Cohn v. Commissioner

Alice E. Cohn, et al., ¹ Petitioners, v. Commissioner of Internal Revenue, Respondent

Cohn v. Commissioner

Docket Nos. 25600, 25601, 25602, 25603

United States Tax Court

21 T.C. 90; 1953 U.S. Tax Ct. LEXIS 44;

October 20, 1953, Promulgated

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">*44 Decisions will be entered for the respondent.

Security Construction Company, a partnership organized in May 1942, built houses for sale before wartime controls of private housing went into effect in February 1943. It received priorities to build multiple unit houses which it intended to sell under N. H. A. regulations, and, later, to build single unit houses which it intended to sell upon completion. All of the defense housing, 178 houses, was completed in 1944, and 109 single unit houses were sold in 1944. Sixty-nine multiple unit houses were rented in 1944, and all were sold in 1945. Upon the evidence, held, that the partnership was engaged in the business of building houses for sale and selling houses in 1943, 1944, and 1945; that it did not enter into a new business in 1944 of renting houses for investment; that the 69 houses sold in 1945 were not capital assets but were houses built and held for sale, were rented only pending sale, and were held primarily for sale to customers in the ordinary course of business; and that the gain reported on an installment basis in 1945 and 1946 is taxable as ordinary income. Nelson A. Farry, 13 T.C. 8;">*45 Victory Housing No. 2, Inc. v. Commissioner, 205 F.2d 371; and Walter R. Crabtree, 20 T.C. 841, distinguished.

Edward L. Conroy, Esq., for the petitioners.

Donald P. Chehock, Esq., for the respondent.

Harron, Judge.

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HARRON

">*90 The Commissioner determined deficiencies in income tax for the years 1945 and 1946 as follows:

Docket No.	Petitioner	1945	1946
25600	Alice Cohn	$ 6,810.12	$ 1,835.48
25601	Marion Cohn	18,468.73	1,967.24
25602	Daniel Cohn	23,018.25	1,198.96
25603	Edgar Cohn	8,051.34	1,088.21

The question to be decided involves the sales of multiple dwelling houses which were sold in 1945 by a partnership, the Security Construction Company, in which the petitioners Daniel and Edgar Cohn are partners. The petitioners Alice and Marion Cohn are involved only because they report income on a community property basis. The year 1946 is involved because the partnership reported sales on an installment basis.

The question to be decided is whether 69 houses sold in 1945 by the Security Construction Company were held primarily for sale to customers in the ordinary course of business, ">*46 as the respondent has determined, so that the gains upon sales were ordinary income; or ">*91 whether the houses in question were capital assets, as defined in sections 117 (a) (1) and 117 (j) of the Code, as petitioners contend, so that long-term capital gains were realized.

The petitioners filed their returns with the collector for the sixth district of California.

FINDINGS OF FACT.

The facts which have been stipulated are found as facts. The stipulations of facts are incorporated herein by this reference.

Edgar and Marion Cohn, and Daniel and Alice Cohn are, each, husband and wife. Edgar and Daniel are brothers. Daniel and Alice Cohn were married on June 5, 1945. All were residents of California during the taxable years, and each filed a separate income tax return for 1945 and 1946 in which income was reported on a community property basis. For convenience, Edgar and Daniel are referred to hereinafter as the petitioners.

The petitioners are the sons of Max Cohn. Max Cohn and petitioners owned the stock in the corporation, Security Construction Co., Inc., which, in 1941, subdivided land in the area, "Beautiful Glenwood," near Burbank, and built thereon 66 single family ">*47 houses. The houses were held for sale to customers and they were sold in 1941 and 1942 upon completion. Tracts of land which are numbered 13170, 13171, and 13172 are involved in these proceedings and they are adjacent to and near the tract on which the corporation built 66 houses for sale in 1941.

On May 21, 1942, Edgar and Daniel formed a partnership, Security Construction Company, referred to hereinafter as "the partnership," in which they were equal partners. The business of the partnership in its income tax returns for the years 1942 to 1946, inclusive, is stated to be "real estate"; and the business of the petitioners in their individual returns for 1945 and 1946 is stated to be "real estate."

The partnership acquired tract number 13172, as acreage, on May 25, 1942. It acquired tract number 13170, subdivided into 56 lots, on September 28, 1943. It acquired tract number 13171, subdivided into 132 lots, on January 21, 1944. The three tracts of land were acquired from Max Cohn. They are located about three-quarters of a mile from the Lockheed Aircraft Corporation plant.

