Pennroad Corp. v. Commissioner

The Pennroad Corporation and Affiliated Companies, Petitioner, v. Commissioner of Internal Revenue, Respondent

Pennroad Corp. v. Commissioner

Docket Nos. 58979, 64889

United States Tax Court

29 T.C. 914; 1958 U.S. Tax Ct. LEXIS 253;

February 20, 1958, Filed

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Decisions will be entered for the respondent.

1. Shortly after its creation in 1828 Canton Company, a subsidiary of petitioner, became the owner of approximately 5,000 acres of land adjacent to and now a part of the city and port of Baltimore. In keeping with the purposes of its organization, and regularly and continuously through the years of its existence, Canton has developed and improved some parts of the said land for the purpose of continued holding and use through either direct operation or rental, and has marketed other parts of the land. It has regularly advertised and held itself out to the public as having land for sale for both industrial and residential purposes, and as a part of its operations, has indulged in the necessary activities to bring about the sale thereof to purchasers. During the taxable years it sold land both for industrial purposes and for residential purposes, making 6 sales in 1950, 11 in 1951, and 16 in 1952. Held, that the properties so sold were held by Canton primarily for sale to customers in the ordinary course of its trade or business, and were not capital assets, within the meaning of section 117 (a), I. R. C. 1939.

2. Fourteen of the parcels sold, 3 in 1950, 6 in 1951, and 5 in 1952, had been rented at some time during the 10 years prior to sale or were rented at the time of sale. With one exception, the properties, so far as shown, were at the time of sale rented for nominal rentals. With two exceptions, none of the properties sold had been improved, and most of them when rented were rented for such purposes as outdoor advertising and farming. Held, that petitioner's proof fails to show that the parcels in question were properties used by Canton in its trade or business within the meaning of section 117 (j).

3. Some or all of certain parcels of property had been acquired by Canton in 1912 for use as right-of-way, pursuant to plans for extension of a railroad owned and operated by its subsidiary company. Plans for the extension of the railroad were abandoned and in 1925 Canton's board of directors adopted a resolution for the sale of the said properties at its president's discretion. Four of the properties sold during the taxable years, 1 in 1950, 1 in 1951, and 2 in 1952, were from the property so acquired. Held, that the petitioner has not shown that the 4 parcels in question were not, at and prior to their sale, held by Canton primarily for sale to customers in the ordinary course of its business.

Charles S. Jacobs, Esq., William R. Spofford, Esq., and Charles I. Thompson, Jr., Esq., for the petitioner.

George H. Bowers, Jr., Esq., for the respondent.

Turner, Judge.

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TURNER

The respondent determined deficiencies in income tax against the petitioner for the years 1950, 1951, and 1952 of $ 11,224.33, $ 69,677.64, and $ 80,219.88. The only question for decision is whether gains realized on the sale of real estate during the years herein are taxable as long-term capital gains, or as ordinary income. One issue involving the disallowance of a claimed interest deduction has been conceded by petitioner.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

The Pennroad Corporation, sometimes hereafter referred to as petitioner, is a Delaware corporation, having its principal office in Wilmington, Delaware. It is an investment company, registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as a closed end management company.

For the calendar years 1950, 1951, and 1952, petitioner, as common parent corporation of an affiliated group of companies, timely filed consolidated income tax returns for itself and its affiliated companies with the collector of internal revenue for the district of Delaware. Among the corporations in the group for which petitioner filed the consolidated returns were the Canton Company of Baltimore, referred to hereafter as Canton, the Canton Railroad, and the Cottman Company. During the years herein the petitioner owned 99.875 per cent of the outstanding capital stock of Canton Company, while Canton, in turn, owned 100 per cent of the stock of Canton Railroad Company, referred to hereafter as Canton Railroad, and 98.6 per cent of the outstanding capital stock of Cottman Company, control of Cottman being acquired on July 19, 1950.

Canton was incorporated by a special act of the Legislature of the State of Maryland in December 1828. Under its charter, it is "capable in law of purchasing, holding, improving and disposing of property, real, personal or mixed * * * for the purposes herein authorized * * * and generally may do every other act or thing necessary to carry into effect the provisions of this act, and promote the objects and designs of said company." The stated purposes for which it was incorporated included:

the improvement * * * of any lands and appurtenances which shall belong to the said company, by laying out into lots, streets, squares, lanes, alleys, and other divisions, any such lands within the vicinity of the city of Baltimore, or near to any navigable water, and erecting, constructing, or making thereon all such wharves, ships, boats and other vessels, workshops, factories, warehouses, stores, dwellings, and such other buildings and improvements as may be found or deemed necessary, ornamental or convenient; and letting, renting, leasing, selling or granting, on conditions, or using any lot or other portion of any of the said lands for agricultural, mining or manufacturing purposes, or any wharf, house, or other building or improvement, to be used by any mechanic or artisan, or other person, whether in the employ of the said company or not, in carrying on any lawful trade, business, or manufacture, authorized or permitted by the laws of this State. Provided that in laying off streets, squares, lanes, alleys or other divisions no infringement be made on the plan of the city of Baltimore, as laid out by the Commissioners under the act passed at December Session 1816 Chapter 209, And Provided also, that the said company and its agents shall in all cases whatsoever be subject to and observe the ordinances of the City of Baltimore within the limits of said City.

