Johnson v. United States

• Decision Date: 10 November 1967
• Docket Number: Civ. A. 10434.
• Citation: 280 F. Supp. 412
• Parties: James F. JOHNSON and Mabel I. Johnson, Plaintiffs, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of New York

280 F. Supp. 412

James F. JOHNSON and Mabel I. Johnson, Plaintiffs, v. The UNITED STATES of America, Defendant.

Civ. A. 10434.

United States District Court N. D. New York.

November 10, 1967.

Smith, Pattison, Sampson & Jones, Troy, N. Y., for plaintiffs; Lambert L. Ginsberg, Troy, N. Y., of counsel.

Justin J. Mahoney, U. S. Atty., for the Northern Dist. of New York, Albany, N. Y., for defendant; Mitchell Rogovin, Asst. Atty. Gen., Washington, D. C., Michael E. Marr, Sp. Atty., Dept. of Justice, Washington, D. C., of counsel.

OPINION

McLEAN, District Judge.^*

This is an action pursuant to 28 U.S.C. § 1346(a) for refund of income taxes allegedly erroneously and illegally assessed against and collected from plaintiffs for the year 1957. Plaintiffs paid the assessment, under protest, on July 1, 1960, filed a claim for refund, and upon a disallowance of that claim, began this action. It is undisputed that the filing of the claim and the institution of suit were timely.

The action involves two wholly unrelated questions: (1) whether a gift made by plaintiffs to the Dunham Hollow West Stephentown Community Association was properly deductible as a charitable contribution, and (2) whether profits made by plaintiffs upon the sale of certain parcels of real estate were capital gains or ordinary income. The two questions will be separately treated in this opinon.

The Gift to the Dunham Hollow West Stephentown Community Association

I find the facts to be as follows.

West Stephentown, New York, is a rural community in southern Rensselaer County. Some of its residents commute to Troy. Others are local farmers and laborers. Some residents have a reasonably adequate income, others are very poor. Many of them, prosperous and poor alike, have children.

In 1954 a group of these residents, including plaintiffs' son-in-law, conceived the idea of organizing an association to educate and assist the children of the area in various ways. They formed the Dunham Hollow West Stephentown Community Association which at first was an unincorporated association, somewhat loosely put together, but with elected officers. On October 12, 1956 the association was formally incorporated as a non-profit membership corporation under the laws of the State of New York.

All the children of the community, whether their parents were members of the association or not, were eligible to participate in the association's activities. No charge was made for that participation. The association was supported by voluntary donations made by the more affluent members. No officer of the association received any compensation.

The association's activities began in a modest way in 1954 and gradually increased over the years to 1957 and thereafter. These activities included organized athletics, instruction in camping, woodcraft and archery, and instruction in sewing and homemaking for the girls. The association also conducted 4-H Club programs. It offered some pre-school instruction for the younger children. It maintained a small library formed of books donated by members. The children were taken on trips to museums in nearby cities. Lectures were given to them on various educational topics by members of the faculty of Rensselaer Polytechnic Institute in Troy. There were also lectures on current events. The instructors and lecturers made no charge for their services.¹

The association was a distinct success. Most of the children of the community participated and derived substantial benefit from the various programs. The association was handicapped, however, by lack of a building of its own. Meetings had to be held in the homes of members or for a time in a rented schoolhouse. The need for an adequate physical plant was particularly apparent in the winter months.

Plaintiff James F. Johnson was born in West Stephentown, although he has lived for many years in Troy. He was interested in the work that the association was doing to help the children of his native community. In 1956 he told the officers of the association that he was disposed to donate a piece of land and some building materials to the association if the members would erect a building to constitute the association's headquarters.

This project was enthusiastically received and carried out. Many residents, young and old, pitched in and constructed a building. Masons and carpenters donated their services. The older children helped in the construction work, without pay.