The partnership engaged in its business from May 21, 1942, until about April 1, 1946, after which date it">*48 was inactive. During the period of active business in the years 1942 to 1946, inclusive, the partnership built and sold 324 houses, of which 253 were single unit houses, and 71 were multiple unit houses. Prior to their sale 69 of the multiple unit houses, which are involved in these proceedings, were rented. The net profit from sales and the net rents received by the partnership in the years 1942 to 1946 were as follows: ">*92

		Single units	Multiple units	Net profit,
Year	Houses sold	sold	sold	sales	Net rents
1942	21	21		$ 15,035
1943	109	109		73,349
1944	109	109		111,436	$ 28,793
1945	69		69	238,329	8,425
1946	16	14	2	64,835	745
Total	324	253	71	$ 502,984	$ 37,963

By August 26, 1942, tract 13172 was subdivided by the partnership into 132 lots. During 1942 and 1943, the partnership built 130 single family houses in that subdivision. All of the houses were sold immediately upon completion; 21 houses were sold in 1942 for a net profit of $ 15,035; and 109 houses were sold in 1943 for a net profit of $ 73,349. All of these houses were built for sale to customers in the ordinary course of the partnership's business. The ">*49 partnership reported the gain from the sales as ordinary income, on the installment basis. The sales of the houses were made by a real estate broker who devoted his full time to the work, with the help and cooperation of the partnership. The broker received a commission of $ 30 for each house sold. The partnership bought two buildings adjoining the tract, in 1941 and 1942, for the transaction of business, which it kept until 1946. Edgar Cohn and various real estate brokers used these buildings in their work.

During the war years Edgar Cohn made continuous inquiries of the local offices of the Federal Housing Administration (F. H. A.) about the availability of priorities for the construction of houses in the area where the partnership was building houses. He learned in the early part of the summer of 1943 that F. H. A. planned for the building of about 1,000 units of defense housing in the San Fernando Valley where tracts 13170 and 13171 are located, and he intended applying for permits to build more single family houses on tract 13170. However, he was advised at that time that priorities would be granted for multiple unit houses, only. He, therefore, made application for authorization">*50 to build multiple unit houses.

Effective February 5, 1943, the National Housing Administration (N. H. A.) issued regulations relating to the construction of defense housing which controlled the occupancy and sale thereof. These regulations applied to private war housing begun on or after February 10, 1943, and they were in force, with some revisions and amendments until some time in October 1945, when they were revoked.

Under the N. H. A. regulations effective February 5, 1943, private war housing had to be held for rental only to eligible war workers for the duration of the national emergency, and, except for involuntary transfers, could be disposed of only in the following manner: An occupant, after 4 months' occupancy, could purchase a private war ">*93 housing unit occupied by him. A person who would not himself occupy such housing could purchase such housing at any time, in accordance with N. H. A. regulations, provided that the N. H. A. limitations applicable to such housing, relating to occupancy and disposition, before such purchase should continue to be applicable after the purchase. Furthermore, at any time after 60 days after completion of any private war housing, ">*51 the owner could petition N. H. A. to permit such housing to be disposed of in some way other than the pertinent regulations prescribed.

The partnership's application to F. H. A. to build multiple unit houses in tract 13170 was granted on July 17, 1943, when it was authorized to build 23 four-unit, and 33 two-unit houses, i. e., 56 houses comprising 158 dwelling units, and W. P. B. priorities for materials were issued. Construction was not started until early in October 1943. Before construction was started, amendments of the N. H. A. regulations applicable to private war housing became effective. Also, before construction of the 56 houses started, the partnership made application to F. H. A. for authorization to construct private war housing on tract 13171.

N. H. A. General Order 60-3B, effective as of August 25, 1943, amended N. H. A. General Order 60-3 by permitting an owner of war housing units to sell to war workers, within 15 days of completion and without first renting the units, one-third of all war housing units placed under construction by the owner in any war housing area. It also permitted the sale of any war housing unit to a war worker occupant after the unit had ">*52 been rented for 2 months. There was no change in the provisions of the prior order permitting an owner to sell war housing units, at any time, to a purchaser who would abide by the N. H. A. regulations relating to the occupancy and disposition of war housing units. The pertinent provisions of N. H. A. General Order 60-3B, which is incorporated herein by this reference, are printed in the margin. ²

">*53 ">*94 Prior to September 1943, Edgar Cohn was aware of the new N. H. A. Order 60-3B amending the earlier order. He intended applying for authorization to build houses on tract 13171, and knew that he could apply to N. H. A. to recognize the partnership's construction on the two tracts 13170 and 13171 as one project, and that by treating all the construction as one project he could sell one-third of the houses upon completion, provided they were sold within 15 days. Also, by September 1943, N. H. A. was authorizing construction of single unit houses.

