Girard Trust Corn Exchange Bank v. Commissioner , 22 T.C. 1343 ( 1954 )

Girard Trust Corn Exchange Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent

Girard Trust Corn Exchange Bank v. Commissioner

Docket No. 36015

United States Tax Court

22 T.C. 1343; 1954 U.S. Tax Ct. LEXIS 86;

September 30, 1954, Filed September 30, 1954, Filed

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Decision will be entered under Rule 60.

1. The unused excess profits credit of the petitioner for a taxable year beginning December 1, 1943, is to be computed on the prorated basis under both the 1943 and 1944 laws, as required by section 710 (a) (6), Internal Revenue Code of 1939, added by section 203 (a), Revenue Act of 1943, notwithstanding the provision that the 1943 amendments were applicable only to years beginning after December 31, 1943.

2. Real estate acquired by a bank in foreclosures and by deeds in lieu thereof was held primarily for sale to customers in the ordinary course of the petitioner's business and sales thereof in 1946 resulted in ordinary losses, rather than capital losses. The decision in Kanawha Valley Bank, 4 T. C. 252 (1944), is not controlling.

George Craven, Esq., and James F. Gordy, Esq., for the petitioner.

William G. Handfield, Esq., for the respondent.

Baar, Judge. Van Fossan, Murdock, and Withey, JJ., concur in the result.

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BAAR

The respondent determined deficiencies in the income and excess profits taxes of the petitioner as follows:

Fiscal year ended November 30	Tax	Deficiency
1945	Excess profits	$ 242,308.86
1946	Excess profits	56,734.54
1946	Income	10,573.95

Two issues are presented for decision, namely:

(1) Should the unused excess profits credit of the petitioner for the fiscal year ended November 30, 1944, be determined on a prorated basis under the statutes applicable to 1943 and 1944, by the application of section 710 (a) (6) of the Internal Revenue Code of 1939, as enacted by section 203 of the Revenue Act of 1943?

(2) Were ordinary losses or capital losses incurred by the petitioner in its fiscal year 1946 as the result of sales of parcels of real estate acquired by foreclosure or by deed in lieu of foreclosure?

Other issues raised by the petition have been disposed of by stipulation or waiver.

The evidence was presented by a stipulation of facts, exhibits appended thereto, oral testimony, and exhibits introduced at the hearing.

FINDINGS OF FACT.

The facts are found in accordance with the stipulation of facts, together with its appended exhibits, which are made a part hereof by this reference.

The petitioner, which was formerly known as the Girard Trust Company, is a corporation organized and doing business under the banking laws of the Commonwealth of Pennsylvania, with its principal place of business at Philadelphia, Pennsylvania. Its name was changed to Girard Trust Corn Exchange Bank, pursuant to articles of merger filed in the office of the Secretary of the Commonwealth of Pennsylvania, which became effective June 15, 1951.

During the years here in issue the petitioner kept its books and filed its Federal income tax returns on a cash basis and on the basis of a fiscal year ending November 30. The petitioner's income and excess profits tax returns for its fiscal years ended November 30, 1945, and November 30, 1946, were filed with the collector of internal revenue for the first district of Pennsylvania.

The respondent determined that for the fiscal year ended November 30, 1945, the petitioner was entitled to an unused excess profits credit carry-over of $ 174,573.78 from the fiscal year ended November 30, 1944, based on invested capital. It is now conceded that this amount should be increased by $ 19,292.93 to $ 193,866.71. Under the method of computation for which the petitioner contends, the unused credit would amount to $ 339,867.55.

For the fiscal year ended November 30, 1944, the petitioner's invested capital was $ 20,951,136.82 and its excess profits net income was $ 1,067,200.66.

The petitioner's normal tax net income, surtax net income, net long-term capital gain, and adjusted excess profits net income for the year ended November 30, 1946, as determined in the deficiency notice, were arrived at by treating as a net long-term capital loss a net loss of $ 270,449.30 which was sustained by the petitioner in that year on sales of real estate.

The net loss of $ 270,499.30 is made up of a net loss of $ 270,580.05 on 23 sales of 52 tracts or parcels of real estate, included in 13 so-called properties, reduced by $ 130.75 for recoveries in that year on claims for deficiencies on account of real estate sold in prior taxable years.

All of the real estate of the petitioner sold in 1946 was acquired upon foreclosure of mortgages or by deeds in lieu of foreclosure. In six of the properties here involved, the petitioner owned a fractional interest.

Of the loss in question, $ 248,659.46 was sustained by the petitioner upon the sale of property referred to as Black Farm, which was wholly owned by the petitioner and concerning which additional facts are stated below.

The remaining $ 21,920.59 represents 9 items of losses, ranging from $ 77.56 to $ 22,002.11 and aggregating $ 52,490.27, minus 2 items of gain in the amounts of $ 679.68 and $ 29,890. Another property was sold with no resulting gain or loss. Additional facts are stated below concerning certain properties to which the larger items relate.

Since 1931 the petitioner in its corporate capacity and in its capacity as fiduciary of estates and trusts foreclosed a number of mortgages on real estate and acquired a number of parcels of real estate on foreclosure and by deeds in lieu of foreclosure.

Throughout that period and during the years 1945 and 1946 the petitioner maintained a real estate and mortgage division which was operated as a separate division or unit of the bank, with a separate accounting division. The number of employees of the division varied during the period 1935-1946, from about 110 in 1935 to 40 in 1946, and was not less than 40 at any time in that period.

The petitioner's real estate and mortgage division is staffed and equipped to handle real estate activities including property management, sales, leases, and maintenance, and also appraisals, real estate and mortgage settlements, mortgage servicing, insurance, and real estate and mortgage accounting procedures. The real estate and mortgage division of the petitioner has managed real estate owned by petitioner, real estate held by estates and trusts of which petitioner is fiduciary, and real estate owned by petitioner's customers.

The petitioner received fees and commissions for certain services performed for its customers by its real estate and mortgage division. Fees for such services are also reflected to a large extent in other fees which it receives, such as commissions as executor and trustee and fees as custodian and depositary.

