Peck v. Commissioner , 19 B.T.A. 345 ( 1930 )

GEORGE H. PECK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Peck v. Commissioner

Docket No. 29232.

United States Board of Tax Appeals

19 B.T.A. 345; 1930 BTA LEXIS 2420;

March 20, 1930, Promulgated

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A. Calder Mackay, Esq., and George M. Thompson, Esq., for the petitioner.

J. E. Mather, Esq., for the respondent.

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VAN FOSSAN

This proceeding is brought to redetermine the income tax of the petitioner for the year 1923 in the sum of $19,008.93. The deficiency letter asserts added deficiencies for the years 1920, 1921, and 1922, but no appeal was taken as to them.

The petitioner alleges that the respondent erred in determining as ordinary income the gain derived from sales of assets held for a period of two years or more instead of computing the tax on such gain at the rate of 12 1/2 per cent in accordance with section 206(a)(6) of the Revenue Act of 1921.

FINDINGS OF FACT.

The petitioner has been a resident of Los Angeles, Calif., for more than sixty years. At the time of the hearing he was old, blind, and had been a diabetic for a number of years.

In 1902 he organized a corporation known as the San Pedro Land Co. and owned all of the capital stock thereof except qualifying shares. To that corporation he transferred certain land valued at between $25,000 and $50,000. The land was not subdivided. The purpose of the formation of the corporation was to facilitate the transfer of title to purchasers by avoiding possible administrative difficulties in the event of the petitioner's death. The corporation subdivided and sold the land acquired from the petitioner and also purchased additional acreage, a portion of which it also subdivided and sold.

Prior to 1912 the petitioner was a pioneer banker of San Pedro, was the president of the Bank of San Pedro and owned a controlling interest therein. He also was engaged in the business of buying and shipping grain to the San Francisco market. In 1912 the petitioner retired as president of the bank. From 1912 to 1919 the San Pedro Land Co. acquired no additional real estate by purchase or otherwise.

In 1919 the petitioner was suffering from diabetes and was blind. He desired to dispose of the real estate holdings of the San Pedro Land Co. and to convert them into other forms of securities. Consequently, on or about July 1 of that year the corporation distributed to him all of its assets, including approximately 1,550 acres of real estate, 300 acres of which were subdivided. The land so distributed was part of the real estate acquired by the corporation prior to 1912, but included none of the real estate originally conveyed to it by the petitioner in 1902.

From 1919 to 1923, inclusive, the petitioner purchased no real estate except one tract of 135 acres for which he paid $400,000. That purchase was made purely as an investment because the petitioner thought the land contained oil. At the close of 1923 he still owned that property. Following the liquidation of the San Pedro Land Co. the petitioner proceeded to sell out as quickly as possible the real estate conveyed to him by it. In addition to effecting the liquidation, he was compelled to make such sales in order to pay expenses.

From 1919 to 1923, inclusive, the petitioner bought and sold no property for any person other than himself. In both 1921 and 1922 the petitioner was informed by the real estate department of the State of California that he was not required to hold a license as a real estate salesman or broker. In 1923, however, such a license was issued to him because of a new law passed by the State of California and particularly in view of the confusion and uncertainty involved in its interpretation. In order to be on the safe side the petitioner preferred to procure such a license. Also the cost thereof was less than the cost of obtaining the opinion of an attorney as to the necessity of securing the license.

For at least three years prior to 1919 the San Pedro Land Co. filed income-tax returns and included therein profits on the sale of real estate and other property owned by the corporation.

A large portion of the income of the petitioner in 1923 was derived from rents, interest on bank deposits and interest from real estate contracts.

OPINION.

VAN FOSSAN: Section 206(a)(6) of the Revenue Act of 1921 provides:

The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or 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.

It is admitted that the real estate, the gain on whose sales forms the basis of the question at issue, was owned by the petitioner for more than two years prior to its sale in 1923. The respondent, however, has refused to assess the tax at 12 1/2 per cent of such gains as provided by section 206 of the said Revenue Act of 1921, but has held that the real estate so sold represented "stock in trade of a regular business rather than property held for a profit or investment."

Prior to 1902 the record does not disclose that the petitioner was engaged in the buying and selling of real estate or even in the promoting and developing of his own property. Subsequent to the incorporation of the San Pedro Land Co. and the acquisition by it of the real estate owned by the petitioner, other land was purchased by the corporation. That land, together with the tracts originally conveyed to it, was subdivided and sold to various purchasers.

From 1902 to 1919 the corporation was engaged in the business of disposing of its own land.

By July, 1919, the petitioner, who was practically the sole owner of the capital stock of the corporation, had become seriously ill with diabetes, and also had become blind. He desired to be relieved from the burden and responsibility of the business of continuing the real estate operations being carried on by the corporation and determined to wind up its affairs as quickly as possible. Consequently, he caused the corporation to convey to him in kind the real estate then owned by it and to take steps resulting in its dissolution. Thereupon he proceeded to sell the land as expeditiously and advantageously as possible. He did not attempt personally to continue in the real estate business. His purpose was to extract from the investment whatever profit, if any, such sales might bring but his primary motive was to dispose of the real estate as soon as possible and to convert the proceeds thereof into cash and other less burdensome forms of wealth.

In view of the foregoing facts it is our opinion that the real estate conveyed to the petitioner by the San Pedro Land Co. on or about July 1, 1919, and held by him for a period of more than two years, constituted capital assets within the meaning of section 206(a)(6) of the Revenue Act of 1921 and that the gains derived from the sale thereof in the year 1923 are subject to taxation at the rate of 12 1/2 per cent as provided by section 206 of that act.

Decision will be entered under Rule 50.