In September 1943, before construction of the 56 multiple unit houses, the partnership filed applications with F. H. A. to build 13 four-family houses comprising 52 units, and 109 single unit houses, a total of 161 dwelling units. The applications were approved; priorities were issued on December 17, 1943. The partnership, then, was authorized to construct 178 houses comprising 319 units of which one-third, roughly 109 could be sold upon completion. ³ The remaining two-thirds, comprising the 69 multiple unit houses, 210 units, would have to be held for rental to eligible war workers, either by the partnership or its transferee. ">*54

In October 1943, the partnership began construction of the 56 multiple dwelling houses on tract 13170. In March 1944, the partnership started construction on tract 13171 of the 13 multiple dwelling houses and 109 single family houses. Construction of all the houses was completed in 1944, as follows:

Tract 13170	Completion date
16 multiples	Feb. 14, 1944
17 multiples	Mar.  8, 1944
10 multiples	Mar. 28, 1944
13 multiples	Apr. 25, 1944
56 multiples
Tract 13171
13 multiples	June 14, 1944
109 singles	Sept. 1, 1944

">*95 The partnership sold all of the 109 single family houses to eligible war workers immediately upon completion. The sales were made during the months of July, August, and">*55 September, 1944. The partnership advertised the houses for sale. A real estate broker sold the houses, receiving a commission of $ 60 for each sale. Edgar Cohn assisted the broker in making the sales. The net profit realized from the sales amounted to $ 111,436. The profit was reported by the partnership in its return for 1944 as ordinary income, on the installment basis.

The 56 multiple dwelling units on tract 13170 were gradually completed in the spring of 1944 before all of the single family houses were completed. The 13 multiple unit houses on tract 13171 were completed by June 14, 1944, which, also, was before the 109 single unit houses were completed, and before the first sales of the single unit houses were made, which sales began in July 1944. The partnership rented the 210 units in the 69 multiple unit houses, as they were completed. The units were rented under 1-year written leases which contained a renewal clause. Under O. P. A. regulations in existence in 1944, the first and the last month's rent could be collected from a tenant only if a 1-year lease was given. In 1944, the partnership received gross rentals of $ 92,437.20 but the net rental amounted to $ 28,793">*56 after payment of various expenses and finance charges. In the partnership return for 1944, depreciation on the multiple unit houses was taken at the rate of 4 per cent per annum.

Edgar Cohn managed all of the activities of the partnership. Daniel Cohn was in the military service during 1944 and 1945 until his discharge on October 29, 1945.

In the latter part of December 1944, Edgar Cohn discussed with his advisors, the matter of selling the 69 multiple unit houses. A decision was made to proceed actively to sell them, and in the early part of January 1945, the partnership listed the multiple unit houses with two separate real estate brokers, Leon Hahn and Huff & Clair, who were to sell them on a commission basis of $ 300 for a 4-unit house, and $ 150 for a 2-unit house. The first sale was made on January 10, 1945. These two firms sold 8 out of 69 houses during January and early February of 1945. Edgar Cohn considered that the sales were proceeding too slowly, and on February 13, 1945, the partnership made an exclusive, 90-day agreement to sell the remaining 61 houses with another real estate broker named Field. The agreement was renewable for 90 days if one-half of the houses">*57 were sold within the first 90 days. Ray McKee, working for Field, devoted most of his time to selling the houses and by October 31, 1945, the 61 multiple houses were sold. Under the exclusive sales agreement with Field, the partnership was to receive a net amount for each house sold, and Field was to receive the regular commission of 5 per cent of the sales ">*96 price, or anything above the stipulated net amount required by the partnership. The purchaser was to make a downpayment. The difference between the downpayment and the F. H. A. mortgage on each house sold was to be carried under a contract with the partnership, providing for monthly payments to the partnership until the amount due under the contract was paid in full. When that point was reached, the F. H. A. would substitute the buyer as the mortgagor, and the buyer would receive the deed held until then in escrow.

The 69 multiple unit houses were sold during a period of 10 months, as follows:

Month	Units sold
January	4
February	5
March	11
April	12
May	11
June	6
July	2
August	7
September	4
October	7
Total	69

The 4-unit houses were sold at prices ranging from $ 14,350 to $ 16,900. The 2-unit ">*58 houses were sold at prices ranging from $ 8,100 to $ 8,950. The purchasers of all of the 69 houses took them subject to the N. H. A. regulations as to occupancy and disposition which were still in effect. Existing leases were assigned to the purchasers.

