United States v. Beard, 15560.

• Decision Date: 27 October 1958
• Docket Number: No. 15560.,15560.
• Citation: 260 F.2d 81
• Parties: UNITED STATES of America, Appellant, v. John B. BEARD and Helen B. Beard, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

260 F.2d 81 (1958)

UNITED STATES of America, Appellant, v. John B. BEARD and Helen B. Beard, Appellees.

No. 15560.

United States Court of Appeals Ninth Circuit.

May 26, 1958.

Rehearing Denied July 8, 1958.

Certiorari Denied October 27, 1958.

John N. Stull, Acting Asst. Atty. Gen., Davis W. Morton, Jr., Lee A. Jackson, I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., Lloyd H. Burke, U. S. Atty., Lynn J. Gillard, Asst. U. S. Atty., San Francisco, Cal., for appellant.

Hoover, Lacy & Bienvenu, Edward M. Lacy, Robert C. Bienvenu, Francis C. Hoover, Modesto, Cal., for appellees.

Before ORR, FEE and CHAMBERS, Circuit Judges.

Certiorari Denied October 27, 1958. See 79 S.Ct. 114.

ORR, Circuit Judge.

Contending that certain income realized by appellee Beard, hereafter the taxpayer, was realized from sale of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business," within the meaning of 1939 Internal Revenue Code, § 117(a) (1), 26 U.S.C.A. § 117(a) (1), the Commissioner made deficiency assessments in the sum of $36,519.29 plus interest, for the taxable years 1946 through 1950.

Taxpayer paid the deficiencies and brought suit in the trial court for its recovery. Findings were made and judgment entered in favor of appellees. In disposing of the questions posed on this appeal we are confronted solely with a question of fact "which ordinarily is governed by the findings of the trial court, unless these are clearly erroneous or unless an appellate court is convinced by an examination of the entire record that a mistake has been committed." Bistline v. United States, 9 Cir., 260 F.2d 77, 78. "Cases of this character present difficulties because there is no agreement among the courts as to what primary element in the transaction determines its character." Pool v. Commissioner, 9 Cir., 1957, 251 F.2d 233, 235.

We turn now to a statement and consideration of the facts. Taxpayer's forebears located in Modesto, California in 1850 and some of the descendants have since engaged in large farming operations, as well as branching out into other allied businesses in the area. The Beard family group now consists of 10 brothers and sisters, each of whom is a 10% stockholder and director in each of seven family corporations. In 1950 these companies included: the Beard Land and Investment Company (hereafter L & I), a family holding company which also conducts extensive farming and business property operations; a short-line railroad; an ice, fuel and appliance business; a farming enterprise; a large public utility water company; and the Modesto Refrigerating Company, a large cold storage and quick freezing concern.

Taxpayer was president and general manager of the refrigerating company from 1926 until its sale in 1953. The concern had an ice making and car-icing facility, sold ice to consumers and to packers for pre-cooling, had a quick-freeze plant for fruit, vegetables and turkeys with a 300,000 lb. daily capacity, and a cold storage warehouse with custom freezing for packers which had a storage capacity of 600 car loads. The family investment in the company was almost doubled by expansion of the plants in 1946 and in 1949-1950 a further increase of $300,000 to $400,000 was made, resulting in a total investment of nearly $2,000,000. By 1950, the last tax year in question here, gross sales were over $1,000,000. Depending upon the time of year, the concern employed from 75 to 125 workers, all of whom were under active supervision of taxpayer.

The five years 1946-1950 were those in which the greatest growth occurred in all the family concerns. Three brothers were the active heads of all the businesses, with the other owners taking little active part in the operations. In addition to his job at the refrigerating company, taxpayer had over-all supervision of City Ice and Fuel Company, and he occasionally dropped in on other family businesses, particularly the railroad. He had no other office than the one at the refrigerating company, and customarily was there from 8 or 8:30 to 5:30 or 6 "with getting out during the day." He testified that he spent something like one to five per cent of his time on his real estate properties, but this time came "somewhere out of a 24 hour day."

A summary of taxpayer's real estate activities and interests follows:

In 1932 taxpayer made his first purchase of land which was later subdivided, the 12 acre Las Palmas tract of 40 lots. By 1936 the city limits ran along one edge of the tract. The first sales were made in 1936 or 1937 and at that time an adjacent tract was also for sale by others. Sales by taxpayer were handled through a Mr. Hopkins, a real estate agent, and he sold 30 lots by 1941, all but two of the 40 being sold by that time.

The first tract purchased by taxpayer which produced income during the taxable years now in question was the Wilson No. 1 tract of 25 acres, adjacent to Las Palmas and 600 feet from the city limits at the time of purchase in 1937. It had been platted for subdivision by the former owners in 1924. Taxpayer had a 50% interest in the property, with two of his sisters. The first sale of a lot was within a year of acquisition, in 1938, and the last was in 1948. Hopkins again was the exclusive agent on a commission basis until 1942, but taxpayer sold a few lots himself to close friends without any solicitation on his part. Taxpayer had nothing to do with Hopkins' sales other than to sign the deeds, but admitted he had discussions with him about ideas to carry on sales and during 1941-1942 even helped him out on some of the advertising. There were no sales during the war and in 1945 L & I began handling the property. Taxpayer built four houses on this tract in 1940 and all were sold by 1942, some being sold by himself.

In 1939, a year after acquiring Wilson No. 1, taxpayer began buying the farms which made up Wilson No. 2, again taking a 50% interest with two sisters. Other developments were opening up near by at the time, and taxpayer personally secured the three government permits and subdivided the tract in 1940. Roads were put in by L & I and water was put in by the family water company. In 1940 and 1941 taxpayer built 5 houses on this tract and sold all of them by 1942, either himself or through his brokers. As with Wilson No. 1, Hopkins was the sales agent until 1942, with taxpayer making a few sales at that time himself. Hopkins made all the contacts and handled all the details on sales he made. In 1945 L & I became the exclusive sales agent and thereafter, taxpayer testified, he had nothing to do with the operation as to advertising, soliciting or making improvements.

The third tract from which sales were made in the period in question was Thousand Oaks, a 44 acre tract taxpayer acquired for himself in 1940. Taxpayer filed the original subdivision map himself. "I done a little preliminary work on it there in 1941 with the idea of going ahead and developing part of it and then had decided to do nothing with it and just let it set there." The tract was divided into 93 lots, and some street work was done and some of the curbs put in by taxpayer directly. L & I handled improvements after 1945 and all lots were sold by L & I between 1946 and 1950.

The 58 acre Covena Park property was purchased in 1940 and 1941. The development was a large over-all subdivision put together by L & I from this and other tracts not owned by taxpayer's family. L & I prepared the necessary legal papers for subdividing, put in all the improvements under its own supervision and made all sales. Taxpayer signed the deeds and L & I deducted expenses from the monthly payments on account to taxpayer. All the 104 lots in this tract were sold quickly, during the 1946-1948 period.

A small area between other...