Tibbals v. United States

• Decision Date: 10 June 1966
• Docket Number: No. 346-60.,346-60.
• Citation: 362 F.2d 266
• Parties: Todd TIBBALS and Helen A. Tibbals v. The UNITED STATES.
• Court: U.S. Claims Court

362 F.2d 266 (1966)

Todd TIBBALS and Helen A. Tibbals v. The UNITED STATES.

No. 346-60.

United States Court of Claims.

June 10, 1966.

Daniel A. Taylor, Chicago, Ill., attorney of record, for plaintiffs. K. Martin Worthy, Hamel, Morgan, Park & Saunders, Washington D. C., and Taylor & Kelly, Chicago, Ill., of counsel.

Richard J. Boyle, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant. C. Moxley Featherston, Lyle M. Turner and Philip R. Miller, Washington, D. C., of counsel.

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

OPINION

PER CURIAM:

This income tax refund case, involving the years 1951-1954, was referred to Trial Commissioner Lloyd Fletcher with directions to make appropriate factual findings and to submit his recommendation for a conclusion of law. At this stage there remain two entirely separate issues in the case, and the commissioner's report contains an opinion, finding, and recommended conclusion on each aspect. His recommendation is for the plaintiffs on both issues. The parties accept the commissioner's opinion, findings, and conclusion on the second issue, involving the sale by the principal taxpayer of stock in a wholly-owned corporation (Parklawn Manor, Inc.). Exceptions have been taken by the defendant, briefs filed, and oral argument had on the first issue, involving gain from the sale of real estate. On that issue we differ to some extent from Commissioner Fletcher; our views are set forth in Part I, infra. On the second issue, as to which no exception has been filed, we agree with the trial commissioner and adopt the portion of his opinion dealing with that question; it appears in Part II, infra. On the whole case, we decide that plaintiffs are entitled to recover in accordance with this opinion, and enter judgment to that effect. The amount of recovery will be determined under Rule 47(c).¹

I Taxpayer's Sales of Real Estate²

This part of the case raises the recurring question whether certain parcels of real estate, prior to their sale, were "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." Int.Rev.Code of 1939, § 117(a) (1) (A). A guiding rule in this class of tax litigation is that each case must be decided on its own facts and circumstances. Miller v. United States, 339 F.2d 661, 663-664, 168 Ct.Cl. 498, 504 (1964); Browne v. United States, 356 F.2d 546, 174 Ct.Cl. ___ (February 1966). A detailed recitation of the facts is therefore necessary.

Plaintiff³ is an architect in Columbus, Ohio. He began the practice of his profession in 1935 as a sole proprietor but later formed a partnership with other architects under the firm name of Tibbals, Crumley, and Musson. The firm has always engaged in a general architectural business and has designed and supervised the construction of numerous public buildings, residences, and private commercial buildings in the Columbus area.

During 1946 and 1947, in addition to the practice of his profession, plaintiff engaged in the construction of 54 houses on his own account. These houses were built on various unimproved lots which plaintiff had acquired in prior years. In 1946 he individually sold 50 such houses, and in 1947 he sold the remaining four. At no time thereafter has plaintiff, solely in his individual capacity, engaged in the construction of houses for sale to customers. Instead, he formed three corporations, Columbus Southern Development Company in 1946, Martha Washington Builders, Inc. in 1949, and Arlington Ridge Development Company in 1951, all the stock of which plaintiff has owned during the times material herein. These three closely-held corporations engaged extensively in the construction of houses on unimproved land transferred to them either by plaintiff or others, and they held such real estate primarily for sale to customers in the ordinary course of their trade or business. Also, during the period 1942 through 1953, plaintiff either owned or controlled numerous other corporations which engaged in various related activities, such as the ownership and management of rental properties (including FHA housing projects), the manufacture and sale of lumber, and the manufacture and sale of panels for prefabricated houses.

In early 1950 plaintiff entered into the transaction which was to precipitate the dispute herein. He and his brother, Charles E. Tibbals, Jr.,⁴ jointly purchased a tract of land previously subdivided into lots in an area on the outskirts of Columbus known as the River Ridge Subdivision.⁵ More than six months later, the brothers disposed of these lots by three separate sales at different times and to different purchasers under circumstances related below. In their respective tax returns, each brother treated his very substantial gain from these sales as capital gain. The Commissioner of Internal Revenue disagreed and held the gain to be ordinary income.

