Garrett v. United States

• Decision Date: 06 April 1954
• Docket Number: No. 49593.,49593.
• Citation: 128 Ct. Cl. 100,120 F. Supp. 193
• Parties: GARRETT et al. v. UNITED STATES.
• Court: U.S. Claims Court

120 F. Supp. 193

128 Ct. Cl. 100

GARRETT et al. v. UNITED STATES.

No. 49593.

United States Court of Claims.

April 6, 1954.

Calvin W. Breit, Norfolk, Va., for plaintiffs.

H. S. Fessenden, Washington, D. C., with whom was H. Brian Holland, Asst. Atty. Gen., for defendant. Andrew D. Sharpe and Ellis N. Slack, Washington, D. C., were on the brief.

Before PRETTYMAN, Circuit Judge, JONES, Chief Judge, and LITTLETON, WHITAKER and MADDEN, Judges.

WHITAKER, Judge.

The plaintiffs sue for a refund of income taxes for a series of years. The major issue is whether the profits from the sales of certain lots, which were a part of the estate of William H. Garrett, deceased, should be treated as capital gains.

William H. Garrett, of Norfolk, Virginia, who died May 13, 1925, owned a large tract of land extending about two miles along the beach of the Atlantic Ocean near Ocean View, Virginia. He also owned rental property in Miami, Florida. Prior to his death Mr. Garrett subdivided this beach property, referred to as East Ocean View, into 3,000 lots. Before his death sales were not frequent, 162 lots having been sold. He, however, maintained an office for the sale of the lots and they were listed on the open market.

By the terms of his will Mr. Garrett left his property to his six children, naming his two sons, Claude B. Garrett and Walter Fay Garrett, and his son-in-law, Elmer Wing, as executors and authorizing them to sell any and all lands and divide the proceeds among his children.

The amount of the proceeds as distributed for the years 1943 to 1946, inclusive, as set out in the fiduciary returns, is shown in finding 3. Amended returns for the years 1943 to 1945 were transmitted to the Collector, but he advised the executors that the so-called "amended returns" were not acceptable. In the amended returns the executors sought to treat the profit from the sale of the lots as capital gains instead of as ordinary income, as they had been treated on the original returns.

The plaintiffs filed, in their respective districts, individual income tax returns for each year as set out in finding 4, reporting the profit from the sale of the lots as ordinary income. Claims for refund were later filed for the years 1943, 1944 and 1945, the dates and amounts being set out in finding 5, on the ground that the profit from the sale of the lots was not ordinary income, but capital gains, and, therefore, that only 50 percent of such income was includable as taxable income under the provisions of section 117 of the Internal Revenue Code, 26 U.S.C. § 117(a) (1).

The Commissioner ruled that because of the method of disposing of the property the gains from the sale of lots was ordinary income from a trade or business, and not transactions which come within the terms of section 117 of the Code.

Thus is presented the principal issue in the case.

The decedent dealt in real estate as a buyer, seller, developer, and builder, and maintained an office for that purpose for about 40 years in the Arcade Building in Norfolk. He bought and sold on his own account rather than as a broker.

Upon the death of William H. Garrett the office in the Arcade Building was continued. William Fay Garrett moved his residence from Miami, Florida, to Norfolk, Virginia, and thereafter devoted the greater part of his time to the sale of the lots constituting the beach property in question. No advertising was done other than to keep a large map of the property on the wall, which map had been placed there by William H. Garrett prior to his death. Two or three signs were placed on the property. These read "East Ocean View Properties, For Sale, W. Fay Garrett, Arcade Building." The Telephone Directory carried a listing "East Ocean View Company" and "W. F. Garrett" with the same telephone number. The listings were in the ordinary small type of other subscribers. There was no such company. The term was used for the convenience of prospective buyers of the lots of the estate.

Substantially all of W. Fay Garrett's time was devoted to the sale of East Ocean View property and matters connected with the estate. He received a fee of 5 percent as executor of the estate and a 10 percent commission on the price of the lots sold by him for the estate. No real estate agents were employed by the estate, but occasionally a real estate agent would come to Garrett's office with an inquiry from which a sale would result. On these sales a portion of the 10 percent commission would be paid to the agent who brought in the inquiry.

No improvements were made prior to the construction in 1926 of a State highway between Ocean View and Virginia Beach. This highway bisected the Ocean View properties. After this the plaintiffs constructed clay roads within the subdivision, and when the City of Norfolk extended its water mains to the property they paid for extensions of the mains within the property. Plaintiffs also advanced funds to bring electricity to the property, but the advances were later refunded.

Most of the lots were sold on installment contracts, a deed not being made until the price was fully paid. The proceeds were deposited in the bank to the credit of the Estate of William H. Garrett.

No other property was ever purchased by the estate, nor was any investment made by the estate with the funds as they accrued, but the funds were distributed to the heirs under the terms specified in the will.

The office of the estate was not used for any purpose other than the sale of the lots in the East Ocean View properties, except for the sale of some property of W. Fay Garrett. W. Fay Garrett did not contribute to or pay any of the expenses of maintaining the office. The estate is still managed as an estate and the property sold is transferred by deeds signed by the executors.

The estate paid a personal property tax to the City of Norfolk on the furniture and fixtures in the Arcade Building for the years involved, but the State of Virginia has not required the estate to pay a capital tax, although real estate businesses are required to pay such a tax in that state. W. Fay Garrett never owned, nor was he required to own any real estate or business license in the City of Norfolk or the State of Virginia.

Section 117 makes a distinction between property held or disposed of by a taxpayer as capital assets, and property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. The application of the principle depends upon the facts of each case. The distinctions are discussed in Farley v. Commissioner of Internal Revenue, 7 T.C. 198, which held that the disposal of portions of property from time to time did not constitute doing a real estate business, and in Commissioner of Int. Rev. v. Boeing, 9 Cir., 106 F.2d 305, which held that gains or losses from sales of timber under the facts of that case did not fall within the capital gains provision. The application as to varying facts is discussed in United States v. Robinson, 5 Cir., 129 F.2d 297; White v. Commissioner, 5 Cir., 172 F.2d 629; Brown v. Commissioner, 5 Cir., 143 F.2d 468; Storrow v. United States, D.C., 99 F.Supp. 672; Trapp v. United States, D.C., 79 F.Supp. 320, and in numerous other cases.

There is no single decisive test as to whether property is held...