Fahs v. Crawford

• Decision Date: 25 April 1947
• Docket Number: No. 11664.,11664.
• Citation: Fahs v. Crawford, 161 F.2d 315 (5th Cir. 1947)
• Parties: FAHS v. CRAWFORD et ux.
• Court: U.S. Court of Appeals — Fifth Circuit

161 F.2d 315 (1947)

FAHS v. CRAWFORD et ux.

No. 11664.

Circuit Court of Appeals, Fifth Circuit.

April 25, 1947.

Robert R. Reynolds, Jr., Sp. Asst. to Atty. Gen., and Sewall Key, Acting Asst. Atty. Gen., Herbert S. Phillips, U. S. Atty., of Tampa, Fla., and Edith House, Asst. U. S. Atty., of Jacksonville, Fla., for appellant

Harry T. Gray and Philip S. May, both of Jacksonville, Fla., for appellees.

Before SIBLEY and LEE, Circuit Judges, and STRUM, District Judge.

STRUM, District Judge.

The problem here is whether certain profits accruing to the taxpayer during the years 1940 and 1941 should be taxed as ordinary income, as defined in 26 U.S.C.A. Int.Rev. Code, § 22, or as gains from the sale of capital assets, as defined in 26 U.S.C.A. Int. Rev.Code, § 117. Contending that the profits arose from the sale of capital assets, the taxpayer declared and paid on that basis. The Collector, insisting that the profits accrued from the sale of lands held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business, and hence excluded from capital assets by the definition of Sec. 117, assessed the profits as ordinary income. The taxpayer paid the additional assessment under protest, sued for and recovered it in the District Court. The Collector appeals.

The taxpayer is a lawyer. Admitted to the Bar in 1906, he has since carried on an active and continuous law practice, having no other trade, business, or profession, unless the transactions here involved constitute an additional business. Aside from his home, and four city lots originally taken as security for debts, the taxpayer has purchased no real property since 1926. He did not ordinarily buy, sell, or deal in real estate, either for himself or as agent for others. He had no business office other than his law office; he had no real estate broker's license, nor did he pay any occupational tax as such, nor did he advertise or hold himself out as a dealer in real estate, nor as anything other than a practicing attorney.

Some time prior to 1915, the lands here involved were platted into a subdivision and offered for sale by San Jose Company, in which company the taxpayer had no interest. Except for limited water service, a paved highway running through the property, and one or two graded but unpaved streets, there were no improvements on the property. The project was unsuccessful, only 15 out of a total of 392 lots being sold. In July, 1925, the taxpayer and several associates purchased the subdivision, in solido, from San Jose Company, as a speculative investment, title being taken in the name of City Realty Company. This was at a time when many other investors were speculating in lands, the so-called Florida land boom then being at its peak.

In October, 1925, the taxpayer and his associates executed a contract of sale for the property as a whole to a speculative syndicate, but the contract went into default and the sale was never consummated. Soon thereafter the taxpayer and associates gave one Griner, a real estate dealer, a contract to sell the lots at retail. This attempted method of sale, though apparently successful in the beginning, ultimately proved unsuccessful. Legal title to the property rested from time to time in divers corporations controlled by the taxpayer and associates, but ultimately the taxpayer and his two remaining associates took the title individually in 1938, at which time the taxpayer owned an 8/15 undivided interest. During 1932 the taxpayer and his co-owners re-platted a portion of the property in order to conform the lots to a new road which was extended through the property, and a portion of the property was temporarily re-converted into acreage to save taxes. It was later re-platted into lots. From 1925 until 1938, the owners held the property for sale as a whole, without success, there being no market for the property, either at wholesale or retail.

Late in 1938 Charles E. Commander, Jr., a building contractor, real estate broker and developer, suggested to the owners that the lots might be sold at retail if dwellings, financed by FHA insured mortgages, were built thereon and a demand for the property thus created. Commander proposed to the owners that he (Commander) would perform all the work necessary to secure approval of these lands for FHA loans, if the owners would grant him the exclusive right to buy, or to sell to others, all or any of the lots, according to a price schedule submitted by him, Commander to receive a 10% discount from the list price if he purchased lots for his own account, or a 10% commission if he sold to others.

The owners agreed to this proposition, and Commander prepared the application and all required exhibits, paid all expenses and performed all work incident to the FHA application. The application was approved subject to the requirement that water be made accessible to all lots, and that the streets on which the lots fronted must be hardsurfaced. Through the efforts of the owners and Commander, the City of Jacksonville extended its water mains and electric lines to the property without cost to the owners. Commander secured bids for surfacing the streets on which the lots fronted (other than San Jose Boulevard, which was already paved) and supervised the carrying out of the work. The owners authorized this work. Its cost, aggregating about $16,000, was paid with money received from sales of the lots.

During 1940 and 1941, Commander purchased for himself, and built dwellings upon, 37 of the lots most of which he re-sold. Fifty-eight additional lots were sold through Commander to other building contractors, who were engaged in building homes for sale. They purchased the lots, erected a dwelling thereon, and re-sold the same to an ultimate purchaser. The owners of the land had no part in these building operations, nor in the resales, nor did they share in the profit or loss therefrom. They merely...