Philbin v. Comm'r of Internal Revenue, Docket Nos. 57155-57160.
| Decision Date | 21 September 1956 |
| Docket Number | Docket Nos. 57155-57160. |
| Citation | 26 T.C. 1159 |
| Parties | JOSEPH M. PHILBIN AND JANE M. PHILBIN, HIS WIFE, ET AL., PETITIONERS,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John J. Cullom, Esq., for the petitioners.
J. Bruce Donaldson, Esq., for the respondent.
1. Held, lots sold by the petitioners in 1951 and 1952 were held by them primarily for sale to customers in the ordinary course of their trade or business and the gains derived therefrom are taxable as ordinary income.
2. Held, the Tax Court has jurisdiction over self-employment tax imposed by sections 480 and 481, I.R.C. 1939, and held, further, the petitioners were subject to the self-employment tax for the years 1951 and 1952 since the income from the sale of lots in the ordinary course of business does not fall within section 481(a)(4) or 481(c)(5) excluding from self-employment tax income derived from the sale of capital assets and income derived from the practice of law.
The respondent has determined deficiencies in petitioners' income tax as follows:
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¦Year¦Docket No.¦Petitioner ¦Deficiency¦
+----+----------+-------------------------------------+----------¦
¦ ¦ ¦ ¦ ¦
+----+----------+-------------------------------------+----------¦
¦1951¦57155 ¦Joseph M. Philbin and Jane M. Philbin¦$2,740.92 ¦
+----+----------+-------------------------------------+----------¦
¦1952¦57157 ¦Joseph M. Philbin and Jane M. Philbin¦2,351.08 ¦
+----+----------+-------------------------------------+----------¦
¦ ¦ ¦ ¦ ¦
+----+----------+-------------------------------------+----------¦
¦1951¦57156 ¦John J. Cullom and Jewell A. Cullom ¦2,724.80 ¦
+----+----------+-------------------------------------+----------¦
¦1952¦57160 ¦John J. Cullom and Jewell A. Cullom ¦2,141.91 ¦
+----+----------+-------------------------------------+----------¦
¦ ¦ ¦ ¦ ¦
+----+----------+-------------------------------------+----------¦
¦1951¦57159 ¦Richard X. Zimmermann ¦4,280.46 ¦
+----+----------+-------------------------------------+----------¦
¦1952¦57158 ¦Richard X. Zimmermann ¦3,389.41 ¦
+----+----------+-------------------------------------+----------¦
¦ ¦ ¦ ¦ ¦
+----------------------------------------------------------------+
The cases were consolidated for trial and opinion.
Petitioners Joseph M. Philbin, John J. Cullom, and Richard X. Zimmermann were engaged in the practice of law as equal partners during the years 1951 and 1952. The questions presented herein are with respect to their distributive shares of the partnership income from the sale of certain vacant lots in the city of Chicago during the years 1951 and 1952. The wives of petitioners Philbin and Cullom are made petitioners herein solely by reason of having filed joint returns with their husbands. Hereafter the term ‘petitioners' shall mean Joseph M. Philbin, John J. Cullom, and Richard X. Zimmermann.
The issues in these consolidated proceedings are (1) whether gains realized by the petitioners in 1951 and 1952 from the sale of real property should be taxed as long-term capital gain or as ordinary income, and (2) whether the distributive shares of income derived by the petitioners from the sale of the above real property is subject to self-employment tax under sections 480 and 481, Internal Revenue Code of 1939.
Some of the facts have been stipulated and they are found accordingly.
Joseph M. Philbin and Jane M. Philbin are husband and wife who reside in Evergreen Park, Illinois, For the calendar years 1951 and 1952, they filed timely joint income tax returns with the then collector of internal revenue for the first district of Illinois.
John J. Cullom and Jewell A. Cullom are husband and wife who reside in Chicago, Illinois. For the calendar years 1951 and 1952 they filed timely joint income tax returns with the then collector of internal revenue for the first district of Illinois.
Richard X. Zimmermann is an individual who resides in Chicago, Illinois. For the calendar years 1951 and 1952 he filed timely income tax returns with the then collector of internal revenue for the first district of Illinois.
