Ross v. Commissioner of Internal Revenue, 15509.

Citation227 F.2d 265
Decision Date18 November 1955
Docket NumberNo. 15509.,15509.
PartiesJulian E. ROSS and Gertrude A. Ross, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Julian E. Ross, Fort Lauderdale Fla., Robert C. Claiborne, Miami, Fla., Julian L. Williams, Fort Lauderdale, Fla., for petitioners.

Carolyn R. Just, Atty. Dept. of Justice, Washington, D. C., H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Sp. Asst. to Atty. Gen., R. P. Hertzog, Acting Chief Counsel, Int. Rev. Service, Charles E. Lowery, Sp. Atty., Grant W. Wiprud, Atty. Dept. of Justice, Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and BORAH and CAMERON, Circuit Judges.

CAMERON, Circuit Judge.

The problem here is whether profits accruing to petitioners during the years 1948 and 1949 from the sale of certain lands should be taxed as ordinary income or as income derived from the sale of capital assets within the meaning of Section 117(a) and (j) of the Internal Revenue Code of 1939, 26 U.S.C.A. 1946 Ed.1 Its resolution will depend on whether the lands were held primarily for sale to customers of petitioners in the ordinary course of their trade or business. The Tax Court, in an unreported opinion, held that the lands were so held and hence were excluded from the definition of "capital assets". The case is before us for review and the decision of the Tax Court will have to be affirmed unless its finding was clearly erroneous.

Petitioners are husband and wife, but the wife's participation in the activities on which the decision was based was in name only and she is a party only because the two made joint returns. The husband is, and has been since 1926, a lawyer engaged in the practice of his profession at Fort Lauderdale, Florida. Since his activities alone are involved, he will be referred to as the taxpayer or petitioner hereafter in this opinion.

Certain items which the Tax Court had before it have been eliminated from the case and they will be mentioned here. The first is an item of $1,046.74 derived by the taxpayer from a partnership known as Flova Trust and which he had reported as long term capital gain; a net amount of $4,286.34 had been similarly handled during the year 1949 and from the same source; and in 1948 an item of $222.04 was derived by the taxpayer from the Devon Trust. The Tax Court held that these items should not have been reported and handled as long term capital gains, but should have been treated as ordinary income. In the oral argument before us petitioner agreed to acquiesce in this holding and those features of the review are now eliminated from our consideration.

There remains before us for decision the matter of the income derived by petitioner from the sale of thirty-seven vacant lots constituting twenty-four transactions in 1948, and one hundred ninety-eight lots constituting fourteen transactions in 1949, all held by the petitioner for more than six months.2 One hundred twenty-three of these lots came to petitioner February 4, 1948 from a liquidation of the assets of said Flova trust and represented a distribution of property already owned in part by petitioner. The remaining lots had been purchased by the petitioner in or before the year 1945 for the construction of rental houses. These lots were acquired for the purpose of constructing houses for rental to Negroes and they lay in far outlying areas which were set apart by the ordinances of Fort Lauderdale for exclusive occupancy by Negro houses. When these zoning ordinances were declared invalid, property closer to the center of the city was made available for the construction of these housing units and petitioner was left owning the outlying lots thus rendered unsuitable for the use for which they were acquired, and with the problem of disposing of them.

By 1949 petitioner had constructed forty-eight rental units on portions of the property so held and before the time of trial this number had been increased to eighty. Petitioner testified categorically that each and every lot sold by him during the two years involved had come either from the Flova distribution or from that portion of the land purchased for the erection of rental units which had been rendered unsuitable for that original purpose; and that none of the lots were purchased or held at any time for resale except by way of liquidation of a capital asset.

The Commissioner put on no witnesses and his efforts at challenging this testimony consisted of the cross-examination of petitioner and the introduction of a number of conveyances to and from petitioner over a decade prior to and including the years in question. The purpose of these efforts was to demonstrate that the petitioner had for a number of years been actively engaged in the real estate business.

It was established that petitioner was a member of several partnership ventures with certain of his clients and friends; one, which did business under the name of Flova Trust, was active in business from 1944 until its liquidation in February, 1948; another was the Tanger Trust, which was active during the years 1943 to 1945; and a third was known as the Devon Trust, whose activities extended from 1944 to February, 1948.

Each of these partnerships, functioning largely through the other partners, engaged in various kinds of real estate activities during the periods respectively mentioned, including the purchase and sale of real estate. Petitioner's activities in those businesses were primarily devoted to performance of legal services connected with the purchase and sale of property and quieting title through legal proceedings although he was active to some extent in the actual sales of lots owned by the partnerships. These activities on the part of petitioner, plus the volume and frequency of sales of lots made by him in the two tax years involved constituted the circumstances relied upon by the Commissioner as establishing a conflict with the testimony given by him, which, the Commissioner contends, was sufficient to sustain the findings of the tax court.

Petitioner claims, on the other hand, and established by testimony undisputed except as the foregoing circumstances may bring about a dispute, that he had been an active lawyer since 1926, giving his entire time to his profession and holding a number of public offices including municipal judge and city attorney for Fort Lauderdale, Florida. He admitted that he had dabbled to some extent in real estate over the period of time mentioned, but stated that he functioned chiefly in a legal capacity; and he testified further and without dispute that the lots sold by him during 1948 and 1949 represented an asset which had come to him either through the distribution mentioned or had been purchased and held for use in constructing rental units; and that the sales were an orderly liquidation of this property.

In our view, the position of petitioner is sound and that of the Commissioner was and is clearly erroneous because it is based on an error of law or a failure to apply settled legal principles to the undisputed facts before the Tax Court. In our opinion, every issue in the case is resolved in favor of petitioner by four decisions of this court,3 two of which have been rendered since the case was decided below.

In the Foran case we discussed the value which should be ascribed to the testimony of the taxpayer where it is not successfully challenged by direct or circumstantial evidence. What we said there is applicable to what we are called upon to decide here. Foran was a broker of oil and gas royalties and he had, over a term of years, purchased and sold some gas and oil properties in his own name. The property there in question was acquired by him in the normal course of business and, after gas production had been obtained on it, he decided to hold it as an income-producing investment. After he had held it thus for eighteen months, the major oil companies controlling the field began active steps to bring about a reduction in the allowable production in the area to such an extent as greatly to curtail his income from it. When the situation thus changed he...

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