The 69 multiple unit houses were rented, prior to the sales, for a period of 12 to 14 months, on an average. The shortest period any house was rented, before sale, was about 9 months; and the longest period any house was rented was about 20 months. During 1945, when vacancies occurred in the multiple unit buildings, the partnership rented the units on an oral month-to-month basis. No written leases with new tenants were made in 1945. When the multiple unit houses were sold, however, some of the original tenants were still occupants. Usually, re-rentals were made without a period of vacancy intervening between tenants. The partnership did not have any difficulty renting units that became vacant during 1945 while the houses were up for sale. During 1945, the partnership received gross rental of $ 45,841, and net rental income of $ 8,425.

The partnership realized a net profit of $ 238,329 from the sales in 1945 of the 69 multiple">*59 unit houses. The profit was reported by the partnership in its returns for 1945 and 1946 on the installment basis as long-term capital gains.

In 1945, Edgar Cohn spent about 65 per cent of his time looking for new locations to build, and about 35 per cent of his time in his office.

Early in the summer of 1945, the partnership applied for and received authorization from F. H. A. and priorities from W. P. B., to construct 14 single family houses and 2 two-unit houses in Pasadena. Construction started in August 1945 and was completed during the ">*97 first 3 months of 1946. The N. H. A. restrictions on occupancy and disposition of war housing units were removed in October 1945. All of the houses were sold upon completion. The sales were made by real estate brokers on a commission basis. The partnership realized a net profit of $ 64,835 from the sales, which was reported as ordinary income on an installment basis.

In 1946, the partnership received income of $ 745 from the rental of some small building or buildings other than the buildings located in the Pasadena project. Also, in 1946, the partnership sold 5 unimproved lots for a gain of $ 3,618.25, which it reported as ordinary">*60 income.

In the 1944 partnership return, aside from income from sales and rental, the only other income items listed are interest income of $ 3,685.16 and forfeiture income of $ 25. In the 1945 partnership return, aside from income from sales and rental, the only other income items listed are interest income of $ 5,882.25 and forfeiture income of $ 150. In the 1946 partnership return, aside from income from sales, the only other income items listed are interest income of $ 7,794.36, rent of $ 745, and miscellaneous income of $ 53.14.

All of the houses built by the partnership, single and multiple unit houses, were financed as Title VI F. H. A., 25-year, 4 1/2 per cent, mortgage loans on individual houses and lots through the Glendale Federal Savings & Loan Association.

From 1946 to December 1951, Edgar and Daniel Cohn formed additional corporations for the purpose of building houses for sale. Houses built by these corporations, owned by the Cohn brothers, during this period include the following:

Security Construction Company, Inc., was organized in 1941. In 1948 and 1949 it built and sold 365 single houses in Hawthorne, Lawndale, and Torrance.

Keswick Corporation was organized">*61 in 1946. In 1946, it built in Toluca Lake, near Warner Brothers Studio, 12 four-unit houses which it rented and then sold in 1947, 1948, and 1949.

Orange Gardens was organized in 1947. In 1947 it built 11 apartments in North Long Beach, about 7 miles from the ocean. The apartments were rented immediately and are still rented. In 1950 it built and sold 124 single houses in Redondo.

D & E Corporation was organized early in 1946. It acquired land in Hawthorne, near Inglewood. In 1946 and 1947, it built and sold 84 single houses. In 1949 and 1950, it built and sold 59 single houses in Pacific Palisades. In 1950 and 1951, it built and sold 202 single houses in Redondo. In 1951, it was building 80 single houses.

Bonnie Brae Gardens was organized in 1947. In 1947 and 1948, it built 13 multiple unit houses containing 46 apartment units in the ">*98 Westlake area, near downtown Los Angeles. The apartments were rented and then sold in 1949 and 1950.

In addition to the above, Edgar and Daniel Cohn had a one-half interest in a partnership known as Construction Enterprises, organized in 1951, which partnership built 72 houses in the San Fernando Valley and sold them upon completion.