Joseph M. Philbin, John J. Cullom, and Richard X. Zimmermann are attorneys at law, having been admitted to the practice of law in the State of Illinois in 1938, 1939, and 1947, respectively. In 1947, Philbin opened a law and real estate office at 7340 S. Western Avenue, Chicago, Illinois, the neighborhood in which he grew up and had previous connections. In 1950, Zimmermann, who had occupied office space with Philbin since 1948, joined Philbin and the partnership of Philbin and Zimmermann was formed. In 1951, Cullom joined the partnership, which then became known as Philbin, Zimmermann, and Cullom. This partnership continued to the date of the hearing. During the years 1951 and 1952, the law firm was engaged in the general practice of law from its office at 7340 S. Western Avenue, Chicago, Illinois.
Philbin obtained a real estate broker's license in 1947 and he has held such a license continuously to the date of the hearing. He was actively engaged in the real estate business from 1947 through part of 1950, and received some brokerage commissions since 1950. From 1947 to the date of the hearing ‘Joseph M. Philbin’ was listed in the classified section of the Chicago telephone directory under the headings, ‘Real Estate’ and ‘Lawyer.’ On the exterior of this 1-story building at 7340 S. Western Avenue, the following signs and advertisements appear: On the front window are painted the words ‘REAL ESTATE’; hung in the front window is a neon sign reading, ‘Joseph M. Philbin, Real Estate-Insurance’; in somewhat smaller letters painted on the front window are the words, ‘Attorney at Law, Joseph M. Philbin-Richard X. Zimmermann’; on each of the two sides of the building, there is painted a sign which covers the entire side of the building which reads, ‘JOSEPH M. PHILBIN, REAL ESTATE, SALES, MORTGAGES, INSURANCE, SPECIAL REAL ESTATE FINANCING.’ These signs and advertisements existed on the exterior of the building during the years 1951 and 1952.
During the calendar year 1947, Philbin individually purchased and sold 3 unimproved lots in the city of Chicago. During the calendar year 1948, Philbin and Cullom jointly purchased and sold 1 unimproved lot in the city of Chicago. During the calendar year 1949, Philbin and Cullom jointly purchased and sold 3 unimproved lots in the city of Chicago. For all 3 of the years enumerated above, the gains realized from the sales of the lots were reported as short-term capital gains.
In 1949, Philbin, Zimmermann, and Cullom began to make joint purchases of vacant lots located in the southwest section of the city of Chicago. Each agreed to share the costs of acquisition, clearing title, and other expenses, and also to share the profits or losses upon the sale of the lots. The following schedule sets forth the number of lots acquired and sold by the petitioners jointly during the years 1949 to 1952, inclusive:
+----------------------------------+
¦Year ¦Lots acquired ¦Lots sold ¦
+------+---------------+-----------¦
¦1949 ¦50 ¦13 ¦
+------+---------------+-----------¦
¦1950 ¦39 ¦37 ¦
+------+---------------+-----------¦
¦1951 ¦50 ¦47 ¦
+------+---------------+-----------¦
¦1952 ¦53 ¦47 ¦
+----------------------------------+
Generally, the petitioners purchased lots which were encumbered by liens, or delinquent taxes, or special assessments. After acquiring the encumbered property, the petitioners would expend time, money, and legal skill putting into motion the legal machinery of Cook County and the State of Illinois by which clear title could be obtained by compromising the amounts owed on the property. After the machinery had been put into motion, a period of from 4 months to a year was required to obtain a clear title in this manner. This procedure is in the nature of a foreclosure proceeding instituted by the landowner by which the petitioners were required to correspond with the commissioners of Cook County, file appearances, attend foreclosure sales, prepare orders of sale, certificates of sale, decrees of foreclosure, confirmation of sales, and any other necessary pleadings. The petitioners performed all of the above services in connection with clearing the liens on their property for themselves, sharing the costs and services.
While some of the lots bought and sold in 1951 and 1952 were scattered over the southwestern section of Chicago, the majority were in the Hinkamp subdivision, which was in close proximity to petitioners' office. This subdivision had been plated some time previous to the acquisition of the lost by petitioners and for the most part, abutted streets and sidewalks. The petitioners, after acquiring the lots, did not list them with real estate brokers, did not hire agents for sales purposes, did not erect ‘For Sale’ signs on the property, did not advertise the lost in newspapers, and did not make physical improvements on the property.
Many factors such as the Korean War and expansion to outlying areas of Chicago produced a great demand for housing in the area in 1951 and 1952, creating a corresponding demand for vacant lots. This brought about a ‘seller's market’ in the area, therefore the petitioners were constantly besieged with requests from contractors and builders with offers to buy.
Generally, the lost were sold to construction companies or general contractors, but a small number were sold to individual buyers. Some of the same...
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