Parkside, Inc. v. C. I. R.

• Decision Date: 02 December 1977
• Docket Number: No. 75-2893,75-2893
• Parties: 78-1 USTC P 9147 PARKSIDE, INC. and Beaconcrest, Inc., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1092

571 F.2d 1092

78-1 USTC P 9147

PARKSIDE, INC. and Beaconcrest, Inc., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 75-2893.

United States Court of Appeals Ninth Circuit.

Dec. 2, 1977.

Susan Long (argued), Bellevue, Wash., for petitioners-appellants.

Leonard J. Henzke, Jr. (argued), of Dept. of Justice, Washington, D. C., for respondent-appellee.

On Appeal from the Decision of the United States Tax Court.

Before CHOY and KENNEDY, Circuit Judges, and PREGERSON, ^* District Judge.

CHOY, Circuit Judge:

The Commissioner of Internal Revenue (Commissioner) issued deficiency notices to taxpayer-appellants Parkside, Inc. (Parkside) and Beaconcrest, Inc. (Beaconcrest) upon determining that income reported as interest for certain taxable years brought the two corporations within the rigorous provisions of the personal holding company tax (PHCT), Int.Rev.Code of 1954, §§ 541-47, ¹ and the Tax Court agreed. We reverse.

The basic facts in this case are undisputed. Parkside and Beaconcrest are Washington state corporations, the stock of which is owned in equal shares by three brothers and a sister: Philip Long, James Long, Dwight Long, and Erma Long McKenzie (shareholders). The stock in Parkside was inherited upon the death of their father. Beaconcrest was formed in 1960 to receive part of the assets of Standard Homes, Inc., a corporation owned and organized by the father to construct buildings for rental or sale. Parkside's principal assets consisted of 26 duplex homes, and Beaconcrest's principal assets consisted of 21 duplexes.

After his father's death, Philip Long left employment in the insurance industry to assume the presidency of both taxpayer-corporations. Concluding after study that liquidation of the two corporations would net no more than $150,000, Long decided to retain the duplexes and continue to rent them. The shareholders had inherited serious financial difficulty along with the property, however, and expenses continuously outstripped receipts. Long ultimately decided that the realty would have to be sold rather than unprofitably rented indefinitely.

To maximize sales proceeds, Long determined to sell the duplexes individually. As part of his plan to avoid the sales difficulties which had plagued his father, Long devised a "unique" set of criteria for potential purchasers, including employment, credit, and residence specifications. He first advertised the duplexes' availability for sale in 1964, and this was the first time that any had been offered for sale since the shareholders succeeded to their interests in 1960. He also contacted all tenants of the duplexes to explore the possibility of purchases by them. Encountering no success from either tactic, Long employed a succession of professional real estate agents who, in turn, ultimately disposed of the 47 units from January 1965 to October 1966, aggregating over $810,000 in sales. The units were generally sold "as is," without improvement, and taxpayers paid nearly $50,000 in brokerage commissions. From 1965 to date of trial, taxpayers acquired no additional real property, their sole remaining activity consisting of receiving principal and interest payments from purchasers and making payments on the existing mortgages upon which they were liable.

The Internal Revenue Code treats

interest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of (the taxpayer-corporation's) trade or business was sold or exchanged . . . (,)

§ 543(b)(3), as "rent" which, in turn, is generally excluded from personal holding company income where it constitutes 50 percent or more of taxpayer's adjusted ordinary gross income, § 543(a)(2)(A). ² The Tax Court held that taxpayers did not qualify under the § 543(b)(3) exception which, if applicable, would have rescued taxpayers from the adverse treatment of the PHCT provisions because, in its opinion, taxpayers' realty was not "held primarily for sale in the ordinary course of (their) trade or business."

While we have been directed to no case construing the relevant language of § 543(b)(3), the above-quoted passage is nearly identical to that of § 1221(1) (definition of "capital assets") "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business" and we can divine no reason to construe the thrust of these passages differently. ³ We will, therefore, turn to § 1221(1) cases for guidance.