The following is a statement of fees and commissions on rents and sales which were entered in petitioner's real estate commissions account in the fiscal years ended November 30, 1936, to November 30, 1946:

Fiscal year ended November 30	On rents	On sales	Fees	Total
1936	$ 5,980.78	$ 8,659.21	$ 7,945.00	$ 22,584.99
1937	8,572.28	4,600.99	2,570.00	15,743.27
1938	7,402.97	6,516.83	4,474.18	18,393.98
1939	6,161.89	5,246.18	2,096.75	13,504.82
1940	3,286.81	6,497.06	1,140.00	10,923.87
1941	5,259.60	11,142.02	2,229.08	18,630.70
1942	2,945.09	12,114.84	3,118.90	18,178.83
1943	4,301.06	10,670.34	1,673.57	16,644.97
1944	1,495.17	12,002.68	525.00	14,022.85
1945	904.08	13,565.17	995.00	15,464.25
1946	178.42	20,856.89	9,059.04	30,094.35

In each of the fiscal years ended November 30, 1935, to November 30, 1946, the employees of petitioner's real estate organization have included 5 to 8 licensed real estate brokers and 5 to 12 licensed real estate salesmen.

The petitioner paid a mercantile license tax as a real estate broker or dealer to the city of Philadelphia every year that such tax was in force.

In each year since 1939 the petitioner has been a member of the Financial Division of the Philadelphia Real Estate Board, the Pennsylvania Real Estate Association, and the National Association of Real Estate Boards. It has also been a member of the Corporate Real Estate Association, the Mortgage Bankers Association, and the Pennsylvania Title Association. The officer in charge of petitioner's real estate and mortgage division was for 4 years the president of the Corporate Real Estate Association. Those organizations functioned for the purpose of the general betterment of the real estate business.

The following is a statement of mortgages on real estate foreclosed by petitioner during the period November 30, 1935, to November 30, 1946, which includes mortgages which the petitioner owned in whole or in part and mortgages owned wholly or in part by estates and trusts of which the petitioner was acting as fiduciary:

	Number	Total principal
Fiscal year ended November 30	of foreclosures	of mortgages
1935	434	$ 4,574,896.59
1936	263	2,400,997.34
1937	181	2,216,879.87
1938	174	1,917,922.17
1939	192	4,635,190.47
1940	135	1,630,108.40
1941	116	1,271,598.66
1942	158	2,069,071.00
1943	59	1,235,016.57
1944	25	621,640.21
1945	8	227,455.60
1946	3	35,044.66

The following is a statement of sales of real estate made by the petitioner's real estate organization during the fiscal years ended November 30, 1943, to November 30, 1946, inclusive, including properties owned wholly or in part by petitioner, those held in estates and trusts of which it was acting as fiduciary, and those in which the petitioner acted as agent for customers:

	All properties sold
Fiscal year ended
November 30
	Total
	number	Total proceeds
1943	739	$ 6,464,414.29
1944	699	8,873,200.32
1945	613	7,328,344.35
1946	500	5,993,903.61

	Properties sold which were owned by petitioner,
	in whole or in part
Fiscal year ended
November 30		Per cent of	Net proceeds	Per cent of
	Number	total	of sales	total
		(approximate)		(approximate)
1943	23	3.1	$ 169,557.46	2.62
1944	35	5.0	579,990.49	6.50
1945	22	3.6	196,360.68	2.60
1946	23	4.6	302,882.06	5.05

The principal activity of the real estate and mortgage division of the petitioner was the management of property owned by customers and property held in trust by the petitioner as a fiduciary. The management of the property consisted of the collection of rents; payment of taxes, insurance, and other expenses; supervision of maintenance, repair, and improvement; general supervision of the property; and advising customers on mortgage and other problems.

During the years 1931 to 1946 the petitioner had under the management of its real estate and mortgage division the following minimum number of separate parcels of real estate, including properties owned outright by it, properties held in its estates and trusts, and properties managed for its customers:

1931	1,488
1932	2,375
1933	2,910
1934	3,650
1935	4,264
1936	4,548
1937	4,780
1938	4,955
1939	5,050
1940	4,863
1941	4,638
1942	4,062
1943	3,298
1944	2,510
1945	1,904
1946	1,421

Where the petitioner had real property to sell for its own account or for customers, its real estate and mortgage division made appraisals to determine the selling price. In an effort to dispose of real estate owned by it, the petitioner advertises in magazines, newspapers, and with brochures and other publications and makes a practice of circulating among other brokers information about such properties. Petitioner has shared in the commissions upon sales by other brokers of properties of the petitioner's customers.

Parcels of real estate owned by petitioner in its corporate capacity and held by it for sale have usually been acquired as a result of foreclosures of mortgages and by deeds in lieu of foreclosure, and by taking over such parcels from estates and trusts for which petitioner has acted as fiduciary. Following the acquisition of such parcels of real estate, the petitioner has made extensive efforts to sell the properties.

The petitioner has made improvements to many of such properties. It has financed the construction of dwelling houses and commercial buildings on vacant land and has made improvements to buildings situated on property owned by it. In the case of certain parcels of vacant land so held by it, the petitioner has developed and improved the property by installing sewers and water pipes, paving streets, grading the land, and installing curbing, and it has plotted and subdivided property in lots and has financed the construction of dwelling houses on many of such lots.

The petitioner has not at any time held real estate as an investment. Real estate which it has acquired upon foreclosures was held for sale as soon as possible at a fair price.

