Chandler v. United States, 51 C 2025
| Decision Date | 04 June 1954 |
| Docket Number | 51 C 2026,52 C 1569.,No. 51 C 2025,51 C 2025 |
| Parties | CHANDLER et al. v. UNITED STATES (two cases). CHANDLER et al. v. JARECKI, as Collector of Internal Revenue. |
| Court | U.S. District Court — Northern District of Illinois |
Wilson & McIlvaine, Chicago, Ill., for plaintiff.
O. H. Kerner, Jr., U. S. Atty., Chicago, Ill., for defendant.
These are three suits, consolidated here for trial seeking to recover for federal income, declared value excess profits and excess profits taxes, for the calendar years 1942 to 1950, both inclusive that the plaintiff alleges were overpaid. The sums claimed together with statutory interest, aggregate in excess of $1,000,000. This controversy presents the question as to whether the Commissioner of Internal Revenue erred in taxing as ordinary income the gains realized by the taxpayer on sales of certain real estate during the calendar years 1942 to 1950, inclusive. The determination thereof depends upon whether the evidence establishes the taxpayer's contention that the real estate involved was not held for sale to customers in the ordinary course of its trade or business.
The evidence reveals that vast Texas acreage owned by plaintiff was originally conveyed by the State of Texas to the Capitol Freehold Land and Investment Company, Ltd., a British corporation, which had been formed to construct the State Capitol building at Austin, Texas. When the building was finished, the corporation under a license from the State of Texas, entered into the cattle ranching business on a large scale and continued until 1912. In that year it was determined that the ranching business was unprofitable. It was then decided to liquidate the holdings which then had a book value of approximately $4,700,000. At that time the aggregate land held was about one million acres consisting of ranching and farming land and two town sites. In addition the investment included extensive agricultural improvements.
On June 4, 1915, these holdings were transferred to the taxpayer trust, the declared purpose of which was, in the opinion of the trustees, to liquidate the property by sales, without sacrificing the values. A liquidation date was set for June 4, 1930. Liquidation was not accomplished within that time and the termination date of this trust was extended to June 4, 1935. The world wide depression, adverse weather conditions and other factors proved a serious obstacle to successful liquidation by the amended termination date of June 4, 1935.
Prior to this date, a reorganization proceeding was filed in this Court, and, as a result thereof, the new trust of December 23, 1933 was created. Its declared purpose was the liquidation of the remaining lands. It merely extended the period during which the trust estate was to be liquidated and it made no change in the ownership.
An agreed tabulation from the books and records, or annual reports, of the trustees reflects that from 1915 through 1932 over 700,000 acres of land were sold for approximately $10,747,000; that from 1933 through 1941 over 187,000 acres were sold at approximately $1,291,000; and that from 1942 through 1950 over 290,000 acres were sold for approximately $5,000,000. During the period from 1942 through 1950 there were at least 536 separate sales transactions, or an average of 59 per year.
The taxpayer trust maintained offices at Dalhart, Texas, and at Farwell, Texas, out of which its representatives contacted prospective purchasers. Originally, a rather large number of commission agents had been employed. In later years, the trust discontinued this method and relied upon a few salaried representatives. The trust maintained an office at Chicago, Illinois, and the record clearly shows that the trustees kept a vigilant eye on every minute phase of the land operation. They approved all sales and leases; fixed all prices for lands; terms of sale or lease; commissions to be allowed; the hiring of employees and agents and their compensation; all advertising and other sales promotional activities; loans; contributions and donations of land to assist tenants or purchasers or for civic needs; improvements; exchanges of land; oil and gas leases and contracts; purchasers of lots; transactions with respect to lands other than those owned by the trust; and miscellaneous expenses.
There was a limited amount of general advertising until the year of 1924. Thereafter, and particularly during the tax years involved, advertisements were limited to annual county fair publications. In 1924, two small hotels were erected by the plaintiff on the acreage to accommodate prospective purchasers, and they were maintained and operated by plaintiff until the mid-1940's. It appears from the taxpayer's tax returns and annual reports that depreciation, a business expense, was shown as a deduction for the two hotels from 1939 through 1945. The returns also reflect depreciation deductions on other improvements and equipment, including automobiles which were apparently used in connection with the automobile and travel sales expense incurred.
Lands, held by the trust, were leased on one year terms for farming or grazing purposes, pending sale. Grazing leases provided for 60 day notice to tenants to vacate in case of sale. Farmer tenants were permitted to remain until they had harvested their crops. During the tax years involved, the rental income was better than 20% of the sales income.
A small townsite at Black, Texas, was laid out in 1925. Six lots were sold prior to February, 1931, and three other lots were given to a church. The remaining lots were turned back into acreage by 1948. There was no surveying of the...
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Chandler v. United States
...of trade or business within the ambit of § 117. Only a distilled version of the facts need be reported since Chandler v. United States, D.C.N.D.Ill. 1954, 121 F.Supp. 722, reflects considerable detailing of the record made below, on a stipulation of certain facts, some documentary evidence ......