">*62 From 1941 to December 1951, Edgar and Daniel Cohn, through their various corporations and partnerships, have built at least 1,332 single and multiple unit houses. Of the buildings constructed, 1,225 were single family houses, and all were sold immediately upon completion. At least 107 of the buildings constructed were multiple houses. The only multiple unit houses built by petitioners, not sold, but still rented, are the 11 apartment buildings built by the Orange Gardens Corporation in North Long Beach. These 11 apartments are located near the ocean, about 35 miles from the 69 multiple houses sold in 1945, which, here, are in controversy.

At least in January 1944, Edgar Cohn was advised by the partnership's accountant about the Internal Revenue Code definition of capital assets, that in order to report gain from the sale or exchange of a capital asset as long-term gain, the capital asset must be held more than 6 months, and that property held for sale to customers in the ordinary course of a trade or business is excluded from the Code definition of capital assets. The partnership's accountant pointed out to Edgar Cohn, that even though the partnership rented the multiple unit">*63 houses constructed on tracts 13170 and 13171, if they were sold, a question might arise whether they were held for sale to customers or were capital assets, and the accountant, who took care of taxation matters for the partnership, advised Edgar to send him a letter "stating that they had determined to hold the buildings for investment so that there would be no question about it in the future if sale occurred." Edgar Cohn complied with the accountant's advice by sending him a letter dated January 12, 1944, which is set forth in the margin. ⁴

">*64 Ultimate Findings.

Prior to and during the taxable years, Security Construction Company, the partnership, was engaged in the business of building houses ">*99 for sale. It did not, in 1944 or 1945, enlarge or change its business to that of renting residential property for investment, or enter into a new business of renting property to defense workers.

It was originally intended to construct the 69 multiple unit houses for sale under N. H. A. regulations, as well as the 109 single unit houses. The 109 single unit houses and the 69 multiple unit houses constituted a single defense housing project, and the construction of the 69 multiple unit houses was necessary in order to sell upon completion, without first renting, the 109 single unit houses. The renting of the 69 multiple unit houses was required by N. H. A. regulations and was only incidental to selling them. The 69 houses were held during 1944 and 1945 primarily for sale to customers in the ordinary course of the partnership's business of building and selling houses. They were rented only until it was profitable to sell. The 109 single unit houses were held primarily for sale to customers in the ordinary course of">*65 the partnership's business of building and selling houses.

The 69 multiple unit houses were not capital assets. The gain realized in 1945 and 1946, on the installment basis, from the sale thereof in 1945 constituted ordinary income rather than long-term capital gain.

OPINION.

The narrow question in these proceedings is whether the 69 multiple unit houses sold in 1945 by Security Construction Company, the partnership, were houses that were held primarily for sale to customers in the ordinary course of the partnership's business, as the Commissioner has determined. If the houses were not so held and were held as "investment" property for more than 6 months before sale, the gain from the sales can be treated as long-term capital gain. Nelson A. Farry, 13 T.C. 8, 13. The applicable statutory provisions are contained in sections 117 (a) (1) and 117 (j), Internal Revenue Code.

The question to be decided is essentially one of fact. Mauldin v. Commissioner, 195 F.2d 714, 716; King v. Commissioner, 189 F.2d 122, 124, certiorari denied 342 U.S. 829">342 U.S. 829; Rubino v. Commissioner, 186 F.2d 304,">*66 certiorari denied 342 U.S. 814">342 U.S. 814. The petitioners contend that the 69 houses in question were capital assets in that they were primarily held for rent for investment in a distinctly separate and new business of the partnership, namely, a business of renting property for investment. The burden of proof is upon the petitioners to prove that the Commissioner's determination is in error. That is to say, they must prove that the 69 houses in question were not held primarily for sale to customers in the ordinary course of business. Greene v. Commissioner, 141 F.2d 645, certiorari denied 323 U.S. 717">323 U.S. 717; Commissioner v. Boeing, 106 F.2d 305, certiorari denied 308 U.S. 619">308 U.S. 619.

">*100 In considering all of the evidence, we have recognized that although there are several factors which are helpful in determining whether property is held primarily for sale to customers in the ordinary course of business, or whether it is sold as a capital asset, no single test is determinative. Mauldin v. Commissioner, supra.">*67 We have weighed all of the evidence to find out whether the 69 houses were acquired for sale or investment, and whether they were held for sale or investment; to ascertain, truly, whether the partnership ever carried on a business of renting residential property for investment, distinct and apart from its admitted, original business of building and selling houses; to determine, truly, whether the partnership in 1944, made a bona fide change from its original purpose to build the 69 multiple unit houses for sale to those who would comply with N. H. A. regulations about rental and sale to defense workers to a new purpose to hold them for rent for investment purposes. We have considered frequency and continuity of sales; the activities of the partners and the agents of the partnership acting in its behalf and under its directions; the extent or substantiality of the transactions. We recognize that the purpose for which the property was held when sold is entitled to considerable weight. Carl Marks & Co., 12 T.C. 1196; Rollingwood Corp. v. Commissioner, 190 F.2d 263. We recognize, also, that a taxpayer can engage in">*68 a dual business, that of selling property and that of renting investment property, Nelson A. Farry, supra, and that if property originally acquired for investment in a business of renting property for investment is sold as a capital asset, the gain is subject to capital gains treatment, Victory Housing No. 2, Inc. v. Commissioner, 205 F.2d 371 (C. A. 10), reversing 18 T.C. 466.

