Estate of Collins v. Commissioner

Estate of M. A. Collins, Deceased, Lila T. Collins, Administratrix, and Lila T. Collins, Individually, Petitioners, v. Commissioner of Internal Revenue, Respondent

Estate of Collins v. Commissioner

Docket No. 62264

United States Tax Court

31 T.C. 238; 1958 U.S. Tax Ct. LEXIS 47;

October 30, 1958, Filed

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Decision will be entered under Rule 50.

Taxpayers were in the business of developing subdivisions of real estate and selling lots therein to builders. In developing the subdivisions here in question it was necessary for taxpayers to arrange and pay for a sewage disposal system servicing the residential units in order to induce people to buy lots therein. By various conveyances, trust deeds, and agreements, the owners of the lots were given an equitable interest in the system, a corporation owned by taxpayers was given the right and duty to operate the system for annual charges to be paid by the lot owners which were abnormally low and resulted in the operation being unprofitable to the corporation, and taxpayers retained a right of reversion on a remote possibility. Held, net proceeds of lots in these subdivisions sold by taxpayers in taxable year constituted ordinary income and not long-term capital gains. Held, further, proportionate cost of sewage disposal system properly includible in cost basis of lots sold.

Hugh R. Dowling, Esq., William R. Frazier, Esq., and James E. Miller, Esq., for the petitioners.

Hugh G. Isley, Jr., Esq., for the respondent.

Kern, Judge. Opper, J., dissents. Murdock, J., dissenting. Harron, Withey, and Drennen, JJ., agree with this dissent.

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KERN

Respondent determined deficiencies in Federal income tax against the original petitioners herein, M. A. Collins and Lila T. Collins (husband and wife), for the years 1950 and 1951 in the respective amounts of $ 11,106.62 and $ 18,591.93. The deficiency for the year 1951 is here at issue. It arose by reason of respondent's determinations that the profits from the sales of lots in two real estate subdivisions during that year were taxable as ordinary income, and that the cost of a sewage disposal system servicing the subdivisions was not includible in the basis of the lots in the subdivisions sold in that year.

M. A. Collins having died after the filing of the petition, Lila T. Collins as the administratrix of his estate was substituted for him as a party petitioner.

FINDINGS OF FACT.

Some of the facts have been stipulated. We incorporate herein by this reference the stipulation of facts and the exhibits attached thereto and identified therein.

Prior to the year 1940 and until the death of M. A. Collins in 1956, M. A. Collins and Lila T. Collins, hereinafter sometimes referred to as petitioners, were husband and wife. At the time of the death of M. A. Collins they lived in Clay County, Florida. They filed a joint Federal income tax return for the year 1951 with the collector of internal revenue for the district of Florida.

For many years prior to and including the taxable year M. A. Collins was engaged in the business of buying undeveloped real estate, subdividing it, and selling the lots to builders. Among the projects undertaken by him in the conduct of this business was the purchase of land in Duval County, Florida, near to but not within the city of Jacksonville, and the development thereof into two contiguous subdivisions known as Rodney subdivisions, consisting of Units No. 1 and No. 2. In the conduct of this business M. A. Collins had for many years made it his practice to take title to the property acquired for subdivision in the name of his wife. Both petitioners joined in the execution of many of the documents required in the development and exploitation of the Rodney subdivisions.

Because of the nature of the soil in these subdivisions, it was not possible to provide for sewage disposal in them by the use of individual sewage disposal units or septic tanks located on each lot. No governmentally operated sewage disposal system was available for use in these subdivisions. The Federal Housing Administration (hereinafter referred to as F. H. A.) and the Veterans' Administration would approve mortgage insurance only on subdivision lots having some adequate sewage disposal service. In the absence of septic tanks or a governmentally operated sewage disposal system, they required that an adequate sanitary sewage disposal system be built to service a subdivision before approving such loans. The F. H. A. also required that legal title to the sewage disposal system be held by a corporation and that the system be transferred to a trustee for the benefit of the owners of the lots in the subdivision and the holders of mortgages thereon.

In conformity with these requirements and in order to qualify the subdivisions for F. H. A. mortgage insurance, M. A. Collins, as "owner-developer," undertook in appropriate documents filed with the F. H. A. in March 1950 that the proposed subdivisions would be serviced by a private sanitary sewage system. Accordingly, in the deeds executed by petitioners incident to the creation of the subdivisions, there were reservations to them of perpetual and alienable easements over and under certain parts of the property for the purpose of erecting and maintaining sewage lines. Thereafter, M. A. Collins caused the incorporation under the laws of Florida of Rodney Sanitary Company, all of the stock of which (5 shares, each having a par value of $ 100) was held by or for him and/or Lila T. Collins. Either petitioners acting on behalf of this company, or this company, with funds provided by petitioners, constructed a sewage disposal plant on one of the lots in the subdivisions (which was conveyed to this company by petitioners) and a system of collecting lines for the purpose of collecting sewage from the residential units and carrying it to the sewage disposal plant. On April 19, 1950, Rodney Sanitary Company, as grantor, executed a trust deed to M. A. Collins, trustee, conveying to him the interest of the company in the plant and the sewage mains and lateral lines constructed or to be constructed up to the individual lot connections. The provisions of this deed (omitting the description of the property conveyed) read as follows:

Whereas, the grantor has constructed on the property hereinafter described, and which is granted to the trustee by this instrument, an adequate sewage disposal plant to service sewage disposal for such of the single or multiple family dwelling units as are now constructed, in process of construction, or hereafter to be constructed in RODNEY, Unit No. 1, according to plat thereof recorded in the Office of the Clerk of the Circuit Court of Duval County, Florida, in Plat Book 21, page 70, and RODNEY, Unit No. 2, according to plat thereof which will hereafter be recorded, being a subdivision located in Duval County, Florida, under commitments from Federal Housing Administration or Veterans Administration for the insurance of mortgages thereon, or otherwise; and

Whereas, the grantor has and does by these presents agree that it will not permit any house in said subdivision constructed by it or its grantees under commitments from Federal Housing Administration or Veterans Administration, or otherwise, as aforesaid, to be occupied until said sewage disposal plant is in actual and satisfactory operation; and

Whereas, said sewage disposal plant has been constructed for the use of all living units in the houses constructed in this project, regardless of the ownership of individual properties, and it is the intent and purpose of the grantor to execute and deliver this trust indenture in order to carry out its undertakings as herein contained and to assure the continuance of the use of the sewage disposal plant for the houses in said subdivision which now, or hereafter may be, constructed under commitments from Federal Housing Administration or Veterans Administration for the insurance of mortgages thereon, or without insured mortgages thereon,

