Lazarus v. United States, 66-56.

• Citation: 172 F. Supp. 421
• Decision Date: 08 April 1959
• Docket Number: No. 66-56.,66-56.
• Parties: Simon M. LAZARUS and Mina Lazarus v. UNITED STATES.
• Court: Court of Federal Claims

172 F. Supp. 421

Simon M. LAZARUS and Mina Lazarus v. UNITED STATES.

No. 66-56.

United States Court of Claims.

April 8, 1959.

George T. Altman, Beverly Hills, Cal., for plaintiffs.

Rufus E. Stetson, Jr., Washington, D. C., with whom was Asst. Atty. Gen. Charles K. Rice, for defendant. Herbert S. Fessenden, Washington, D. C., was on the brief.

PER CURIAM.

The issue in this case is whether the proceeds of the sale of certain properties should be treated for tax purposes as capital gain or ordinary income.

The trial commissioner was directed to make findings of fact and to recommend conclusions of law. Pursuant to such direction these have been filed.

The court having considered the evidence, the briefs and the argument of counsel adopts the findings, opinion and recommendation of Trial Commissioner Mastin G. White.

Since the trial commissioner's findings and opinion were filed, the court rendered its opinion in the case of Boeing v. United States, 168 F.Supp. 762, involving the same general issue. The defendant insists that the Boeing decision should govern the instant case. We think the instant case is clearly distinguishable on the facts and that the cited case is therefore inapposite. We have briefly discussed these distinctions in the appendix at the end of the court's findings of fact and conclusion of law.

Plaintiffs are entitled to recover with interest thereon as provided by law, and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38(c), 28 U.S. C.A.

It is so ordered.

Opinion of the Commissioner

This case grew out of a controversy as to whether the profits derived by the plaintiffs in 1950 from the sale of certain parcels of land constituted a capital gain or ordinary income.

The plaintiffs are husband and wife. They reside in California, where the system of community property in marriage prevails, and all the income involved in this case was community income. Plaintiff Simon M. Lazarus (who will usually be referred to hereinafter as "Lazarus") managed the plaintiffs' community property at all times pertinent to this case, and his actions discussed in this opinion were taken by him on behalf of the community estate.

Lazarus has been continuously engaged in the business of operating motion-picture theaters since 1917. In 1943 and 1944, he assembled approximately 76 acres of land within the outer limits of the City of Los Angeles for the purpose of establishing a farm. The farm was operated by Lazarus as an avocation from 1944 until November 1949, and it was used by Lazarus and his wife as their home during the period 1945-1949. In operating the farm, Lazarus had the assistance of a full-time farm hand until sometime in 1948, and thereafter he was assisted by a part-time farm hand.

In 1946, Lazarus decided to construct a drive-in motion-picture theater on part of his farm, and he decided to sell another part of the farm as a means of raising money with which to finance the drive-in theater project. A 24-acre portion of the farm was selected for sale, and preliminary steps to convert this area into a 32-lot subdivision of the City of Los Angeles were taken. The tentative subdivision was designated as Tract 14471. Difficulties were encountered, however, in connection with the proposal to establish a drive-in theater on Lazarus' property, and that project was ultimately abandoned in April 1948.

At the time of the abandonment of the drive-in theater project, Lazarus was in need of money for his existing theaters. Consequently, he proceeded with the plan for the establishment of Tract 14471 as a subdivision for sale. This involved, among other things, the making of certain improvements that were required by an ordinance of the City of Los Angeles, including the installation of water mains, fire hydrants, public utility service connections, and drainage facilities and the paving of certain streets and walks.

After Tract 14471 had been established as a completed subdivision, with the 32 lots recorded and ready for sale, Lazarus offered to sell the subdivision as a single parcel to two different people, but neither was interested in purchasing the property at the price fixed by Lazarus. He then turned over the sale of the lots in Tract 14471 to an independent real estate broker, who undertook to sell the lots on a commission basis. The actual sale of lots in Tract 14471 was begun in 1949, and 25 of the lots were sold during that year.

In 1950 (the year that is involved in this suit), Lazarus completed arrangements for the conversion of another portion of the farm into a subdivision for sale. That subdivision was designated as Tract 15746. It consisted of approximately 47½ acres and was subdivided into 80 lots. The sale of lots in Tract 15746 was also undertaken on a commission basis by the same broker who was handling the sale of lots in Tract 14471.

