Gudgel v. CIR

• Decision Date: 28 December 1959
• Docket Number: No. 13778.,13778.
• Citation: 273 F.2d 206
• Parties: Boyd GUDGEL and Geraldine Gudgel, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

273 F.2d 206 (1959)

Boyd GUDGEL and Geraldine Gudgel, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13778.

United States Court of Appeals Sixth Circuit.

December 28, 1959.

Richard C. Oldham, Louisville, Ky. (Clinton R. Burroughs, Louisville, Ky., on the brief), for petitioners.

Helen Buckley, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Karl Schmeidler, Atty., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before McALLISTER, Chief Judge, and SIMONS and WEICK, Circuit Judges.

SIMONS, Circuit Judge.

The petitioners, husband and wife, were dairy farmers. The principal issue in the case is whether, in subdividing their farm and selling lots therein, during the tax years 1951, 1952, and 1953, at a profit, they should have been permitted to return such profit in their income tax returns as capital gains or whether they were required to return it as ordinary income. The Commissioner asserts the profits constituted ordinary income and the Tax Court so held. The petitioners challenge that determination.

There is no dispute about the evidentiary facts. Most of them were stipulated and others brought forth upon oral examination of Gudgel, not controverted by conflicting evidence, attacked upon cross-examination, or by destructive analysis. The Tax Court rested its determination upon an ultimate fact inferred from the evidentiary facts found by it.

Since the Commissioner and the Court placed great reliance upon the chronological sequence of events, it becomes necessary to recite them in detail.

In 1940, long prior to the tax years, the petitioners acquired 17½ acres of land in Jefferson County, Kentucky, on which they built a house, barn and silo, and proceeded to operate thereon a dairy farm. The acreage not so used was devoted to pasture. In 1943, they acquired 19½ additional adjoining acres, which they fenced in 1944 for pasture and hay. Later in that year, the State of Kentucky extended Ralph Avenue through their property, dividing it approximately into halves. In 1945, the petitioners purchased an additional 14.7 acres, adjoining the land previously acquired, and leased other adjoining land for grazing and hay production. In 1948, or 1949, the petitioners received an offer from someone by the name of Fey who wished to construct a house upon part of their land and, at his solicitation, sold him five lots abutting on the south side of Ralph Avenue, as extended. Later in 1949, petitioners placed an advertisement in a Louisville newspaper, offering lots for sale and about a dozen crude signs were put upon the fence line bearing the inscription "Lots". Still later, they sold three additional lots abutting on the south side of Ralph Avenue. In 1950, the petitioners sold five lots abutting on the north side of Ralph Avenue and one additional lot abutting on the south side of Ralph Avenue. In that same year, they opened up Likens Avenue into the remaining portion of their land south of Ralph Avenue, dedicating the roadway to public use, after having the abutting land surveyed and subdivided into residential building lots. Two of these lots were sold in 1950. In that year, they acquired a tract of land located 1200 feet from the subdivided property, on which they constructed a small shopping center.

In 1951, the first tax year, the petitioners sold thirteen lots on Likens Avenue and one on the north side of Ralph Avenue. In 1952, they opened Gudgel Road into that part of the property north of Ralph Avenue, dedicated it to public use and had the abutting land surveyed and subdivided into residential building lots. That year, they sold one tract abutting on the south side of Ralph Avenue and ten lots abutting on Gudgel Road. In 1952, the second tax year, the Illinois Central Railway Company approached the petitioners with an offer to purchase 5.72 acres of land for use as a right-of-way across the farm. Gudgel testified, without contradiction, that the Railroad wanted to buy just enough to lay the track which would require about a third of an acre. He insisted that they buy the whole tract but after some talk about putting a viaduct underneath the railroad, so he could get to the west side of his farm, the Railroad said it would be impossible, but "if I would stake off the land west of there — west of the railroad — they would take the remaining property that I had left over to correspond with my property plan." The petitioners then sold the Railroad the 5.72 acres of land. Since the railroad ran at right angles to Ralph Avenue, it divided the farm into four irregular sections.

When, in 1944, Ralph Avenue was continued to accommodate the traffic from Rubber Town, it wasn't, at first, too big a problem crossing the road. When they started running three and four shifts, working twenty-four hours a day, the traffic was terrific. It would take three or four men to move the cattle and "the people just had no respect whatever for my livestock." It was then that the petitioners started to dispose of their farm. Asked what effect the sale to the railroad had, the response was, "Well, it just put me out of business." In the three tax years, a total of forty eight lots were sold. While they opened the roads for access by the purchasers, they made the very minimum of improvements. They installed no water lines and the purchasers dug their own individual wells. After the vendees started to build, they themselves arranged for connection with the electric light company. The area was zoned for heavy industry and factories moved into the neighborhood. The lot owners began fighting the smoke from Rubber Town. In selling to prospective homeowners, the petitioners took what they could get as a down payment, with instalments sometimes of $20.00 per month. Neither Gudgel nor his wife had ever been in the real estate business, they had no real estate license, they bought no land prior to 1941, and bought none subsequent to the tax years. Their reason for letting a real estate man sell some of the lots was that he owed them money and the lots were to be sold on the understanding that the commissions would be applied upon his indebtedness. They had sold the real estate agent four lots upon which the agent built houses, just to get rid of them because the land was getting stale and was going "sour". Gudgel placed one advertisement of "Lots For Sale" in a newspaper and the crude signs placed on the fence line had the single designation, "Lots".

Section 117(a) of the Internal Revenue Code of 1939, 26 U.S.C. § 117(a), defines "capital assets" as property held by the taxpayer (whether or not connected with his trade or business), but does not include the taxpayer's stock in trade or other property of a kind which would properly be included in the inventory of the taxpayer, if on hand at the close of the taxable year, or "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."

The principal issue is whether, during the tax years 1951, 1952 and 1953, the Gudgel farm land had been held by the petitioners primarily for sale to customers, in the ordinary course of trade or business. Gudgel's attack upon the Tax Court's decision rests primarily on his assertion that he was forced to liquidate his farm and his activities were directed only to that end. The Government urges that this contention is a factual rather than a legal attack upon the Court's finding, resting upon three asserted premises: 1) That the area around the farm was zoned for heavy industry, 2) that the State in 1944 extended Ralph Avenue across the farm, and 3) that the Illinois Central Railroad in 1952 continued its right-of-way across the farm so as to divide it into quarters and that these three events made it impossible for Gudgel to continue the operation of his dairy farm.

The Tax Court reasoned that no one of these factors had any material bearing upon Gudgel's asserted desire to liquidate the farm. It is, however, common experience that where the character of a neighborhood undergoes substantial change, it is usually the result not of an isolated circumstance but derives from cumulative changes that affect the desirability of land for the purpose for which it was originally purchased. Gudgel's complaint is not primarily the extension of Ralph Avenue but from the greatly increased use of it due to the zoning of the area for factory purposes, which made it difficult for him to move his stock and, so, made uneconomical the carrying on of his farm activities. The building of a railroad track across his farm was the climax of his troubles in operating the farm. The totality of interference with his dairy activities provides an eminently reasonable ground for finally concluding that he could not economically operate his farm as a dairy, and called for its liquidation.

The Tax Court's ultimate finding that Gudgel was engaged in the real estate business during the tax years is based primarily upon the undisputed fact that Gudgel sold...