Now, Therefore, for and in consideration of the premises and the further sum of One Dollar ($ 1.00) lawful money of the United States, paid to grantor by trustee, the receipt whereof is hereby acknowledged, the grantor does hereby grant, bargain, sell and convey to the trustee the following property located in Duval County, Florida, more particularly described as:

* * * *

This grant and conveyance is upon the trusts and for the uses and purposes following, to-wit:

1. This grant is for the benefit of the present and future owners of all and each of the houses in the project, as well as the holders of the mortgages which may be placed thereon, including those insured by the Federal Housing Administration or Veterans Administration, and trustee shall hold the title to the property granted by this indenture until either, (a) the said sewage disposal plant and the sewage system connected therewith is taken over by a governmental authority for maintenance and operation; or (b) other adequate disposal of sewage from the houses in said project is provided by a governmental authority through means other than the operation of such sewage disposal plant, and upon the happening of either of these conditions, this indenture shall be of no further effect, and trustee shall thereupon immediately reconvey the property to grantor, its successors or assigns.

2. The grantor will and does hereby agree to be bound by the recitals contained in the preamble to this trust indenture, and to complete, operate and manage the said sewage disposal plant until the happening of one of the events specified as (a) or (b) in paragraph numbered 1 above. Grantor reserves the right to levy and collect an assessment against each house and dwelling unit during its period of operation and management of such sewage disposal plant, for sewage disposal, at not to exceed Eighteen Dollars ($ 18.00) per dwelling unit per year.

3. Should grantor fail to operate and manage the sewage disposal plant until the happening of one of the events set forth under (a) and (b) of paragraph numbered 1 above, or fail to provide satisfactory sewage disposal service for the houses and dwelling units in said project during its period of operation and management, or collect or attempt to collect in excess of Eighteen Dollars ($ 18.00) per dwelling unit per year for sewage service, whichever may first occur, then trustee shall have the right to immediate possession of the sewage disposal plant and the sewage disposal system connected therewith, for the purpose of operating and maintaining the same; and the right to hold, use, operate, manage and control the same, either himself, or by or through any of the agencies or parties for whose benefit this trust is created, and he may take possession thereof for the purpose of operating the same, and in that event trustee or the entity operating the sewage disposal plant in his or its behalf, or in behalf of any of the beneficiaries of this trust, shall be subrogated to all rights of the grantor to levy and collect an assessment against such dwelling unit at not to exceed Eighteen Dollars ($ 18.00) per year.

4. The grantor shall not suffer or permit the creation of any lien or encumbrance on the sewage disposal plant or the sewage disposal system connected therewith, nor shall trustee create or cause any lien or encumbrance thereon prior to the happening of one of the events enumerated as (a) or (b) in paragraph numbered 1 above. Grantor shall not transfer the plant or property to any person, firm or corporation whatsoever, except a governmental authority which is empowered to take over the plant and sewage system and operate it, and the trustee shall have no power to execute a conveyance for the plant and property except to grantor under the provisions of paragraph numbered 1, or to such governmental authority.

5. If it shall become necessary at any future time for the trustee or any entity acting in his behalf, or any beneficiary under this trust indenture, to take over, operate and manage the sewage disposal plant and sewage disposal plant system under the provisions of this trust, then and in that event the operator of such system shall be subrogated to the easement reserved in favor of grantor for repairing and maintaining sewage mains and lateral lines, as set forth in the conditions and restrictions applicable to all building lots in Rodney Unit No. 1 and Unit No. 2 subdivision, and recorded with the said plats thereof, and the party so operating may exercise such easement and have access to such sewage mains and lateral lines for purposes of repair and maintenance thereof.

6. In entering into the agreement contained herein, and executing this trust indenture, the trustee acts for himself as such trustee, and as representative of and by authority of all persons, firms, corporations or entities which are, or may be, beneficiaries under the trust hereby created.

7. The interests of the trustee in the properties herein above conveyed shall cease and terminate immediately upon the death or resignation of said trustee. In the event the trustee shall die or resign, the holders of a majority of the lots in said Rodney Unit No. 1 and Unit No. 2, upon which there shall be dwelling units erected shall have the right to designate a successor trustee by an instrument executed with the formalities of this trust indenture, and recorded in the public records of Duval County, Florida. Upon the designation of such successor trustee, he shall be vested with the title to the property herein above described and may exercise all the rights and privileges vested in the trustee by virtue of this indenture.

8. The grantor has by instrument of even date herewith entered into an agreement with Lila T. Collins and M. A. Collins, her husband, who now own all of the building lots located in said Rodney Unit No. 1 and Unit No. 2. In and by said agreement, said owners covenanted and agreed, for themselves and their executors, administrators, devisees, successors and assigns, that said lots should be impressed with a lien to secure an annual charge not to exceed Eighteen Dollars ($ 18.00) for each living unit in favor of grantor for sanitary sewage disposal service, and provided means for enforcement and collection of said charge. By reference, said agreement is incorporated herein and made a part hereof to the same extent as if set out in full herein.

On the same date Rodney Sanitary Company and petitioners executed the following agreement:

Whereas, the parties of the second part have heretofore subdivided and platted certain property owned by them into the subdivision known and designated as:

RODNEY, Unit No. 1, according to plat thereof recorded in the Office of the Clerk of the Circuit Court of Duval County, Florida, in Plat Book 21, page 70, and

Whereas, said subdivision is located outside the corporate limits of any municipality having a sanitary sewage disposal plant, and septic disposal tanks will not be approved by the State Board of Health of the State of Florida, and said subdivided land cannot be utilized as home sites unless an adequate system for the disposal of sewage is installed and operated for the use of said land, and

Whereas, the party of the first part, at the request of the parties of the second part, has constructed a sanitary sewage disposal plant to serve the residences being erected and which will hereafter be erected in said subdivision, and has agreed to maintain and operate the same for the use, benefit and convenience of the residential lots of said subdivision, and

Whereas, in order to protect the party of the first part and to guarantee the prompt payment of a reasonable charge for such sanitary sewage disposal service, the parties of the second part, as a part of the consideration for the conveyances heretofore made, and which will be hereafter made, have covenanted and agreed to and with the party of the first part, its successors and assigns, that the charge to be made for such service shall constitute a lien on the property until paid,

Now, Therefore, in consideration of the premises and of the mutual covenants of the parties hereto, it is covenanted and agreed as follows:

1. The party of the first part covenants and agrees that it will maintain and operate said sanitary sewage disposal system and that it will furnish to each residential lot or plot in said subdivision, adequate sanitary sewage disposal.