In the ensuing litigation, Charles has been successful. The Tax Court of the United States decided that Charles did not hold his one-half interest in the lots primarily for sale to customers in the ordinary course of his trade or business and had properly reported his share of the realized gain as long-term capital gain. Charles E. Tibbals v. Commissioner, 17 T.C.M. 228 (1958). Because plaintiff's activities with respect to the lots were more extensive than, and in part different from, those of his brother, this court is now called upon to decide whether the two stand in different tax positions.

The River Ridge Subdivision was originally acquired and subdivided into about 1,200 lots sometime during the 1920's by the Arlington Ridge Realty Company. Plaintiff has never held any stock in that corporation, but he was acquainted with some of its officers and had a general familiarity with the area in which the subdivision was located. During the years of its ownership, Arlington Ridge Realty Company had sold about two-thirds of the 1,200 lots to individual purchasers, and in the late 1940's the county had installed a sewer system in the subdivision. Very little other development took place, however, and the tract continued to look like a "big briar patch." In early 1950, due apparently to stockholder dissension, the officers of Arlington Ridge Realty Company decided to sell the company's remaining lots as a block and then liquidate the corporation. The company's real estate salesman approached plaintiff, who was a neighbor and friend, told him that the remaining lots were available as a block for $20,000, and urged him to buy them. Despite their ragged appearance and lack of improvements,⁶ plaintiff concluded that the asking price was cheap because of the location of the lots immediately north of one of the most desirable residential areas in Columbus. Accordingly, on February 21, 1950, he signed an agreement to purchase the lots, subject, however, to the approval of his brother whose financial participation he apparently needed. He contacted Charles in Tennessee, and it was agreed between them that they would join in the purchase. The transaction was closed on April 27, 1950.

A few days thereafter, plaintiff was approached by an acquaintance who had recently gone into the real estate business and who had been circulating a petition among various lot owners for the construction by the county of water mains in River Ridge. This man asked plaintiff as the joint owner of the largest single block of lots to sponser the petition and to help defray some minor expenses. Plaintiff agreed to do so and authorized his attorney, George H. Chamblin, to enter into the matter. Chamblin thereupon prepared new petitions for water, sewer, and street improvements and presented them to the county officials. In his testimony, plaintiff tried to make light of his activities in these efforts to get county improvements, but the record is clear that, acting mostly through his attorney, he was the moving force behind them. He knew that the proposed improvements would substantially enhance the value of his and his brother's holdings in River Ridge. The Board of County Commissioners acted favorably on the petitions. In the fall of 1951 the county commenced construction of the improvements and completed the work in early 1953.

When plaintiff and his brother purchased the River Ridge lots, it was orally agreed between them that, since Charles lived in Tennessee, the legal title to the property would be held for convenience in plaintiff's name.⁷ In April 1951, two of the lots were sold to Cozy Cottages, Inc., one of plaintiff's wholly-owned corporations, for the purpose of building two experimental prefabricated homes thereon.

There were no further sales until June 1952. In September of the previous year plaintiff had organized a wholly-owned corporation under the name of Arlington Ridge Development Company for the purpose of building houses on lots in River Ridge. To that end, in June 1952 (the contract of sale was entered into on September 21, 1951), plaintiff and Charles sold 100 lots for about $80,000 to the Development Company which proceeded, under plaintiff's general supervision, to build houses on about 60 of the lots. The county improvements were only partially completed, and the houses did not sell very well. Of the remaining lots, about 15 were sold by the Development Company to the Columbus Home Builders Association for a Parade of Homes; 20 lots were sold by it to a man named Aleshire who was one of the builders in the Parade of Homes; and ten were sold to Kay Investments, Inc., the stock of which was owned by plaintiff. Although the Development Company was the seller in the above sales contracts, in many instances the deeds to the purchaser, for convenience and to save conveyancing expense, ran directly from plaintiff to the purchaser, rather than to Arlington Ridge Development Company and then to the purchaser.

The remaining 333½⁸ lots were...