Certain properties not sold in this taxable year were rented while they were held for sale. Of the properties sold in this year which were wholly owned by the petitioner, none were rental or income producing properties. Five properties which were sold in this year and in which the petitioner owned a fractional interest were producing some rental income prior to the sale thereof, as follows:

		Loss (or	Rental
Property	Interest of petitioner	gain) of	per
		petitioner	month 1
North Broad Street	1,800/250,000 (approximately
	0.72 per cent)	$ 239.96	$ 1,618.34
Tredyffrin Country Club	5,920.05/148,000 (approximately
	4.00 per cent)	(679.68)	66.66
		(Gain)
1604 Walnut Street	5,800/150,000 (approximately
	3.70 per cent)	1,617.73	1 5,000.00
Melrose Country Club	5,301.87/218,450 (approximately
	2.43 per cent)	2	450.00
King of Prussia Road	48,500/190,000 (approximately
	25.53 per cent)	22,002.11	40.00

Certain property which is referred to as Black Farm and is located in Bryn Mawr, Pennsylvania, was acquired by the petitioner by foreclosure in 1935. It consisted of 97.184 acres of unimproved land. During 1941 the petitioner plotted and subdivided 8.667 acres of this property into 24 lots. The remainder, 88.517 acres, was left unplotted and undivided, but plans for eventual subdivision had been prepared. The petitioner installed sewers and made other improvements on the subdivided portion at a cost of $ 6,880.73, and financed the construction of 10 dwelling houses at a cost of $ 106,959.12, under an arrangement for dividing the proceeds of sale between the builder and the petitioner. A brochure of information concerning this property was prepared and circulated by the petitioner. This property produced no rental income. From the time the property was acquired until it was finally disposed of the petitioner was continuously engaged in attempting to sell at a fair price both the lots and the unsubdivided portion. Twelve of these lots were sold through brokers during the years 1941 to 1945. One lot was sold in the fiscal year 1946. In another single transaction, the remaining 11 lots and the unplotted portion, or 88.517 acres, were also sold in the fiscal year 1946. The adjusted basis of the lots and the unplotted acres which were sold in 1946 was $ 369,851.33, the petitioner's share of the aggregate net proceeds of the sales was $ 121,191.87, and the resulting loss of the petitioner was $ 248,659.46.

A loss of $ 22,002.11 was sustained by the petitioner in the fiscal year 1946 upon the sale of certain real estate located on King of Prussia Road, in Radnor, Pennsylvania. An interest of 48500/190000 in this property (about 25.53 per cent) was acquired by the petitioner by foreclosure of a mortgage in 1934. It consisted of about 198 acres of farm land and buildings and was rented at $ 40 per month at the time of the sale. The petitioner's adjusted basis was $ 31,691, and $ 9,688.89 was received as the proceeds of the sale.

The petitioner acquired 85.979 acres of land referred to as Chatham Village by foreclosure of mortgage in 1935. Petitioner plotted and subdivided the property and expended about $ 160,000 for sewers, water pipes, pavements, and other improvements. It also financed the construction of 181 dwelling houses on the property at a cost of about $ 780,000. The petitioner prepared and circulated several hundred copies of a brochure describing the property. Houses and lots were sold during the years 1935 to 1949 through the sales organization of the corporation which constructed the houses and shared in the proceeds of sales. The employees of the petitioner did not participate to any material extent in the selling activities. This property produced no rental income. Three sales were made during the fiscal year ended November 30, 1946. The petitioner's adjusted basis of the parcels sold was $ 13,896.80, its share of the aggregate proceeds of sale was $ 1,997.80, and it sustained a resulting loss of $ 11,899.

The petitioner acquired 3 1/3 acres of unimproved property in Merion, Pennsylvania, by foreclosure of mortgage in 1933 or 1934. This property was replotted and subdivided into 22 lots. Improvements were made and $ 11,700 was advanced by the petitioner for the construction of 1 house. A brochure describing the property was prepared and circulated by the petitioner. The property produced no rental income. Lots were sold during the years 1934 to 1946, and in 2 sales made in 1946 the entire unsold portion, including all or parts of 13 lots, was sold for $ 17,222.35, at a loss of $ 8,577.65.

The petitioner acquired approximately 4 acres of unimproved land on Ryan Avenue, in Philadelphia, Pennsylvania, by deed in lieu of foreclosure in 1941. The petitioner's adjusted basis was $ 16,665. In separate sales on June 7 and August 8, 1946, the property was sold for a total amount of $ 11,855. The property was never plotted or subdivided, and produced no rental income. The petitioner's resulting loss was $ 4,810.

A gain of $ 29,890 was realized by the petitioner on May 28, 1946, upon the sale of property in Bryn Mawr, Pennsylvania, which it had acquired by foreclosure of mortgage in 1944 or 1945. It consisted of 51.401 acres of unimproved land, which was never plotted or subdivided, produced no rental income, and was sold in 1 transaction on May 28, 1946. The petitioner's adjusted basis was $ 65,000 and the proceeds of the sale amounted to $ 94,890.

The petitioner received $ 276.37, which was exactly the amount of its adjusted basis, for an interest of 5301.87/218450, approximately 2.43 per cent, in property known as Melrose Country Club, from 2 sales of residual portions of the property in the fiscal year 1946. At the time of the sales the property was rented at $ 450 per month.

At all times during the fiscal year ended November 30, 1946, and for many years prior thereto, the petitioner was engaged in business as a bank or trust company. In the ordinary course of that business, upon the foreclosures of mortgages or in transactions in lieu thereof, the petitioner regularly acquired and thereafter held and sold real estate and interests therein. It did not purchase real estate for resale.

Each of the real estate properties mentioned above and every other real estate property owned in whole or in part by the petitioner and every other interest in real estate which was sold by the petitioner during the fiscal year ended November 30, 1946, and which was included among those upon the sale of which the petitioner sustained in the aggregate a net loss of $ 270,449.30 in that year, was held primarily for sale to customers in the ordinary course of the trade or business of the petitioner.

OPINION.

The first issue for our decision is whether the petitioner must compute its excess profits credit for the year ending November 30, 1944, on a prorated basis whereby the statute in effect for the calendar year 1943 ("1943 law") should apply in proportion to the number of days of the fiscal year falling in 1943 and the statute in effect for the calendar year 1944 ("1944 law") should apply in proportion to the number of days of the fiscal year falling in 1944.

The dispute between the parties grows out of the amendments made to section 710 and section 714 of the Internal Revenue Code of 1939 by the Revenue Act of 1943, whereby excess profits taxes were increased by means of an increase in the rate of tax and a reduction in the credit allowed upon the basis of invested capital. The specific question here involved concerns the application of these amendments to a fiscal year 1943-1944, beginning on December 1, 1943. Section 201 of the Revenue Act of 1943 provided:

SEC. 201. TAXABLE YEARS TO WHICH AMENDMENTS APPLICABLE.

Except as otherwise expressly provided, the amendments made by this title shall be applicable only with respect to taxable years beginning after December 31, 1943.