2. The parties of the second part covenant and agree that the party of the first part may make a reasonable charge for said sanitary sewage disposal service not to exceed Eighteen Dollars ($ 18.00) per annum per lot or living unit, and parties of the second part covenant and agree, for themselves, their successors, grantees and assigns, that said charge shall be promptly paid as the same becomes due. The parties of the second part further covenant and agree that the aforesaid promise to pay is made for the benefit of the above described land and is connected therewith, and shall constitute a covenant running with said land and binding upon the parties of the second part, their successors, grantees and assigns.

3. The parties of the second part further covenant and agree that the party of the first part, its successors and assigns shall have the right and power to bring all actions against the aforesaid properties or any part thereof for the collection of such charge and to enforce the aforesaid lien therefor.

4. It is further covenanted and agreed that the charge made from time to time by the party of the first part for the service aforesaid may be made monthly, quarterly, or annually within the limits mentioned above.

5. In order to provide an accurate record of the charges secured by the lien aforesaid which from time to time shall remain unpaid, the party of the first part covenants and agrees that it will, on or before the 15th day of March in each year, file in the office of the Clerk of the Circuit Court of Duval County, Florida, a list of all properties against which there remains any charges for said sanitary sewage disposal service secured by said lien which is unpaid at the end of the calendar year immediately preceding said date. As to all properties not appearing on said list, it shall be conclusively presumed that all charges made by the party of the first part through the calendar year next preceding the date of said certificate, have been paid or waived; provided, however, that waiver of the lien against any property through omission to include it in said list, shall not be deemed to be a waiver of said lien as to all charges made subsequent to the date covered by said certificate.

The party of the first part further covenants and agrees that it will give to the owner of any lot or plot in said subdivision, or to the holder of any mortgage encumbering any such lot or plot, at all reasonable times, a statement showing the date to which all charges made hereunder have been paid and the lien hereby reserved, satisfied.

6. In the event the sanitary sewage disposal plant and the properties of the party of the first part shall be acquired for the purpose of operation by any duly constituted governmental authority, then and in that event, the obligation of the party of the first part to render the service aforesaid shall cease and determine, and said party shall immediately thereafter, by proper instrument, release the above described property from the covenant to pay running with the land; and in the event of its failure or refusal to make such release, any Court of competent jurisdiction, upon determining the existence of the conditions mentioned above, may by its decree cancel said lien.

7. The parties of the second part further covenant and agree that in all conveyances of any part of the property hereinabove described, they will insert in the instrument of conveyance substantially the following:

"This conveyance is made subject to that certain lien and covenant running with the land as contained in instrument recorded in Deed Book    , page    , of the current public records of Duval County, Florida, and the grantees, by the acceptance of this instrument, covenant and agree that the property herein described is subject to the terms of said instrument."

8. The grantor has by trust indenture of even date herewith conveyed and transferred said sewage disposal plant, including the mains, lateral lines and other properties embraced therein, to M. A. Collins, as Trustee, for the purpose of assuring continuity of operation of said system. Said Trust indenture in the form executed has been submitted to the parties of the second part hereto, who hereby expressly consent to the conveyance of said sewage system to said Trustee, and to the terms and provisions of said trust indenture. Parties of the second part further covenant and agree that the lien reserved herein to secure said annual charge for sewage disposal service shall inure to the benefit of said Trustee and his successors.

9. Prior to the enforcement of any lien for the non-payment of any charge made for such sanitary sewage disposal service, the holder of any mortgage encumbering any lot or plot in such subdivision shall be notified of the delinquency of such charge and shall have the right, without the obligation, to pay the charge made for such sanitary sewage disposal service and be subrogated to the rights of the party of the first part, its successors and assigns, and shall be entitled to add the amount so paid to the mortgage indebtedness and recover the same together with interest at the rate provided in such mortgage.

This agreement shall be binding upon the parties hereto and upon their respective successors, grantees and assigns.

On March 20, 1951, a similar agreement was executed by and between the same parties relating to Rodney subdivision, Unit No. 2.

The trust deed executed by Rodney Sanitary Company on April 19, 1950, was recorded in Deed Book 1435, page 240, of the public records of Duval County, Florida.

The cost of the sewage disposal service was $ 63,201.02. The basic purpose in constructing this sewage system was to induce people to buy lots in the Rodney subdivisions. M. A. Collins never contemplated the possibility of making a profit from the operation of this system but hoped to break even in such operation. The low service charge provided for in the above trust deeds and agreements made it impossible as a practical matter for the operation of the sewage system to result in a profit, and at the same time to provide for its maintenance and upkeep. The system was unsatisfactory and its operation resulted in numerous complaints by the owners of houses in the subdivisions. The assessment of $ 18 per year per dwelling unit provided to Rodney Sanitary Company under the trust deed and agreements above referred to was less than the prevailing charge for sewage service made in the Jacksonville area, which was $ 2.50 per month.

For the fiscal years ended March 31, 1951 and 1952, that company reported "gross profit" in the total amount of $ 1,567.95 and a net loss for both years in the total amount of $ 97.09.

The Spring Park Manor subdivision, consisting of several units, adjoined the Rodney subdivisions and was served with a private sewage system which was similar to the one operated by the Rodney Sanitary Company and was also limited to charging the same rates. It was owned and operated by the developer of that subdivision. By the spring of 1952 he and M. A. Collins were both dissatisfied with the operation of these sewage systems, and considered that a consolidation of them might result in a more satisfactory operation. After some bargaining M. A. Collins acquired on or about May 19, 1952, this sewage system servicing the adjoining subdivision on behalf of Rodney Sanitary Company for $ 1,500. No capital assets are shown in the balance sheets attached to the income tax returns of that company for the fiscal years ended March 31, 1951, 1952, and 1953. The balance sheet attached to its return for the fiscal year ended March 31, 1954, showed capital assets (undepreciated) in the amount of $ 1,500, described in Schedule I of the return as "Treatment plant."

The returns of the Rodney Sanitary Company for the fiscal years ended March 31, 1953, 1954, 1955, and 1956, show "gross profit" in the respective amounts of $ 6,706.52, $ 7,487.72, $ 10,904.19, and $ 1,597.50. The same returns indicate net losses for the fiscal years ended March 31, 1954 and 1956, in the respective amounts of $ 1,449.97 and $ 3,402.40, and net income for the fiscal years ended March 31, 1953 and 1955, in the respective amounts of $ 82.93 and $ 1,975.90. The balance sheet included in the return for the fiscal year ended March 31, 1956 (the last year for which the company filed a return), shows that it had assets as of the end of that year in the total amount of $ 1,190.13 and liabilities (other than capital) in the amount of $ 3,580.76. Schedule J of that return shows that it had as a depreciable asset as of the beginning of the year a "Sewer Disposal Plant" with a cost basis of $ 1,500 which was "Abandoned 8/11/55." No depreciation was ever taken upon the sewage disposal system here in question.