Construction started in the fall of 1956 and was completed by the spring of 1957. Thereafter on July 16, 1957, plaintiffs executed a deed to the land and delivered it to the Dunham Hollow West Stephentown Community Association, Inc., the membership corporation, which, by resolution of its board of directors dated July 15, 1957, accepted the deed. Plaintiffs received no consideration for the transfer. It is stipulated that the value of the land and the miscellaneous building materials given by plaintiffs to the association was $2,018.50.²

I conclude that the Dunham Hollow West Stephentown Community Association, Inc. was a charitable corporation within the meaning of 26 U.S. C. § 170(c) (2) (B). Cf. Mustard v. United States, 155 F.Supp. 325, 140 Ct. Cl. 205 (1957); Pennsylvania Co. etc., v. Helvering, 62 App.D.C. 254, 66 F.2d 284 (D.C. Cir. 1933).

No part of the corporation's earnings inures to the benefit of any private stockholder or individual. It does not carry on propaganda or otherwise attempt to influence legislation. A gift to this corporation is therefore deductible.

Defendant contends that plaintiffs selected the wrong year in which to claim this deduction and that they should have claimed it in 1956. I reject this contention. I find and conclude that the gift was made on July 16, 1957 when the deed to the land was delivered. Although by that time the building had already been erected on the land, it belonged to plaintiffs until they delivered the deed. The fact that Johnson had previously indicated his willingness to make a gift does not alter the fact that he actually made it in 1957.

I conclude that plaintiffs were entitled to a deduction of $2,018.50 in computing their taxable income for 1957. Defendant's disallowance of this deduction was therefore illegal and erroneous.

The Real Estate Transactions

I find the facts to be as follows.

Plaintiff James F. Johnson has been a real estate broker in Troy for forty-eight years. As a broker he has brought about the sale of many properties, the great majority of which have been residential, rather than commercial. Also in the years prior to 1957, he has on occasion acquired certain properties for his own account which he has subsequently sold. The evidence discloses seven such transactions in the years 1954, 1955 and 1956.

One of these, the Tifft transaction, involved the sale to a neighbor of land which Johnson had owned for over twenty years. This is different in character from the others. As to the other six, although Johnson's testimony concerning them was not entirely lucid, it sufficiently appears that it was through his activities as a real estate broker that Johnson first learned of the availability of these properties which he eventually purchased and resold. The properties in each instance, with perhaps one exception, were residential houses.

In two instances, Johnson purchased from a client a house which he had previously attempted, without success, to sell for that client. In one case, he purchased the property from a client when the buyer whom he had previously procured defaulted on his agreement to purchase it. In two instances Johnson as a broker sold property for a client and in order to facilitate the sale, he lent money to the buyer and took a mortgage to secure the loan. When the buyer eventually failed to pay the mortgage, Johnson acquired the property through foreclosure. In one case the buyer of the property, whether a client or not does not appear, "bought it and couldn't go through with it." Johnson thereupon bought the house, repaired it and later resold it.

On the Tifft transaction, Johnson made a profit of $2,012. As to the other six, he sustained a loss on two, and a small profit, in no case more than approximately $2,000, on the other four. He treated all these transactions as capital transactions in his income tax returns, without challenge from the Internal Revenue Service.

In the year 1957, the year with which we are concerned in this case, there were three more similar transactions. One resulted in a profit of $354.92. The other two resulted in losses of $282.47 and $605.77 respectively. Plaintiffs treated these as capital transactions and reported them on Schedule D of their 1957 income tax return. The profit of $354.92 was reported as a short-term gain. The other two were reported as long-term losses.

The nature of these three transactions was briefly as follows. The one that resulted in a small profit was another case in which Johnson lent money to the purchaser of a client's house in order to facilitate the sale, the buyer eventually defaulted on his mortgage to Johnson, who thereupon took over the property and a short time later resold it. The transaction in which Johnson suffered a loss of $282.47 involved a house which Johnson was unable to sell for a client. He bought it himself and later resold it. The third transaction, involving in this instance a farm, is still another case in which Johnson acquired the property in order to protect his interest as mortgagee. He resold it within a little more than a year.

The evidence discloses several transactions in the years subsequent to 1957. For the most part, these fall into the same pattern. They need not be discussed in detail here for they do not affect the conclusions set forth hereinafter.

I turn now to the transactions in 1957 which are of primary importance on this branch of the case, those involving the so-called Kalbfleish tract. In 1946 a farmer named Adam Kalbfleish...