As a question of fact arguably mixed with law, our review of a lower Court's finding with respect to the nature of a taxpayer's holdings under § 1221(1) is subject to the restraint of the "clearly erroneous" rule. See Fed.R.Civ.P. 52(a); Int.Rev.Code of 1954, § 7482(a); Malat v. Riddell, 383 U.S. 569, 572, 86 S.Ct. 1030, 16 L.Ed.2d 102 (1966); Rockwell v. Commissioner,512 F.2d 882, 884 (9th Cir.), cert. denied, 423 U.S. 1015, 96 S.Ct. 448, 46 L.Ed.2d 386 (1975); Estate of Freeland v. Commissioner, 393 F.2d 573, 583 (9th Cir.), cert. denied, 393 U.S. 845, 89 S.Ct. 132, 21 L.Ed.2d 117 (1968); Austin v. Commissioner, 263 F.2d 460, 461-62 (9th Cir. 1959) (decided under § 117(a)(1) of the 1939 Code, now § 1221); Los Angeles Extension Co. v. United States, 315 F.2d 1, 2-3 (9th Cir. 1963) (same); Bistline v. United States, 260 F.2d 77, 78 (9th Cir. 1958) (same); United States v. Beard, 260 F.2d 81, 82 (9th Cir. 1958) (same). ⁴ See also Commissioner v. Duberstein, 363 U.S. 278, 289-91, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960); United States v. United States Gypsum Co., 333 U.S. 364, 394-95, 68 S.Ct. 525, 92 L.Ed. 746 (1948); United States v. Hart, 546 F.2d 798, 801-02 (9th Cir. 1976) (en banc), cert. denied sub nom. Robles v. United States, 429 U.S. 1120,97 S.Ct. 1155, 51 L.Ed.2d 571 (1977); Lundgren v. Freeman, 307 F.2d 104, 115 (9th Cir. 1962). ⁵ See generally 5A J. Moore, Moore's Federal Practice P 52.03(1), at 2613-17, 2655-57 (2d ed. 1975); id. P 52.03(5). A factual finding by the trial court will ordinarily not be reversed unless the reviewing court concludes that such a finding is clearly erroneous, or it is definitely and firmly convinced that, upon an examination of the entire record, a mistake has been committed. See United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948); Allen v. United States, 541 F.2d 786, 788 (9th Cir. 1976); Collman v. Commissioner, 511 F.2d 1263, 1267 (9th Cir. 1975); Bistline, supra; Beard, supra.

Analysis under § 1221(1) has focussed, inter alia, upon the following factors:

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.

Los Angeles Extension Co., 315 F.2d at 3. See Estate of Freeland, 393 F.2d at 582-83; Biedenharn Realty Co. v. United States, 526 F.2d 409, 415 & n. 22 (5th Cir. 1976), cert. denied, 429 U.S. 819, 97 S.Ct. 64, 50 L.Ed.2d 79 (1977). See also Malat v. Riddell, 383 U.S. 569, 86 S.Ct. 1030, 16 L.Ed.2d 102 (1966). That sales take place in the course of a "liquidation" neither automatically compels nor forecloses a finding that property was held primarily for sale in the ordinary course of a trade or business. Ehrman v. Commissioner, 120 F.2d 607, 610 (9th Cir.), cert. denied, 314 U.S. 668, 62 S.Ct. 129, 86 L.Ed. 534 (1941); Commissioner v. Boeing, 106 F.2d 305, 309 (9th Cir.), cert. denied, 308 U.S. 619, 60 S.Ct. 295, 84 L.Ed. 517 (1939); Huxford v. United States, 441 F.2d 1371, 1375-76 & n. 4 (5th Cir. 1971). See Jersey Land & Dev. Corp. v. United States, 539 F.2d 311, 315 (3d Cir. 1976).

Based upon factors such as the means by which taxpayers acquired the property in issue, the prior holding of those properties for rent, the "as is," piecemeal sale of the realty, and the absence of additionally-acquired properties, the Tax Court concluded that the taxpayers had not successfully sustained their burden of persuading the court that the Commissioner's determination was in error. We disagree. The Tax Court itself recognized indicia including the substantial commitment of taxpayer-corporations' president, Philip Long, to the acquisition, refinement, and implementation of real estate sales techniques and the large number of individual sales extending over two years which would support the conclusion that, at least during the relevant tax years, the taxpayers held the property primarily for sale within the meaning of § 543(b)(3). We find the presence of additional factors sufficiently compelling to sway the balance: the fact that shareholders' father held the realty for rental or sale; the substantial advertising of the sales venture; and the substantial sums expended for brokerage commissions. While we rely on these factors in the instant case, we do not establish here a precise balance of factors as a rule of law for all cases of this type. In the final analysis, each case must be decided upon its own facts. This is especially so in tax matters. See Los Angeles Extension Co., 315 F.2d at 3; Bistline, 260 F.2d at 78. We hold that the Tax Court's ruling below is clearly in error and must be reversed.

Moreover, we note the disingenuity of the Commissioner's claim that, in any case, taxpayers' original reporting of the income from sales of the involved realty as gains arising from the sale of § 1231(b)(1) property (property used in the taxpayer's trade or business but not held primarily for sale to customers in the ordinary course of that trade or business) is "persuasive documentary evidence of taxpayers' own intent and understanding at the time the sales took place." In view of the apparently undisputed fact that, pursuant to the original returns, the rate and amount of tax calculated as...