Upon organization in 1828, Canton acquired approximately 3,000 acres of land, and between 1831 and 1834 it acquired about 2,000 additional acres. The land so acquired was located in and near Baltimore, Maryland, fronting on and adjacent to the Patapsco River. In keeping with the purposes of its organization, Canton began improving and selling its real estate. Some, if not all, of the improvements then made were with a view to the continued holding and use of the property improved. The improvement included the construction of waterfront facilities, such as docks, wharves, and piers. By 1835 its real estate sales had amounted to $ 93,618.50.

In 1866 Canton organized the Union Railroad, to furnish railroad facilities to industries established on the Canton properties. The Union Railroad was the first connecting link between railroads from the west and those from the north, including the Philadelphia, Wilmington & Baltimore Railroad, now the Pennsylvania Railroad, which extended to Philadelphia. As a part of the Union Railroad, the Hoffman Street Tunnel in Baltimore was constructed. In 1882 the Pennsylvania Railroad acquired the Union Railroad, including the Hoffman Street Tunnel, from Canton, which railroad and tunnel are now a part of the main line of the Pennsylvania Railroad between New York and Washington.

Canton Railroad is a class 1 switching railroad under part I, section 20 of the Interstate Commerce Act. Its charter was procured by Canton in 1906, and the major portion of the road was constructed between 1907 and 1914. It operates 37 miles of track, of which 6 miles are main line track, and it has interchange facilities with the Baltimore & Ohio, Pennsylvania, and Western Maryland railroads. It owns 37 acres of its right-of-way. The remainder of its right-of-way, approximately 172 acres, and its terminal facilities are held under a 99-year lease from Canton. It performs a switching service between the industries located on its lines and the 3 trunk lines, as well as the waterfront. In making sales of real estate, Canton has made a practice of retaining protective strips of land, so as to prevent competing railroads from obtaining access to the area served by Canton Railroad.

From time to time, in the course of its operations, Canton has purchased additional parcels of real estate. In 1912 its president in his annual report to the stockholders announced the purchase of about 100 acres of land in fee "for future development." The described purpose for the purchase of various parcels was to "straighten boundary lines" of parcels already owned. A dominant, if not the primary, purpose of the purchases so described was to fill out or shape up irregular parcels it was holding for sale, so as to make them more attractive to customers who were or might be in the market for industrial sites. Part, if not all, of a parcel of 7.702 acres sold in 1951 to Anchor Motor Freight, Inc., and one of the sales in question herein, was part of approximately 30 acres which had been acquired in two purchases, apparently in 1916 and 1917, in connection with a sale to another customer, American Radiator & Standard Sanitary Corporation. A parcel of 1.328 acres sold in 1950, the sale of which is likewise involved herein and designated as having been acquired to "straighten boundary lines," was part of a larger acquisition or acquisitions of some 30 to 50 acres. One parcel of 0.424 acres described as acquired "to straighten boundary lines" was purchased on December 12, 1952, and sold 2 days later for $ 16,500 and at a profit of $ 15,024.92. Purchases were made in 1951 to fill out lands in respect of which negotiations for the sale thereof were being carried on with Standard Oil Company. The parcels so filled out or the boundaries of which were "straightened" were in fact sold to Standard Oil in 1953.

In or prior to 1912, Canton developed plans to extend the Canton Railroad from Back River to Towson, Maryland, and in 1912 it purchased 16 parcels of real estate along the route of the proposed extension. Some, if not all, of the parcels purchased were acquired because they were regarded as having strategic locations along the proposed route, such as land at highway intersections.