An exception with respect to the computation of tax for fiscal years beginning in 1943 and ending in 1944, such as is here involved, was expressly made by adding to section 710 (a) of the 1939 Code a formula for a proration of two computations of tax liability, as prescribed by the new subparagraph (6) which is set out in the margin. ¹ There is no provision specifically dealing with the determination of the excess profits credit or unused excess profits credit of such a fiscal year.

According to the respondent's computation the petitioner's excess profits credit for the fiscal year ended November 30, 1944, which was based on invested capital under the provisions of section 714 of the 1939 Code, reflected an apportionment of the amounts computed under section 714 before and after amendment by section 205 of the Revenue Act of 1943, similar to that specified in 1939 Code, section 710 (a) (6). The petitioner urges that such excess profits credit is to be determined solely under the provisions of 1939 Code, section 714, as applicable to the year 1943, prior to its amendment by section 205 of the Revenue Act of 1943, without reflecting the reduction of the credit for the year 1944 accomplished by that amendment.

In our judgment the necessary interpretation of the statutory provisions to which we shall refer results in an exception "expressly provided," under which the 1943 amendment of section 714 is applicable for the determination of the unused excess profits credit of a taxable year beginning before December 31, 1943. We therefore sustain the respondent upon this issue. The arguments to the contrary are strongly presented in the petitioner's brief, from which extracts are given in the margin. ²

If it is true, as is argued by the petitioner, that Congress has not expressed any intention that the unused excess profits credit for a fiscal year ending in 1944 should be determined to any extent under the amended provisions of section 714 of the 1939 Code, the position of the petitioner would seem clearly to be sustained by section 201 of the Revenue Act of 1943, providing that the amendments upon which the respondent here relies "shall be applicable only with respect to taxable years beginning after December 31, 1943."

Beyond question, the taxable year here involved did not begin after December 31, 1943. Superficially, therefore, the petitioner's contention that the amended statute has no application here would seem to be impregnable. Closer analysis, however, leads us to the contrary conclusion.

The excess profits credit prescribed by section 714has no purpose or significance except as it enters into a computation of tax liability under section 710, either for the current taxable year or for a prior or subsequent period. Therefore the provisions of section 710 (a) (6), which require two tentative tax computations for a fiscal year falling within the two calendar years, 1943 and 1944, in substance and effect provide expressly that such a fiscal year shall have not one excess profits credit but two different excess profits credits, one determined under the law applicable to 1943 and another determined under the law applicable to 1944.

It is therefore impossible to find any single credit which conforms to the specification of "the excess profits credit" for this taxable year, such as is the basis of the determination of the unused credit defined by section 710 (c) (2). Thus the present controversy clearly appears in its true light to involve a statute which is essentially ambiguous and which, if applied to the present situation without the aid of construction, would be obviously inconsistent and contradictory.

This problem can be solved only by a construction which will find the essential meaning expressed in the particular words used in the statute, in the light of the legislative purpose and intention as demonstrated by the background of the ambiguous provision and the context of the statute as a whole.

There can be no doubt of the general legislative purpose to treat fiscal years such as are here involved as if they were in part governed by one statute and in part governed by another, in proportion to the number of days falling within each of the two calendar years. The absence of any specific statutory provision governing the determination of the credit or the unused credit for a 1944 fiscal year may probably be attributed to oversight rather than design. Nevertheless, it must now be decided whether or not the language of the particular sections which are here controlling requires or permits the conclusion that section 203 of the Revenue Act of 1943, amending section 710 (a) by adding paragraph (6), "expressly" provides that the amended section 714, notwithstanding section 201 of the 1943 act, "shall be applicable" to this taxable year beginning before December 31, 1943.

This result can be sustained only if section 710 (c) (2) may be so construed that the terms "the excess profits credit" for this taxable year describe, in effect, a composite credit reflecting a proportionate part of each of two credits, of which one would be used in the computation of one tentative tax, if the income had been large enough to be taxable, and the other would have been used in the computation of another tentative tax under appropriate circumstances.

This is, of course, the position which the respondent urges in this case. It may be further clarified by the following figures:

Credit determined under "1943 law"		$ 1,407,068.21
31/366 thereof			$ 119,158.28
Credit determined under "1944 law"		1,247,556.84
335/366 thereof			1,141,889.73
"The credit" for the fiscal year:
	(1) As computed by proration, as above		1,261,048.01
	(2) As claimed by the petitioner (under "1943 law")		1,407,068.21
	(3) As determined (in effect) by the respondent:
	Excess profits net income	1,067,200.66
	Unused credit	193,866.71
	Total credit		$ 1,261,067.37

Since 2 different credits for the fiscal year 1944 must be used in the tax computation expressly prescribed by section 710 (a) (6) of the Code, we conclude that Congress did expressly provide that section 714 as amended by the Revenue Act of 1943, in combination with section 710 (a) (6) as enacted by that statute, should govern the computation of the unused excess profits credit for such a fiscal year. Therefore, notwithstanding section 201 of the 1943 act, the 2 credits must also be used in appropriate proportions in the determination of the unused credit for such a fiscal year.

It is true that nowhere in the statute is there any description of an excess profits credit for this fiscal year which meets the foregoing description of a "composite" credit. It is also true that the amount of such a composite credit has never been used by this taxpayer for any tax purpose nor by the respondent in his determination, and would not appear as such even in the tentative computations which would have been required if the taxpayer's excess profits net income for the fiscal year had been subject to tax. On the other hand it is equally clear that by means of the prescribed computations the excess profits tax liability for such a fiscal year is determined "as if" each of the 2 amounts of taxable income and credit and the various tax rates were reduced to composite figures, in proportion to the 2 periods of time. The only difference is that instead of reducing a number of factors to proportionate components and employing a number of composites, the statute prescribes the use of the entire factors to arrive at 2 tentative tax results, which are then reduced in the same proportions and combined into a single composite.

In our opinion this is equivalent to an express provision to the effect that the excess profits credit for this fiscal year is the composite amount, and that only this composite can properly be used in the determination of the unused excess profits credit for the fiscal year 1944 which may be carried over to the fiscal year 1945.