The contentions of petitioners have been fully considered, giving attention to the several factors which they emphasize. They rely, for authority in support of their contentions, chiefly upon Nelson A. Farry, supra; and Carl Marks & Co., supra. They cite, also, several unreported memorandum decisions of this Court.

Our conclusion, based upon the findings and ultimate findings, is that the 69 multiple houses were held primarily for sale to customers in the ordinary course of the partnership's business of building and selling houses during 1944 and 1945, and, at least during 1945, when they were sold, and that they were not at any time "investment" property">*69 -- capital assets of a business of renting property for investment. These conclusions are based upon the entire record. We must reject the petitioners' assertion, as unsubstantial, that the original purpose of building the 69 multiple unit houses for sale to nonoccupants, and under N. H. A. regulations and restrictions, changed in 1944 to a bona fide intention and purpose of renting the houses and holding them for investment. And we have concluded that the petitioners have failed in their burden of proving that the 69 houses were "investment" ">*101 properties and were not held primarily for sale to customers in the ordinary course of business.

Although the findings set forth the facts in detail, we think the following should be noted here: In the first place, the business of the partnership from its inception was building houses for sale and, until 1944, it never held any rental property. In order to continue its business of building houses, it had to obtain priorities for construction materials, and only for multiple unit houses were priorities granted, at first. Therefore, the partners applied for priorities to build the 69 multiple unit houses with the intention of selling">*70 them to nonoccupants, subject to Government restrictions, as it could do under the N. H. A. regulations, under which the partnership, the builder, or its transferees should rent the houses to eligible defense workers. Before construction of the first group of multiple unit houses, 56, was undertaken, F. H. A. enlarged the classification of defense housing to include single unit houses, and N. H. A. amended its basic order to permit a builder to sell to defense workers upon completion, without first renting to defense workers, one-third of its houses, provided a sale was made within 15 days after the final inspection. It is perfectly obvious that the partners calculated that by applying for authorization to build 13 additional multiple unit houses, they could apply for priorities to build 109 single unit houses, which could be sold upon completion, because by combining construction on tracts 13170 and 13171 into one project, 319 dwelling units would be constructed. The applications for priorities to build 69 multiple unit houses were made, therefore, in order to obtain priorities for building the 109 single unit houses for immediate sale to defense workers without first renting. ">*71 That, however, did not foreclose the partnership from building, also, the 69 multiple unit houses for sale. Even though the regulations required that the 69 multiple unit houses, comprising the remaining two-thirds of the entire number of dwelling units, had to be rented for 2 months, at least, before they could be sold to defense workers, they could, nevertheless, be sold upon completion to nonoccupants subject to the restrictions as to rental and sale to defense workers. Edgar Cohn was aware of this, as his testimony shows. He testified (page 140 of the transcript) that the 69 houses could be rented and they could be sold at any time.

The renting of the units in the 69 multiple unit houses by the partnership did not preclude its selling any one of the 69 houses.

In fact, Edgar Cohn, in his testimony, indicated clearly that it was desirable to have tenants in the dwelling units when offering a house for sale to a nonoccupant who could take assignment of leases. It was not inconsistent with an intent to sell the 69 multiple unit houses that the 109 single unit houses were sold first, or that the multiple unit houses were rented prior to the sales thereof. It is also quite ">*102 ">*72 conceivable it was desirable to sell the 109 single unit houses first; they had to be sold, if at all, within 15 days of completion, and it took 3 months, until September 1944, to sell the 109 single unit houses which were completed after the construction of the first 56 multiple unit houses. At best, the evidence, in our opinion, shows merely a dual purpose, namely, to rent the multiple unit houses until such time as it would be profitable and convenient to sell them. In that situation it must be concluded that "one of the essential purposes (in acquiring or holding the houses) is the purpose of sale," Rollingwood Corp. v. Commissioner, supra, and the profit on sale cannot be treated as capital gain.

