George v. Commissioner

EDWIN S. GEORGE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

George v. Commissioner

Docket Nos. 31032, 47788.

United States Board of Tax Appeals

22 B.T.A. 189; 1931 BTA LEXIS 2159;

February 17, 1931, Promulgated

---

">*2159 Fair market value on March 1, 1913, of certain land determined.

Raymond H. Berry, Esq., and C. Frederic Stanton, Esq., for the petitioner.

Hartford Allen, Esq., for the respondent.

---

VAN FOSSAN

">*189 These proceedings, which were consolidated for hearing and decision, were brought for the redetermination of deficiences in income tax for the years 1923, 1924, 1925, 1926, and 1927, in amounts as follows:

1923	$6,301.57
1924	9,503.55
1925	8,596.98
1926	5,571.41
1927	2,305.92

The issues are: (1) The value as of March 1, 1913, of various parcels of land sold by petitioner in the years 1923, 1924, 1925, 1926, and 1927, respectively; (2) whether or not losses sustained by the petitioner in the years 1926 and 1927 in the operation of certain orchards were losses incurred by him in a trade or business.

Petitioner alleged, among other things, that the respondent erred by refusing to allow the deduction from gross income of the sum of $500 which was contributed by petitioner during the year 1925 to the Woodward Avenue Improvement Association of Detroit, Mich. At the hearing of this proceeding the respondent, by his counsel, ">*2160 conceded that such deduction should be allowed.

A fourth allegation of error contained in the petition has been abandoned by the petitioner.

">*190 FINDINGS OF FACT.

About the year 1906 the petitioner built a residence in the Bloomfield Hills section of Oakland County, Michigan. His residence and the land immediately surrounding it were located on a road known as the Long Lake Road. At the time of the hearing of this proceeding the petitioner had occupied this property as his permanent residence from the year 1908 or 1909. From 1909 to 1918 he bought land in the immediate neighborhood of his home at varying prices per acre, until in 1918 he owned more than 1,100 acres. This property embraced land bordering on three lakes known as Forest Lake, Island Lake, and Lower Long Lake. Petitioner's residence was situated on the shores of Lower Long Lake. These lakes are known as "unmeandered" lakes. Title to property on an unmeandred lake extends into the bed of the lake, while title to property on meandered lakes extends only to the meandered line of the lake. Meandered lakes are public lakes but unmeandered lakes are private property. Petitioner owned almost all of the">*2161 land surrounding these three lakes as well as nearly the whole of the lakes themselves. He could control the purpose for which the lakes were to be used. There were also two other much smaller lakes on petitioner's property, and about 40 per cent of his total holdings was under water. In the year 1913 petitioner purchased about 28 acres of land which had no lake frontage. This was the first purchase made by him of land without water frontage. This purchase cost petitioner $12,000, or at the rate of approximately $428 per acre. This land was close to petitioner's home, but was on the sough side of Long Lake Road, the other property owned by the petitioner at that time being north of Long Lake Road. In 1914 petitioner purchased 70 acres of land without water front for about $357 per acre, and in 1916 he purchased 120 acres for approximately $600 per acre. This latter land had a small frontage on Island Lake.

With the increase in the use of the automobile during the years immediately prior to 1913 the lake property in Oakland County, Michigan, was in increasing demand for residential purposes and the value of property with lake frontage appreciated largely from 1907 or 1908">*2162 to 1913. Meanwhile the Long Lake Road had been improved through the efforts of the petitioner and others, and it had become a good gravel road, well adapted to use by automobiles. The distance from Lower Long Lake to the City Hall in Detroit was 22 1/2 miles. Access to the petitioner's property from Detroit was by way of Woodward Avenue and Long Lake Road, Woodward Avenue being the leading thoroughfare between Detroit and the Bloomfield Hills section, and the drive by automobile from the petitioner's property ">*191 to Detroit by way of Woodward Avenue and Long Lake Road occupied a little more than an hour in time. There was also an electric street car service between Detroit and Bloomfield Center, which place was at the junction of Long Lake Road and Woodward Avenue. Bloomfield Center was about four miles from petitioner's property. The electric street car line from Detroit was operated under a 20-minute headway, and a trip from Detroit to Bloomfield Center required a little over an hour in time. In 1913 the Grand Trunk Railroad had a line from Detroit to Birmingham, Mich., which latter place was six miles from petitioner's property.