The plans for the said extension were later abandoned, however, and in 1925 Canton's board of directors adopted a resolution "that the right of way of 100 feet in width as [then] retained should be disposed of" at the president's discretion. ^{*263 The Cottman Company is a stevedoring company, which performs stevedoring operations for Canton Railroad and other companies. It leases from Canton and Canton Railroad, on a year-to-year basis, the ore pier, the cranes, the conveyor system, and all of the facilities used by it in the loading and unloading of ships. The various unloading facilities leased to Cottman by Canton and Canton Railroad had been constructed at a cost of several million dollars. The cost of Canton of the conveyor system, which was completed in 1952, was approximately $ 1,300,000, and Canton presently has invested in cranes some 4 to 5 million dollars. *264 and have a total floor area of approximately 745,000 square feet. After the war, Canton acquired the warehouses from the Government and since that time one of its activities has been the leasing of warehouse space to about 20 tenants for manufacturing and storage purposes. Among the tenants are Lever Brothers, Western Electric Company, and American Can Company.}

Over the years, and in keeping with the purposes for which it was organized, Canton has regularly carried on a program of improving portions of its property for continued use in its operations, while selling or marketing other portions. The development of the port of Baltimore has always been a matter of special interest to Canton, and from the beginning, it has devoted particular attention to both the current and future improvement and development of its waterfront property. In making a sale of land to Western Electric Company in 1929, it reserved a long strip of land to protect its riparian rights, thereby making it possible to add to its waterfront terminals when the appropriate time should come. The Canton Railroad has likewise been a strong influence in Canton's operations. Since the projection and construction of the railroad Canton has made it a practice to sell land regarded as suitable for industrial uses only to purchasers which it thought would be traffic producers therefor. Sales of land not suitable for industrial use, because located too far from the railroad or because of terrain features, have not been so restricted, and a large percentage, if not most, of such sales have been for residential sites.

To make the land held for sale more readily marketable, Canton would at times lay out and grade streets and otherwise indulge in the development of a particular area in which it had land for sale. To illustrate, early in the 1900's, it so improved and marketed for residential purposes property adjacent to and in the vicinity of Patterson Park, and in 1908 it sold 20 acres to the city to be used in extending the park to the east, where the land was either Canton-owned and for sale as homesites or had already been sold. In 1912, on other Canton-owned land, it built and offered for sale 4 brick and 2 frame houses, in anticipation that the said houses when sold would "be the nucleus of another residential section." One of the frame houses, and possibly the other also, was in or adjacent to the area from which Canton was selling land for residential purposes in 1951 and 1952. HoldingsYear(acres)19301,70019351,50019401,30019451,100195088719518411952806

Canton did not list any of the real estate it had for sale with brokers and it maintained no list prices at which it would be willing to sell such real estate. It did not engage agents or brokers to sell its properties and none of its officers or employees was licensed as a real estate dealer or broker.

The sales prices of the properties sold by Canton were fixed by one of its officers and approved by its board of directors. The prices Canton received for its properties compared favorably with the prices other sellers in comparable localities received from the sale of similar properties.

Canton posted no "For Sale" signs on any of the properties it had for sale. It did, from time to time, however, issue brochures for the purpose of advising the public of its operations and activities and its real estate holdings. Also, at intervals, it would prepare a supply of maps of that portion of Baltimore in which the Canton District is located. On such maps it would show by separate colors the Canton Company improved property, the Canton Company unimproved land, the Canton Railroad property, and the lands which had been sold by Canton. It would also indicate the location of the large and prominent industries which had acquired their business sites from Canton. These maps were available to any person interested therein, including real estate brokers, prospective buyers, and brokers representing such prospects.

In a brochure prepared and issued in 1923, the facilities and services of the Canton Water Front Terminals, the Canton Railroad, the Canton Central Manufacturing District, and the Canton warehouses were described. On page 21, under the heading "Our Proposition," it was stated that Canton would sell "Industrial Real Estate," that certain portions of its real estate were better adapted for residential purposes than for industrial purposes, and that Canton was ready to sell such lands to those desiring to build either dwellings or blocks of houses.

A brochure issued in 1928 was in the form of a booklet, entitled "Canton Days the First Hundred Years or So." After giving considerable historical background of Canton and its development, there appeared in the last paragraph of the booklet the following statement: "The hundreds of acres which the Company now owns, extending eastward to Back River, much of it binding on deep water-ways, and nearly all of it served by the Canton Railroad, will eventually be taken over by new industrial plants and homes."

An elaborate brochure issued in 1941 concluded with a statement the caption of which the "Canton and Baltimore may be your solution." Thereunder, following a statement suggesting advantages for industries located in the Canton area, attention was called to an attached map showing "the availabilities." The map referred to was a 1941 map, and was in the form above described. The brochure concluded with the following: "If you'd like to talk it over with us, we'll be glad to have a Canton man call and then later on if you desire, to show you Canton. Why don't you drop us a line today?"

