Meyers v. Commissioner, Docket No. 3048-69.
| Decision Date | 19 October 1971 |
| Docket Number | Docket No. 3048-69. |
| Parties | Louis C. Meyers and Ruth Meyers v. Commissioner. |
| Court | U.S. Tax Court |
Albert B. Arbaugh, for the petitioners. Frank E. Wrenick, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal income tax for the joint returns of Louis C. and Ruth Meyers for the calendar years 1964 and 1965 in the amounts of $1,578.05 and $1,471.67, respectively. The issue is whether income recognized in those years resulting from sales of real estate constituted capital gain or ordinary income.
Some facts have been stipulated; the stipulation of facts and the exhibits attached thereto are incorporated herein by reference.
Louis C. Meyers, hereafter Louis, and Ruth Meyers, hereafter Ruth, were husband and wife during the taxable years 1964 and 1965. Their principal residence was Canton, Ohio, at the time the petition was filed. Joint income tax returns were filed by the Meyers for the years in question with the district director of internal revenue, Cleveland, Ohio.
Louis became a registered public accountant in 1929 and engaged in the practice of his profession in Canton, Ohio, and vicinity from that time through the years in question. During the period 1950 through 1965, Louis reported between $25,900 and $32,300 per year as gross income and between $13,200 and $17,700 as net income from his accounting practice.
Petitioners sold various parcels of real property located in Canton, Ohio, during the years 1952 through 1965. Gain on the sales of these parcels was reported by petitioners on the installment basis. In 1964 and 1965, the years at issue here, there was reported gain from sales transactions occurring in each previous year back to 1952. In each instance in which the sale followed a holding period of over six months, the gain was reported and claimed on the tax return to be entitled to long-term capital gain treatment. The long-term capital gain deduction at issue here is $3,540.14 for 1964 and $3,508.39 for 1965.
A summary of sales for which gain was recognized in 1965 and the average amount of time for which the properties had been held prior to sale, is set forth below. (Sales of property held 18 months or more are set forth individually to avoid distortion.)
Transactions not at issue Transactions at issue
---------------------------------------------------------------------------------
(Property held less than 6 months: (Property held over 6 months
no long-term capital gain long-term capital gain
deduction claimed) deduction claimed)
Year Average Average Total
of Parcels period Parcels period sales
sale sold held sold held per year
---------------------------------------------------------------------------------
1952 .. .... 3 11 months 3
1953 4 2 months 3 7 months 7
1954 1 4 months 2 9 months 3
1955 .. .... 1 1.5 years | 3
1955 .. .... 2 7 months >
1956 .. .... 3 9 months | 3
1957 1 1 month 1 2.7 years | 8
1957 .. .... 6 8 months >
1958 2 2 months 5 7 months | 7
1959 .. .... 1 8.2 years | 9
1959 .. .... 8 7 months >
1960 3 1 month 2 8 months | 5
1961 .. .... 8 8 months 8
1962 .. .... 2 8 months 2
1963 .. .... 1 1.1 years |
1963 .. .... 1 3.6 years > 3
1963 .. .... 1 5.8 years |
1964 .. .... 3 7 months 3
1965 .. .... 1 7 months 1
At the close of 1964, petitioners owned five rental dwellings and at the close of 1965, they owned six rental dwellings.
The transactions described above involving both long and short term holding periods generally arose in the following manner. In 1950 the petitioners conceived and embarked upon a program which consisted of buying houses located in fringe and changing neighborhoods in the city of Canton, Ohio. Petitioners generally paid from $2,500 to $4,000 for each parcel of real estate purchased by them during the entire period from 1950 through 1965. They repaired 95 percent of the properties they purchased. These repairs included papering, painting, flooring, roofing, window repairs, and installation of window shades. Repairs on the properties were generally performed by a handyman regularly employed by petitioners. After repairs and rehabilitation, petitioners would rent these properties to tenants under the agreements containing an option to purchase, or under agreements which gave the tenant the preferential right to purchase after an "equity" had been built up through rental payment, and after the credit rating of the individual tenant had been established.
If the tenant or the preferential agreement holder proved to be reliable by keeping his rental payments current and his credit rating was proven to be satisfactory, petitioners and the tenant would enter into a land contract covering the property. When a land contract was entered into, the vendee was required to pay an interest rate, usually 6 percent, which was above the then prevailing mortgage interest rate. Petitioners further enhanced their rate of return by adjusting principal each half year rather than monthly as payments were made. Little or no down payment was required. The lessee-purchasers were given "credit" against the down payment for part of the rent they had paid during the seven to eight-month rental period prior to entering into the land contract. The land contracts provided in part that upon payment of one-half of the contract price, petitioners would issue a deed and take a mortgage back from the purchasers.
Prospective purchases were located through Ruth's perusal of the daily newspaper listings of properties for sale. The decision to purchase was made jointly by Louis and Ruth. Both interviewed prospective tenant-purchasers, showed the houses to these prospects, and checked the prospects' credit references. Both handled collection of rents. Ruth handled complaints of the tenants and purchasers, and Louis handled evictions of undesirable tenant-purchasers. In the course of the 16 years from 1950 to 1965, only five repossessions were necessary.
Petitioners' intent at the time a house was first placed on the market was to find a person willing and able to purchase the property after a short rental period. Of the 65 sales of property being reported in petitioners' 1965 return, only six were held one year or more prior to the exercise of the purchase option. Ten involved an exercise of the option within the first two months following purchase by petitioners. The balance of the properties were sold under the option or preference arrangement after an average of between seven and eight months' retention by petitioners.
The combined selling price of the 54 sales at issue taking place over the period from 1952 through 1965 equaled approximately $381,000. After deduction of costs and selling expenses of $228,000, the profit was $153,000, or 67 percent. Eleven transactions during the 1952 to 1965 period, not at issue here since they involved a holding period of less than 6 months, resulted in only slightly less than a 50 percent profit. The profits on the 1964 and 1965 transactions were 99 and 104 percent, respectively. In comparison, the total interest income received on the contracts over the 1952 to 1965 period was approximately $162,000. The receipt of rent resulted in net rent income of $362.28 in 1964 and $338.38 in 1965.
OpinionThe issue is framed by sections 1202 and 1221, I. R. C. 1954.1 The special tax treatment prescribed by section 1202 applies only to capital gains. Section 1221 defines capital assets and excepts from that definition those assets which are "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."
A preliminary question must first be disposed of, that is, whether this dispute involves the capital character of only those sales made during 1964 and 1965, or whether this dispute encompasses the capital character of all sales made during the years 1952 through 1965 to the extent that gain from those sales was recognizable on the installment basis in 1964 and 1965, the two years for which the deficiency notice asserted additional tax owing.
The deficiency notice stated "that gains you realized from sales of real estate during 1964 and 1965" were ordinary rather than capital income; however, the computations in the deficiency notice show a disallowance of the section 1202 capital gain deduction taken in the years 1964 and 1965 relating to the total installment portion of all gains from sales in all years from 1952 through 1964 and 1965, respectively. The arguments of both parties were directed primarily toward the nature of sales occurring in 1964 and 1965, but some evidence is available from which the environment of the pre-1964 sales may be determined. Since deductions may be disallowed by the Commissioner without assigning any reason in the notice of deficiency for his action, ...
To continue reading
Request your trial