Gruver v. Commissioner , 1 T.C. 1204 ( 1943 )

Jacob S. Gruver, Petitioner, v. Commissioner of Internal Revenue, Respondent

Gruver v. Commissioner

Docket No. 111725

United States Tax Court

1 T.C. 1204; 1943 U.S. Tax Ct. LEXIS 157;

May 27, 1943, Promulgated

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Decision will be entered under Rule 50.

The petitioner's business was buying, selling, trading, or exchanging real property on his own individual account. In 1932 he acquired, by trade, approximately 92 acres of unimproved land, subdivided about one-third of it, and sold lots at a profit in 1939 and 1940. The petitioner contends that the property was held for trade or exchange, and not exclusively for sale, and that the profit was capital gain. Held, that the property is not a capital asset within the meaning of section 117 of the Internal Revenue Code because held "primarily for sale to customers in the ordinary course of his trade or business" and the profit realized upon the sale of lots from the property is taxable to the petitioner in full.

Martin W. Meyer, Esq., for the petitioner.

E. L. Corbin, Esq., for the respondent.

Turner, Judge.

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TURNER

The respondent has determined deficiencies in income tax against the petitioner for the years 1939 and 1940 in the respective amounts of $ 2,389.66 and $ 3,581.73.

The only question presented is whether the petitioner's tax liability for 1939 and 1940, on profit from sales of property, should be computed under the capital gains provisions of section 117 or under ordinary income provisions of section 22 of the Internal Revenue Code.

FINDINGS OF FACT.

Substantially all of the facts have been stipulated and are found as stipulated. Those facts hereinafter appearing which are not from the stipulation of facts are facts found from the evidence introduced at the hearing.

The petitioner is an individual and resides in Washington, D. C. His income tax returns for 1939 and 1940 were filed with the collector of internal revenue for the district of Maryland.

The petitioner has been engaged in the real estate business continuously since 1908, on his own individual account. He has an office in the Woodward Building, in Washington, D. C. Early in his career he did a great deal of building on land he bought and also did some trading. He later discontinued his construction business and devoted himself to dealing in land and improved properties. At all times he traded, exchanged, bought, and sold property. His trades and exchanges have been a substantial part of his business both in number of transactions and in dollars and cents values. He has never had a real estate broker's or agent's license. He does not belong to such organizations as real estate men customarily join. He employs no salesmen and has not employed any for many years. He very rarely advertises. He does not purchase or sell as agent for others, but prefers to deal with brokers and pay them the commission rather than meet the actual buyer or seller. He rarely negotiates directly with the other party. He disposes of his property in most instances by trading or selling it to real estate traders or persons from whom he has acquired it by trading or purchasing. In some instances he initiates a trade or sale by calling in an agent or firm whom he knows to be versed in that particular kind of property, while in other instances they initiate the transaction by coming to him.

The petitioner acquired approximately 92 acres of unimproved land near Silver Spring, Maryland, in 1931 or 1932 by trade. He subdivided about 25 or 30 acres of it into lots in order to dispose of the tract more readily. During the taxable years here involved he sold a number of lots from the subdivision at a total profit of $ 20,941.72 in 1939 and $ 18,915.42 in 1940. Since the taxable years he has sold some lots and traded some for improved property. He has held this tract of land at all times, and still holds the undisposed portion of it, approximately 65 or 70 acres, for sale, trade, or exchange or other disposition, his preference being determined not by the type of transaction but by the gain to be derived.

Since prior to the time of his acquisition of this tract of land the petitioner has been trading, exchanging, buying, and selling real estate.

The only other real estate sold at a profit by the petitioner during the taxable years involved consisted of unimproved lots in square 4560, Washington, D. C. The total profit on these sales was $ 3,547.79 in 1939 and $ 3,021.16 in 1940. During 1939 he also sold three acres of land at a loss of $ 756.25, and during 1940, the property at 4019 Fourteenth Street, N. W., Washington, D. C., at a loss of $ 651. This real estate was likewise at all times held just as much for trade or exchange or other disposition as for sale.

One of the petitioner's objectives has always been steadily to step up and increase the potential value of his real estate holdings, and for a long time he handled a great deal of unimproved property as well as improved property. More recently petitioner has at the same time sought to convert his real estate holdings into improved income-producing real estate. He has not conducted a rental agency. In the real estate business, standard forms of exchange contracts are used. The petitioner used such forms in his trades or exchanges of property. The form contains a provision for stipulating any difference of price to be paid in cash or by promissory notes.

Income derived in 1939 and 1940 from the disposition of real estate other than the Silver Spring tract was reported by the petitioner on his returns for those years as ordinary income from his business.

OPINION.

The respondent has determined that the profit the petitioner received from sales of property in 1939 and 1940 is ordinary income from his business. The petitioner contends that it is capital gain. In the respondent's determination the taxes were computed on 100 percent of the petitioner's profit under section 22 of the Internal Revenue Code, but if the petitioner's contention is correct, the tax should, under section 117 (b) of the Code, be computed on 50 percent of his profit.

Section 117 (a)(1) defines capital assets to mean "property held by the taxpayer (whether or not connected with his trade or business), but does not include * * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."

Section 19.117-1 of Regulations 103, in defining the meaning of terms, states "The term 'capital assets' includes all classes of property not specifically excluded by section 117 (a)(1)."

It is conceded that the petitioner was in the real estate business, but he contends that he held the property, involved herein, for trade or exchange as much as for sale and therefore it does not come within the meaning of words used in the statute, "property held * * * primarily for sale." He further contends that, if the property had been held primarily for sale, it was not for "customers in the ordinary course of his trade or business." We can not agree with the petitioner's interpretation of the law. The petitioner has been in no other occupation since 1908 than the real estate business. He has received an income from this business out of which he has accumulated and developed property, and is continuing to do so, by buying, selling, trading, and exchanging property.

There are many definitions of the word "sale." A "sale" may include a trade or an exchange of property where the property has a fixed value or price, and particularly where there is a difference in value or price to be paid in money or its equivalent. We believe most trades or exchanges of real property are made in that manner. The standard form that realtors use in trades or exchanges of property, on which the petitioner places much importance, carries a particular provision to take care of any difference of price in the transaction, indicating that few trades of property are mere acts of exchange without consideration of value or price. Although a substantial part of the petitioner's business may have been in trades and exchanges, yet those trades and exchanges represented dollars and cents values to him, and it was his business to make dollars and cents in the long run from his transactions. However, he did not confine his business to trades or exchanges but much of it was selling property for cash. It is not clear whether his trades and exchanges were more than his sales for money, but a substantial part of his business was such sales. He held the property as much for money sale as for trade or exchange for other property. In our opinion, and we so conclude, the property here in question was property held by the petitioner primarily for sale in his business within the meaning of the statute.

Did the petitioner hold the property primarily for sale to customers in the ordinary course of his business? Undoubtedly he did. Since it was his business to buy, sell, trade, and exchange property, he necessarily held the property for buyers and traders. His customers were usually real estate brokers or speculators. He preferred to deal with them rather than with the parties direct, but that did not remove them from the classification of "his customers" any more than his willingness to trade or exchange property indicated that he did not hold it for sale.

Under the record presented, it is clear that the petitioner's business was real estate, that the property he acquired was held primarily for sale, and for sale to his customers in the ordinary course of his business. The determination of the respondent is accordingly sustained.

Decision will be entered under Rule 50.