A brochure issued in 1953 was entitled "Canton." It contained photographs and descriptions of the facilities of Canton, Canton Railroad, and Cottman. On the back cover, under the heading "The Seal of Superb Service," was a "Representative List of Industries Located in the Canton District." Concluding the printed matter on the back cover, was the following:

CANTON COMPANY OF BALTIMORE

Incorporated 1829

Industrial Real Estate

CantonHouse . 300 Water Street . Baltimore 2, Maryland

In 1937, 1942, and again in 1955, Canton carried a full page advertisement in the Baltimore City Suburban Directory, the general tenor of which was that it had choice industrial sites, both large or small, and several buildings suitable for manufacturing or storage for sale or lease, also some property, both improved and unimproved, located on the waterfront. The readers were also advised that all such property was served by the Canton Railroad and one or more of the "Trunk Lines" at "Baltimore Flat Rates."

During the years 1940 through 1955 Canton regularly placed advertisements in the Real Estate and Building News, a magazine published monthly by the Real Estate Board of Baltimore, Inc. In such advertising, Canton offered industrial sites in east Baltimore for sale or lease, also large or small tracts available to builders for residential purposes, suggesting that readers call or write for further information.

In the January 1942 issue of Gardens, Houses and People, Canton advertised building lots in the Harford section of Baltimore for sale. In the November 1947 issue of the same magazine, it advertised industrial sites in east Baltimore for sale or lease, also that large and small tracts were available to builders for residential purposes.

During the taxable years, Canton carried a full-page advertisement, usually the inside of the back cover, in a monthly magazine by the name of Baltimore, published by the Baltimore Association of Commerce. In many of these advertisements, it gave its address and listed itself as follows:

CANTON COMPANY OF BALTIMORE

Incorporated 1829

Industrial Real Estate

CantonHouse . 300 Water Street . Baltimore 2, Maryland

During the first 7 months of 1951 Canton ran classified advertisements in the Baltimore-News Post, a daily newspaper, and the Baltimore American, a Sunday newspaper. In these advertisements, it offered industrial sites for sale or lease, "[also] large and small tracts available to builders for residential purposes."

Canton's sales of real estate for the years 1940 through 1949, the area sold, stated in acres, the aggregate of the sales prices, the aggregate book profit, 4 were as follows:

	Number of	Total	Aggregate	Aggregate	Income tax
Year	separate	acres sold	sales price	book profit	profit
	sales
1940	10	36.385	$ 120,055.36	$ 60,494.74	$ 9,178.46
1941	32.954	1 150,087.50	1 98,238.91	1 48,438.00
1942	12	114.952	308,103.95	234,214.07	65,050.34
1943	7	11.655	28,600.00	21,337.70	11,209.00
1944	6	1.128	10,288.69	5,254.10	2,163.39
1945	11	56.370	272,632.93	68,888.09	46,786.74
1946	18	40.922	321,587.50	249,394.11	67,582.48
1947	16	113.610	607,692.00	334,521.53	179,625.94
1948	15	28.980	346,420.48	178,603.45	63,251.69
1949	6	4.1847	48,650.00	31,674.89	1,977.87
Total	113	441.1407	2,214,118.41	1,282,621.49	495,263.91

Of the 113 sales above, 27 were sales of land acquired in 1912, pursuant to plans for the extension of Canton Railroad to Towson. There were no sales of such land in 1948 and 1949. For the other years, the number ranged from 1 to 5. In size, the parcels sold ranged from single lots to tracts of 10.1 acres, sold in 1940, and 31 acres, sold in 1945. The total area so sold, stated in acres, amounted to 96.472 acres. The aggregate of the sales prices was $ 124,560, the aggregate book profit $ 71,131.07, and the gain for income tax purposes $ 69,089.83. On the sale of right-of-way properties, all having been acquired in 1912, the gain for income tax purposes was in the great majority the same as Canton's book profit.

Among the 113 sales in 1940 to 1949, were 16 sales of properties which had been acquired for the so-called purpose of "straightening boundary lines." Nine of the 113 sales covered properties which had been sold or leased at one time and another had been reacquired. Seventy-seven of the 113 sales covered property which had been owned, in whole or in part, continuously since the 1830's, and presumably were from the approximately 5,000 acres acquired when Canton was organized, or shortly thereafter.

Of the above 113 sales, 25 were sales of property which were rented at the times of sale or had been rented at sometime during the 10 years preceding sale. With respect to 13 of such 25 properties, the rent was nominal. One of the 13 was used as a baseball diamond. The other 12 were rented as billboard sites and for farming. The rent on 12 of the 25 parcels was more than nominal or apparently so. Nine of the said 12 properties included improvements as well as land.

Two of the 113 sales covered property which was being used or had been used rent free by the city of Baltimore as playgrounds.