It being apparent that the operations of Rodney Sanitary Company were unsatisfactory to its customers and that its revenues were insufficient to pay the costs of operation and also provide for proper maintenance, and it being impossible to raise the charges from the $ 18 per year per residential unit, M. A. Collins organized in December 1954 a corporation named Independent Utility Company, with the intention that it would furnish sewage disposal service not only to the subdivisions serviced by Rodney Sanitary Company but also to other adjacent subdivisions, as to which its charges would not be so limited. One of these subdivisions, known as Cherokee Park, was owned by petitioners. On December 20, 1954, an agreement was executed by Independent Utility Company (as party of the first part) and petitioners (as parties of the second part), reading in pertinent parts as follows:

Whereas, the parties of the second part are the owners of all the land in the subdivision known and designated as:

CHEROKEE PARK, according to plat thereof recorded in the Office of the Clerk of the Circuit Court of Duval County, Florida, in Plat Book 25, page 45, and

CHEROKEE PARK REPLAT, according to plat thereof recorded in the Office of the Clerk of the Circuit Court of Duval County, Florida, in Plat Book 25, Page 83.

Whereas, said subdivision is located outside the corporate limits of any municipality having a sanitary sewage disposal plant, and septic tanks will not be approved by the State Board of Health of the State of Florida, and said subdivided land cannot be utilized as home sites unless an adequate system for the disposal of sewage is installed and operated for the use of said land; and

Whereas, the party of the first part, at the request of the parties of the second part, is constructing, or causing to be constructed, a sanitary sewage disposal plant to serve the residences to be erected in said subdivision, and has agreed to maintain and operate the same for the use, benefit and convenience of the residential lots of said subdivision; and

Whereas, in order to protect the party of the first part and to guarantee the prompt payment of a reasonable charge for such sanitary sewage disposal service, the parties of the second part, as a part of the consideration for the conveyance which will be hereafter made, have covenanted and agreed to and with the party of the first part, its successors and assigns, that the charge to be made for such service shall constitute a lien on the property until paid;

Now, Therefore, in consideration of the premises and of the mutual covenants of the parties hereto, it is covenanted and agreed as follows:

1. The party of the first part covenants and agrees that it will maintain and operate said sanitary sewage disposal system and that it will furnish to each residential lot or plot in said subdivision adequate sanitary sewage disposal.

2. The parties of the second part covenant and agree that the party of the first part may make a reasonable charge for said sanitary sewage disposal service not to exceed Thirty-six and No/100 Dollars ($ 36.00) per annum per lot or living unit or such greater amount as a majority of the property owners served by said system may from time to time authorize (each living unit to have one vote regardless of the number of owners of one unit or the number of units owned by one owner). The parties hereto further agree that it is their mutual intention and desire that party of the first part derive a fair and reasonable profit and continuing income from the operation of said system and that therefore changes in the economic situation should not be permitted to deprive party of the first part of said fair and reasonable profit and continuing income. In the event a majority of the property owners served by said system refuse to grant a request of the party of the first part for an increase or increases, then parties of the second part agree that party of the first part may by proper petition to a court of competent jurisdiction seek judicial relief by said court determining and fixing a fair and reasonable charge on the basis of the economic circumstances then existing. Parties of the second part recognize that party of the first part may by contract and/or judicial order and/or trust deed be required to extend sewage disposal service to units in the subdivisions of Rodney, Units 1 and 2, and Spring Park Manor, Units 6, 7, 8, 9 and 9-A, at charges less than the charge that party of the first part may fix for sewage disposal service to units in said Cherokee Park, and parties of the second part do specifically hereby agree, for themselves, their successors, grantees and assigns, that such lesser charge or charges for service by party of the first part to units in the subdivisions of Rodney, Units 1 and 2, and Spring Park Manor, Units 6, 7, 8, 9 and 9-A, shall not be controlling or in any way be a factor in the determining and fixing of a charge for service to units in Cherokee Park. Parties of the second part covenant and agree, for themselves, their successors, grantees and assigns, that said charge shall be promptly paid as the same becomes due. The parties of the second part further covenant and agree that the aforesaid promise to pay is made for the benefit of the above-described land and is connected therewith, and shall constitute a covenant running with said land and binding upon the parties of the second part, their successors, grantees and assigns.

* * * *

6. In the event the sanitary sewage disposal plant and the properties of the party of the first part shall be acquired for the purpose of operation by any duly constituted governmental authority, then, and in that event, the obligation of the party of the first part to render the service aforesaid shall cease and determine and said party shall immediately thereafter, by proper instrument, release the above-described property from the covenant to pay running with the land; and in the event of its failure or refusal to make such release, any Court of competent jurisdiction, upon determining the existence of the conditions mentioned above, may by its decree cancel said lien.

* * * *

8. It is specifically understood and agreed by the parties hereto that this agreement shall not alter the ownership of the mains, lateral lines, pipes and rights of way and any and all other physical facilities and legal rights constituting a part of said sewage disposal system, now or hereafter laid, constructed or acquired, all of which shall be the property of party of the first part and its successors in title. Party of the first part contemplates conveying and transferring said sewage disposal plant, including the mains, lateral lines and other properties embraced therein, to a Trustee for the purpose of assuring continuity of operation of said system. Parties of the second part, for themselves, their successors, grantees and assigns, hereby expressly consent to a conveyance of said sewage system by the party of the first part to a Trustee without the necessity of further notice to or approval by the parties of the second part, and parties of the second part hereby agree that they and their successors in interest will be bound by the terms of said trust conveyance the same as though they had been parties thereto insofar as the terms of said trust conveyance are not inconsistent with the spirit of this agreement. In the event such a trust conveyance is made by party of the first part, parties of the second part, for themselves and their successors in interest, agree that notice to or service of process upon the Trustee by party of the first part shall constitute notice to or service upon parties of the second part, and their respective successors in interest, for any purpose or legal proceedings in connection with or arising out of the provisions of this agreement, except in foreclosure proceedings to enforce the lien herein provided for. Parties of the second part further covenant and agree that the lien reserved herein to secure said annual charge for sewage disposal service shall inure to the benefit of said Trustee and its successors if and when said Trustee or its successors should be operating said sewage disposal system.

