Greene v. Commissioner

HOLMES, Circuit Judge.

This case involves petitioners’ income tax liability in 1938 and 1939 arising from profits earned upon 37 sales of interests in oil and gas leases. In his returns for each year the taxpayer treated his profits as gains resulting from the disposition of capital assets; the Commissioner, asserting that the properties were not capital assets but were held primarily for sale to customers in the ordinary course of business, treated the profits as ordinary income, and made a deficiency assessment. The Tax Court sustained the Commissioner, and, upon the petition for review brought by the taxpayers, this court must decide whether the finding of the Tax Court upon the issue of fact thus presented has a reasonable basis in the evidence.

Petitioners are husband and wife residing in Midland, Texas, and the profits involved were realized from dealings in property of the marital community. The husband managed the community, and handled the transactions relevant here. Prior to 1931 he was an oil scout for the Shell Oil Company; continuously since 1933 he has also engaged in the purchase and sale of mineral interests as a broker, and has bought and sold oil properties as manager of the marital community. He had a brokerage license issued by ■ the State of Texas, maintained an office at Midland, and was well known as a dealer in oil properties throughout the industry in that area. It was conceded before the Tax Court that petitioners were engaged in the trade or business of buying and selling oil properties, and the narrow issue before us is whether or not those community interests sold in 1938 and 1939 were held primarily for sale in the ordinary course of that trade or business.

In 1938 eighteen mineral leases and interests were sold. One of these had been acquired in 1933, one in 1934, five in 1935, three in 1936, three in 1937, and five in 1938. Nineteen similar properties were sold in 1939, of which one was acquired in 1934, two in 1935, four in 1936, three in 1937, four in 1938, and five in 1939. All dealings in behalf of the community were somewhat restricted because of a limited operating capital, and new purchases usually were made with proceeds from sales. The extent of the community holdings gradually was built up until there were approximately 100 separate oil leases or interests at the time of the hearing in the Tax Court. Mr. Greene attempted to develop some of his leases, and had drilled some producing wells, but none of the properties disposed of in 1938 and 1939 was producing.

At the hearing in the Tax Court Mr. Greene testified that he was always ready and willing to sell any property owned by the community if offered a purchase price that he considered good, and that at the time he acquired each property he did not know whether he would hold it for investment or speculation, develop it, sublease it, sell it, or abandon it. It was his general policy to purchase “wildcat” properties and to deal therein in accordance with his best business judgment as to prospects for its successful development. In the year 1939 Mr. Greene’s earnings from ' his brokerage business abruptly declined and the profits from his dealings in the community property during the two tax years were more than twice his income for the same period from his brokerage commissions.

Section 117(a) (1) of the Revenue Act of 1938 excludes from the definition of capital assets property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.¹ The deficiency assessment by the Commissioner imposed upon petitioners the burden of proving that the particular properties sold in 1938 and 1939 were held primarily for investment rather than primarily for resale. There was no direct proof of intent or purpose ■ even in the testimony of Mr. Greene, and the Tax Court was required to draw an inference as to this ultimate fact from the circumstantial evidence relevant thereto. The burden upon petitioners in this court is to show that the inference so drawn was not warranted by any substantial evidence.²

Since it is admitted that the taxpayers were in the business of buying and selling oil properties, at least a substantial portion of the properties owned must have been held primarily for resale in the ordinary course of‘business. The properties sold were of comparatively recent acquisition, and not one of them was productive of any income at the time it was sold. The substance of petitioners’ testimony was to the effect that they had neither the capital nor the inclination to hold for investment more than a chosen few of all the properties held.

W.e think the facts were consistent with and justified the inference that the properties sold in 1938 and 1939 were held primarily to be sold in the ordinary course of business.

The decision of the Tax Court is affirmed.

1 52 Stat. 500, 26 U.S.O.A. Int.Rev. Acts, page 1061.

2 Dobson v. Commissioner, 64 S.Ct. 239.