Pope v. Commissioner

WILLARD POPE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT .

FRANCIS C. MCMATH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Pope v. Commissioner

Docket Nos. 42734, 42747, 43904, 44567, 51646, 52023.

United States Board of Tax Appeals

28 B.T.A. 1255; 1933 BTA LEXIS 1033;

August 23, 1933, Promulgated

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Right to have their gains from the sale of real estate treated as capital gains denied for the reason that the taxpayers held the lands primarily for sale in the course of their business.

Raymond K. Dykema, Esq., for the petitioners.

James K. Polk, Esq., for the respondent.

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MARQUETTE

These proceedings have been consolidated and involve redetermination of the following deficiencies in income tax:

	Willard Pope		Francis C. McMath
Year	Docket No.	Deficiency	Docket No.	Deficiency
1925			42747	$881.17
1926	42734	$877.50	42747	1,758.84
1927	43904	355.23	44567	1,195.01
1928	51646	551.44	52023	1,803.14

The only error asserted is that the respondent has determined that certain income received by the petitioners is not taxable under section 208 of the Revenue Act of 1926 and section 101 of the Revenue Act of 1928.

FINDINGS OF FACT.

Both petitioners are civil engineers and residents of Detroit, Michigan. McMath was president and Pope vice president of the Canadian Bridge Co. from its organization in 1901 until their retirement in 1921. Except as hereinafter stated, and except that each petitioner was a director in a few corporations, they have, since 1921, attended only to their personal investments and have not purchased or sold real estate. Neither was licensed as a real estate broker.

Charles T. Miller, who from 1913 to 1930 was secretary-treasurer of the Bridge Co., became interested in the purchase of two tracts of land, obtaining respectively 40 acres and 32.6 acres of acreage property near the boundary lines of Windsor and Walkerville, Ontario. He obtained the price of these properties and, after talking with a number of men in the Bridge Co., offered them the opportunity to join with him in the purchase. Among these were the petitioners. Windsor and Walkerville were at this time growing rapidly and there was a good chance of an increase in value of the property. Miller purchased both tracts which were conveyed to him by deeds dated September 16, 1919, and October 31, 1919. At this time there was no purchaser in sight. The petitioners took no part in these purchases except to contribute their portions of the purchase price. On December 1, 1919, Miller and twelve others, including the petitioners, entered into an agreement entitled "Tecumseh Land Syndicate Declaration of Trust of Charles T. Miller," which, after reciting that the parties thereto had through Miller purchased the two tracts of land above mentioned; that there were two mortgages on the tracts; the interests of the parties and their liabilities for the payment of the mortgages and other expenses; and that Miller was desirous of declaring the trust, then provided that Miller should hold the lands for himself and the other parties, each of whom, in turn, agreed to the extent of his or her interest to assume his or her part of the mortgages and expenses. It further provided that Miller, as trustee, should have power to sell or mortgage the lands.

AND THAT the sale of the said properties as a whole or the subdivision and sale thereof in lots shall be at the discretion of the said Trustee, the parties of the second part, however, and the said Trustee to fix a minimum price or prices upon the said properties as a whole or upon the subdivision lots, provided the said properties are hereafter subdivided, and the Trustee to be at liberty to sell at any price, provided it is not less than the minimum price or prices so fixed, and upon any terms which he may deem advisable.

ALL questions as to prices shall be submitted by the said Trustee for the decision of the parties hereto, and shall be decided by a two-thirds vote in value, and the said Trustee shall have a vote upon any of such questions.

This agreement was signed by the thirteen members of the syndicate.

By an agreement dated October 20, 1920, McMath and Pope acquired from the Modern Dwellings, Ltd., an assignment of a contract of purchase which the latter had acquired from Walker Sons, Ltd. This purchase was made for the benefit of the syndicate. The tracts covered by this assignment contained 179.4 acres and adjoined the properties purchased by Miller for the syndicate. On December 20, 1920, a contract was entered into between the syndicate, signed by all its members, the Essex Real Estate Co., Ltd., Miller, McMath, and Pope, which, after reciting the facts above set forth, and further that the Essex Co. had acquired an interest in the syndicate of 29 percent, which was to constitute compensation for its services, provided among other things:

1. For greater convenience in dealing with the said lands and rights, the same shall be conveyed and assigned to Essex Real Estate Company Limited, in trust for itself and the other members of the said Syndicate, according to their several interests above mentioned.

2. The Company shall have full power to manage, mortgage, lease, sell and dispose of the said lands and rights en bloc or in parcels, as it may see fit, and the members of the Syndicate (other than the Company) individually hereby irrevocably constitute and appoint the Company their Agent and attorney for the purpose of dealing with the said lands and rights for the benefit of the Syndicate.

* * *

5. The Company's discretion in the premises, and as to the time or times for making the distribution of proceeds of sales among members of the Syndicate, shall be absolute, but the Company shall furnish each member of the Syndicate with a statement of the affairs of the Syndicate, at least every twelve months.

* * *

By this agreement McMath, Pope, and Miller were held harmless against the costs of the properties acquired by them for the syndicate.