Our conclusion is supported by the fact that the avowed purpose of Congress in enacting the excess profits tax provisions of the Revenue Act of 1943 was to produce additional revenues. See H. Rept. No. 871, 78th Cong., 1st Sess., 1944-1 C. B. 901, et seq. As argued by the respondent, in the light of this purpose

It is inconceivable that Congress intended to discriminate between fiscal year and calendar year taxpayers, by allowing fiscal year taxpayers the benefit of a larger [unused] credit under the prior law. If the petitioner's contention were to be adopted, calendar year [1944] taxpayers would receive less [unused] credit under the new law than would fiscal year taxpayers.

Petitioner argues that this conclusion is opposed to the statement in the cited report, that the effect of the 1943 legislation upon excess profits credit carry-overs was given "careful consideration" and would receive further study, but that the conclusion was that "it was not possible to suggest changes in these credits, carry-overs, and carry-backs at this time."

It is true that the effect of our decision will be that the excess profits credit carry-over of this petitioner will be reduced below the amount which it would have enjoyed had there been no enactment of the 1943 act. We do not believe, however, that this result is at all in conflict with the quoted statement of the legislative intention. The result here reached represents merely the logical application of the legislative action to a secondary consequence of the reduction of the excess profits credit. The quoted statement, in our opinion, did not indicate any legislative intention that the reduction in the credit should not correspondingly reduce the unused credit carry-over, but referred only to substantial or structural changes directly modifying the scheme of carrying over unused credits, upon which action had been deferred.

Both parties claim support from the case of North Carolina Lumber Co., 19 T. C. 587, 594-595 (1952), but we regard that decision as inapplicable here. There the taxpayer claimed the benefit of an exclusion from income subject to the declared value excess-profits tax, under section 510 of the Revenue Act of 1943. That section, however, was expressly declared, without exception, to be "applicable to taxable years beginning after December 31, 1943." The taxable year of the taxpayer began, as in this case, on December 1, 1943. Nevertheless, contended the taxpayer, the statute should be applicable upon the proration formula contained in the 1939 Code, section 108 (b), which was added to the Code by section 108 of the Revenue Act of 1943. That section prescribed the formula only with specific reference to other taxes, imposed under enumerated sections other than section 600 of the 1939 Code by which the declared value excess-profits tax was imposed. The Court held that the declared value excess-profits tax for a fiscal year was not to be determined by a formula which was expressly applicable only to other taxes. This holding does not indicate whether or not a formula prescribed for the computation of the excess profits tax is also applicable to the determination of the credit allowed for the same year with respect to the same tax.

The present question is perhaps more analogous to that decided by C. Ray Novak, 11 T. C. 341 (1948), cited in the preceding case. There the Court held, upon the ground that the tax computed under the tax table as provided by the 1939 Code, section 400, was "in lieu of the tax imposed by sections 11, 12, and 450," that for the fiscal year 1944, there involved, the tax might be computed under section 400 even though that taxable year was specifically governed by Code section 108 (b) which referred to sections 11, 12, and 450 but made no provision for applying section 400.

The second issue concerns the character of a net loss sustained by the petitioner during its fiscal year 1946 from the sale of certain parcels of real estate. The nature of this loss depends upon the purpose for which the property was held by the petitioner.

The petitioner contends that the statutory limitations upon the deduction of capital losses are inapplicable because the real property sold was held by it primarily for sale to customers in the ordinary course of its trade or business, and was therefore excluded from the statutory definition of "capital assets." ³ The respondent bases his opposing argument upon our holding in the case of Kanawha Valley , 4 T. C. 252 (1944), and his rulings made in accordance therewith. He contends that the losses here in question were capital losses because they resulted from sales of nonproductive property held by the petitioner for investment.

The position taken here by the petitioner is the same as that adopted by the respondent in G. C. M. 21497, 1939-2 C. B. 187, under the provisions of section 117 (b) of the Revenue Acts of 1934 and 1936. It was there held that a bank, mortgage finance company, or building and loan association which offers for sale parcels of real estate acquired by foreclosure is holding such foreclosed real estate primarily for sale to customers in the ordinary course of its trade or business.

In the light of the decision in the Kanawha Valley Bank case, supra, the respondent reconsidered this question and in G. C. M. 24910, 1946-1 C. B. 101, ruled that sales by lending institutions of property acquired through foreclosure would be treated as sales of capital assets, giving rise to capital gain or loss. This position was maintained by the respondent until 1951, when it was modified by G. C. M. 26690, 1951-1 C. B. 28. In view of the amendment of the statute in 1942, it was then held that real estate acquired by an institution such as the petitioner by deed in lieu of foreclosure and thereafter managed and rented for the purpose of reducing the loss thereby sustained would be regarded as real property used in the general trade or business of the financial institution. Such real estate would therefore be excluded from the definition of capital assets in the 1939 Code, section 117 (a) (1), and would be subject to the tax consequences prescribed by Code section 117 (j) if held for more than 6 months. Nonproductive properties held for investment purposes were excepted from this ruling, and it was expressly reaffirmed that all properties so acquired and held were still regarded as not held primarily for sale to customers in the ordinary course of the trade or business.

In the case of Kanawha Valley Bank, supra, involving a taxable year 1940, the Court said (4 T. C. at p. 256):

We think it unreasonable to conclude that petitioner forbidden by state law to carry on a real estate business, was actually engaged in that business and selling real estate to customers in the regular course thereof, merely because it had acquired and sold three parcels of real estate over a period of two years, the transaction in each instance being an incident to the collection or recovery of money loaned by it in the transaction of its regular banking business. We think that the three parcels of real estate here involved were capital assets in petitioner's hands within the purview of section 117 (a) (1), supra. Thompson Lumber Co., supra, [43 B. T. A. 726 (1941)].

By the decision in Kanawha Valley Bank, supra, the Court rejected the Commissioner's contention that in all cases real estate acquired by a bank in foreclosure must be considered as held by it primarily for sale to customers in the ordinary course of the trade or business of the bank. The respondent now argues that in all such cases involving nonproductive real estate the contrary rule must be applied because of that decision.

