Kaltreider v. Commissioner of Internal Revenue

• Decision Date: 21 May 1958
• Docket Number: 12337.,No. 12336,12336
• Citation: 255 F.2d 833
• Parties: Walter H. KALTREIDER and Irene C. Kaltreider, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

255 F.2d 833 (1958)

Walter H. KALTREIDER and Irene C. Kaltreider, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 12336, 12337.

United States Court of Appeals Third Circuit.

Argued January 23, 1958.

Decided May 21, 1958.

As Amended July 17, 1958.

Before BIGGS, Chief Judge, KALODNER, Circuit Judge, and WRIGHT, District Judge.

Robert H. Griffith, York, Pa. (Arthur Markowitz, York, Pa., C. Philip Moore, Jr., York, Pa., on the brief), for petitioners.

Arthur I. Gould, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Attorneys, Department of Justice, Washington, D. C., on the brief), for respondent.

KALODNER, Circuit Judge.

Was real estate sold by taxpayers in 1951 and 1952 held by them primarily for sale to customers in the ordinary course of business within the meaning of Section 117(a) and (j) of the Internal Revenue Code of 1939, as amended?¹

That is the primary question presented by these petitions for review of the decision of the Tax Court² which answered it affirmatively, thereby making gains on the sale of the real estate taxable as ordinary income rather than "capital gains".

A second issue presented is whether the Tax Court erred in sustaining the Commissioner's determination that taxpayers were subject to penalties for failure, under Section 294(d) (1) (A) of the Internal Revenue Code of 1939, as amended,³ to file a declaration of estimated tax for 1952, and for substantial underestimation of tax due for 1952, under Section 294(d) (2) of the Internal Revenue Code of 1939, as amended.⁴

Taxpayers contended in the Tax Court that they had relied solely on their accountant to file the required declaration of estimated tax; that he failed to do so and that therefore their failure to file was due to reasonable cause and not willful neglect. In rejecting the contention the Tax Court held that proof had not been presented that taxpayers' accountant was qualified to advise them concerning tax matters; that there was no evidence that their reliance on the accountant was "well placed" and accordingly the failure to file the declaration was not due to reasonable cause.

The facts may be summarized as follows:⁵

In 1936, Walter H. and Irene C. Kaltreider ("taxpayers"), husband and wife, purchased twenty-seven acres of farmland located on the outskirts of York, Pennsylvania, for $9,500.00. In 1938 they built their residence on a part of that land and continued to use the property exclusively for farming for a number of years.

On October 21, 1947, taxpayers, together with their son, Walter H. Kaltreider, Jr., a graduate engineer, organized Kaltreider Construction Inc. ("Corporation") under the laws of Pennsylvania to carry on a building and construction business.

The capital of Corporation was initially contributed by taxpayers and their son and, with the exception of twenty-five shares issued to each of taxpayers' two grandchildren on December 25, 1952, all outstanding stock has been held by them since the incorporation.

During 1951 and 1952, the taxable years in issue, taxpayers' son served as president of Corporation. The taxpayers, husband and wife, acted as treasurer and secretary respectively. Throughout this period Corporation was engaged in the construction of homes, garages, schoolhouses, and freight truck terminals.

During 1948 taxpayers developed a seven-acre tract of their twenty-seven acre farm and subdivided it into fifteen lots; Corporation constructed homes on eleven of them. In 1952 the taxpayers developed a second seven-acre tract of their farm and subdivided it into thirteen lots; Corporation constructed homes on seven of them.

Two of the homes were sold in 1949, and four in 1950, at a profit. In their joint income tax returns for the years 1949 and 1950, taxpayers treated the profits as ordinary income. On the first page of their tax returns the taxpayers listed their occupation as "Contractor" while in Schedule "C"⁶ of the tax returns, in which they specifically reported the profits, they listed the "nature of their business" as "Real Estate".

