McManus v. C. I. R.
| Decision Date | 04 October 1978 |
| Docket Number | Nos. 76-1527,76-1528,76-1532,76-1760 and 76-1761,76-1531,s. 76-1527 |
| Citation | 583 F.2d 443 |
| Parties | 78-2 USTC P 9748 Thomas K. McMANUS and Margaret F. McManus, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ESTATE of John C. GUTLEBEN, Deceased, United California Bank, Executor, and Vera B. Gutleben, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ESTATE of Eleanor and Nelson CHICK, Deceased, Nelse Chick Siler, Executrix, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Paul E. Anderson (argued), San Francisco, Cal., for petitioners-appellants.
Gilbert S. Rothenberg (argued), of Dept. of Justice, Washington, D. C., for respondent-appellee.
Petition to Review a Decision of The Tax Court of the United States.
Before CARTER, Circuit Judge, KUNZIG, Judge, * and TANG, Circuit Judge.
The taxpayers 1 appeal from a decision of the tax court, published at 65 T.C. 197 (1975), upholding the Commissioner's assessment of additional income taxes. We affirm.
Most of the facts were stipulated. The taxpayers were long-time associates in two construction companies. In 1954, they purchased a tract of land in Oakland, California. The tract was subdivided, and streets and utilities were installed. The subdivided parcels were then sold, with the last sale occurring in 1960.
In 1961, the taxpayers acquired a second tract, Tract 2347, which is the subject of this appeal. Tract 2347 is prime industrial real estate, and is located directly across the freeway from the taxpayers' earlier tract. Title was taken as tenants in common. The property, about 36 1/2 acres, was purchased for $926,000.00.
Shortly after the purchase, the taxpayers applied to the city planning commission for permission to subdivide the property. A plat was filed in May, 1962, showing 14 separate plots and a street.
Between March and September, 1962, the taxpayers spent about $240,000.00 installing roads, sewer lines, water, gas and electrical facilities. The taxpayers also commissioned a study by the Stanford Research Institute on the feasibility of building an office building on the site. The report was generally unfavorable.
At various times between 1963 and 1973 portions of Tract 2347 were leased. The leases were for pipe storage, amusement rides, billboard advertising and car parking. All these leases were for short periods and the tax court found the total rental income over the period was nominal.
Between 1961 and 1973, various parcels of Tract 2347 were sold, and a parcel was condemned by the State of California. The parties disagree as to how many sales occurred during the period. The taxpayers claimed that there were only eight voluntary sales, while the Commissioner asserted that there were at least 15 sales. 2 The property was listed in the Western Real Estate News, the California Site Selection Handbook, and publications of the California Chamber of Commerce. Each of these publications received wide circulation within the real estate industry. The taxpayers did not authorize the inclusion of Tract 2347 in these publications, nor did they take any steps to remove the listings though they were aware of them. The listings were made without charge. At one time, a broker was given an exclusive listing for one parcel. The tax court found that it was generally known among brokers that Tract 2347 was available for sale or lease. The taxpayers' connection with Tract 2347 ended in 1973 when the remaining portions of the property were sold to the Continental Development Company. At the time of this sale, Gutleben had died, and Chick was in poor health.
From 1961 to 1970, the financial transactions regarding the property were recorded by the taxpayers in a system of books that listed the property as an asset of McManus, Gutleben and Chick. Some of the entries in this account are labelled "Drawing 3 partners". Such draws were made in equal amounts to the individual taxpayers. In 1967, the taxpayers opened a bank account at the United California Bank in San Leandro, California; the signature card indicated all three were co-partners and the card was signed in their capacity as partners. From 1961 to 1970 partnership tax returns were filed in the name of McManus, Gutleben and Chick, which included the Tract 2347 transactions. After 1970, on the advice of counsel, the filing of partnership returns was discontinued. During the course of the audit preceding this suit, McManus wrote two letters to the Internal Revenue Service which stated that Tract 2347 was owned by the partnership of McManus, Gutleben and Chick, and that he was a member of the partnership.