On April 29, 1955, Independent Utility Company executed a trust deed to Atlantic National Bank of Jacksonville as trustee, reading in pertinent parts as follows:

Whereas, Grantor is the owner of certain real property, lying and being in Duval County, Florida, and more particularly described as: [Here follows description.]

* * * *

The above-described tract of land contains 2.55 acres more or less, upon which there is to be constructed or caused to be constructed by Grantor a sewage treatment plant, a sewage collection system and appurtenances (all of which is hereinafter referred to as "sewerage system"), for the purpose of supplying sewage disposal service to all properties connected to or to be connected to the sewage system; and

Whereas, Grantor will cause to be constructed said sewerage system for the purpose of serving the residences being erected and which hereafter will be erected in those certain subdivisions lying and being in Duval County, Florida, and more particularly known and described as:

SOUTHLAND, CHEROKEE PARK, SPRINGDALE and SOUTH PINES subdivisions, as well as other subdivisions and individual units;

and

Whereas, the improvement and development of the said subdivisions is contingent upon the acceptance for mortgage insurance by the Federal Housing Administration and Veterans Administration of mortgage loans covering the separate properties and improvements built or to be built thereon; and

Whereas, the Federal Housing Administration and Veterans Administration require assurances as to the continuous and satisfactory operation of the said sewerage system before accepting said mortgage loans for mortgage insurance; and

Whereas, it is the intention and purpose of Grantor that such sewerage system shall be used and operated to provide adequate disposal of sewage for each of the properties connected thereto and properly to maintain the sewerage system so that it will not adversely affect said properties, and to assure the continuance of the operation and maintenance of such sewerage system for the benefit of the present and future owners and mortgagees of all and each of said properties;

Now, Therefore, for and in consideration of the undertakings of Trustee to provide and assure the maintenance and operation of the sewerage system as aforesaid and the further sum of ONE and NO/100 DOLLARS ($ 1.00) in lawful money of the United States of America, cash in hand to Grantor paid by Trustee, the receipt whereof is hereby acknowledged, the Grantor does hereby grant and convey to the Party of the Second Part, as Trustee, the following property, to-wit:

(A) All of grantor's right, title and interest in and to the following-described real property, lying and being in Duval County, Florida, and being more particularly described as: [Here follows description.]

* * * *

(B) The sewage collection system including the sewage mains and lateral lines heretofore constructed, now in process of construction and hereafter constructed on the property within the confines and exterior boundaries of the aforementioned subdivisions and such other subdivisions as may be served by the system and the sewage treatment plant located on the property described in (A) above, together with the effluent lines to points of final disposal heretofore constructed or to be constructed, including all easements incident to the ownership and operation of said sewerage system.

This grant and conveyance is upon the trusts and for the uses and purposes following, to-wit:

1. This grant is for the benefit of the present and future owners and mortgagees of all and each of the SOUTHLAND, CHEROKEE PARK, SPRINGDALE and SOUTH PINES subdivisions properties and other properties now or hereafter connected to the said sewerage system, and Trustee shall hold the title to the property granted and conveyed by this Indenture until either one of the following occurs:

(a) The sewerage system is taken over by any governmental authority for maintenance and operation; or

(b) Other adequate sewage disposal service is provided by any governmental authority through means other than the operation of the sewerage system now transferred to the Trustee herein.

Upon the happening of either of the events set out in (a) and (b) above, Trustee shall immediately reconvey all of said property to Grantor, its successors or assigns, and this Indenture shall be of no further effect.

2. Grantor agrees to provide at all times, for each of the aforesaid properties connected to the said sewerage system, service adequate for the safe and sanitary collection, treatment, and disposal of all domestic sewage from said residences. Grantor, further, shall operate and maintain the sewerage system, including the sewage treatment plant, in a manner so as not to pollute the ground, air, or water in, under or around said properties with improperly or inadequately treated sewage, or with noxious or offensive gases or odors. Grantor further agrees to operate the system in accordance with regulations and recommendations of the State Board of Health and any and all other public authorities having jurisdiction in such matters, and to produce an affluent of a quality satisfactory to the State Board of Health and any and all other public authorities having jurisdiction over such matters. Records of any and all tests conducted in connection with said system shall be kept as permanent records by the Grantor and said records shall be open to inspection by the State Board of Health of the State of Florida and the owners of the properties connected to the said sewerage system. The said Board of Health and/or its agents shall at all times have access to the plant of Grantor to conduct any and all tests as said Board shall consider necessary to determine compliance with the said regulations and recommendations. In the event said Board shall determine that the operations of the system do not meet with the said regulations or recommendations, Grantor immediately shall undertake, at its sole cost, to make any adjustment, repair, installation, or improvement that shall be necessary or recommended by said Board to bring the operation of the said system in compliance with said regulations and recommendations, but Grantor shall have a reasonable period of time to accomplish such necessary adjustment, repair, installation or improvement.

3. Grantor shall maintain said sewerage system at all times in good order and repair so that satisfactory service as aforesaid may be supplied to each of said properties as provided in paragraph 2 above.

4. Should Grantor while this Indenture is still in effect fail to operate and manage the sewerage system in the manner and under the conditions specified in paragraphs 2 and 3 above or deliberately collect or attempt to collect from any of the customers a charge in excess of the rate specified in paragraph 6 herein or paragraph 15 herein as to houses or units now being rendered sewage disposal service by the sewerage plants now located in and serving RODNEY, Units 1 and 2, and SPRING PARK MANOR, Units 6, 7, 8, 9 and 9-A, then the Trustee shall have the right to immediate possession of the sewerage system for the purpose of operating and maintaining the same, and the right to hold, use, operate, manage, and control the same, either itself or by or through any of the parties for whose benefit this trust is created, and it may take possession thereof for the purpose of operating the same; and, in that event, Trustee or the entity operating the sewerage system in its behalf or in the behalf of any of the beneficiaries of this trust, shall be subrogated to all rights of Grantor to levy and collect a charge against each customer at rates not in excess of those specified in paragraph 6 herein, or paragraph 15 herein as to houses or units now being rendered sewage disposal service by the sewerage plants now located in and serving RODNEY, Units 1 and 2, and SPRING PARK MANOR, Units 6, 7, 8, 9 and 9-A.

* * * *

6. Grantor reserves the right to levy and collect an assessment against each dwelling unit (whether or not such unit be used for residential or business purposes) connected to the sewerage system during Grantor's period of operation and management of said sewerage system, for sewage disposal services, an amount to be determined from time to time by Grantor but not to exceed an annual rate of THIRTY and NO/100 DOLLARS ($ 30.00), or such greater amount as a majority of the property owners served by said system or a court of competent jurisdiction may from time to time authorize. * * *

* * * *

During the period of Grantor's maintenance and operation of said sewerage system, the proceeds collected from said service charges shall belong solely to Grantor, its successors or assigns, and Grantor, its successors or assigns, shall in no way be required to account for same to the Trustee herein or to those for whose benefit this trust is created.

