Morrison v. United States, C76-526.
| Decision Date | 07 March 1978 |
| Docket Number | No. C76-526.,C76-526. |
| Citation | 449 F. Supp. 663 |
| Parties | Hart B. MORRISON et al., Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Ohio |
COPYRIGHT MATERIAL OMITTED
John Kennedy Lynch, Cleveland, Ohio and Paul A. Weick, Cuyahoga Falls, Ohio, for plaintiffs.
David J. Curtin, Dept. of Justice, Tax Division, Washington, D. C., for defendant.
Plaintiffs Hart B. Morrison and Theodore H. Case brought separate suits against the United States for the refund of federal income taxes assessed in 1970.1 Since these two refund suits shared common questions of law and fact the court consolidated them for trial pursuant to Fed.R.Civ.P. 42(a). Jurisdiction is based upon 28 U.S.C. § 1346(a) (1970).
Hart B. Morrison has been in the real estate business since 1920 when he acquired a real estate license from the State of Ohio. He has been engaged in the development and sale of residential and industrial real estate since at least 1949. Sometime in 1954-1955 he met Theodore H. Case, who was employed by the Geneva Telephone Company. At that time Morrison was developing a residential area in Newburg, Ohio.
In June 1969 Morrison and Case formed a partnership under the name of "Geneva Cottages." The purpose of the partnership was to acquire property immediately to the west of Geneva State Park in Geneva-on-the-Lake, Ohio and then attract other investors to join with the partnership in developing the property into a residential and recreational area. Besides money, Morrison and Case were to contribute their own unique skills to the partnership. Morrison was very experienced in acquiring and marketing real estate in the Geneva area, and Case, who had worked with Geneva area utilities, was uniquely qualified to handle arrangements for bringing power, water, and gas to the partnership's planned residential development.
In June of 1969 the Morrison and Case partnership began to acquire property to the west of Geneva State Park. Their first acquisition was a 3.8 acre tract purchased from Herbert E. and Nona J. Behner (hereinafter the "Behner property"). The property was transferred by a deed of trust executed on June 27, 1969. The Behners conveyed the property to the Ohio National Bank as trustee for Case and Morrison, and in exchange received $72,800 from the bank.
The second piece of property the Morrison and Case partnership acquired was a 8.2 acre tract owned by George H. and Catherine Johnson (hereinafter the "Johnson property"). On February 16, 1970 the partnership entered into a land contract with the Johnsons and agreed to pay them $150,000 for their property. The partnership put $2,000 down and agreed to pay the rest in two installments: $18,000 on July 15, 1970 and $130,000 on or before January 1, 1971. The contract provided that the partnership could not receive title until the full purchase price was paid; that it could not take possession until 30 days after the title was transferred to it; that in lieu of interest on the unpaid purchase price the Johnsons were to receive the rents from the property until title passed; and that the taxes, assessments, and insurance on the property were to be prorated between the partnership and the Johnsons as of the date title was transferred.
On March 15, 1970 the Morrison and Case partnership acquired a third piece of property west of the Geneva State Park. It bought Jack D. and Inez C. Nightwine's contract rights2 to 4.35 acres of land (hereinafter the "Nightwine property") and agreed to pay the Nightwines $64,457. The partnership immediately received possession of the property and became responsible for the payment of the taxes and insurance payments as of March 15, 1970. On July 20, 1970 $500 of the purchase price was paid to the Nightwines and on October 15, 1970 an additional $15,500 was paid them.
One final piece of property is involved in this suit, but one not purchased by the partnership itself. On January 15, 1970 Morrison, acting individually, bought a 162 acre tract from the B'Tawn Beach Club partnership (hereinafter the "B'Tawn property"). Case did not join Morrison in the purchase because he was a partner in the B'Tawn Beach Club. Morrison agreed to purchase this property for $425,000 under a land contract. He put $10,000 down on January 15, 1970 and agreed to pay the rest in two installments: $290,000 on or before December 1, 1970 and $125,000 on or before December 31, 1970. The terms of this land contract were the same as those in the contract the Morrison and Case partnership had entered into for the "Johnson Property": title was to remain in the B'Tawn Beach Club until payment of the entire purchase price; in lieu of interest on the unpaid purchase price the B'Tawn Beach Club was entitled to the rents from the property until title was transferred to Morrison; the taxes, assessments, and insurance on the property were to be prorated between the B'Tawn Beach Club and Morrison as of the date of transfer of title; and Morrison was not entitled to physical possession until 30 days after transfer of title.
