Ehrman v. Commissioner of Internal Revenue, 9723.

• Decision Date: 06 June 1941
• Docket Number: No. 9723.,9723.
• Parties: EHRMAN v. COMMISSIONER OF INTERNAL REVENUE. HELLER v. SAME. HELLMAN et al. v. SAME.
• Court: U.S. Court of Appeals — Ninth Circuit

120 F.2d 607 (1941)

EHRMAN v. COMMISSIONER OF INTERNAL REVENUE.

HELLER v. SAME.

HELLMAN et al. v. SAME.

No. 9723.

Circuit Court of Appeals, Ninth Circuit.

June 6, 1941.

Sidney M. Ehrman, Lloyd W. Dinkelspiel, and Heller, Ehrman, White & McAuliff, all of San Francisco, Cal., for petitioners.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Benjamin M. Brodsky, and Warner W. Gardner, Sp. Assts. to Atty. Gen., for respondent.

Before GARRECHT, HANEY, and STEPHENS, Circuit Judges.

STEPHENS, Circuit Judge.

The question for determination is whether the United States Board of Tax Appeals erred in concluding that certain gains realized by petitioners from the sales of lots in a subdivision are taxable under the Revenue Act of 1934 as ordinary gains instead of as capital gains as contended for by petitioners. The applicable section of the statute, Sec. 117, Revenue Act of 1934, c. 277, 48 Stat. 680, 26 U.S.C.A. Int.Rev.Acts, page 707, reads,

"(a) General Rule. In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income: * * * rates

"(b) Definition of Capital Assets. For the purposes of this title, `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."

The facts found by the Board of Tax Appeals are substantially as follows, and are not disputed:

I. W. Hellman, Sr., was a banker. At his death in 1920 he left an estate of about $9,500,000, which included a large number of tracts of land, both improved and unimproved, including nine or ten improved tracts in Los Angeles, and six ranch properties, one of which was Repetto Ranch of 1,569.93 acres, located about five miles east of the City Hall of Los Angeles, but outside the city limits. The ranch properties had been acquired by Hellman, Sr., at least thirty years prior to his death. Repetto Ranch was acquired between 1870 and 1880.

Upon the death of Hellman, Sr., the residue of his estate, including Repetto, passed in equal parts to his children, Florence H. Ehrman, Clara Hellman Heller and I. W. Hellman, Jr., I. W. Hellman, Jr., died about a month later, leaving an estate of about $1,500,000. His interest in Repetto passed to Frances J. Hellman and Wells Fargo Bank & Union Trust Company, as trustees under his testamentary trust. About 1926, Clara Hellman Heller transferred to her son, Edward H. Heller, a one-twelfth interest in Repetto.

Aside from a sale of one of the ranches in order to pay inheritance taxes, and the sales in controversy in the instant action, none of the properties distributed from the Hellman, Sr., estate have been sold. The sales involved in this appeal are from Repetto Ranch.

No particular effort was made to sell Repetto down to 1929. Offers were received and rejected by the taxpayers, who were opposed to a subdivision project and wished to sell outright, either for cash or substantial cash and security for the balance.

In 1929 about 800 acres of Repetto, constituting practically all of the level land of the ranch, were sold to Ransom Corporation, which company proposed to subdivide the land and sell it. The total consideration for the sale was $4,052,000, with a down payment of $250,000 and the balance payable over a period of approximately ten years with interest on the unpaid balance. Title was conveyed to Farmers and Merchants National Bank of Los Angeles, as trustee under "Repetto Land Trust No. 813", which was set up on May 29, 1929.

Ransom Corporation proceeded to develop a portion of the land, but in 1931 and 1932 became involved in difficulties and advised the taxpayers' agent that it could not carry out the entire transaction. After negotiations, the parties on May 16, 1932, entered into a modification of the declaration of trust. Some of the land was released and the total purchase price was reduced. Thereafter Ransom continued its efforts, but in a short time defaulted under the amended agreement, and on December 2, 1932, notified the trustee and the taxpayers that it could no longer proceed. On July 31, 1933, the taxpayers demanded sale and on February 13, 1934, purchased the property at a trustee's sale, and deed was delivered to them on May 30, 1934.

The property so reacquired by the taxpayers had been subdivided into lots, some of which had actually been deeded to purchasers and some of which were under contracts of sale. The uncompleted contracts were acquired by the taxpayers, and the taxpayers assumed certain obligations of Ransom to install improvements such as streets, sidewalks and landscaping.

The Hellman heirs taxpayers were then faced with the problem as to what to do with the property which they had reacquired. Their agent, a Mr. Keller, made an investigation of the matter at their request, and recommended to them that they carry on with the subdivision, first reducing the price of the lots to meet the market at that time. The Hamilton Sales Corporation was thereupon employed to carry on the work of the subdivision. A contract was entered into with Hamilton on February 19, 1934, reciting the taxpayers to be the owners of the subdivided lands described, and providing...