Before and during the year 1913">*2163 prominent citizens of Detroit were purchasing tracts of land in the neighborhood of petitioner's property for residential purposes, and expensive residences were being erected thereon. At that time, however, none of petitioner's property was in the market for sale. It had not been subdivided into lots, was not platted until the year 1921, and none of it was offered for sale until the latter year. However, in 1913, when selling property bordering on the lakes in the Bloomfield Hills section, it was customary to sell such property at a price per front foot. In 1912 an automobile club bought 100 feet of land fronting on Pine Lake, which was about two miles from Lower Long Lake, and paid $7,000 for such land, namely, at the rate of $70 per front foot. In 1913 a 75-foot frontage on Pine Lake was sold for $6,000, or at the rate of $80 a front foot, and in that year a contract was made to sell a frontage of 280 feet on the same lake for $21,000, or at the rate of $75 a front foot. Lots located on Pine Lake sold in 1912 and 1913 were 400 feet in depth. The property on Pine Lake was not platted or subdivided in 1913. In that year such property was not in general as desirable as land">*2164 fronting on Lower Long Lake, for the reason that Pine Lake was a meandered lake and the public had access to it, while the public could be excluded from Lower Long Lake because that lake was an unmeandered lake. Lower Long Lake also was nearer than Pine Lake to the city of Detroit. However, the demand for Pine Lake property developed more quickly than for property located on other nearby lakes because of the presence of the automobile club at Pine Lake.

In or about the month of May, 1913, 210 feet of lake frontage on Lower Long Lake were sold. This property was included in the small part of the shore frontage of Lower Long Lake which was not owned by the petitioner. It was sold in two parcels of 105 feet frontage each, one parcel being sold for $5,000 and the other for about $4,000 or at a front-foot rate of $48.60 and a little over $38, respectively. The parcels so sold were from 200 feet to 250 feet in depth. Figured as acreage, these parcels were sold for between ">*192 $8,000 and $10,000 per acre. There was also sold a small strip on the easterly side of Lower Long Lake, measuring about 30 feet in depth and 20 feet on the lake front. The price for this small parcel">*2165 was $600. The parcels on Lower Long Lake sold in 1913 were similar in type to those sold by petitioner in the years 1923, 1924, 1925, 1926, and 1927 which are in question in this proceeding. Petitioner's land, bordering on the lakes embraced within his property, rose from the edge of the lake in knolls or bluffs, the higher bluffs being more valuable for residential purposes than the lower. A small part of the petitioner's land on the shore of Lower Long Lake was swampy and not suitable for residential purposes, the same condition being true to some extent of the shore of Forest Lake. In 1913 petitioner's property surrounding the lakes referred to consisted of a large number of acres which were behind the line of the lots sold in the years in question as lake-front property. In that year the land back of the lakes, which is referred to in the evidence as land on the hills, had an acreage value of approximately $400. Most of this part of petitioner's property was wooded. In 1913, however, the property immediately contiguous to the shores of the lakes was the most valuable portion of petitioner's property, the shore property on Forest Lake, because of its contour, being somewhat">*2166 less valuable than that on the shore of Lower Long Lake.

In 1921, having subdivided and platted his property, petitioner offered it for sale. In 1923 he sold four parcels fronting on Lower Long Lake for front-foot prices aggregating $52,500. In 1924 petitioner sold parcels fronting on Lower Long Lake for the total sum of $51,000. In 1925 petitioner's sales of lake-front property, all bordering on Lower Long Lake, amounted to $79,375, and in 1926 the sales of property on that lake amounted to $35,000. In 1926 petitioner also sold property fronting on Forest Lake for the total sum of $65,750. In 1927 petitioner sold land on the shore of lower Long Lake for $18,500. All of these sales were made by the front foot. The lots sold were irregular in shape and varied in depth from 600 to 900 feet. The average price per front foot for all sales was approximately $130. The fair market value on March 1, 1913, of the land fronting on Lower Long Lake was $50 per front foot. The March 1, 1913, value of land fronting on Forest Lake was $40 per front foot.

In his income tax returns for the years 1923, 1924, 1925, 1926, and 1927 the petitioner reported the sales of property made in each">*2167 of the respective years and stated the value of property sold as of March 1, 1913, as $50 per front foot. The respondent, however, held that the value as of March 1, 1913, should not be computed on a front-foot ">*193 basis but on an acreage valuation, and, determining that the average value per acre as of March 1, 1913, of the whole of petitioner's property was $375, calculated petitioner's profits on that basis.

During the years 1909, 1910, and 1911 the petitioner planted two orchards, known as the "Bonnie Bess Orchard" and the "Hillside Orchard," the former occupying 35 acres of land, and the latter, from 35 to 40 acres of land. In addition to these two orchards the petitioner maintained a garden orchard, covering about six acres of land in the immediate vicinity of his residence. The operation of the garden orchard, however, is not in question in this proceeding. The "Bonnie Bess Orchard" and the "Hillside Orchard" were largely planted with apple trees, but the petitioner had planted in them about five acres of peaches and four acres of plums. Subsequent to the planting of these orchards petitioner regularly marketed the fruits received from them in the markets of">*2168 the cities of Pontiac and Detroit. Petitioner's purpose in maintaining these two orchards was to operate them at a profit and to add to the general value of the land owned by him. In connection with the operation of these orchards he kept and maintained separate books of account showing receipts and disbursements and showing depreciation of the machinery and other materials used by him in connection with the operation of the orchards. Machinery and equipment used included plows, harrows, horses and wagons, a tractor, spraying equipment and materials, crates and barrels. All of the fruit taken from the orchard was accounted for in petitioner's books. If any of such fruit was used in petitioner's home suitable entries were made, charging such fruit to petitioner's home. Petitioner's receipts for the last eight years from the operation of his orchard averaged over $8,000 per year. Petitioner, however, sustained losses in the operation of the orchard for the years prior to 1926 and 1927, and the deduction of the amount of these losses from gross income in such prior years was allowed by the respondent. Petitioner also incurred losses in the operation of his orchard in the years">*2169 1926 and 1927. He deducted the amounts of these losses in his respective income tax returns for 1926 and 1927, but such deduction for the years 1926 and 1927 was disallowed by the respondent on the ground that during those years the losses were not sustained in the operation of a trade or business.