During the years 1950, 1951, and 1952 the number of sales of real estate made by Canton, the area sold, stated in acres, the aggregate of the sales prices, the aggregate book profit, 5 were as follows:

	Number of	Total	Aggregate	Aggregate	Income tax
Year	separate	acres sold	sales price	book profit	profit
	sales
1950	6	22.273	$ 163,000	$ 129,764.76	$ 13,303.54
1951	11	46.969	395,289	344,509.43	132,090.32
1952	16	35.654	447,781	356,770.90	148,555.33
Total	33	104.896	1,006,070	831,045.09	293,949.19

Of the above 33 sales, 4, 1 each in 1950 and 1951 and 2 in 1952, were of property acquired in 1912, pursuant to the Canton Railroad extension plan. The 1950 sale was of 4.885 acres and that in 1951, 3.982 acres. One of the parcels sold in 1952 was described as land and improvements, No. 6 Henry Avenue, and as containing 0.161 acres. Under the heading covering use during 10 years before its sale, it was described as "rented as dwelling at nominal rental." The other such property sold in 1952 was described as "Bed of Glade Ave." The aggregate of the sales prices of the 4 properties was $ 17,000, aggregate book profit $ 9,897.50, and gain for income tax purposes $ 10,041.61. On 3 of the 4 sales the book profit and the gain for income tax purposes were the same. On the sale covering both land and improvements, the book profit was $ 918.95 and the gain for income tax purposes $ 1,063.06.

One sale made in 1950, 1 in 1951, and the 2 in 1952 included property which had been acquired for the so-called purpose of "straightening boundary lines." One such parcel was that above described as having been acquired December 10, 1952, and sold December 12, 1952, the selling price being $ 16,500, the book profit $ 15,221.59, and the gain for income tax purposes $ 15,054.92. The gain on that sale was reported as short-term capital gain.

Part or all of 27 of the 33 parcels sold were shown as having been owned continuously since the 1830's, and presumably were part of the approximately 5,000 acres acquired at the time of Canton's organization, or shortly thereafter.

Eight of the 11 parcels sold in 1951 and 5 of the 16 parcels sold in 1952 were purchased by 2 land companies, with a view to the construction and sale of houses thereon. The parcels ranged in size from 1.951 acres to 11.805 acres, with the majority between 3 and 4 acres. All of the parcels were part of an oblong area north of Eastern Avenue and south of Baltimore Street and extending from Quinton or Forty-first Street, just inside the eastern boundary of the city of Baltimore, for approximately 1 mile to Rolling Mill Road to the east. Because of its nearness to the Canton Railroad, the plan at one time was to sell the property as industrial sites, but because of the hills in the area that plan was abandoned and the land was thereafter held for sale for residential purposes. The area in question was bisected near its center by North Point Road, running from the northwest to the southeast; and by 1940, streets had been laid out and a school had been located in that part of the area adjacent to and immediately east of North Point Road. 6

Except for a parcel of land rented at and prior to its sale to Revere Copper and Brass, Inc., and on which the lessee, likewise the purchaser, had made some improvements, and the above-mentioned property at No. 6 Henry Avenue, all of the 33 parcels of land sold by Canton in the taxable years were unimproved. Eleven parcels, including the Henry Avenue property, were or at sometime during the 10 years preceding their sale had been rented at nominal rentals, most of them for outdoor advertising or farming operations. On the parcel purchased by it, 1.073 acres, Revere Copper and Brass, Inc., was paying an annual rental to Canton of $ 1,290.72. Another of the parcels sold in 1952 had been rented for use as a lumberyard from March 1, 1945, to February 28, 1946, at $ 3,300 per year, and from March 1, 1946, to June 30, 1947, at $ 2,700 per year. This property consisted of 1.668 acres. One parcel at the date of sale was rented to a trucking concern and used for storing trucks and equipment.

Most of the sales of real estate made by Canton during the taxable years 1950, 1951, and 1952 were initiated by 3 real estate brokers in the Baltimore area as representatives of the purchasers and who had acquired Canton's maps or brochures, or both. In making these sales, Canton was represented by Milton Shreck, vice president and treasurer of Canton, as well as vice president of Canton Railroad. He had also represented Canton in making sales of real estate in prior years. Shreck spent an average of 5 to 6 hours on each sale. He also was in charge of leasing Canton's real estate and properties. He devoted about 25 per cent of his time to Canton and 75 per cent to Canton Railroad.

The executive offices of Canton, Canton Railroad, and Cottman are housed in one building, known as CantonHouse. The officers of Canton are likewise officers of Canton Railroad, and the general office employees of Canton Railroad perform the duties of general office employees for Canton, for which Canton Railroad is reimbursed by Canton. Canton itself has only 13 employees, 8 of whom perform general maintenance work at Colgate warehouses. The others do the janitorial work at CantonHouse. Canton Railroad has approximately 400 employees.