Five of the homes and the four remaining vacant lots⁷ in the 1948 development were sold at a profit by taxpayers in 1951, the first of the two taxable years in issue. In their 1951 tax return taxpayers made allocation of sales price, costs, and gross profits between houses and lots. The profit allocated to sales of houses ($350.00) was reported as ordinary income in Schedule "C" and one half ($10,478.90) of the profit allocated to sale of the lots⁸ was reported as long-term capital gain in Schedule "D".⁹

The allocation procedure established by taxpayers in their 1951 tax return was pursued in their 1952 tax return with respect to the seven homes which were built and sold that year. Profit allocated to sale of houses ($5,150) was reported as ordinary income in Schedule "C" and one-half ($6,744.50) of the profit allocated to sale of the lots on which the houses were built was reported as a long-term capital gain in Schedule "D".

On the first page of their 1951 and 1952 tax returns taxpayers listed their occupation as "Contractor". On Schedule "C" of the 1951 return taxpayers stated the nature of their business to be "Sale of Homes"; on Schedule "C" of their 1952 return it was stated to be "Contractor" and their principal product was described as "Homes".

Taxpayers' tax returns for the years 1949 to 1952, inclusive, were prepared by their accountant, John Cusma, from memoranda which they supplied him. He also prepared their declarations of estimated tax — except for the year 1952 when he failed to do so. His failure, he testified, "was purely an error on my part; he taxpayers had nothing to do with it."

Cusma was also Corporation's auditor and prepared its tax returns for the taxable years here involved. He had been engaged as a public accountant in York, Pennsylvania since 1944. Prior to that time he was an investigator for the United States Department of Labor.

At the request of one of taxpayers' attorneys Cusma prepared amended returns for both taxpayers and Corporation in which profit allocated to the sale of houses that year in taxpayers' original 1952 return was eliminated and included instead in Corporation's return.

On the score of the taxpayers' activities in general during the taxable years involved and the period beginning with the launching of the development in 1948 these facts may be added to those already stated:

Taxpayers were not licensed real estate brokers nor did they hold themselves out to be such; they did not list the lots in their two developments with any real estate agents; they placed no signs on the lots, nor did they advertise in newspapers. Contracts for sales of the houses in their developments were made either in the name of Corporation or Corporation and taxpayers jointly; never by taxpayers alone. With respect to the transfer of title to the houses following their sale all such transfers by deed were made by taxpayers since they were the title holders of the lots and the houses built upon them.

During the years 1949 to 1952, inclusive, taxpayers were not engaged in farming, as evidenced by their own tax returns for those years.

On the facts as stated the Tax Court made the following finding of fact:

"During the years in issue, the petitioners taxpayers were engaged in the business of subdividing, improving and selling real estate. The lots sold by them during the taxable years under consideration constituted property held primarily for sale to customers in the ordinary course of their trade or business."

In its Opinion the Tax Court, in support of its finding, stated:

"In 1948 and again in 1952, one of the tax years in issue, the petitioners taxpayers incurred considerable expense in subdividing the acreage in question into some 28 lots for residential purposes. They then caused their closely held family corporation to construct houses on 18 of those lots; 12 of which were sold to individual purchasers during the taxable years under consideration. The record does not disclose what motives underlay the original purchase of the 27-acre tract. However, even were we to make the gratuitous assumption that petitioners taxpayers acquired the land solely for investment purposes, nothing of merit would be added to their case. When they embarked upon the development, construction, and sales program which we have outlined, they acquired the status of `dealers\' in relation to the property in issue and thereupon became engaged in the real estate business * * *."

With respect to the part which Corporation played in constructing the houses, and the taxpayers' contention that under its arrangement with Corporation the latter was to receive that portion of the purchase price allocable to the house while taxpayers received only that portion allocable to the land, the Tax Court determined that "* * * whatever was done here by the Corporation was done at the instance and for the benefit of the petitioners taxpayers as their agent." In connection with this last statement the Tax Court said:

"* * * It is an accepted principle of law that one may conduct a business through agents, and that because others may bear the burdens of management, the business is none the less his."

Taxpayers' position here may be summed up as follows:

Their property was acquired for residential and investment purposes; they actually farmed it for several years; they were not real estate brokers nor did they hold themselves out as such; they did not list or advertise their property, or any of it, for sale; the costs of construction of the houses were borne by Corporation and taxpayers were only paid for the land; Corporation "found purchasers for the homes" and sold them; taxpayers under their arrangement with Corporation sold the land only to one customer, Corporation.

The Commissioner's position is that the Tax Court's determination is amply sustained by the record; that it is further...