On December 21, 1923, the Essex Co. purchased for the syndicate 11.2 acres of land adjoining the other property of the syndicate. By an agreement dated February 10, 1925, the Essex Co. acknowledged that it held this property in trust for the members of the syndicate. Of the 263.2 acres thus acquired, one small parcel has not been subdivided and sold. Of the total acreage 222 acres were subdivided for residence purposes, as follows:

Block	Date	Acreage	Number of lots
A	August 1922	64	433
B	May 1924	21	185
C	December 1924	52	354
D	June 1926	50	334
E	April 1927	35	240
		222	1,546

Of the above 1,546 lots, 48 belonged to a third person, leaving 1,498 lots belonging to the syndicate. Lots were sold as follows:

	Lots sold
1922	4
1923	131
1924	239
1925	126
1926	331 1/2
1927	40 1/2
1928	23
	895

In addition to the above, 2.25 acres were sold in 1922 and 1.81 acres in 1923, both for school purposes; 32 acres were sold for a park in 1925; seven tenths of an acre was sold for a school site in 1926 and two thirds of an acre was sold for a gasoline station in 1928.

The syndicate had no office, held no meetings, had no place of business or stationery and, except as above shown, did no business.

The Essex Co. was organized in 1913. McMath was its president from its organization through 1928; Pope has been its vice president since 1921; Miller was one of its officers from its inception. These three were on its board of directors during the period 1920 to 1928, inclusive, and constituted a majority thereof. During this period McMath attended 24 and Pope 15 meetings of the stockholders and directors of the company. Miller was, in fact, the manager of the company and his suggestions were generally carried out. After 1921 consultations between petitioners and Miller were infrequent, but the petitioners were consulted on important matters. The Essex Co. maintained no sales office, but sold through independent brokers on a commission basis, the latter doing all the advertising. The largest part of the sales of property by the syndicate were made on the installment basis, but some were made for cash. Of the income received by petitioner McMath from the syndicate for 1925 and 1926, the amounts of $167.30 and $94.60 were derived in 1925 and 1926 respectively, from the sales of land held for less than two years. Of the income received by petitioner Pope in 1926 from the syndicate, $48.56 was derived from sales of property held for less than two years.

OPINION.

MARQUETTE: The petitioners seek to have so much of their income as was derived from the sale of the lands belonging to the syndicate taxed under the provisions of section 208 of the Revenue Act of 1926 and section 101 of the Revenue Act of 1928. The only issue is whether these lands constituted "capital assets" within the meaning of these sections. By section 208(a)(8) of the Revenue Act of 1926, it is provided:

The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * *

Section 101(c)(8) of the Revenue Act of 1928 is not materially different from the provision quoted above. It is conceded that with the exceptions set forth in our findings the lands had been held during the years in question by the taxpayers for more than two years. Real estate may not be included in inventory. ; ; .

Whatever may have been the intention of the parties in 1919, it is clear that these lands were held during the period 1925 to 1928, inclusive, primarily for sale. They produced no rental income. It is not claimed that the owners ever intended to erect improvements on the land for rental purposes. The intention to sell is clearly indicated by the declaration of trust of Miller of December 1, 1919, and by the agreement of December 20, 1920. As early as August 1922, a part of the property had been subdivided. In subsequent years four additional blocks were subdivided. In this way the syndicate owned first and last 1,498 lots which they held for sale and no other purpose.

The one remaining question is whether these properties were held by each of the petitioners for sale "in the course of his trade or business." We may eliminate the word "trade", since if a profession may be termed a trade, both petitioners were engineers. Whittled down, the issue is whether the activities of the petitioners set forth in our findings amounted to carrying on a business. In , the Court said:

"Business" is a very comprehensive term and embraces everything about which a person can be employed. Black's Law Dict. 158, citing . "That which occupies the time, attention, and labor of men for the purpose of a livelihood or profit." 1 Bouvier's Law Dict. p. 273.

On the other hand, isolated transactions do not constitute the carrying on of a trade or business. ; ; . It is often difficult to apply the general definitions, with the result that "the decision in each instance must depend upon the particular facts before the court." .

In the case before us we have not isolated transactions, but continuity of effort. Two tracts were purchased in 1919, one in 1920, and one in 1923. The tracts were laid out in lots in August 1922 (before the last tract was purchased), May 1924, December 1924, June 1926, and April 1927. In the period 1923-1928, inclusive, 891 lots and 5 larger tracts were sold. All of this required time, attention and labor, and the purpose was gain. These transactions, taken as a whole, in our opinion constituted a business. The fact that no property was purchased during the years before us does not militate against this conclusion, since a business may consist of only the sale of assets acquired in previous years. . Since these transactions constituted a business, the question is, Whose business was it? The properties purchased and sold belonged to the individual members of the syndicate, among whom were the petitioners. The Essex Co. held the bare legal title. Every act done by Miller or by the Essex Co. was authorized by these members. They conferred on that company the authority under which it acted; and all this "For greater convenience in dealing with said lands and rights * * *." In other words, the members of the syndicate, of whom the Essex Co. was one, operated through their chosen representative. It is axiomatic that one may confide the management of his business to another; but it still remains the business of the owner.

At this point the petitioners call attention to the fact that the appointment of the Essex Co. is irrevocable. It does not lie in the mouths of the petitioners to advance this contention. They, together with Miller, held the important executive offices of the company and they with Miller constituted a majority of its board of directors. Thus they, and the syndicate through them, were in absolute control of their agent.

We conclude that the petitioners held the properties in question primarily for sale in the course of their business. The petitioners rely on . We do not think that case is controlling. The facts there differ materially from those presented in these proceedings. Cf.

Judgment will be entered for the respondent.