Longfellow v. Commissioner

31 T.C. 11, 1958 U.S. Tax Ct. LEXIS 70

• Court: United States Tax Court
• Decided: October 9, 1958
• Docket: Docket No. 60054
• Status: Published

Opinions

OPINION.

Murdock, Judge:

George was asked on direct examination “how did this piece of property fit into your business” and he replied, “I needed space to keep my equipment.” He then referred to equipment which he had at the time he was testifying on December 7, 1956, saying that he had about 20 pieces of heavy equipment scattered all over Illinois which he left sitting out all of the time because he wouldn’t be able to get it on his own property. George testified that he had an outlet on the north end of the 21-acre property to a public street through 2 lots which he owned in an adjoining subdivision, only a small amount of grading would be required there and he intended to build a home there with some sheds large enough to accommodate working space for repair and storage of “this machinery,” referring to the 20 pieces which he said he had in December 1956. He also testified that in 1943 and for the duration of the war, the heavy equipment which he was using consisted of only 3 tractors and scrapers and 2 old cranes. The 21 acres were in a strictly residential zone. George never built any house or sheds on the property or used it as a residence or in connection with his contracting business. He testified that he didn’t build because of a ban on building during the war and because costs were too high. He decided to sell the property prior to putting a “For Sale” sign on it about 1947. George, at all times material hereto and at least since 1936, lived in his residence in Alton. A plan for subdividing the 21-acre tract had been made previously but it is not clear from the record whether George knew of this plan at the time he bought it. He was not asked while on the stand whether he had any intention or thought of grading, subdividing, and selling the 21 acres in lots when he bought it in 1943. George’s testimony as a whole does not prove convincingly that he might not have had such a thought in mind at the time he purchased the tract.

However, regardless of what his original purpose might have been or of what he might have had in mind when he bought it, his purpose could change and it is clear that he decided not later than the summer of 1951 to grade, subdivide, and sell the entire tract in lots in order to make profits, not just to liquidate an investment. It cost him over seven times the cost of the bare land to improve it, yet he wants his original investment to control the whole activity so that not only any gain from the holding of the bare land, but also the gain resulting from the improvements, would receive capital gains treatment. Cf. Shearer v. Smyth, 116 F. Supp. 230, affirmed per curiam 221 F. 2d 478, certiorari denied 350 U. S. 840. Actually, what he sold was not the bare land which he had held for a number of years but a product which he created out of that bare land by his own efforts and the investment of $56,786.84 of his own money.

He was not a real estate agent but he made a business of developing this tract of over 21 acres as a subdivision and selling it off at retail as lots. He did that in order to make profits, not from the land alone, but from his own services and the use and risk of his own funds in creating a product which he could sell for a greater profit than any profit which he might have realized from a liquidation of his small investment in the land alone. He entered into a business when he started to improve, subdivide, and sell the lots. He bore the entire risk of the costly venture. He engaged help for that part of the business which he cared to entrust to others. Maurice did not buy the tract or act as principal in connection with it, he merely helped with the platting and subdividing and then received as his only compensation a commission of $100 for each lot that he was able to sell. The activities of Maurice in selling the land, that is, whatever advertising he did and the other efforts which he made to find purchasers, must all be regarded as done in George’s behalf and as part of the business which he was carrying on with the aid of Maurice whom George paid for services rendered by him.

George was in charge of this business and made all of the important decisions. He decided to enter into the plan in the first place. He brought water lines to the tract at his own expense before Maurice talked to him. He decided later to use the services of Maurice and engaged him on a regular continuing basis. He decided to have the tract platted, surveyed, and the lots and streets marked off. He did tlie grading and shaping of the streets through his own corporation and at his own expense. He put in curbs and gutters at places to make the lots more readily salable. He fixed the prices of the lots. He paid his selling agent a commission. He retained control over the type and size of the houses to be built and he executed the deeds to the lots only when all of the purchase price had been paid. George was active in the business at all times.

Sales were continuous over a period of years. They were frequent enough and substantial enough to constitute a business activity. The income from them was a substantial part in each year of the total income reported. George was maiding a profit on the sales which took place during the taxable years of about 100 per cent on his total investment. The evidence indicates that only a small part of that profit could be attributed to any possible increase in the value of the bare land as opposed to the portion of the sales price and profit attributable to the work which George did in grading, subdividing, and improving the bare land.

Each case of this kind must be decided on its own facts. Mauldin v. Commissioner, 195 F. 2d 714, affirming 16 T. C. 698; Gamble v. Commissioner, 242 F. 2d 586. No decided case duplicates the facts of this one. No advantage would be gained by comparing the facts in this with those in other decided cases, regardless of the results reached in those cases. The law and facts here justify the conclusion that George did actively engage in business in order to sell these lots and to treat his gain as ordinary income.¹

The Judge who heard the witnesses in this case participated in the several conferences of the Court when it was considered and the Court has had the full benefit of his views on the evidence.

Eeviewed by the Court.

Decision will be entered for the respondent.

1 The case of Allen Moore, 30 T. C. 1306 (1958) adopted by the Court at the same conference at which this case was adopted, is believed to be distinguishable on its facts.