Goldberg v. Commissioner of Internal Revenue, 15317.

Citation223 F.2d 709
Decision Date21 June 1955
Docket NumberNo. 15317.,15317.
PartiesNathan D. GOLDBERG and S. E. Wood, Jr. v. COMMISSIONER OF INTERNAL REVENUE.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Tom B. Rhodes, Geo. S. Atkinson, Dallas, Tex., for petitioners.

S. Dee Hanson, Ellis N. Slack, Hilbert P. Zarky, Alonzo W. Watson, Jr., Sp. Assts. to Atty. Gen., H. Brian Holland, Asst. Atty. Gen., Daniel A. Taylor, Chief Counsel, and Charles E. Lowery, Sp. Atty., Internal Revenue Service, Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and TUTTLE and JONES, Circuit Judges.

TUTTLE, Circuit Judge.

The sole question presented in these petitions for review is the propriety of the Tax Court's finding of fact that 90 houses sold by Pinecrest Housing, Inc., in 1946, were then held primarily for sale to customers in the ordinary course of trade or business. The Tax Court, in an opinion reported at 22 T.C. 533, held the petitioners liable as transferees, for a corporation income tax deficiency for 1946, redetermined against Pinecrest on the ground that the $58,675.41 profit realized on the sales of the houses, and reported by it as a capital gain, was taxable as ordinary income. Since petitioners admit they are transferees of the assets of Pinecrest, the decision of the Tax Court must be affirmed unless it was clearly erroneous in its finding that the houses were in 1946 held primarily for sale to customers in the ordinary course of trade or business. 26 U.S.C. § 117(j) (1) (B) (1946 Ed.).

The following statement of facts, being in substance taken from the brief of the respondent, fairly presents the evidence relied on as supporting the Tax Court's decision:

Pinecrest was incorporated under the laws of Texas in 1943, "to erect, construct, or repair any building or improvements, and to purchase, sell, rent, subdivide, and improve real property in towns, cities, villages and their subdivisions * * *." The 2,000 shares of $10 par value stock were owned as follows: S. E. Wood, Jr., and James B. Cheek, 667 shares each; Marion F. Fooshee, 666 shares. In 1943 the corporation had 111 housing units constructed in Marshall, Texas, these being two- and three-bedroom houses. At that time there was an acute need of housing in the area because of the influx of defense workers. The project was financed by an insurance company, upon the Federal Housing Administration guaranty to the extent of 90 per cent of the project's appraised value. The guaranty was conditioned on design of the houses for residential rental by war workers, and Pinecrest indicated in its application to the F.H.A. that they would be used for rental. Under the F.H.A. regulations, Pinecrest could sell the houses at a ceiling price fixed by F.H.A. to war workers who had occupied the premises four months and who agreed in writing to continue occupancy for a specified period after purchase. Effective September 10, 1945, the restrictions on sales were revoked as to housing then or thereafter vacant, provided the vacancy had not been created by eviction and that a maximum authorized sales price had been established for the housing to be sold.

In April 1944, the corporation having difficulty meeting its mortgage payments because of insufficient rental income, shareholders Cheek and Fooshee sold their stock to petitioners so as to make each the owner of 50 per cent of the stock. Pinecrest was also granted a one-year delay in making payments on the mortgage and a reduction of interest thereon. By the end of 1944, rental income increased and Pinecrest resumed full current payments on the mortgage. It reported operating losses on rentals in each of the four years of its existence, 1943 and 1946, although by the end of 1945 the housing units were almost fully occupied. However, profits were realized from the sale of houses in each of these years; in 1943, $134.50 from the sale of two houses; in 1944, $698.83 from the sale of two houses; in 1945, $7,642.16 from the sale of 17 houses and a vacant lot; and in 1946, the year in question, $58,675.41 from the sale of 90 houses. Most of the 1946 sales were to tenants, many of whom were war veterans. Property sales were handled by petitioner Goldberg, whose office received $100 a month from 1944 to 1946 for keeping Pinecrest's rental and sales records. Sales of the houses were not advertised, but their availability for sale was made known by word of mouth; no "for sale" signs were put up; no salesmen were hired; and no commissions were paid on the sales. In 1946 there was a heavy demand for housing in the area. The corporation was dissolved in December, 1946, and petitioners divided all the corporation's assets equally. Petitioner Wood, president of Pinecrest, was an automobile dealer from 1919 through 1949, was not in the business of buying and selling real estate, and did not have a real estate dealer's license, though he occasionally sold a parcel of real estate. Petitioner Goldberg, vice president of Pinecrest, was a real estate agent with 26 years' experience.1 Before 1944 his principal activity was managing properties for others, but he occasionally sold properties for others on commission.

On these facts, the Tax Court found that although petitioners went into business for the purpose of building houses for rental, by the beginning of 1946 the nature of the corporation's business had been changed to selling houses; therefore, that the profit realized from sales in 1946 was taxable as ordinary income and not as capital gain.

First, as to the scope of the review which we may make of the Tax Court's finding that the houses were held during the taxable year for sale to customers in trade or business, we reaffirm all that we said on the subject in our recent case of Galena Oaks Corp. v. Scofield, 5 Cir., 218 F.2d 217, 219. As Judge Rives expressed the principle applicable to the decision of the present case, as we conceive it:

"Insofar * * * as the so-called `ultimate fact\' is simply the result reached by processes of legal reasoning from, or the interpretation of the legal significance of, the evidentiary facts, it is `subject to review free of the restraining impact of the so-called "clearly erroneous" rule.\' Lehmann v. Acheson, 3 Cir., 206 F.2d 592, 594. As succinctly stated by Professor Moore, `Findings of fact that are induced by an erroneous view of the law are not binding. Nor are findings that combine both fact and law, when there is error as to the law.\' 5 Moore\'s Federal Practice, 2d Ed., Sec. 52.03 (3) * * *."

We are convinced that the finding of the Tax Court was the result of an erroneous view of the law, and proceed now to state our view of the substantive law involved.

Like other courts, we have had frequent occasion to consider this matter. Dunlap v. Oldham Lumber Co., 5 Cir., 178 F.2d 781; Fahs v. Crawford, 5 Cir., 161 F.2d 315; Lobello v. Dunlap, 5 Cir., 210 F.2d 465; and Galena Oaks Corp. v. Scofield, 5 Cir., 218 F.2d 217, are several of the leading cases in this circuit. Since the cases are so numerous, and since practically every judicial discussion involves the particular combination of facts present in the case, it is difficult to review them in brief. But the cases follow a...

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