We can not agree that any such rule was adopted by that case or should now be recognized. Later decisions compel the conclusion that the issue here presented is one of fact, which can be decided only upon consideration of all the circumstances bearing upon the compliance with the statutory requirements. Lawyers Title Co., 1221">14 T. C. 1221 (1950); Mauldin v. Commissioner, (C. A. 10, 1952) 195 F. 2d 714, affirming 16 T. C. 698 (1951); Albert Winnick, 17 T. C. 538, 541 (1951), remanded for additional findings (C. A. 6, 1952) 199 F. 2d 374, supplemental decision 21 T.C. 1029">21 T. C. 1029.

The Kanawha Valley Bank decision may be regarded as correct in view of the facts presented and as applicable only to similar situations. It referred to an "established practice" but there was no finding of any specific transactions other than three sales made within the taxable year. The decision may also be regarded as limited by the finding that the taxpayer was "not permitted under the laws of West Virginia to carry on a real estate business." For reasons suggested later herein, however, this finding may be deemed to conflict with the conclusion, stated in the Opinion in the same case, that the "statute permits the acquisition of real estate by a banking institution * * * as an incident of the satisfaction of debts" and requires that such properties "be disposed of at the earliest practicable date."

The decision in Lawyers Title Co., supra, cited above, dealt with a similar situation in that it concerned a financial institution, and not a bank, which, in the hope of avoiding or reducing a threatened loss, acquired 35 real estate properties held as security in a single transaction. The Opinion states (14 T. C. at pp. 1227-1228):

The petitioner originally became involved with the Rolla project in connection with its business of examining and insuring titles to real estate and acting as escrowee between lending institutions and builders. * * *

Upon a full consideration of all the facts and circumstances surrounding petitioner's activity in relation to the Rolla project, we are convinced that the properties came into petitioner's possession as a necessary incident to the conduct of its business and that they were held and completed primarily for sale to customers in the ordinary course of its business. Joe B. Fortson, 47 B. T. A. 158. The fact that petitioner had not had occasion to follow this course of action before (so far as our record shows) does not prevent its being in the ordinary course of petitioner's business in the light of the surrounding circumstances. Welch v. Helvering, 290 U.S. 111">290 U.S. 111.

In any event, we think it is clear that the petitioner's activity in relation to the Rolla properties after it took title to them amounted to engaging in the real estate business. The facts that petitioner had no license to engage in the real estate business and that it apparently had not done so in the past are not determinative of the question of whether petitioner entered the real estate business when it acquired these properties. It took title to the properties, supervised the completion of construction, rented some of the houses, and ultimately sold them all. Petitioner did not merely hold the property for sale as an investment when it acquired them. It actively engaged in improving and completing them, in the meantime deriving such revenue from them as it could until it managed to complete and sell them to such purchasers as it could find. We conclude that petitioner was engaged in the real estate business in the fullest sense from the time it acquired the Rolla properties. Cf. Snell v. Commissioner, 97 Fed. (2d) 891; Ehrman v. Commissioner, 120 Fed. (2d) 607; certiorari denied, 314 U.S. 668">314 U.S. 668. * * *

The present case cannot be disposed of simply upon the narrow ground that the taxpayer is a bank or a lending institution selling property acquired by foreclosure or by deed in lieu of foreclosure. On the contrary, consideration must be given to other factors which have been recognized as significant. As stated in Mauldin v. Commissioner, supra, 195 F. 2d at page 716:

There is no fixed formula or rule of thumb for determining whether property sold by the taxpayer was held by him primarily for sale to customers in the ordinary course of his trade or business. Each case must, in the last analysis, rest upon its own facts. There are a number of helpful factors, however, to point the way, among which are the purposes for which the property was acquired, whether for sale or investment; and continuity and frequency of sales as opposed to isolated transactions. * * * [Citing and reviewing many decisions.]

Similar statements were made in the case of Albert Winnick, supra, 17 T. C. at pages 541-542, 544. Among other cases expressing and applying the same rule are: Martin Dressen, 17 T.C. 1443">17 T. C. 1443, 1447 (1952); Thomas E. Wood, 16 T.C. 213">16 T. C. 213, 226 (1951); W. T. Thrift, Sr., 15 T. C. 366, 369 (1950); Boomhower v. United States, 74 F. Supp. 997">74 F. Supp. 997 (1947).

In the ordinary course of its business the petitioner frequently acquired real estate in foreclosure proceedings. The petitioner's sole objective with respect to this real estate, and its duty as a bank under the Pennsylvania statute, was to sell it as soon as possible at a fair price. To accomplish this result, the petitioner subdivided a large number of parcels into several hundreds of lots, laid out streets, put in pavements, sewers, and water pipes and in certain subdivisions financed the construction of a large number of dwelling houses, investing large amounts. It used the services of licensed real estate salesmen and brokers who were employed in its real estate and mortgage division. It circulated hundreds of brochures describing some of the properties which it was offering for sale. It listed such property with a number of brokers through multiple listing facilities and advertised extensively. The sales made by the petitioner in 1946 and prior years were numerous and the amounts realized were substantial, amounting in the fiscal year 1946 to $ 302,882.06. The purchasers were the "customers" of the petitioner. The activities of the petitioner were so extensive as to constitute a business. The real estate was held primarily for sale to customers in the ordinary course of that business.

In reaching this conclusion we have attached very little significance to the stipulated evidence concerning the extensive activities of the real estate and mortgage division of the petitioner. It clearly appears that the activities of the real estate and mortgage division were primarily concerned with the properties of customers of the bank and estates and trusts of which it was a fiduciary. Only an almost negligible portion of those activities concerned the properties of the bank. The character of the bank's dealings in the 13 properties here involved cannot be characterized by reference to the activities of the bank concerning the properties of its customers. With respect to these specific properties, however, and also as to other properties similarly held during prior years, there is abundant evidence of continuous and extensive activity which in our opinion amounted to the conduct of a trade or business, in which the bank was clearly engaged in selling real estate to its customers.

We do not decide that the petitioner was a "dealer in real estate" in the fiscal year ended November 30, 1946. Although the petitioner urges and the respondent opposes such a conclusion, we do not consider it necessary to the decision of this case.