As shown by the consolidated returns filed by the petitioner for 1950, 1951, and 1952, Canton's gross income was as follows:

	1950	1951	1952
Interest on loans, notes, mortgages,
etc	$ 50,622.59	$ 65,780.38	$ 66,260.87
Interest on United States obligations
issued after March 1, 1941	10,839.17	13,865.26	3,432.38
Rents	899,326.91	919,756.42	1,075,335.95
Excess of net long-term capital gain
over net short-term capital losses	10,366.04	141,033.23	147,792.83
Dividends	91,031.00	109,570.00	554,785.00
Total gross income	1,062,185.71	1,250,005.29	1,847,607.03

At January 1, 1950, and at December 31, 1950, 1951, and 1952, Canton's depreciable assets, less reserves for depreciation, as shown by its balance sheets, were as follows:

Jan.  1, 1950	$ 4,031,240.97
Dec. 31, 1950	4,046,860.33
Dec. 31, 1951	4,985,070.02
Dec. 31, 1952	6,035,714.58

For Federal income tax purposes, Canton has always reported its gains from the sale of its real estate as gain from the sale of capital assets. Canton's reporting of such gains in that manner was not questioned by the respondent until 1949, in which year the gain on such sales was $ 1,977.87.

On the consolidated returns filed by the petitioner for 1950, 1951, and 1952, Canton's business was described as "Real Estate -- Active."

The petitioner, in its annual reports to its stockholders for the years 1940 to 1950, inclusive, stated that "Canton Company of Baltimore was chartered in Maryland in 1829 [sic] for the purpose of dealing in real estate, etc. The principal business is the sale and/or rental of real estate."

In 1951 and 1952, Canton, in its annual reports to its stockholders, referred to the lands it had sold during such years as "unimproved land which had been held for many years as an investment." The reports for the years immediately preceding 1951 carried no such reference to the lands sold.

The real estate sold by Canton during the taxable years 1950, 1951, and 1952 was held by it primarily for sale to customers in the ordinary course of its business.

OPINION.

It is the position of the petitioner that the parcels of real estate sold by Canton during the taxable years were capital assets, within the meaning of section 117 (a) of the Internal Revenue Code of 1939, section 117 (j), *282 the gains from the sale of both of which are entitled to capital gains treatment under the statute.

Summarized, the arguments supporting the claim that the said parcels of real estate sold were capital assets are (1) that for the purposes of section 117 (a), the selling by Canton of its real estate was a passive liquidation of land held as an investment, and not the sale thereof in the ordinary course of its trade or business, in that the majority of the parcels sold had been owned by Canton for a period of more than 100 years; it did not actually solicit purchasers, did virtually no advertising, maintained no real estate office or personnel, and made very few additional acquisitions of real estate; its sales in any one year were few and its profits were relatively small or insignificant when compared to its income from over-all operations; and (2) that since Canton restricted its sales of industrial real estate, so-called, to purchasers which it thought would be freight producers for Canton Railroad, and not to the public at large, namely, any person willing to pay Canton's price, the purchasers thereof were not customers within the meaning of the statute, and it may not properly be said that the parcels were held primarily for sale, or sold, to customers in the ordinary course of Canton's trade or business.

The claim that certain of the parcels sold during the taxable years were assets used in Canton's trade or business within the meaning of section 117 (j) relates to the parcels which were rented at the dates of their sale.

That Canton was engaged in the business of selling real estate to customers in the ordinary course of its operations, is, we think, abundantly clear from the evidence and the facts found therefrom. And it is our opinion that the result is not made otherwise by the fact that Canton had owned most of the land sold during the taxable years for the more than 100 years of its existence, that it did or did not in the interim make numerous other acquisitions of real estate, that when compared with its other operations its selling of real estate and the profits therefrom were relatively small, or that in its organization and its methods of operation it was and is not the counterpart of the usual real estate development or brokerage business.

Canton, immediately and shortly after its organization, acquired and became the owner of a very extensive land acreage, all of which it was thought would in time become a part of the city and port of Baltimore. It was the purpose and intention of its organizers that some of its operations would cover the development of parts of the land for the holding and continued use thereof, either through direct operation or rental. It is equally clear that other parts of the land so acquired, and in fact the major part, insofar as area is concerned, should be held primarily for sale and marketed by Canton over the years and in the course of its operation and that it would conduct its operations to the end stated in the manner which in the judgment of its operating officers would make of the operations and business a sound and profitable one for the years to come. The facts, in our opinion, show that it has done just that.