In 1968, after the California condemnation, McManus purchased property in Fremont, California which he believed constituted replacement property under 26 U.S.C. § 1033. McManus did not notify the Commissioner that he had purchased replacement property until after April 1, 1970. No election under 26 U.S.C. § 703 was ever filed on behalf of the partnership.
In their individual tax returns, the taxpayers claimed the gain realized on the California condemnation as capital gains. On previous returns, gains from the sale of parcels of Tract 2347 had been reported as ordinary income. During the audit the taxpayers signed Form 872-A which provided for an extension of the statute of limitations for tax year 1968 until 90 days after either the Commissioner or the taxpayer gave written notice to the other revoking the extension. The Commissioner, on March 23, 1973, assessed deficiencies against the taxpayers on the basis that gain realized from Tract 2347 was ordinary income and not capital gains as reported. 3 The matter was heard by the tax court, which found for the Commissioner on all counts. The taxpayers now bring this appeal.
The taxpayers raise four issues. They claim that Form 872-A was ineffective, and therefore the assessments for 1968 were beyond the statute of limitations. They claim that the tax court erred in finding that Tract 2347 was not a capital asset and in finding that Tract 2347 was owned by a partnership. Finally, McManus claims that the tax court erred in holding that he could not avail himself of the benefits of 26 U.S.C. § 1033. Each of these matters will be discussed in turn.
The statute of limitations, 26 U.S.C. § 6501, provides for a three year assessment period for income taxes, § 6501(a). However, § 6501(c)(4) also provides,
Where, before the expiration at the time prescribed in this section for the assessment of any tax imposed by this title, except for the estate tax provided in chapter 11, both the Secretary or his delegate and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.
Absent an extension the assessment period for the tax year 1968 would have expired on April 15, 1972. The Commissioner issued the deficiency notices March 23, 1973.
The taxpayers argue that the form which they signed (Form 872-A) 4 is ineffective under the language quoted above because it does not set a definite time when the limitations period would end. In the taxpayers' view, Form 872-A extends the limitations period forever contrary to the intent of § 6501(c)(4). We are not persuaded.
This form does not, as the taxpayers contend, extend the limitations period forever. The tax court held that the waiver would be accepted and operative for a reasonable time only. The taxpayers do not contend that the assessments here, filed 11 months after the three year period, were unreasonably delayed, nor could they prevail on such a contention.
Nor does § 6501(c)(4) demand the reading the taxpayers give it. The statute requires an agreement between the taxpayer and the Commissioner; it does not require an agreement for a fixed period of time. If a fixed period is agreed to, it can be extended. The taxpayers could have cut the extension period to 90 days by sending a letter. They failed to do so. We fail to see any significant difference between not sending a letter here and granting a further extension. A similar agreement was upheld in United States v. Mortell, 248 F.Supp. 706 (N.D.Ill.1965). We hold that the 1968 assessments were not beyond the limitations period.
The question here is whether Tract 2347 was "property held . . . primarily for sale to customers in the ordinary course of . . . trade or business" within the meaning of 26 U.S.C. § 1221(1). The taxpayers contend they bought the property and held it for investment and rental purposes. The Commissioner asserts the taxpayers were in the business of buying raw land, developing it, and selling it for profit, and that their activities with regard to Tract 2347 were part of this business.
In this circuit, a finding that a particular asset was or was not a capital asset is a finding of fact and must be upheld unless clearly erroneous. Rule 52(a), Fed.R.Civ.P.; Parkside, Inc. v. Commissioner, 571 F.2d 1092 (9th Cir. 1977); Los Angeles Extension Co. v. United States, 315 F.2d 1 (9th Cir. 1963). The case law has developed a series of factors to be evaluated in determining whether land is held for sale in the ordinary course of business. These factors are:
The length of holding of the property, the nature of the acquisition of the property, the frequency and continuity of sales over an extended period of time, the nature and the extent of the taxpayer's business, the activity of the seller about the property, and the extent and substantiality of the transactions.
Parkside, supra at 1096 quoting Los Angeles Extension Co., 315 F.2d at 3.
Applying these factors to the facts here, we can not...
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