Nadalin v. United States

• Decision Date: 15 July 1966
• Docket Number: No. 344-60.,344-60.
• Parties: John NADALIN and Mary Nadalin v. The UNITED STATES.
• Court: U.S. Claims Court

364 F.2d 431 (1966)

John NADALIN and Mary Nadalin v. The UNITED STATES.

No. 344-60.

United States Court of Claims.

July 15, 1966.

Roger K. Powell, Columbus, Ohio, attorney of record, for plaintiff. W. S. Pealer, Columbus, of counsel.

Saylor L. Levitz, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant. Richard M. Roberts, Lyle M. Turner and Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, WHITAKER, Senior Judge, and DURFEE, DAVIS, and COLLINS, Judges.

OPINION

PER CURIAM.

This case was referred to Trial Commissioner Saul Richard Gamer with directions to make findings of fact and recommendation for conclusions of law. The commissioner has done so in an opinion and report filed on March 25, 1965. Exceptions to the commissioner's report and opinion were filed by plaintiffs and the case was submitted to the court on the briefs of the parties and oral argument of counsel. Since the court is in agreement with the opinion, findings and recommendation of the commissioner, it hereby adopts the same as the basis for its judgment in this case, as hereinafter set forth. The commissioner's opinion is in accord with the recent decision of the Supreme Court in Malat v. Riddell, 383 U.S. 569, 86 S.Ct. 1030, 16 L.Ed.2d 102 (1966), as well as with the decisions of this court in Browne v. United States, 356 F.2d 546, 174 Ct.Cl. ___ (February 1966), and Tibbals v. United States, 362 F.2d 266, 176 Ct.Cl. ___ (June 1966). Plaintiff is therefore not entitled to recover and the petition is dismissed.

OPINION OF COMMISSIONER^*

GAMER, Commissioner:

The question here presented is whether the gain realized by plaintiff¹ in 1956 from the sale of certain lots in two subdivisions constituted long-term capital gain resulting from the sale of a capital asset, or ordinary income resulting from the sale of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." (26 U.S.C. § 1221 (1958 ed.))

In 1955, plaintiff, then a general contractor for some 35 years, was the owner of 33 acres of unimproved land in Upper Arlington, Ohio, a city located on the outskirts of Columbus, Ohio. This acreage had been assembled from 5 acres purchased as long ago as 1943, 6 adjoining acres in 1944, and 22 also adjoining acres in 1955.

At least from the time plaintiff took title to the 22 acres in April 1955, it is plain that he intended to subdivide the entire 33 acres with a view to effecting a profitable disposition, at the earliest favorable opportunity, of the approximately 100 residential lots that would be contained therein. Indeed, some 6 months earlier, at a time when he owned only 11 acres, he already began appearing before the City Planning Commission to seek preliminary approval of a plat he proposed to develop. Appearances were made in October and November 1954. At that time only a small part of this 11-acre tract, consisting of six lots, had sewer connections, and it was the only part that could be profitably subdivided. Around that same time, however, plaintiff arrived at an understanding with one Spires, the neighbor-owner of the 22 acres, for the purchase of this tract at an agreed price ($2,000) per acre. The preliminary sketch which had been prepared by an engineer employed by plaintiff and submitted to the Planning Commission had already included the Spires' tract. Although plaintiff was not at that time the record owner of the 22-acre tract, it was necessary, in order to obtain the requested preliminary approval for the development of the 11-acre tract, to show the effects of the proposed development on the area as a whole, including how the proposed streets would tie in with existing adjacent streets. At about this time, plaintiff gave a real estate development company an option to purchase the six more readily marketable lots with available sewer facilities.

Plaintiff took title to the Spires' 22-acre tract on April 28, 1955, and the very next day employed an engineering firm to prepare another preliminary subdivision plat relating to the entire 33 acres, showing its boundaries, the adjoining lots and subdivisions, and a proposed layout of the streets to be built within the subdivision. By that time it had become obvious that the entire 33 acres could be profitably subdivided. A few months earlier, the city had acquired land for a new high school in the vicinity of the 33 acres and around 2 weeks earlier, the city had, on April 11, 1955, adopted a resolution for the construction of a sewerline that would effectively serve the entire 33 acres.