* * * *

10. Grantor has by the hereinabove-referred-to agreements dated the 20th day of December, 1954, entered into agreements with SOUTHLAND, INC., a Florida corporation, which corporation now owns all of the property located in the aforementioned platted and to be platted units of SOUTHLAND subdivision, and with M. A. COLLINS and LILA T. COLLINS, his wife, who now own all the building lots in the aforementioned CHEROKEE PARK subdivision. In and by said agreements, said owners covenanted and agreed, for themselves, their heirs, legatees, devisees, successors and assigns, that all lots in both subdivisions should be impressed with a lien to secure the sewage disposal charge referred to in paragraph 6 herein in favor of Grantor, and provided means for enforcement and collection of said charge. By this reference said agreements are incorporated herein and made a part hereof to the same extent as if set out in full herein.

* * * *

14. Grantor shall have the right during such time as it is operating and maintaining said sewerage system to connect to said system additional units, lying in subdivisions other than SOUTHLAND, CHEROKEE PARK, SPRINGDALE and SOUTH PINES subdivisions, except that the prior approval of the Florida State Board of Health shall be required for any such additional connections and such additional connections shall not cause the total number of units served by the plant to exceed the designed capacity of the plant. In the event of any such additional connections this Trust Deed shall also be for the benefit of every owner and mortgagee of property so connected to said system and the provisions of this Trust Deed shall in all respects be applicable to the service furnished such additional properties.

15. In the event the sewerage plants now loacted in and serving RODNEY, Units 1 and 2, and SPRING PARK MANOR, Units 6, 7, 8, 9 and 9-A, should discontinue such service, then if a court of competent jurisdiction orders the cancellation of the trusts wherein said plants were conveyed to trustees, Grantor agrees that the sewerage plant herein conveyed will render sewage disposal service to the houses, homes and units now being served by the sewerage disposal system located in RODNEY and SPRING PARK MANOR subdivisions and, immediately upon the cancellation of said trusts, all houses or units now being rendered sewage disposal service by said plants shall be deemed to be connected to the system herein conveyed so that the owners and mortgagees of said properties shall be beneficiaries of this trust conveyance herein made at the moment the cancellation of the aforementioned trusts becomes effective. Grantor agrees that the charge for such sewage disposal service shall not exceed EIGHTEEN and NO/100 DOLLARS ($ 18.00) per year per lot or living unit, and that the provisions for an increase as set out hereinabove in paragraph 6 shall not be applicable to said units in RODNEY and SPRING PARK MANOR. The maximum limitation of $ 18.00 shall apply only to the units in said subdivisions RODNEY, Units 1 and 2, and SPRING PARK MANOR, Units 6, 7, 8, 9 and 9-A, and shall in no way prejudice the right of Grantor to charge a greater amount for such services to other units subject only to the limitation set forth in paragraph 6 hereof. Charges for sewerage service to units in RODNEY, Units 1 and 2, and SPRING PARK MANOR, Units 6, 7, 8, 9 and 9-A, shall be collectible and enforceable in accordance with the provisions of those certain lien charge agreements recorded in Deed Book 1393, page 498; Deed Book 1397, page 295; Deed Book 1422, page 295; Deed Book 1433, page 466; Deed Book 1436, page 442, and Deed Book 1489, page 87, current public records of Duval County, Florida.

A suit in equity was filed in the Circuit Court of Duval County, Florida, by Spring Park-Rodney Civic Association, Inc., and certain named individuals against Independent Utility Company, M. A. Collins, trustee, and Rodney Sanitary Company. A final decree entered in that action on May 20, 1955, reads as follows:

This cause coming on to be heard, due notice having been given all parties, counsel for Plaintiffs and Defendants being present, and The Prudential Insurance Company of America, Perry Hogan & Company and First Federal Savings & Loan Association of Jacksonville, though not represented at hearing by counsel, having each previously filed a Receipt of notice of said hearing and a Consent to the holding of said hearing, and it appearing:

That a Notice of said hearing was published in the May 11th, 1955 issue of The Florida Times Union, a newspaper of general circulation in Duval County, Florida, a copy of which Notice is a part of the record of this cause;

That copies of a Notice of said hearing were posted in various public places in the subdivisions of Duval County, Florida, known as Spring Park Manor and Rodney, sufficiently in advance of said hearing to apprise all owners of property in said subdivisions of said hearing;

That the attorney for the Plaintiffs has of record expressed on behalf of said Plaintiffs a Consent to this Court granting the relief prayed for by the Amended Cross-Claim and said attorney having of record announced his intention to not further prosecute the Plaintiffs' Claim as set forth in the Amended Complaint;

That no party, person, firm or corporation has appeared in opposition to the relief prayed for by the Amended Cross-Claim; that the issue involved in the Amended Cross-Claim is of common and general interest to all property owners and mortgagees of properties in the Duval County, Florida subdivisions of Rodney, Units 1 and 2, and Spring Park Manor, Units 6, 7, 8, 9 and 9-A, so that the representation of said owners and mortgagees as Cross-Defendants is properly of a class nature;

That the individuals joined as Cross-Defendants in this cause are sufficient representation of the class of said owners and the Cross-Defendants, The Prudential Insurance Company of America, Perry Hogan & Company and First Federal Savings & Loan Association of Jacksonville are sufficient representation of the class of said mortgagees;

That it is in the best interests of the owners and mortgagees of properties in Spring Park Manor, Units 6, 7, 8, 9 and 9-A, and Rodney, Units 1 and 2, for the following to simultaneously occur:

Termination of the Trust now covering the sewage treatment plants serving Rodney, Units 1 and 2, and Spring Park Manor, Units 6, 7, 8, 9 and 9-A;

The discontinuance of sewage disposal service by said plants;

The conveyance in trust of a sewage treatment plant now being constructed in Cherokee Park, a subdivision of Duval County, Florida;

The extension of sewage disposal service by said Cherokee Park Sewage disposal plant to all residences now being served by sewage disposal plants serving Rodney, Units 1 and 2, and Spring Park Manor, Units 6, 7, 8, 9 and 9-A.

