responsible for all their activities. He received a salary from the corporations and did not build any new houses as an individual developer after 1958. He has never held a real estate broker's license.
On June 6, 1958, Brown entered into a contract to purchase 40 acres of unimproved farmland from George W. G. Emmons, Lorane E. Petal, Albert Petel, Marion W. Emmons, and Ann Emmons. This property will be referred to herein as the Emmons property. It was located about 1/2 to 1 mile from other developed property and about 8 miles from downtown Oklahoma City. Brown agreed to pay a purchase price of $120,000. He made a downpayment of $1,000 in respect of the purchase price at the time he entered into the contract and an additional $38,000 at the time (June 24, 1958) he entered into the trust agreement hereinafter described. The balance of the purchase price was payable in three annual installments together with 5 1/2-percent interest on the unpaid balance, the buyer to have the privilege of paying any part of the balance without penalty or additional interest. The contract of sale stated, among other things, that, upon approval of title by the buyer (Brown), the sellers would convey the title to the property to the American First Title & Trust Co. (hereinafter sometimes referred to as American) to hold under the terms of a trust agreement to be entered into by the parties. The contract of sale also provided:
6. The property hereinabove described shall be platted and divided into lots and blocks to provide for building sites and adequate traffic ways to be dedicated for public use. After the land is platted and subdivided, and the plat filed for record, the American First Title and Trust Company shall convey to the Buyer at the request of the Buyer such lots or blocks as shall be from time to time designated by the Buyer until the total area including the adjoining streets is equal in proportion to the total area of said property as the money paid under this contract is equal in proportion to the total contract price. Thereafter upon request of Buyer, American First Title and Trust Company shall convey to Buyer any building site designated by Buyer upon the payment to said American First Title and Trust Company of a sum of money equal to $3,000.00 per acre based upon the area of lots or building sites as it bears in proportion to one acre, all of the above to be included in the trust agreement hereinabove mentioned.
On June 24, 1958, the parties to the foregoing contract entered into the trust agreement contemplated by the contract. The sellers, as ‘Seller Trustors,’ Brown, as ‘Buyer Trustor,‘ and American, as ‘Trustee,‘ agreed that American would hold legal title to the Emmons property while Brown made payment for the property in the manner described in the trust instrument. The trust agreement provided in part as follows:
WHEREAS, it is the desire of Buyer Trustor to subdivide said property for residence and/or business purposes, and to provide for building sites, and public streets and ways in said area, and in order to keep proper and accurate records of the subdivision, and to handle the purchase price money, Trustors are desirous that Trustee take title to said real property as Trustee for the use and benefit of Trustors, all in accordance with the terms and conditions hereinafter set out.
NOW THEREFORE, in consideration of the terms, conditions, and considerations herein set out, the parties hereto do agree as follows:
2. Trustee shall, in its name, and upon demand from Buyer Trustor, do all things necessary to complete the proper platting and subdividing of said tract at the expense of the Buyer Trustor. Buyer Trustor shall furnish Trustee, as needed, necessary instructions including Engineer's notes and records regarding the subdividing and platting of said property. Buyer Trustor shall furnish Trustee with Engineer's certificates showing the dimensions of all lots or building sites, and if any be irregular in shape, shall furnish said Engineer's certificate showing are area thereof.
4. Buyer Trustor shall pay all taxes as the same falls due on said land, and Trustee shall have no liability therefor. Seller Trustors shall have the privilege of advancing sufficient funds to pay such taxes in case of default of the Buyer Trustor and such payments shall be added to the debt of the Buyer Trustor, and shall be repaid as hereinafter set out.
5. After the property herein has been subdivided and the plat filed for record, the Trustee shall convey to the Buyer Trustor or his designee such lots or blocks or building sites as said Buyer Trustor or his designee shall designate from time to time, until there has been conveyed sufficient property in area in proportion to the total area of the property herein as $39,000.00 is to $120,000.00. Thereafter, upon request of Buyer Trustor, Trustee shall convey any property to Buyer Trustor, or his designee upon the payment to Trustee of a sum of money equal to $3,000.00 per acre based upon the area of the property so conveyed as it bears in proportion to one acre.
In determining the area of the property conveyed at the request of Buyer Trustor, the area of said property shall include the area to the center of any adjoining or abutting street or public way dedicated hereunder.
6. Buyer Trustor shall pay to Trustee the remaining $81,000.00 in three annual installments, together with 5 1/2 percent interest on the unpaid balance, the first installment to be on or before one year from the date hereof, and like installments payable two years and three years respectively from the date hereof, provided however, that Buyer Trustor shall have the privilege of paying any part or all of said balance at any time without penalty or additional interest.
7. Trustee shall keep a complete record of all conveyances made hereunder, and all moneys received and disbursed, and shall account for all funds paid to Trustee, and after paying certain items of expense as hereinafter set out, shall distribute said money (to Seller Trustors) in the following ratio: * * *
Sometime prior to January 8, 1959, Brown ordered American to have the Emmons property subdivided and platted. The subdivision, referred to on the record plat as ‘Royce Brown's Holiday Village Addition,‘ was approved by the Oklahoma City Planning Commission on January 8, 1959, and the portions of the property dedicated to Oklahoma City were accepted and the subdivision annexed by resolution of the City Council of Oklahoma City on March 3, 1959.
In a letter addressed to ‘Royce Brown, Royce Brown Development Co.,‘ dated December 24, 1958, the Hughes Engineering Co. estimated the cost of constructing streets, a sanitary sewer, storm sewer, and pumping station in the Royce Brown Holiday Village subdivision.
On a letterhead of ‘Royce Brown Construction Company’ Brown submitted to American the following statement of his personal financial condition as of December 31, 1958:
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¦ROYCE BROWN, PERSONAL ¦
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¦Financial Statement ¦
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¦December 31,...To continue reading
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