During the year 1950, 7 lots in Tract 14471 were sold for a total of $21,450 and 12 lots in Tract 15746 were sold for a total of $42,850. Hence, the aggregate amount derived from the sale of lots in 1950 was $64,300.

The plaintiffs filed a joint income tax return for the calendar year 1950, showing a net income of $9,666.46 and taxes due in the amount of $1,470.06. This return indicated that profits in the amount of $33,716.36 had been derived by the plaintiffs from the sale of the lots mentioned in the preceding paragraph, and these profits were treated by the plaintiffs as a capital gain for income tax purposes.

Thereafter, following an examination by an internal revenue agent of the plaintiffs' income tax returns for 1950 and for certain other years, of work sheets prepared by the plaintiffs' accountants, and of the records of an insurance company respecting a loan that was made to the plaintiffs for the purpose of improving Tract 15746, the Internal Revenue Service determined in 1954 that the profits derived by the plaintiffs from the sale of lots in 1950 amounted to $35,136.69, instead of the amount reported by the plaintiffs ($33,716.36). The Internal Revenue Service concluded that such profits constituted ordinary income and not a capital gain, as asserted by the plaintiffs. No other question was raised by the Internal Revenue Service respecting the plaintiffs' income tax return for 1950.¹

The plaintiffs were informed by the Internal Revenue Service of the adjustments mentioned above, and an additional payment in the amount of $8,078.47 was demanded by the Internal Revenue Service. That amount was paid by the plaintiffs, and the present suit was subsequently instituted for its recovery (plus interest).

In this litigation, the plaintiffs state that they are willing to concede the correctness of the $35,136.69 figure used by the Internal Revenue Service as the amount of the plaintiffs' profits from the sale of lots in 1950, and that they only contest the action of the Internal Revenue Service in treating such profits as ordinary income rather than as a capital gain.

In situations where taxpayers acquired sizeable tracts of land and subsequently decided to offer the property for sale to the public as subdivided acreage, the courts have frequently been called upon to determine whether profits derived from such sales constituted ordinary income or capital gains. Under the pertinent statutory provision, the basic question in each of these cases has been whether the parcels of land sold by the taxpayer came within the category of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business".² If so, the profits have been held to be ordinary income. Otherwise, the profits have been held to constitute a capital gain.

Perhaps the only guiding principle of general application that can be gleaned from the judicial decisions dealing with the problem referred to in the preceding paragraph is that every case of the type mentioned must be decided on the basis of its own facts, there being no single test that can be applied to all such cases with decisive results. Garrett v. United States, 1954, 120 F.Supp. 193, 128 Ct.Cl. 100, 104; Mauldin v. Commissioner of Internal Revenue, 10 Cir., 1952, 195 F.2d 714, 716; Victory Housing No. 2 v. Commissioner of Internal Revenue, 10 Cir., 1953, 205 F.2d 371, 372. There are, however, several factors that courts have considered in disposing of such cases.

One of the factors regarded by courts as pertinent is the purpose for which the land was originally acquired— i. e., whether it was originally purchased for the purpose of resale or was acquired for some other purpose. For example, in Berberovich v. Menninger, D.C.E.D. Mich.1957, 147 F.Supp. 890, 892, the court emphasized the fact (along with other matters) that the land under consideration had been originally purchased by the taxpayer for a farm in holding that profits from the sale of lots carved out of the farm should be treated as a capital gain for income tax purposes, and not as ordinary income. On the other hand, although the fact that the land involved in Mauldin v. Commissioner of Internal Revenue, supra, had originally been acquired by the taxpayer for a purpose other than resale was regarded by the court as worthy of consideration, it was nevertheless held (195 F.2d at page 717) that this particular circumstance was outweighed by other facts leading to the conclusion that the taxpayer subsequently utilized the land to engage in the business of selling lots.

If only the "purpose of original acquisition" test were applied to the facts of the present case, it would necessarily be decided that the profits realized by the plaintiffs from the sale of their lots constituted a capital gain rather than ordinary income from the business of selling realty. The plaintiffs' land was originally purchased for a farm, and not for resale. The decision to subdivide and dispose of the property was made some years after its acquisition, and because of changed...