Estate of Mundy v. Comm'r of Internal Revenue, Docket Nos. 81315-81317.
| Decision Date | 21 July 1961 |
| Docket Number | Docket Nos. 81315-81317. |
| Citation | 36 T.C. 703 |
| Parties | ESTATE OF WILLIAM D. MUNDY, DECEASED, JOAN B. MUNDY, EXECUTRIX, AND JOAN B. MUNDY, INDIVIDUALLY, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
George F. Townes, Esq., for the petitioners.
James E. Johnson, Jr., Esq., for the respondent.
1. Petitioners inherited tract of land in 1948. Petitioners were not in the real estate business and had no desire to go into it, but wanted only to liquidate the property as soon as possible at a fair price. Through their agent the property was turned over to a real estate development firm in 1953, which subdivided, developed, and sold the property in lots as part of a residential development. Petitioners did not personally participate in any way in the development and selling activities, full control of the property being given to the real estate development firm by contract, petitioners being required only to sign deeds. Held, the property was not held by petitioners during the years 1954, 1955, and 1956 primarily for sale to their customers in the ordinary course of their business, and the gain realized from the sale of lots is taxable to petitioners as capital gain.
2. Held: Petitioner S. W. Creech bought lots from a real estate firm of which he was president at less than fair market value. Petitioner agreed that any excess of fair market value of the lots over his purchase price was taxable to him as a dividend. Fair market value of the lots determined.
In these consolidated proceedings, respondent determined deficiencies in income tax for the calendar years and in the amounts as follows:
The principal issue in all three cases is whether the gain realized from the sale of lots in 1954, 1955, and 1956 by the partnership known as Mundy Property, in which William D. Mundy, James C. Mundy III, and Ruth M. Creech were partners, is to be considered as gain from the sale of capital assets or as ordinary income in those years; and in Docket No. 81317, two other issues are: (1) Whether the gain realized by Ruth M. Creech from the sale by her of a lot in 1954 is to be considered as gain from the sale of a capital asset or as ordinary income in that year, and (2) the fair market value of certain lots sold to S. W. Creech in 1954 and 1956 by a corporation of which he was a stockholder. It is agreed that the excess of the fair market value over the amount Creech paid for the lots was a dividend to Creech.
Other issues raised by the pleadings relating to medical expense deductions and to deficiencies in self-employment tax will automatically be resolved upon the basis of the foregoing issues. Petitioners in Docket Nos. 81315 and 81317 have abandoned issues relating to charitable contributions.
Some of the facts have been stipulated and are found as stipulated.
Petitioner Joan B. Mundy, executrix of the estate of William D. Mundy, deceased, was the wife of William D. Mundy, hereinafter referred to as William, during the taxable years 1954, 1955, and 1956. They filed joint income tax returns for those years with the director of internal revenue for the district of South Carolina. Their returns showed their residence as Greenville, South Carolina, in each of those years. An amended return was filed for the year 1954 on April 14, 1958. Schedules C, Profit (or Loss) From Business or Profession, reporting net profit from William's business in the amount of $1,287.70 and listing his principal business activity as ‘Outside Salesman—Methods & Systems & Real Estate,‘ were filed by William and Joan with both their original and amended returns for the year 1954. William died May 15, 1959.
Petitioners James C. Mundy III and Emily B. Mundy, hereinafter referred to as James and Emily, respectively, were husband and wife during the taxable years 1954, 1955, and 1956. James and Emily filed joint income tax returns for the taxable years 1954, 1955, and 1956 with the director of internal revenue for the district of South Carolina, their returns stating their home address to be Greenville, South Carolina. However, during those years, James was on active duty with the United States Military Forces and Emily was employed by the United States Air Force. An amended return was filed for the year 1954 on April 14, 1958.
