Royster v. Commissioner
| Decision Date | 29 May 1985 |
| Docket Number | Docket No. 2366-79,2367-79,2368-79. |
| Citation | 1985 TC Memo 258,49 TCM (CCH) 1594 |
| Parties | W. R. Royster and Minnie M. Royster et al. v. Commissioner. |
| Court | U.S. Tax Court |
Carl D. Dawson and Joseph E. Warren, 320 East Adams St., Jacksonville, Fla., for the petitioners. Avery B. Cousins, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioners' Federal income taxes as follows:
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Taxable Year Addition to Tax
Petitioners Ended Deficiency Sec. 6653(a)2
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W. R. Royster & Minnie M. Royster 12/31/69 ........... $138,922.78 $6,946.14
12/31/70 ........... 71,604.63 3,580.23
12/31/71 ........... 131,667.24 6,583,36
12/31/72 ........... 181,037.48 9,051.87
12/31/73 ........... 71,490.87 3,574.54
12/31/74 ........... 127,058.17 6,352.91
John E. Royster & Faith S. Royster 12/31/72 ........... 2,666.00 133.00
12/31/73 ........... 6,096.00 305.00
12/31/74 ........... 17,862.00 893.00
Dan Earl Royster & Dale T. Royster3 12/31/72 ........... 2,592.00 130.00
12/31/73 ........... 866.00 43.00
12/31/74 ........... 20,307.00 1,015.00
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After concessions4 the issues for decision are:
(1) Whether certain sales of real estate reported by John E. Royster ("John") and Dan Earl Royster ("Dan") on their Federal income tax returns for the years 1969 through 1974 should be imputed to W. R. Royster ( ) and Minnie M. Royster ("Minnie").
(2) Whether interest on the installment obligations attributable to these sales should be imputed to W. R. and Minnie.
(3) Whether W. R. and Minnie may make an installment sale election for sales imputed to them.
(4) Whether W. R. and Minnie must recognize gain from the sale of real estate described as Paradise View Estates Addition No. 3 in all of the years at issue.
(5) Whether respondent correctly determined the basis for gain on sales of real estate not reported on W. R. and Minnie's Federal income tax returns for the years at issue.
(6) Whether W. R. must recognize ordinary income on sales of real estate made by him during the years at issue.
(7) Whether W. R. paid compensation to John and Dan in the years 1969 through 1974.
(8) Whether petitioners are liable for self-employment taxes under section 1401 attributable to income earned by W. R., John and Dan in the amounts determined by respondent for each of the years at issue.
(9) Whether interest income attributable to certificates of deposit held in the names of W. R. and Minnie and other members of the Royster family should be reported by W. R. and Minnie.
(10) Whether petitioners are entitled to the full amount of charitable contribution deductions claimed for contributions of real estate.
(11) Whether petitioners are subject to the addition to tax under section 6653(a) for each of the years at issue.
(12) Whether W. R. and Minnie are entitled to use the income averaging provisions of sections 1301 through 1305 for each of the taxable years at issue.
(13) If we do not sustain respondent's determination in the issue raised in (1) above, whether John and Dan must recognize ordinary income from sales of real estate reported on their Federal income tax returns for the years at issue.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
W. R. and Minnie resided in Bascom, Florida, when they filed their petition in this case. John and his wife Faith S. Royster ("Faith") resided in High Springs, Florida, when they filed their petition in this case. Dan and his wife Dale T. Royster ("Dale") resided in Dunnellon, Florida, when they filed their petition in this case. The notices of deficiency were issued to petitioners on November 22, 1978.
W. R. was born on September 19, 1916, and married Minnie in 1938. Neither W. R. nor Minnie were formally educated beyond the tenth grade. Ralph born in 1939, John born in 1945 and Dan born in 1947 are three of W. R. and Minnie's four children.
Prior to 1947 W. R. was engaged in farming. In 1947 W. R. sold his farm, and the Royster family travelled for several years. The Royster family moved to Sebring, Florida, in 1954. Shortly after they moved to Sebring, W. R. and Minnie began to purchase parcels of real estate. In succeeding years W. R. and Minnie continued to purchase large tracts of real estate and make sales of this real estate. In the years 1955 through 1973, W. R. and Minnie reported 40 sales of both improved and unimproved real estate on their Federal income tax returns.
As of 1971 W. R. and Minnie owned approximately 100 subdivision properties in Florida and had made sales of or given options to purchase at least 18 separate subdivision properties, including four properties which were at the time purportedly owned by John and Dan. Some of the properties had been subdivided by W. R. as a result of concern about a stringent zoning law which was to be passed in Putnam County, Florida. W. R. subdivided his property prior to enactment of the new zoning law in order to retain the value of his real estate. The records of Putnam County show that W. R. and Minnie platted approximately 38 subdivisions of between 400 and 600 lots in 1960.
W. R. maintained an office for his real estate activities. W. R. also conducted real estate activities "out of the trunk of his car." Although some advertising was done, generally prospective purchasers learned of the property without advertising by W. R. other than site signs. W. R. was never licensed to sell real estate.
On the Federal income tax returns filed by W. R. and Minnie for the years 1969 through 1974, W. R.'s occupation was listed as "investments" in 1969 and 1970, no occupation was listed in 1971 or 1972 and W. R.'s occupation was listed as "retired" in 1973 and 1974. Minnie's occupation was listed as "housewife" in 1969 and 1970, no occupation was listed in 1971 or 1972 and Minnie's occupation was listed as "retired" in 1973 and 1974. However, in each year W. R. and Minnie claimed nonbusiness expenses and in 1971, 1972 and 1974 they claimed employee business expenses.5 W. R. and Minnie listed their present home address as Box 201, Interlachen, Florida, on their returns for the years 1970 through 1973.
The expenses reported by W. R. and Minnie for the years 1969 through 1974 included the following:6
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1969 1970 1971 1972 1973 1974
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Gas & Oil ............. $1,442.35 $1,005 $1,640 $ 969 $ 916 $ 920
Insurance ............. 175.95 192 472 205 251 273
Parts & Repair ........ 423.33 450 814 527 578 191
Telephone ............. 329.59 383 648 671 .... 581
Electricity ........... 148.08 116 117 118 50 102
Travel, Meals & Lodging 547.31 562 314 314 423 439
Office Expense ........ 134.70 67 83 223 9 665
Postage ............... 31.06 36 162 1 41
Parking & Tolls ....... 50.00 85 80 100 100
Depreciation .......... 1,223.09 1,624 1,155 1,314 1,907 1,905
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The income reported on their returns was predominantly attributable to sales of real estate. The only additional source of income reported on their returns during these years was interest income. All sales of real estate were reported as sales of property held for investment. In the years 1955 through 1968 W. R. and Minnie's income as reported on their Federal income tax returns was also predominantly attributable to sales of real estate. W. R. was aware that systematic sales of real estate could result in his being treated as a dealer in real property for Federal income tax purposes.
As W. R. and Minnie's sons matured, they also became involved in activities related to real estate sales and development. Ralph became involved in real estate development and construction. By the time John was 12 and Dan was 10, they were assisting Ralph in his business. Initially, John and Dan were merely "picking up roots," but by the time Dan was 16 he and John were operating construction and development equipment for Ralph. John and Dan anticipated becoming involved in real estate development and construction after they graduated from high school. Both John and Dan sought and were granted removal of disabilities of nonage when they reached...
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