The fact that the 69 houses were rented is not inconsistent with a purpose to hold the houses primarily for sale, Rubino v. Commissioner, supra;Niels Schultz, 44 B. T. A. 146; Charles H. Black, Sr., 45 B. T. A. 204; Walter G. Morley, 8 T.C. 904, particularly where, as here, the houses were rented for varying periods of from">*73 9 to 20 months. Cf. Nelson A. Farry, supra, where most of the properties were rented for from 1 to 11 years. In these proceedings, upon all of the evidence, the rental of the units in the 69 houses cannot be construed as anything more than an incidental activity.

It is observed, also, that the total net profit realized upon the sales of the 69 houses in 1945, based on sales prices, was $ 238,329, more than 6 times the net rentals received in 1944, $ 28,793. There were, in 1945, the frequency, continuity, and substantiality of sales usually indicative of holding property primarily for sale. Neither the financing of the construction of the 69 houses, nor the manner of selling them, differed in any substantial respect from that of financing and selling the 109 single unit houses. All of the 178 houses constructed in 1944 were sold by real estate brokers engaged by the partnership on a commission basis.

The petitioners argue that these proceedings come within the ambit of the Farry case, the chief authority cited, but the facts of the Farry case are different from the facts here in many important respects as is clear from the following: In the">*74 Farry case, the taxable years were 1944 and 1945. Nelson A. Farry had been in the business of managing properties and collecting rents since 1927. Beginning in 1934, he began accumulating rental properties, some of which he bought and some of which he built. At the end of 1941, he owned 45 rental properties comprising about 100 rental units, and in 1943, he acquired 18 more rental properties. Farry, clearly, was in the business of acquiring rental properties, and renting them for investment. In 1944, he sold 19 of his rental properties, and in 1945, he sold 27, a total of 46. Of all of the parcels sold, more than 15 had been rented from 5 to 11 years; 23 had been rented from 1 to 5 years; and 2 had been rented from ">*103 6 months to 1 year. Farry decided to liquidate his rental properties because the demand for housing, not investment properties, in Dallas late in 1943, had become extremely large. Rental vacancies had been absorbed and people, in seeking a place to live, were willing to buy houses. Also, rent control was in effect, so that the interest on notes given by purchasers of houses would yield more than the rents from Farry's rental properties. This Court">*75 concluded that Farry had proved "by overwhelming evidence that he purchased and held these rental properties primarily for investment purposes," and that the fact that "in the taxable years he received satisfactory offers for some of them and sold them" did not establish that he was holding them primarily for sale to customers in the ordinary course of his trade or business. Farry also constructed houses for sale in two subdivisions which, generally, he sold soon after completion, but such houses were in no way related to or connected with his rental properties and were not in the same location.

In contrast, in these proceedings, we have a business firm which, since its organization, had only built houses for sale. It was obliged to build some multiple unit houses in order to get priorities to continue in the building business. Admittedly, it intended, in the beginning, to sell the multiple unit houses. It began to sell the multiple unit houses 6 months after the last was completed; and admittedly, it took into consideration the tax advantages which might result from renting them for 6 months, at least, before putting them up for sale. We cannot say here that petitioners have">*76 proved that the partnership built and held the multiple unit houses primarily for investment purposes.

Victory Housing No. 2, Inc. v. Commissioner, supra, is also sharply distinguishable from these proceedings. Victory Housing No. 2, Inc., was organized in October 1942. Its fiscal year began on July 1 and ended on June 30. The corporation was organized for the purpose of constructing rental houses for defense workers. At some time after March 17, 1943, and during 1944, the corporation constructed 64 single family houses; 32 multiple unit houses, each containing 4 dwelling units; and 20 single houses, a total of 84 single unit houses, and 32 multiple unit houses. All of these houses were rented. During the period from July 1, 1943, to October 1, 1946, 3 years and 3 months, the period involved in the case, none of the 32 multiple unit houses were sold and the corporation held them for rental and investment purposes. During the period July 1, 1943, to April 10, 1946, 2 years and about 9 months, only 2 out of the 84 single unit houses were sold, and during the same period the remaining 82 single unit houses were rented. During 2 1/2 months, from">*77 April 10, 1946, to June 30, 1946, 42 single unit houses were sold; and between July 6, 1946, and October 1, 1946, the remaining 40 single unit houses were sold. In other words, ">*104 from the time of the completion in 1943 and 1944 of the 116 buildings, until the period April 10, 1946, to June 30, 1946, the 114 buildings were rented, 2 having been sold before April 10, 1946. Houses were rented, before being offered for sale, for, roughly, from 2 to 2 1/2 years. Upon these facts, this Court found that the corporation was engaged in the business of owning and renting residential property during the taxable years. We also found that all of the houses were constructed for rental. The United States Court of Appeals concluded, in reviewing the decision of this Court, that the 42 single unit houses sold in 1946 constituted capital assets in the corporation's rental business, and that the sales thereof constituted sales of capital assets. The Court of Appeals held, also, that the corporation did not abandon its rental business and that it did not change or enlarge its business so as to become engaged in a new business of buying or developing real estate for sale, and on this point">*78 reversed the decision of this Court. The Court of Appeals noted, too, that the corporation, when it sold the 42 single unit houses, did not list them with real estate brokers.

