Longfellow v. Comm'r of Internal Revenue
| Decision Date | 09 October 1958 |
| Docket Number | Docket No. 60054. |
| Citation | 31 T.C. 11 |
| Parties | GEORGE W. LONGFELLOW AND RUTH LONGFELLOW, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Don O. Russell, Esq., for the petitioners.
Towner S. Leeper, Esq., for the respondent.
Capital Gains v. Ordinary Income— Subdivision of Land— Sale to Customers in Ordinary Course of Petitioner's Trade or Business.— The petitioner sold lots over a period of years in a subdivision created from his rough land which was located in a residential zone. The land was graded by the petitioner's grading company, subdivided, and otherwise improved by the petitioner at an expense of many times the cost of the land. The lots were sold to customers in the ordinary course of the petitioner's trade or business and the gain is taxable as ordinary income.
The Commissioner determined deficiencies in income tax and additions under section 294(d) as follows:
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¦ ¦ ¦Additions ¦
+----+----------+----------¦
¦Year¦Deficiency¦under sec.¦
+----+----------+----------¦
¦ ¦ ¦294 (d) ¦
+----+----------+----------¦
¦1951¦$513.18 ¦$171.23 ¦
+----+----------+----------¦
¦1952¦2,239.22 ¦ ¦
+----+----------+----------¦
¦1953¦2,072.05 ¦246.14 ¦
+--------------------------+
The only issue for decision is whether the profit from the sale of lots is taxable at capital gain rates or as ordinary income. The additions to the tax are not contested except as they would be reduced by a reduction of the deficiencies.
The petitioners filed joint income tax returns for the taxable years in the eighth district of Illinois. They live in Alton, Illinois.
George was engaged since 1936 in the business of contracting for grading, using heavy equipment. The work included grading on roads and other types of grading, clearing areas, ditch work, sewer work, and putting in water lines. He operated that business as a sole proprietor until about 1948 after which he operated through a corporation which he controlled and dominated. The heavy equipment which he was using in 1943 and thereafter during World War II consisted of 3 tractors and scrapers and 2 old cranes.
George purchased a tract of rough, unimproved land in Madison County, Illinois, for $7,750 in May 1943. It had an area of a little more than 21 acres and was located about a mile and a quarter east of Alton. It was in a residential, not a commercial, zone. A hogback 30 to 40 feet high ran through the property. Subdivisions containing many residences adjoined this tract on three sides and from such subdivisions three streets came to dead ends on the east side of this property, a street abutted it on the north, and a narrow street ran along the north side of the property. There were no improvements on the property in 1943.
George made no use of the property until 1951, but in 1947 he decided to sell it and he erected a sign on the property stating ‘This Property For Sale, Owner George W. Longfellow.’ He rejected an offer in 1948 of $35,000 for the entire tract upon condition that he would grade it. George, at his expense, had the municipality bring water lines to the tract in the fall of 1950. He had another ‘very nice offer’ in 1950 from a school board for about 7 acres on the east side of the property, but he rejected that. The sign was knocked down at some time and not replaced.
Maurice Wickenhauser, hereafter called Maurice, was a real estate agent with whom George had been acquainted for many years and with whom he had previously done business. Maurice advised George in May or June 1951 that three builders would be interested in building houses on george's tract of land if George would grade the property, subdivide it, and put in all improvements. Maurice said that he would assist in platting the subdivision and would endeavor to sell all of the lots for a commission. One builder indicated that he would build at least 10 houses if George would improve the property as above described.
George started to grade the property in the latter part of 1951. Maurice, representing George, had an engineer, who had previously done work for George, survey the property and consulted with him as to the number and size of the lots and the location of the streets. A plat of 56 lots was adopted and registered with the proper authorities. That plat did not include the eastern portion of the tract and in 1954 the remainder of the tract was incorporated in a new plat of lots numbered 57 through 87. One additional unnumbered lot was involved, making 88 lots in all into which the tract was eventually subdivided. The property, as finally platted, was bisected by four 50-foot streets, three running north and south and one running at an angle to those streets. Another street was laid out on the north edge of the property by using a part of George's property to widen the existing street at that point to 50 feet.
George graded the entire tract and put in the streets, as shown in the plats. The name ‘Turner Acres' was given to the subdivision in the late summer of 1951 when Maurice, acting for George, began to advertise the subdivision. The parties have stipulated that the cost incurred by George in improving the tract was as follows:
George agreed to pay Maurice a commission of $100 for each lot sold through his efforts and no other real estate agent sold any of the lots. George fixed the sales price of each lot sold and in that connection gave consideration to the cost or probable cost to him of the grading, the streets, the water, the platting, bringing the abstract down to date, and various other costs. The price was originally $1,350 for inside lots and more for corner lots. The sales prices were paid in cash. Five contractors bought lots, built houses on them and then sold the individual properties. They installed curbing and gutters in front of those houses and George then put in curbing and gutters in front of adjoining lots to prevent the streets from washing and to help in the sale of those adjoining lots. He added the cost of the curbing and the gutters to the prices of the lots.
George retained the right to approve or disapprove the type and size of houses to be built and the plans had to be inspected and approved either by him, his wife, or Maurice before a house was started. He made that requirement in order to protect the remaining lots.
Maurice had had experience in developing and selling subdivisions. He put signs on the Turner Acres property showing his name and address and acted as real estate agent in selling most of the lots. The words ‘Another Maurice J. Wickenhauser Development’ appeared on a sign. Maurice paid none of the costs incident to the improvement of the land, he did not help any purchaser with his financing, and the record does not show what expenses, if any, he paid in connection with the sale of the lots here involved. He received his commission when the purchase price was paid in full.
At least 27 houses were built on the subdivision during the 3 taxable years, most of them by the builders whom Maurice had mentioned to George before the grading was started.
Four lots were sold in 1951, 16 in 1952, 16 in 1953, 18 in 1954, and 11 in 1955. The record does not show the sales made from the tract after 1955.
The parties have stipulated that George's expenses during the taxable years on the lots in the Turner Acres subdivision were as follows:
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¦ ¦1951 ¦1952 ¦1953 ¦
+---------------------------+-------+---------+---------¦
¦Commissions paid ¦$400.00¦$1,400.00¦$1,600.00¦
+---------------------------+-------+---------+---------¦
¦Real estate taxes ¦85.97 ¦289.00 ¦225.72 ¦
+---------------------------+-------+---------+---------¦
¦Title and abstract expenses¦ ¦526.05 ¦327.25 ¦
+---------------------------+-------+---------+---------¦
¦Total ¦485.97 ¦2,215.05 ¦2,152.97 ¦
+-------------------------------------------------------+
One-half of the long-term capital gains shown as follows on the returns were reported as taxable income:
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