From the beginning, it has regularly and continuously been engaged in developing portions of its property for continued holding and use and in marketing other portions. By announcement, advertising, and other dissemination of information, in a manner which would reach prospective buyers, it has regularly held itself out as having real estate for sale both for industrial and residential purposes. It has planned and conducted its activities in such manner as to keep its real estate selling operations on a sound and profitable basis. Where the filling out of a particular parcel held for sale would make it more attractive to a prospective purchaser, it has made additional acquisitions of property to that end. It has also studied and planned the sales of its holdings, having due regard for the uses to which the land held for sale and sold could be best adapted, be the use industrial or residential. When offering a certain area for sale for residential purposes, it has at times laid out and graded streets. In short, the evidence shows, we think, that the selling of real estate has regularly and consistently been an integral part of Canton's business and that the sales herein were to customers in the ordinary course thereof. The sales were not those of a passive investor.

We are also of the view that the sales of industrial sites were not any the less sales of property to customers in the ordinary course of Canton's business by reason of the fact that it made such sales only to purchasers which it thought would be freight producers for Canton Railroad. A commonly accepted meaning of the word customer is "a buyer or purchaser," see Webster's New International Dictionary. A buyer or purchaser is one without which there is no sale, and the facts not only show that Canton did have purchasers of the land suitable for industrial sites during the taxable years, but through advertising in various publications and other effective methods of disseminating the information that it had desirable industrial sites for sale, it was regularly engaged in locating purchasers for such property. We find nothing in the statute to justify or permit the conclusion or holding that the purchasers herein were not customers within the meaning of the statute merely because Canton made it a practice to restrict its sales of industrial sites to purchasers which it thought and hoped would thereafter bring to it further and other profits as customers of Canton Railroad. Actually, the fact that the customers sought for and dealt with were only those which in their subsequent operations might do business with Canton Railroad and thereby bring additional profits to Canton, may well be regarded as further support for our conclusion that the sales in question were, under the statute, sales to customers in the ordinary course of Canton's business. See and compare E. Aldine Lakin, 28 T.C. 462">28 T. C. 462, affd. 249 F.2d 781">249 F. 2d 781.

The basis for the claim that certain of the parcels of land sold during the taxable years were assets used in Canton's trade or business, within the meaning of section 117 (j), appears to be that Canton's business in major part was the owning and maintaining of property for the purpose of producing income in the form of rent, and that various of the properties sold during the taxable years having been rented at the time of sale, were assets used in Canton's trade or business within the meaning of the statute. The facts show that 13 of the parcels sold were or at sometime during the 10 years preceding their sale had been rented, and in its statement of facts on brief, petitioner has listed all 13 parcels as being section 117 (j) assets. In its argument, however, it lists only 6 parcels as having been rented at the time of sale and it is only these 6 that are now claimed to have been section 117 (j) assets. Four of the 6, as had been true of most of the others of the 13 parcels, were rented at only a nominal rental. With respect to 1 of the 2 parcels remaining, the record does not show whether the rent was nominal or substantial. As to the sixth parcel, which was sold to Revere Copper and Brass, Inc., the facts show that at the time of its sale it was rented to Revere for $ 1,290.72 per year; that it was adjacent to property previously sold to Revere and on which the business of Revere was located, and that Revere had on its own account placed improvements thereon of undisclosed character and value. As to the 4 properties rented at a nominal rental, there is no showing which would justify any conclusion other than that the renting thereof was purely incidental and not indicative of the primary purpose for which they were held, that they were so rented only pending the time when they would be sold in the course of Canton's business, and the primary purpose for which they were held was the sale to customers in the ordinary course of such business. See Stockton Harbor Industrial Co. v. Commissioner, 216 F.2d 638">216 F. 2d 638, affirming a Memorandum Opinion of this Court dated April 15, 1952. As to the parcel on which the record is silent, the conclusion must be the same.

With respect to the parcel sold to Revere, there could be some question. Aside, however, from the fact that at the time of its sale the said parcel was producing a rental which was somewhat more than nominal in amount, there is no proof to show that the production of rent was the primary purpose for which it was being held. Taking into account, however, the fact that it was Canton's general purpose to sell in the course of its operations all of the land which it did not develop and hold for continued use and that Revere, not Canton, was responsible for such improvements as were on the property, we are unable to say that the said parcel was not likewise held primarily for sale to customers in the ordinary course of Canton's business, rather than for use in its business as rental property. The claim that the said parcel so rented to Revere at the time of sale was a section 117 (j) asset is accordingly rejected. Cohn v. Commissioner, 22">226 F. 2d 22, affirming 21 T.C. 90">21 T. C. 90; and Greene v. Commissioner, 141 F. 2d 645, affirming a Memorandum Opinion of this Court dated October 31, 1942.