In contrast to the Victory Housing case, we have here the reverse situation. Security Construction Company was organized to build houses for sale and it engaged in the business of building houses for sale. Admittedly, it built all of the controlled housing, single and multiple unit houses, for sale, and upon the evidence, we cannot find that it went into another business of renting houses for investment purposes. We cannot find that the 69 multiple unit houses were the capital assets of a rental business and that, therefore, in 1945, capital assets were sold.

Walter R. Crabtree, 20 T.C. 841, is distinguishable on its facts.

The respondent's determinations are sustained.

Decisions will be entered for the respondent.

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Footnotes

• 1. Consolidated with Alice E. Cohn, Docket No. 25600, are Marion A. Cohn, Docket No. 25601; Daniel E. Cohn, Docket No. 25602; and Edgar M. Cohn, Docket No. 25603.↩

• 2. SECTION 3. Disposition of Private War Housing:

  .01 For the duration of the national emergency * * * all private war housing begun on or after February 10, 1943 shall be held for rental to eligible war workers as provided in NHA General Order No. 60-2, at the payments specified in the application for priority assistance or authority to begin construction submitted in connection with such dwelling units, * * * and, except for involuntary transfers, shall be disposed of only as follows:

  a. (i) a dwelling unit in a private war housing project may be purchased by an occupant (initial occupant or re-occupant) after two months' continuous occupancy by such occupant. (ii) Without conforming to (i) which precludes selling except at the option of the eligible war worker occupant exercised after at least two months' rental occupancy, a dwelling unit in a private war housing project may be held for sale or sold to an eligible war worker, provided that any sale so made shall take place not later than 15 days after the Federal Housing Administration makes its final Priority Compliance Inspection Report ("Completion Report") with respect to the unit (after which time the unit if not sold shall be held for rental as indicated in (i), and provided, further, that no owner shall sell more than one-third of the units in all projects (begun on or after February 10, 1943) which he has placed under actual construction in any war housing area except such sales as are made in conformity with the requirement of holding for rental as indicated in (i), and provided, further, that any sale made pursuant to (ii) shall be within a price range for the general types of units intended to be sold which is acceptable to the National Housing Agency. * * *

  * * * *

  b. Any such housing may be transferred to a person who will not occupy any part of such housing as his (or her) own dwelling, if

  (1) the sale price (except as provided in Section 4 hereof) of each dwelling unit in such housing is not in excess of the fair market price thereof, or $ 6,000, whichever is lower, and

  (2) the transferor submits to the National Housing Agency Regional Representative, * * * an agreement in the prescribed form * * * properly executed by the transferee, stating that such transferee will hold the premises subject to all occupancy and disposition provisions set forth in NHA General Order No. 60-2.↩

• 3. The 69 multiple unit houses comprised 210 dwelling units. The total housing authorized comprised 319 dwelling units, of which 109 were the single family houses. It appears that N. H. A. gave its approval of treating 109 units as one-third, and 210 units as two-thirds of the project built on tracts 13170 and 13171.↩

• 4. We are now building fifty-six buildings consisting of thirty-three doubles and twenty-three four family dwellings in Tract 13170, City of Los Angeles, within three-quarters of a mile from Lockheed Aircraft Corporation.

  During the past three years we have built 200 single family dwellings, all of which we sold and are now occupied by war workers.

  After due and careful consideration, and in view of the fact that we are now engaged in building rental units, we have decided to rent all of the 158 units in the 56 buildings now under construction and hold same for investment purposes.

  Respectfully yours,

  Security Construction Company,

  Edgar M. Cohn, Co-partner↩.