Galena Oaks Corp. v. Scofield

• Citation: 116 F. Supp. 333
• Decision Date: 07 July 1953
• Docket Number: Civ. A. No. 6604.
• Parties: GALENA OAKS CORP. v. SCOFIELD.
• Court: U.S. District Court — Southern District of Texas

116 F. Supp. 333

GALENA OAKS CORP. v. SCOFIELD.

Civ. A. No. 6604.

United States District Court S. D. Texas, Houston Division.

July 7, 1953.

Leachman, Matthews & Gardere and Wright Matthews, Dallas, Tex., and Price, Guinn, Wheat & Veltmann, Houston, Tex., for plaintiff.

Brian S. Odem, U. S. Atty., and Wm. R. Eckhardt, Asst. U. S. Atty., Houston, Tex., for defendant.

CONNALLY, District Judge.

The plaintiff is a private corporation, chartered under laws of this State in February 1942. In this action it seeks to recover certain income taxes allegedly illegally assessed and collected for the fiscal years ending February 28, 1947 and February 29, 1948. The single question presented is whether profits from the sales of 102 houses, constructed during the years 1943 and early 1944; rented from early 1944 until June 1946; and thereafter sold during the period from June 1946 until August 1947, constituted ordinary income (as contended by the Collector) or constituted the sale of capital assets, as defined in Section 117 of Title 26, U.S.C.A.

The plaintiff corporation at all material times has been controlled by D. H. Canterbury, who has owned 50% of the stock and controlled the remaining 50%, as guardian of the estate of his minor child. Mr. Canterbury, individually, has been engaged in the business of subdividing land, and the construction and sale of houses thereon, for a great many years.

Immediately after incorporation, taxpayer applied to the Federal Housing Administration for the necessary authority and priorities for the procurement of materials to build 97 houses for sale, pursuant to the F.H.A. program to encourage construction of dwelling units in defense areas suffering a critical housing shortage in the early war years. Such authority was granted, and the 97 houses were constructed and sold during 1942. Profits therefrom were returned as ordinary income for the fiscal year ending February 28, 1943.

Thereafter (late 1942) further application was made for the construction of 105 houses, which likewise was granted, though only 102 were constructed. The F.H.A. regulations then in effect, and subject to which these last mentioned houses were built, required that the contractor rent same to defense workers at a fixed monthly rental. In compliance therewith, the houses were rented as they were completed, and taxpayer continued to rent all of the houses in the project from 1943 until June 1946. Due to changes in F.H.A. regulations, taxpayer was permitted, if it chose, to sell a number of the houses as early as 1943, and was permitted by pertinent regulation to sell and dispose of all of the houses by 1945. Nevertheless, taxpayer sought no permission to make any such sales, and in fact made none until June 1946. Beginning at the last mentioned date, taxpayer began a rather intensive sales program. One of its principal employees (J. B. Brown) was placed in charge of sales. Extensive advertising was taken in the local papers, and one or more "for sale" signs were placed at strategic locations on the property. Prospective purchasers were contacted through the plaintiff's Houston office. The entire 102 houses were sold in a matter of about fourteen months.

In addition to the foregoing facts, which are undisputed, Mr. Canterbury has testified that on behalf of the corporation he decided to go into the construction and rental of these houses in order to secure a lucrative and safe investment; that taxpayer enjoyed a period of almost complete occupancy until the spring and early summer of 1946. By that time, however, he noticed that costs of maintenance and upkeep were rising sharply; that the net rentals produced an unsatisfactory return on the investment; and by that time he considered the investment as a speculative one not suitable for the estate of his minor child. In view of the fact that real estate prices had risen, and returning war veterans provided a ready market, he concluded that it would be the part of wisdom to sell the houses.

The following facts likewise were undisputed. The proceeds from the sales above mentioned were used by the taxpayer for the purchase of unimproved real estate in and near the City of Houston; except for the two groups of 97 and 102 houses hereinabove mentioned, taxpayer has neither bought nor sold any other houses during its corporate existence; neither Canterbury, Brown, nor the corporation held a real estate dealer's license (despite Brown's extensive activities in effecting the sales above mentioned); during the three to four year rental period, taxpayer claimed and was allowed depreciation on the 102 houses, while this was not the case as to the original groups of 97, which admittedly were built for sale; in its income tax returns, taxpayer has described its "kind of business" variously as (a) "real estate subdivision, building rentals"; (b) "real estate subdivision, building, etc."; and (c) for the two years in question "real estate".

Under Section 117(a) and (j) of Title 26, U.S.C.A., taxpayer contends that the...