The issue is whether the real estate sold conformed to the statutory specification of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." Without characterizing the business of the petitioner within any recognized category, we hold only that the real estate in question was held by the petitioner primarily for sale to its customers in the ordinary course of its trade or business as a bank engaged in acquiring real estate mortgages or making mortgage loans and attempting to realize upon the value of the security acquired upon foreclosure of such mortgages. As stated in Carter Lumber Co. v. Commissioner, (C. A. 5, 1944) 143 F.2d 296">143 F. 2d 296, 297: "The management and administration of foreclosed property is an essential ingredient of the business of financing."

It is often stated that the words "to customers" and "ordinary" were inserted in section 117 (a) (1) by the Revenue Act of 1934 to express the purpose of Congress to allow only "dealers" to deduct from ordinary income losses sustained upon sales of property held primarily for sale. See Thomas E. Wood, supra (16 T. C. at pp. 219-220). It is only in the exceptional cases, however, where the property held for sale by a "dealer" would not constitute "stock in trade" or would not "properly be included in the inventory of the taxpayer," that "dealers" would be at all concerned with the further exclusion of "property held * * * primarily for sale to customers."

While the term "dealer" has not been authoritatively defined in this connection, it probably includes the requirement of buying as well as selling for purposes of profit. See the definition of a "dealer in securities" in Regulations 118, section 39.22 (c)-5, and prior regulations.

In this case the respondent strongly urges that since the petitioner never did purchase real estate to be sold at a profit, and under the banking law was prohibited from doing so, it necessarily was not a dealer and therefore is not entitled to the deductions claimed. In many cases, however, without discussion of this point, the deduction has been allowed where neither the property in question nor any other property had been purchased for resale, as by a dealer. It has been emphasized, as in the case of Albert Winnick, supra, 17 T. C. at 543:

There may be a change of intent between the time of acquisition and the time of sale, and if property originally acquired for investment is held in the taxable year primarily for sale to customers in the regular course of trade or business, the gain realized in the taxable year is not subject to capital gain treatment. This conclusion is based on the language of section 117 which, in the definition portions of both subsections (a) and (j), speaks of "property held by the taxpayer" rather than property "acquired" or "purchased." Richards v. Commissioner, 81 F.2d 369">81 F. 2d 369. * * *

But compare McGah v. Commissioner, (C. A. 9, 1954) 210 F.2d 769">210 F. 2d 769, reversing 17 T. C. 1458 (1952), decided upon remand by 193 F. 2d 662 (C. A. 9, 1952), vacating 15 T. C. 69 (1950).

In Mauldin v. Commissioner, supra, it is stated by the Court of Appeals for the Tenth Circuit (195 F. 2d at p. 717):

While the purpose for which the property was acquired is of some weight, the ultimate question is the purpose for which it was held. Rollingwood Corp. v. Commissioner, 9 Cir., 190 F.2d 263">190 F. 2d 263.

Admittedly, Mauldin originally purchased the property for purposes other than for sale in the ordinary course of trade or business. When, however, he subdivided and offered it for sale, he was undoubtedly engaged in the vocation of selling lots from this tract of land at least until 1940. * * *

To the same effect is Brown v. Commissioner, (C. A. 5, 1944) 143 F. 2d 468, affirming a Memorandum Opinion of this Court, holding that land was property held primarily for sale to customers in the ordinary course of the trade or business, where it was subdivided and sold by a widow after having been for several years held as community property and used for grazing cattle.

See also Ehrman v. Commissioner, (C. A. 9, 1941) 120 F.2d 607">120 F. 2d 607, 610, affirming 41 B. T. A. 652 (1940), certiorari denied 314 U.S. 668">314 U.S. 668 (1941).

The respondent relies upon the statutory prohibition against the purchase and sale of real estate by this petitioner under the banking laws of Pennsylvania, Purdon's Pennsylvania Statutes Annotated, 1939, title 7, section 819-1014. This statute provides:

A. Except as otherwise provided in this act, a bank, a bank and trust company, or a trust company shall not purchase, own, or hold any real property, except as follows:

* * * *

(2) Such as it shall purchase at sales under judgments, decrees, or mortgages held by it, or as it shall otherwise acquire in good faith in satisfaction of debts previously contracted to it, or in order to protect an interest it may otherwise have lawfully acquired in such property.

It is further provided that any such real estate shall not be owned or held "for a period longer than five years after the acquisition of such real property," except upon permission granted pursuant to application. The statute also states:

This section shall not be construed to prevent any bank, bank and trust company, or trust company from making improvements to properties owned, but not occupied by the bank, the bank and trust company, or the trust company, for the purposes of sale or lease.

The language of this statute seems clearly to sustain the contention of the petitioner that it permits the transactions here involved. Since it imposes upon the bank a positive duty to sell such property within a 5-year period, as extended, and expressly contemplates improvements for purposes of sale or lease, it clearly implies that the bank was authorized and obligated to make such sales only after taking all reasonable means of assuring the realization of the reasonable value of the property.

It is stated in G. C. M. 26690, supra, that the common statutory restrictions upon the purchase of real estate by banks should not "preclude an examination of a bank's real estate activities in order to determine, as a question of fact, whether the property is used in the business of banking." Neither should they preclude a determination that property is sold to customers in the ordinary course of the business of the bank.

The limitations upon the deduction of capital losses would be avoided in this case if the property sold should be regarded as "real property used in the trade or business of the taxpayer." Such property is excluded from the definition of capital assets in Code section 117 (a) (1) and is the subject of special treatment under the provisions of section 117 (j), which was added to the Internal Revenue Code by section 151 (b) of the Revenue Act of 1942. Property held primarily for sale to customers in the ordinary course of the trade or business of the taxpayer is excluded from section 117 (j), as well as from section 117 (a) (1).

The petitioner has not referred to section 117 (j) in support of its position, which we sustain entirely under section 117 (a) (1). While we therefore make no decision with respect to section 117 (j), we may point out that the respondent seems to have conceded a substantial portion of the petitioner's claim upon the ground that some of the losses were deductible as ordinary losses under that section.

It may be noted that Code section 117 (j) was not applicable to the taxable year 1940 which was involved in the case of Kanawha Valley Bank, supra, and that the Opinion in that case does not refer to that statute, although it had been enacted 2 years earlier. The modification of the respondent's rulings in 1951 because of section 117 (j) has been noted above.