That the proposed Trust Deed wherein the said Cherokee Park Plant is to be conveyed in trust fully preserves and protects the rights of the beneficiaries of trusts now covering the plants serving Rodney, Units 1 and 2 and Spring Park Manor, Units 6, 7, 8, 9 and 9-A;

Wherefore, the Court being fully advised in the premises, and after due consideration, it is

Ordered, Adjudged and Decreed as follows:

1. That the Trusts arising from the following Trust Deeds be, and are hereby, ordered terminated as of the date that the certain proposed Trust Deed conveying a part of Tract B, Cherokee Park Subdivision, Duval County, Florida, is properly executed and filed of record in the office of the Clerk of the Circuit Court in and for Duval County, Florida:

(a) Trust Deed, dated 5 May 1950, recorded in Deed Book 1444, page 133, current public records of Duval County, Florida;

(b) Trust Deed, dated the 1st day of August, 1949, recorded in Deed Book 1393, Page 488, current public records of Duval County, Florida;

(c) Trust Deed, dated the 19th day of April, 1950, recorded in Deed Book 1435, page 240, current public records of Duval County, Florida.

A copy of the proposed Trust Deed for the aforementioned Cherokee Park sewage disposal plant is attached hereto and by this reference is incorporated herein as a part of this Decree.

2. The assumption of Independent Utility Company of sewage disposal service to residences in Rodney, Units 1 and 2, Spring Park Manor, Units 6, 7, 8, 9 and 9-A, shall be at an annual charge per dwelling unit not in excess of EIGHTEEN DOLLARS ($ 18.00), but such limitation of the annual charge to the aforementioned residences in Rodney and Spring Park Manor shall be without prejudice to the right of Independent Utility Company to charge in excess of $ 18.00 per year for sewage disposal service to customers other than those in Rodney, Units 1 and 2, and Spring Park Manor, Units 6, 7, 8, 9 and 9-A;

3. That the discontinuance of the aforementioned sewage disposal service by Rodney Sanitary Company and the assumption of such service by Independent Utility Company shall be promptly followed by Rodney Sanitary Company, or its Assignee, demolishing and removing from their present locations the three existing sewage disposal plants now serving Rodney, Units 1 and 2, and Spring Park Manor, Units 6, 7, 8, 9 and 9-A;

4. That Lot 12, Block 6, Rodney, Unit 2, according to plat thereof recorded in Plat Book 22, page 62-A, current public records of Duval County, Florida is divested of the trust now covering said property as recorded in Deed Book 1435, page 240, current public records of Duval County, Florida as of the date said Trust Deed is terminated as above provided;

5. That Lot 25, Block 4, Spring Park Manor, Unit 9-A, recorded in Plat Book 22, page 14, of the current public records of Duval County, Florida, is divested of the trust now covering said property as recorded in Deed Book 1444, page 133, current public records of Duval County, Florida as of the date said Trust Deed is terminated as above provided;

6. That certain tract or parcel of land, being a part of the Eleanor Hogan Donation, Section 32, Township 2 South, Range 27 East, Duval County, Florida; being more particularly described as commencing at the Northeasterly corner of Lot 8, Block 15, as shown on map of Spring Park Manor Unit 6, as recorded in Plat Book 21, page 2, of the current public records of Duval County; thence South 85 o 05' East a distance of 30 feet to a point for the point of beginning; thence North 4 o 55' East a distance of 47.75 feet to a point; thence South 87 o 47' East a distance of 202 feet to a point; thence South 4 o 55' West a distance of 81.76 feet to a point; thence South 83 o 51' East a distance of 123.2 feet to the Westerly right of way line of Spring Park Road; thence South 18 o 02' East along the same a distance of 10.96 feet to a point; thence North 83 o 51' West a distance of 329.4 feet to a point in the Easterly line of said Spring Park Manor Unit 6; thence along the same North 4 o 55' East a distance of 30.15 feet to the point of beginning, is divested of the trust now covering said property as recorded in Deed Book 1393, page 488, current public records of Duval County, Florida as of the date said Trust Deed is terminated as above provided;

7. That the pipe, couplings, fittings, man holes, sewage mains and lateral lines and other personalty conveyed in trust by any of the three aforementioned existing trust be freed of said trusts as of the date said trusts are terminated as above provided.

8. That when said trusts are terminated as above provided, the title to the properties above-described in Paragraphs numbered 4., 5., 6. and 7. hereof shall revest in Rodney Sanitary Company, subject to any claims, conveyances or other matters not a subject matter of this cause.

9. That upon the assumption of sewage disposal service by Independent Utility Company to residences in Rodney, Units 1 and 2., and Spring Park Manor, Units 6, 7, 8, 9 and 9-A, the charges for such service shall be collectible and enforceable by the means and in the manner provided in those certain Lien Charge Agreements as follows:

(a) Lien Charge Agreement dated the 19th day of April, 1950, recorded in Deed Book 1433, page 466, current public records of Duval County, Florida;

(b) Lien Charge Agreement, dated the 20th day of March, 1951, recorded in Deed Book 1489, page 87, of the current public records of Duval County, Florida;

(c) Lien Charge Agreement, dated the 1st day of August, 1949, recorded in Deed Book 1393, page 498, as amended by agreement dated the 28th day of September, 1949, recorded in Deed Book 1397, page 295, current public records of Duval County, Florida;

(d) Lien Charge Agreement, dated the 2nd day of January, 1950, recorded in Deed Book 1422, page 295, current public records of Duval County, Florida;

(e) Lien Charge Agreement dated the 5th day of May, 1950, recorded in Deed Book 1436, page 442 of the current public records of Duval County, Florida.

10. That the Amended Complaint be, and is hereby, dismissed.

Subsequently in 1955 some of the equipment of the Rodney Sanitary Company was taken over and used by the Independent Utility Company, but its plant was demolished and abandoned except as to a few inconsequential items with regard to which unsuccessful attempts were made to realize salvage.

The income tax returns of Independent Utility Company for the calendar years 1955 and 1956 show that it owned as a depreciable capital asset a "Sewer Disposal Plant" with a cost basis ascribed to it for the year 1955 of $ 91,016.79 and for the year 1956 of $ 94,264.59.

In 1950 petitioners sold all 72 of the lots located in Rodney subdivision, Unit No. 1, for $ 1,000 each. In 1951 they sold 68 of the 118 lots in Rodney subdivision, Unit No. 2, for an aggregate selling price of $ 75,900. Their cost basis in the lots sold in 1951, without considering the cost of the sewage disposal system, was $ 21,328.45. The cost basis of these lots claimed by petitioners in their income tax return for 1951 included a proportionate part of the cost of the sewage disposal system. Such inclusion was disallowed by respondent.

The cost of the sewage disposal system was properly includible by petitioners in their cost basis in the lots in the Rodney subdivisions.