OPINION.

VAN FOSSAN: The first question for determination is the fair market value as of March 1, 1913, of the lands sold by petitioner in the years 1923, 1924, 1925, and 1927.

">*194 The petitioner contends that since this land was sold on a frontfoot basis its fair market value as of March 1, 1913, should be determined on the same basis. The respondent, on the other hand, maintains that petitioner bought his property by the acre, that it was not subdivided or platted on March 1, 1913, that the lake fronts were merely a part of a large tract and that, therefore, the average value per acre of the tract at that time is the proper basis for the computation of the fair market value as of March 1, 1913, of the parcels sold in the taxable year.

The problem for solution is the fair market value of certain land on March 1, 1913. We are concerned not with the selection of one">*2170 or two methods of valuation, as such, but with determining a value that is reasonably correct. "The determination of fair market value is largely a matter of judgment and the various theories of valuation are useful only in so far as they support a result that comports with sound judgment." ; affd., . Nor are we interested in laying down a rule hereafter to be followed blindly in other cases involving other facts and conditions. Sufficient to say the method urged by respondent does not appeal to our reason as likely to lead to a correct determination of fair market value in this case.

Petitioner sold only lake frontage of shallow depth. He retained the back-lying land. We are satisfied that in 1913 the lake frontage was much the more valuable of the two types of land. Thus, an average of all as acreage would not correctly reflect the value of the lake front. On the other hand, we believe that the foot front valuation method will give us a reasonably accurate appraisal of the fair market value of the lake frontage on the given date. The evidence clearly establishes the value of $50 per front foot">*2171 as to land fronting on Lower Long Lake and of $40 per front foot of land fronting on Forest Lake.

The remaining issue is whether or not petitioner operated two orchards as a business. The evidence discloses that for several years prior to those in question the respondent had allowed the deduction of losses incurred in the operation of the orchards. But it is now claimed on behalf of the respondent that in 1926 and 1927 the operation of the orchards was not a business, because the losses incurred continued from year to year and because "continually hanging on to this enterprise changes its aspect."

In our opinion the fact that petitioner sustained losses year after year may be of some evidentiary value, but by itself that fact does not prove that the orchards were not carried on as a business, nor ">*195 does the fact stressed by the respondent that petitioner had other and larger business interests. In , we sustained deductions of large sums of money on account of farm losses incurred in 1920 and 1921. In that proceeding we said: "The mere fact that petitioner sustained losses and that he had other business interests does not">*2172 prove that the farms were not so operated * * *." See also ; ; ; . The real test is whether the operation was carried on as a business for gain or whether it was carried on for recreation or pleasure. And this question is largely a matter of the intent of the petitioner. ;.

The petitioner testified that he planted the orchards for the purpose of increasing the value of his property and because he thought that the proceeds of the sale of the fruit would help him to carry his land until the proper time for the sale of the land arrived. Petitioner also had a small orchard of about six acres close to his residence. He called this orchard his garden orchard, while the two orchards in question, called the "Bonnie Bess" and "Hillside," are referred to as commercial orchards. Petitioner makes no claim for losses on his garden orchard and its operation was kept separate from that of the "Bonnie Bess" ">*2173 and "Hillside" orchards. Petitioner also testified that the garden orchard was a hobby but that the "Bonnie Bess" and "Hillside" were not hobbies. He stated that he was an "orchardist" who operated his orchards as a business and that although the orchards had sustained losses, because of various conditions, he expected, nevertheless, to make a profit in the season succeeding the hearing of this proceeding. The evidence discloses, too, that the production of the orchards was regularly marketed in nearby cities and that the business receipts and expenditures of the two orchards were entered regularly in books of account kept for that purpose. There is no evidence contradicting this testimony.

We, therefore, hold that in the taxable years in question petitioner intended to and did operate the orchards known as the "Bonnie Bess" and "Hillside" as a business for gain. It follows that losses sustained in the operation of the orchards during the years in question are deductible from gross income. There is no dispute about the amounts of these losses.

Judgment will be entered under Rule 50.