In accordance with G. C. M. 26690, supra, the respondent argues in this case that 8 specified properties here involved were not excluded from section 117 (a) (1) as "real property used in the trade or business," and consequently were not covered by section 117 (j), because they were not income producing property and therefore must be deemed to have been held by the bank for investment purposes.

The respondent's enumeration of such properties includes 3 from which some rental income was derived, as shown in our Findings of Fact, being the properties there referred to as Tredyffrin Country Club, Melrose Country Club, and King of Prussia Road. In view of the small amount of the rental income and the small fractional interest of the petitioner therein, the respondent asserts that these properties must be regarded as "nonproductive."

From this category of nonproductive property held for investment, the respondent omits not only the North Broad Street and the 1604 Walnut Street properties, from which rental income was derived, as shown by our findings, but also the property referred to as Chatham Village, the property in Merion, and another property referred to as Mayfair which is not mentioned in our findings. According to the stipulation, these 3 properties were not "rental or income producing properties."

The respondent, therefore, seems to recognize that there are 5 properties which, being omitted from his enumeration of "nonproductive" properties "held for investment purposes," are governed by section 117 (j). If so, the respondent apparently concedes that the losses upon these properties, aggregating $ 24,287.44, are deductible as ordinary losses under section 117 (j), under the rule stated in G. C. M. 26690, supra, as follows:

The financing of loans and foreclosing of mortgages constitute an integral part of the banking business. In general and in the absence of any facts to the contrary (such as nonproductive property held after foreclosure for investment purposes), real property acquired by foreclosure should be considered as used in the trade or business of the lending institutions.

Under this view, and excluding the loss of $ 248,659.46 upon the Black Farm property, upon the remaining 7 properties the petitioner realized a net capital gain of $ 2,366.85. Our decision, however, does not to any extent rest upon this apparent concession by the respondent.

Decision will be entered under Rule 60.

---

Footnotes

• 1. Third item is rental per year.↩

• 2. No gain or loss.↩

• 1. Internal Revenue Code of 1939.

  SEC. 710. IMPOSITION OF TAX.

  (a) Imposition. --

  * * * *

  (6) Taxable years beginning in 1943 and ending in 1944. -- In the case of a taxable year beginning in 1943 and ending in 1944, the tax shall be an amount equal to the sum of --

  (A) that portion of a tentative tax, computed as if the law applicable to taxable years beginning on January 1, 1943, were applicable to such taxable year, which the number of days in such taxable year prior to January 1, 1944, bears to the total number of days in such taxable year, plus

  (B) that portion of a tentative tax, computed as if the law applicable to taxable years beginning on January 1, 1944, were applicable to such taxable year, which the number of days in such taxable year after December 31, 1943, bears to the total number of days in such taxable year. [As amended by Revenue Act of 1943, section 203 (a)↩.]

• 2. "The petitioner's unused excess profits credit for the year ended in 1944, as defined in Section 710 (c) (2), is 'the excess, if any, of the excess profits credit' for that year over 'the excess profits net income' for that year. The unused excess profits credit is thus defined specifically by statute and is not governed in any way by Section 710 (a), which imposes the tax. * * *

  "As applied to the petitioner, if there had been a tax payable for its fiscal year December 1, 1943 to November 30, 1944, the tax so imposed would have been 31/366ths of a tentative tax computed by the first method plus 335/366ths of a tentative tax computed by the second method. However, the statute does not provide for proration of any element other than the tentative taxes so computed. Since the petitioner had no tax to pay for that year, the proration provision has no application whatsoever. * * *

  "Except as otherwise expressly provided, the 1943 amendments do not apply to a taxable year beginning prior to January 1, 1944. There is no express provision which authorizes the use of the 1943 amendment in computing the excess profits credit or the excess profits credit carry-over to the following year. The statute which provides for proration in computing tax imposed for a fiscal year beginning in 1943 and ending in 1944 does not authorize a proration for any other purpose. * * *

  "The Revenue Act of 1943 does not contain any provision which purports to change the excess profits credit or the net income for a taxable year beginning in 1943 and ending in 1944. It follows, therefore, that the petitioner's excess profits credit, its excess profits net income and consequently its unused excess profits credit for the year ended in 1944 must be computed without regard to the 1943 amendment.

  "In attempting to reduce the petitioner's excess profits credit carry-over by applying an amendment which relates solely to the imposition of the tax, the respondent distorts the plain language of the statute. * * *

  "It would be a strange result here if an amendment relating solely to the imposition of the excess profits tax and contained in a section relating solely to such imposition should be found to apply to a wholly different section of the law, relating to the computation of the excess profits credit and the unused excess profits credit, which are specifically defined in unamended sections.

  "Moreover, in cases where Congress intended that an amendment apply to the computation of the unused excess profits credit when a taxpayer was on a fiscal year basis, it used plain and specific language to accomplish those purposes. For example, Section 710 (c) (2) of the Code provides that for the purpose of the unused excess profits credit, the excess profits credit and the excess profits net income for any taxable year beginning in 1940 shall be computed under the law applicable to taxable years beginning in 1941. Section 710 (c) (2) [as amended by Revenue Act of 1945, section 122 (c)] provides further that the unused excess profits credit for a taxable year beginning in 1946 and ending in 1947 shall be an amount which is such part of the unused excess profits credit determined under the preceding portions of that paragraph as the number of days in such taxable year prior to January 1, 1947 is of the total number of days in such taxable year.

  "It thus appears that when Congress intended that the computation of the unused excess profits credit for any fiscal year should be computed under provisions of the statute other than those in effect at the beginning of the year, it used clear language to accomplish that purpose. Congress did not so provide in the case of the computation of the unused excess profits for a taxable year beginning in 1943 and ending in 1944, and there is nothing to indicate that it so intended. Therefore, there is no support for the respondent's attempt in this case to reduce the petitioner's excess profits credit carry-over by a statute which was not in force at the beginning of the taxable year and which was not intended to apply to such carry-over." [Petitioner's brief.]

• 3. Internal Revenue Code of 1939.

  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 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, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), or an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, or real property used in the trade or business of the taxpayer; [As amended by Revenue Act of 1941, sec. 115 (b) and (c); Revenue Act of 1942, sec. 151 (a) and sec. 101.]