Two subdivisions were platted from the 33 acres. One, called "Windsor Place Addition," consisted only of the six lots in the original 11-acre tract which already had access to sewage facilities and which were under sale option. The other, called "Windsor Place Addition Extension No. 1," consisted of the remainder of the property. In June 1955, the Planning Commission tentatively approved the plat and plaintiff thereupon authorized the engineering firm to proceed with the preparation of the final plats and the making of the necessary surveys. In October, plaintiff appeared before the Commission and obtained approval of the final plat for the six-lot Windsor Place Addition. The following month plaintiff dedicated property to the city for the improvement of a road on the northern boundary of the 22-acre tract and, in addition, granted an easement along the boundary for the sewer, which was in fact constructed shortly thereafter.

Up to this time, it would seem indisputable that plaintiff was fully intending and preparing to engage in a lot selling business activity in the two subdivisions he had created. The time was ripe therefor and all of his activities were certainly pointing in this direction.

However, plaintiff contends that at about this time he abandoned any such ideas that he might have had and instead decided to dispose of substantially the entire acreage in one transaction. This is essentially the basis for plaintiff's capital gain contention. It is grounded upon the following events:

Sometime around the middle of 1955 one Jones, a local realtor, learned of plaintiff's recent acquisition of the 22-acre tract. Recognizing the potential for profitable development of plaintiff's entire 33 acres, he approached plaintiff and discussed development plans of possible mutual benefit. Jones' major problem was lack of capital. He himself, therefore, could neither purchase lots nor invest funds in their development. Without making any substantial investment himself, he could nevertheless participate in the development venture through commissions resulting from the sale of houses to be built on the lots. For this purpose, however, he would have to have sufficient control so as to effect an exclusive right to sell the houses. He convinced plaintiff that he would be able to find homebuilders who would be willing to purchase the lots at an attractive improved property price, provided plaintiff would take just a small downpayment and then wait for the balance until the improvements were all installed and the houses were built and sold. Plaintiff would have the builder's note and mortgage to secure the balance. Since the entire area would have to be developed with the usual subdivision improvements, such as streets, waterlines, sewers, and sidewalks, and since the price of the lots would be fixed as for improved property, the cost of such improvements (or the payment of assessments therefor) would also have to be defrayed by plaintiff. However, this could be done in the form of a deduction from or adjustment to the sales price of the lot which would similarly be made when the house would be sold and the builder would pay the balance due on the lot. In the meantime, the builders, operating through construction loans, would advance the necessary funds therefor as part of their construction operations.

Plaintiff finally was persuaded to work out an arrangement with Jones along such lines. The advantage to plaintiff was that, without having to pay any commissions, he would not have to be concerned with seeking buyers for the lots and would be relieved of many of the details concerning the installation of the improvements. Jones and the builders would tend to these matters. He would still be able, however, to obtain a very satisfactory price for his lots on an improved property basis. All he would have to do would be to consent to defer the payment of the bulk of the sales price of the lots until the houses were erected and Jones was able to sell them. And the builder's note and mortgage for such balance would be quite adequate security, even with the subordination thereof to the first liens which the builder's financing institutions would necessarily require on their construction loans. The advantage to Jones was, of course, that, provided he could find builders who would buy the lots, make initial outlays for improvements, and build the houses, and provided also that he could sell the houses, he would be able, on his exclusive agency basis, to earn substantial commissions and thus share in the fruits of the development with little investment.

To give Jones the control required to effect an exclusive sales agency, the lots would have to be conveyed to the builders through Jones as owner. It was therefore agreed that, as Jones found builder-buyers for the lots who would be willing to operate on the proposed basis, he would take a downpayment of $500 per lot. Jones would then turn such payment over to plaintiff, who would thereupon execute a deed to the lot to Jones, and receive from Jones a note and mortgage for the balance due. Jones would then convey the lot to the builder-buyer, receive the buyer's note and mortgage for the balance, and assign the note and mortgage to plaintiff (in substitution for Jones' note and mortgage).

The price of the lots was fixed at $55 per front foot less...