S. W. Creech and Ruth M. Creech, hereinafter referred to as Sam and Ruth, respectively, were husband and wife and were residents of Greenville, South Carolina, during the taxable years 1954, 1955, and 1956. They filed joint income tax returns for those years with the director of internal revenue for the district of South Carolina. An amended return was filed for the year 1954 on April 14, 1958.
William, James, and Ruth, hereinafter referred to collectively as the Mundy heirs, were the only children of James C. Mundy, Jr., who died testate on June 26, 1948. Upon the death of their father, they inherited a 52.6-acre tract of land, hereinafter referred to as the Mundy tract, on Edwards Road near Greenville, South Carolina. In 1948 this tract was country land. Two houses were situated on the tract and at the time of the death of James C. Mundy, Jr., James was living in one of the houses and the other house was being rented to third parties. Both houses were occupied on different occasions after the death of their father by each of the Mundy heirs.
The Mundy heirs wanted and attempted to sell or liquidate the Mundy tract ‘at its value’ from the time they inherited it but they received no offers for the tract as a whole. Two lots on which were located the two houses were sold by the heirs in 1950 and 1952, and on January 16, 1953, an unimproved lot was sold with the deed containing the following recital: ‘That the remaining portion of said tract of land * * * shall be used for residential purposes only and any deeds by us to a purchaser of any lot out of said tract shall contain such a restriction therein.’
In August 1950, James was recalled to active duty in the military service and, except for occasional visits, was away from Greenville from that year until his return in 1957. In 1953, James was stationed in Korea and Japan, and his wife, Emily, lived in Bamburg, South Carolina, during that year until she joined him in Japan.
During the period 1950 through 1953, William spent considerable time in Florence, South Carolina. When James, who was the executor of the estate of James C. Mundy, Jr., left Greenville in 1950, the management of the Mundy tract was left to Ruth's husband, Sam. James felt that Sam would look after Ruth's best interests with respect to the property and, in so doing, would look after the interests of James and William. The Mundy heirs never discussed with Sam the subdivision of the tract or placing it in the hands of a real estate agent but simply asked him to dispose of the property at its true value as soon as possible. Sam felt that his authority to act for the Mundy heirs did not go beyond putting the tract in the hands of a realtor. Sam approached two realty firms and discussed with them the possibility of improving and developing the tract in order to sell it. The Mundy heirs had no money with which to develop the property, and the two realty firms were not interested in developing the tract.
In 1953, Sam approached a third real estate company, Central Realty Corporation, hereinafter referred to as Central Realty, which was in the business of land development, and was successful in interesting this company in the development and sale of the Mundy tract. Before 1953, Sam had asked Central Realty to consider developing the tract, but Central had not considered that tract ready for development. However, in 1953, Lake Forest, Inc., a corporation owning land adjacent to the Mundy tract, was preparing to develop its land, and the city of Greenville was growing in the direction of the Mundy tract. Therefore, Central Realty was willing to develop and sell the Mundy tract in 1953.
On June 3, 1953, the Mundy heirs entered into an agreement with Central Realty and a related corporation, Central Agencies Company, which provided in part, that whereas the Mundy heirs owned a tract of land and were desirous of having Central Agencies Company, referred to therein as ‘agent,‘ supervise the development of said tract as a subdivision and serve as sales agent for said subdivisio...
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...an incident to a sale of the entire tract will not alone necessarily serve to deprive him of capital gains treatment. Estate of Mundy v. Commissioner, 36 T.C. 703 (1961); Smith v. Dunn, 224 F.2d 353 (5th Cir. 1955); Gordon v. United States, 159 F.Supp. 360, 141 Ct.Cl. 883 (1958); McConkey v......
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...Bauschard v. Commissioner, 279 F.2d 115, 118 (6 Cir., 1960); Achong v. Commissioner, 246 F.2d 445, 447 (9 Cir., 1957); Estate of Mundy, 36 T.C. 703, 712 (1961). We think that such isolation was not effected here; that this is an agency situation; and that, under the circumstances of this ca......
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