The lots sold by petitioners in 1951, which are here in issue, were held by them primarily for sale in the ordinary course of their business.

OPINION.

The first issue involved in the instant case is whether respondent erred in his determination "that the 68 lots in Unit 2, Rodney Subdivision, sold * * * in 1951 were held primarily for sale to customers in the ordinary course of a trade or business within the meaning of section 117 (a) (1) of the Internal Revenue Code of 1939 and that the entire gain realized from the sale of these lots is taxable as ordinary income."

Petitioners, relying on the fact that title to the subdivision was taken in the name of Lila T. Collins, a housewife, contend that it was purchased for her as an investment by her husband to whom she had turned over funds of her own "from time to time," that the sales activities of her husband, M. A. Collins, could not be attributed to her, and, even if they could, they were not "the usual activities associated with one in the real estate business."

This contention is without merit. The record before us clearly indicates that M. A. Collins was engaged in the business of buying and developing real estate subdivisions and selling the lots principally to builders for many years, including the year before us, that his policy was and had been to take title to the property used in this business in the name of his wife, that she signed all necessary documents in conformity with his wishes, that the property known as the Rodney subdivisions was acquired and exploited as a part of the regular real estate business of M. A. Collins, and that the sales of the lots therein being principally to builders did not entail and require the sales activity normally associated with the "retail" sale of residential units to the ultimate purchasers. The fact that Lila T. Collins may have contributed an indeterminate amount of money to M. A. Collins at an indeterminate time for his use in this business and the fact that he may have purchased some rental property for her as an investment are both irrelevant.

The second issue has given us more difficulty. That issue is whether respondent erred in his determination "that no part of the cost of a sewage disposal system located in Rodney Subdivision is includible in the basis of the lots in said subdivision."

Respondent contends that his determination is justified under the authority of two comparatively recent cases, Colony, Inc., 26 T. C. 30, affirmed on other issues 244 F.2d 75">244 F. 2d 75, and Albert Gersten, 28 T.C. 756">28 T. C. 756.

The petitioners contend that the basic purpose in constructing the sewage disposal system in this case was to make salable the lots in the Rodney subdivisions, and that under the authority of Country Club Estates, Inc., 22 T. C. 1283, the cost of the system should be regarded as part of the basis of the lots.

The case upon which respondent principally relies, Colony, Inc., supra, involved the construction by subdividers of a water supply system. In deciding that the cost of that system should not be regarded as a part of the basis of the lots sold, we distinguished Country Club Estates, Inc., supra, in the following language:

The difficulty with petitioner's contention is that, unlike the taxpayer in Country Club Estates, Inc., supra, the petitioner has not given up any property in order to sell its lots. For the funds it expended, the petitioner acquired a water supply system which it owned and operated during the taxable years and thereafter. It is true that the system has not been operated at a profit, due, perhaps, to the small number of houses which have been constructed at The Colony. And it also may be true, as petitioner contends, that the pumping station may be abandoned at some time in the future, when the facilities of the Lexington Water Company reach the subdivision. These circumstances, however, do not alter the fact that the petitioner retained full ownership and control of the water supply system during the taxable years, and that it did not part with the property for the benefit of the subdivision lots. Because of this retention of ownership, Country Club Estates, Inc., supra, is distinguishable. * * *

A careful consideration of the cases above cited indicates that if a person engaged in the business of developing and exploiting a real estate subdivision constructs a facility thereon for the basic purpose of inducing people to buy lots therein, the cost of such construction is properly a part of the cost basis of the lots, even though the subdivider retains tenuous rights without practical value to the facility constructed (such as a contingent reversion), but if the subdivider retains "full ownership and control" of the facility and does "not part with the property [i. e., the facility constructed] for the benefit of the subdivision lots," then the cost of such facility is not properly a part of the cost basis of the lots.

It is apparent to us on the record of the instant case that the basic purpose for the construction of the sewage disposal system was to induce and make possible the sale of the lots in the Rodney subdivisions. The difficult problem is whether petitioners retained such full ownership and control of the sewage system without sufficiently parting with the property rights therein for the benefit of the subdivision lots as to make applicable the rule enunciated in Colony, Inc., supra.

The resolution of this question requires a careful consideration of all the pertinent facts, and we have set them forth in extenso in our findings.

After a detailed study of these facts and of the entire record herein, we have concluded that petitioners constructed the sewage system not only for the basic purpose but for the sole purpose of inducing and making possible the sale of lots in the Rodney subdivisions, that they did not retain full ownership and control of the sewage system, and that they parted with material property rights therein for the benefit of the subdivision lots.

Our analysis of the various transactions evidenced by the documents quoted so extensively in our findings indicates that petitioners intended to and did convey substantial beneficial property rights in the sewage disposal system to the owners of lots in the Rodney subdivisions. There was retained to their wholly owned corporation the unprofitable right (and duty) to operate the system for the benefit of the owners of the lots. They also retained a reversionary interest contingent upon a remote possibility. In view of our conclusion, it is our opinion that the case of Colony, Inc., supra, is not controlling and that the applicable rule is the general one stated in Country Club Estates, Inc., supra.

Under the facts of this case we are persuaded that the inclusion of the cost of the sewage system in the basis of the lots would better and more fairly reflect the true income received by petitioners during the taxable year. Such inclusion is permissible and proper under our interpretation of the pertinent authorities. Therefore on this issue our decision is for petitioners.

Decision will be entered under Rule 50.

MURDOCK

Murdock, J., dissenting: Clearly the petitioners were in the business of selling real estate but the cost of the sewage disposal plant should not be a part of the cost of the lots.

The sewage disposal plant was owned by the Sanitary Company and the petitioners owned all of its stock. They would have reaped the benefits through that corporation if the operation of the plant had been profitable and they would have benefited similarly from a sale or disposition of the plant. This case is not distinguishable satisfactorily from Colony, Inc., 26 T.C. 30">26 T. C. 30, even if the petitioners paid the cost of the construction of the sanitary plant themselves. I think the majority opinion on this point makes bad law. If the cost of the sewage plant was paid by money contributed to the Sanitary Company by the petitioners, either directly or constructively, the loss, if any, would be a loss of the corporation and the petitioners' case for ignoring the corporation and deducting those costs as their costs of the lots would be even weaker.

The mere fact, if true, that there was no expectation of profit from the operation of the plant is not a determining factor and the fact that the operation of the sewage plant turned out to be unprofitable is immaterial. If the petitioners had desired to include the cost of the sewage disposal plant in the cost of the lots, they could have transferred the title to that plant in some way for the sole benefit of the lot owners but, instead, they retained title to that property for their own benefit through a wholly owned corporation.