The question whether the selling of the property acquired in 1912, pursuant to plans for the extension of the Canton Railroad, was the passive liquidation of property acquired by Canton for use in its business, or the sale thereof to customers in the ordinary course of such business, is likewise a question not to be resolved as a matter of course. Admittedly, the original purpose for acquiring that part of such property as was actually within the proposed right-of-way was not for resale, but for use in Canton's and Canton Railroad's business; and, unless after the abandonment of the proposed railroad extension and the decision in 1925 to sell the said property there was such change in the holding and selling thereof as to make the selling a part of Canton's real estate business, the position of the petitioner would appear to be well taken. Alamo Broadcasting Co., 15 T. C. 534; and Carter-Colton Cigar Co., 9 T.C. 219">9 T. C. 219. Compare Mauldin v. Commissioner, 195 F. 2d 714, affirming 16 T.C. 698">16 T. C. 698.

On the record before us, however, we are of the view that this question must likewise be resolved against the petitioner. First, as indicated by our findings of fact, it is not at all clear that all of the so-called right-of-way properties were in fact within the boundaries of the proposed right-of-way and were to have been used as such. Furthermore, such evidence as we do have with respect to the selling of the various parcels of such property tends to support, rather than negative, the conclusion that these properties, along with Canton's other properties, were primarily held for sale, and were sold, to customers in the ordinary course of its business. Mauldin v. Commissioner, supra.

Decisions will be entered for the respondent.

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Footnotes

• 1. Whether or not the 16 parcels in their entirety, or in substantial part, were actually within the boundaries of the proposed right-of-way is not altogether clear. From the testimony of one witness, a dominant factor in the selection and purchase of the particular parcels was that the ownership of land at highway intersections along the proposed route would work to the advantage of the company in its subsequent acquisitions of right-of-way property. Two of the 16 parcels, one of "around 35 acres" and the other "fifteen, maybe," and located at or near Harford Road, were of such shapes and dimensions as to justify their subdivision and sale as lots. In the advertising, the lots were described as being in the "Harford Road Section." Whether the lots were laid out preparatory to their sale by Canton, or at some prior time, does not appear.↩

• 2. According to the evidence, no more than three of the four cranes could have been in existence during the taxable years, and there is no showing, estimate, or approximation of the cost of the fourth crane as compared with the other three.↩

• 3. One of the frame houses was at Eastern Avenue and Forty-first Street (shown on maps herein as Quinton Street) and the other was "on North Point Road." See subsequent finding for description of area from which sales for residential purposes were being made in 1951 and 1952. The four brick houses were described as being on Eastern Avenue, but their exact or approximate location on Eastern is not shown.↩

• 4. Omitting 4 lots of right-of-way property sold as 1 sale in 1940 and on which Canton sustained a book loss of $ 6.32 and likewise realized no gain for income tax purposes, Canton realized a book profit on each of the sales made during the period 1940 through 1949, although on 32 of such sales it realized no gain for income tax purposes. Presumably the difference between book profit and gain for income tax purposes was attributable to the use of March 1, 1913, fair market value as the basis for computing gain for income tax purposes, since all 32 properties except one had been acquired prior to March 1, 1913. The exception covered a 1945 sale of a property which had been acquired in that year in exchange for land acquired in 1831.↩

• 1. Includes cancellation of two contracts of sale at price and profit of $ 2,437.50.↩

• 5. Canton realized a book profit on each of the 33 sales made during the taxable years, but on 11 of the 33 it realized no gain for income tax purposes. Each of the 11 on which no income tax gain was realized was from land acquired in 1834, or prior thereto, and presumably the differences between book profit and gain for income tax purposes were due primarily to differences between March 1, 1913, fair market value and cost or some other book basis.↩

• 6. The tenor of the testimony at one point seems to be that with respect to the real estate sold during the years 1940 to 1952, inclusive, as shown by schedules attached to the stipulation of facts herein, Canton did not subdivide or make any improvements normally associated with a real estate subdivision. According to the 1940, 1946, 1948, and 1954 maps, however, Canton was still the owner of all, or practically all, of the area from North Point Road east to Rolling Mill Road when the streets subdividing the area into blocks were laid out, whether they were or were not laid out by Canton or at its instigation. From the maps, it would appear, as stated in the above finding, that the streets in the area immediately east of North Point Road had been laid out prior to the preparation of the 1940 map, also that one street was extended and another laid out in part between 1940 and the drawing of the 1946 map, and that the final projecting and laying out of streets in the area were between 1948 and the preparation of the 1954 map.↩

• 7. SEC. 117. CAPITAL GAINS AND LOSSES.

  (a) Definitions. -- As used in this chapter --

  (1) Capital assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include --

  (A) 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 to customers in the ordinary course of his trade or business;

  (B) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), or real property used in his trade or business;↩

• 8. (j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. --

  (1) Definition of property used in the trade or business. -- For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not * * * (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * *↩