Upon the acquisition of the Behner, Johnson, Nightwine, and B'Tawn properties Morrison and Case began the initial stages of their residential development project. They named their planned housing development "Shoreland Acres," retained an engineer for advice on subdivision, and hired an artist to do some preliminary sketches for use in a sales brochure.
On September 22, 1970 the State of Ohio announced that it was going to expand the Geneva State Park.3 Shortly thereafter, Morrison and Case were notified of the state's intention to acquire the Behner, Johnson, Nightwine, and B'Tawn properties and all plans for the proposed "Shoreland Acres" development were dropped. At the time they received notice of the threatened condemnation Morrison and Case were clearly holding their properties for sale to customers in the ordinary course of their business.4
On December 7, 1970 upon the instructions of Morrison and Case, the Northeastern Ohio National Bank transferred the title to the Behner property to the State of Ohio. Subsequently the state paid the bank $175,000. The bank then discharged the deed of trust it held on the Behner property and paid the remainder of the $175,000 to Morrison and Case.
On December 7, 1970, the same day that the bank deeded the Behner property to the State of Ohio, George and Catherine Johnson deeded the Johnson property to Morrison and Case;5 and on December 11, 1970 Morrison and Case sold the Johnson property to the state for $334,000. They then paid the Johnsons the $110,000 outstanding on the original purchase price.
On December 11, 1970 Morrison and Case also sold the Nightwine property to the State of Ohio.6 They were paid $139,000 and they then paid the Nightwines the $48,457 they owed on that property.
Morrison's sale of the B'Tawn property was handled differently from the other three sales. He had bought the B'Tawn property under land contract and the title was to remain in the name of the B'Tawn Beach Club until the amounts due under the contract were paid. On December 4, 1970 the B'Tawn Beach Club conveyed title to the B'Tawn property in trust to Howard Nazor. Nazor was instructed to hold the property for the benefit of Morrison and to convey the property to him upon the payment of the balance due the B'Tawn Beach Club on the land contract. On December 17, 1970, before the B'Tawn Beach Club had received any further payment from Morrison, Nazor conveyed to the State of Ohio both legal and equitable title to the B'Tawn property. The state subsequently paid Nazor $565,000 and he then paid the B'Tawn Beach Club the balance due on the land contract. The remainder he turned over to Morrison.
In their income tax returns for 1970 Morrison and Case reported the gains they realized from the sales of their properties as long-term capital gains. The Internal Revenue Service (IRS) examined their tax returns and determined that the proceeds from the sale of these properties should have been reported as ordinary income instead of long-term capital gains. Accordingly, the IRS assessed a tax deficiency against Morrison in the amount of $106,556.35 (including interest) and against Case in the amount of $61,908.65 (including interest). Both Morrison and Case paid these assessed tax deficiencies in full and then filed timely refund claims with the IRS. After the IRS denied both their claims in full they filed suit in this court pursuant to I.R.C. § 7422.
An ultimate finding of fact: Were the properties capital assets at the time of their sale to the State of Ohio?
The Internal Revenue Code provides preferential capital gains treatment for the profit realized by the sale of a "capital asset." I.R.C. § 1221 excludes certain types of property from the definition of "capital asset." Among the exclusions is property held primarily for sale to customers in the ordinary course of a taxpayer's business.
I.R.C. § 1221(1) (emphasis added).
The Sixth Circuit has consistently taken the position that whether or not a taxpayer holds property "primarily for sale to customers in the ordinary course of his trade or business" is a question of fact. Philhall Corporation v. United States, 546 F.2d 210, 214 (6th Cir. 1976); Mathews v. Commissioner of Internal Revenue, 315 F.2d 101, 107 (6th Cir. 1963); Bauschard v. Commissioner of Internal Revenue, 279 F.2d 115, 117 (6th Cir. 1960); Harry Slatkin Builders v. Commissioner of Internal Revenue, 235 F.2d 189, 189-190 (6th Cir.) cert....
To continue reading
Request your trial
-
Case v. U.S.
...Johnson property for less than six months; to that extent, it granted the government's motion for summary judgment. Morrison v. United States, 449 F.Supp. 654 (N.D.Ohio 1977). The Court declined to rule on the appropriate treatment of Morrison's gain from the sale of the B'tawn property unt......