Margolis v. Commissioner, Docket No. 85706
| Decision Date | 19 April 1962 |
| Docket Number | Docket No. 85706,88082. |
| Citation | 1962 TC Memo 86,21 TCM (CCH) 444 |
| Parties | B. B. Margolis and Iris M. Margolis v. Commissioner. |
| Court | U.S. Tax Court |
Harrison Harkins, Esq., for the petitioners. Marion Malone, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
The respondent determined the following deficiencies in income tax of the petitioners:
Year Amount
1955 ........... $76,991.93
1956 ........... 51,505.15
1957 ........... 14,932.11
1958 ........... 53,738.47
Some of the issues raised in the pleadings have been settled by stipulation and some have been abandoned by petitioners. The remaining issues are:
1. Were the gains realized by petitioner in the U. S. Holding Company and Sachs exchanges in 1955 and from the Lillian Levikow exchange in 1957 recognizable for tax purposes, and, if so, were they taxable as ordinary income or long term capital gains?
2. Were the gains realized by petitioner in connection with transactions involving Trusts R-13316, R-14066, 2018, S-275, 432, 473 and 482 taxable as ordinary income or as long term capital gains?
3. Did the respondent err in disallowing $1,200 of the deduction claimed by petitioner for travel and entertainment expenses in his returns for each of the years 1955, 1956 and 1957?
Findings of Fact
Some of the facts have been stipulated, and, as stipulated, they are incorporated herein by reference.
Petitioners, husband and wife, are residents of San Diego, California. They filed joint income tax returns for the years 1955, 1956, 1957 and 1958 with the district director of internal revenue for the Los Angeles, California, internal revenue district.
At all times material herein B. B. Margolis (hereinafter referred to as petitioner) was in the real estate and insurance business. His reported income from business and capital gains during the taxable years was as follows:
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1955 1956 1957 1958
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Real estate commissions ............. $ 11,751.34 $ 18,563.93 $ 20,747.03 $ 21,880.10
Insurance commissions ............... 4,762.84 3,086.90 5,175.94 5,278.17
Profit on sale of real estate ....... 4,507.01 3,603.83 7,028.96 750.00
___________ ___________ ___________ ___________
$ 21,021.19 $ 25,254.66 $ 32,951.93 $ 27,908.27
Expenses ............................ 41,759.20 34,518.74 36,652.02 34,322.28
___________ ___________ ___________ ___________
Loss ................................ ($ 20,738.01) ($ 9,264.08) ($ 3,700.09) ($ 6,414.01)
Net capital gains ................... $119,108.71 $102,832.14 $ 33,160.87 $122,769.50
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Petitioner has maintained his business office at 6575 El Cajon Boulevard, San Diego, since 1945. His present staff consists of an office manager and a part-time stenographer. In the past he also employed a full-time bookkeeper, but not recently. He employs no salesmen, and the only salesman he ever had was a retired army sergeant who was employed for a few years after World War II. He never gave any instructions to his bookkeeper as to how or in what account his properties should be entered on his books.
Petitioner's business career began with the Title Insurance and Trust Company in Los Angeles where he was employed from 1921 to 1926. During the last two or three years of that employment he handled 30 or 40 active subdivision trusts and his duties involved the drawing of contracts and deeds, collections, policies of title insurance and all matters pertaining to the trusts.
From 1926 to 1932 petitioner was employed in the San Diego area for one of the persons whose trust he had been handling at the Title Insurance and Trust Company. From 1932 to 1936 he did general real estate work. Beginning in 1936 he became interested and active in rehabilitating distressed properties and subdivisions in the San Diego area. In the course of this work he acquired ownership or ownership interests in the following subdivisions:
From 1936 until he entered the Marine Corps in 1942, petitioner was engaged in the sale of lots in these subdivisions. He was in military service from 1942 through "a good part of" 1945.
In the period after World War II petitioner developed and sold four subdivisions: Rolando Park, 421 lots; South Bay Terrace, 173 lots; Vista La Mesa Villas, 94 lots; and Country Club Manor, 101 lots. He owned a 50 percent interest in South Bay Terrace, and a 25 percent interest in Vista La Mesa Villas. With the exception of South Bay Terrace, out of which some lots were sold, the lots in the post-war subdivisions were improved with houses and the completed houses and lots were sold.
In terms of zoning or land use, there were three classes of lots in the pre-war and post-war subdivisions: Most of the lots were zoned R-1 for single family residence; a few were residential income lots, for the construction of multiple residential rental units (duplex, four-family rental, etc.); and some of the lots were C-zone, or commercial lots, that could be used for commercial income producing purposes.
Petitioner and his associates did not offer for sale all of the lots in the subdivisions. They retained some lots because they were either commercial or desirable "view" lots. Upon the termination of the subdivision projects, they apportioned among themselves the retained lots, and, whenever possible, petitioner arranged to take commercial lots. Of the 17 rental properties now owned by petitioner, all but two were developed on lots retained from past subdivision projects.
The lots retained by petitioner and his associates from the subdivisions, and not sold by them, were salable at the time. Four of the lots thus retained by him (together with 10 other lots) were involved in the U. S. Holding Company, Sachs and Levikow exchanges hereinafter mentioned. These four lots were as follows:
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Lot Block Classification Tract Date Acquired Date Exchanged
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4 21 Residential Rolando No. 3 ........ | 3- 9-39—60% | 1-55
| 3- 7-51—40% |
18 12 Residential Rolando No. 2 ........ 12-28-42 (reacquired
3-8-56) 9-55
26 C Residential Windsor Hills ........ 1- 6-45 1-55
9 5 Commercial South Bay Terrace .... 8-16-46 1-55
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U. S. Holding Company Exchange: In September of 1955, petitioners consummated an exchange with U. S. Holding Company of San Diego, California, in the course of which they transferred $26,000 in cash and four lots located in San Diego County in exchange solely for three and a fraction lots, improved with an 8-room residence. Petitioners realized a gain of $17,450.33 on the exchange. They did not include this amount in the taxable income reported in their 1955 income tax return. Respondent determined it was taxable as ordinary income.
The four lots transferred by petitioners to U. S. Holding Company in the September, 1955 exchange were the following:
Period
Lot Date Acquired Held
Lot 18, Block 12, Rolando
No. 2 ..................... 12-28-42 12¼ years
Lots 4 (except N. W. 20
feet), 5, and 6, Block
216, Middletown ........... 5-14-40 15 1/3 years
Each of these lots had been carried on petitioner's books since the dates of their acquisition in Account No. 124 entitled "Real Estate Held for Sale." The Rolando lot was a vacant residential lot retained by petitioner from the Rolando subdivision. The Middletown lots were vacant residential lots acquired by petitioner on May 14, 1940, through the foreclosure of improvement bonds. They were close to the city, had good "views," and could have been rezoned as residential income property. There were no buildings on the Middletown lots, and those sold in 1955 represented one-half of the Middletown lots acquired by petitioner in 1940. The other one-half of these lots was sold by petitioner prior to 1955.
The four lots transferred by petitioner to the U. S. Holding Company were held by him primarily for sale to customers in the ordinary course of his business.
The property received by petitioners in the September, 1955 U. S. Holding Company exchange was acquired for their residence and they still occupy it as such.
In the year following the 1955 exchange with U. S. Holding Company, petitioner reacquired from U. S. Holding Company Lot 18, Block 12, Rolando Unit No. 2, at a cost of $3,532.04, in return for cash and Lot 9, Block 4, South Bay Terrace, a commercial lot.
Sachs Exchange: In January of 1955, petitioner consummated an exchange...
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