Source: https://law.justia.com/cases/federal/appellate-courts/F2/337/1001/227949/
Timestamp: 2019-12-13 20:54:05
Document Index: 289674533

Matched Legal Cases: ['§ 1031', '§ 12213', '§ 1221', '§ 22', '§ 1031', '§ 38', '§ 1221']

B. B. Margolis and Iris M. Margolis, Petitioners, v. Commissioner of Internal Revenue, Respondent, 337 F.2d 1001 (9th Cir. 1964) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Ninth Circuit › 1964 › B. B. Margolis and Iris M. Margolis, Petitioners, v. Commissioner of Internal Revenue, Respondent
B. B. Margolis and Iris M. Margolis, Petitioners, v. Commissioner of Internal Revenue, Respondent, 337 F.2d 1001 (9th Cir. 1964)
U.S. Court of Appeals for the Ninth Circuit - 337 F.2d 1001 (9th Cir. 1964) September 11, 1964
Rehearing Denied November 30, 1964
See 339 F.2d 537.
Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Carolyn R. Just, Dept. of Justice, Washington, D. C., for respondent.
During those years, taxpayer,1 a resident of San Diego, California, was actively engaged in the business of buying and selling real property. His petition presents in a variety of circumstances the question whether property exchanged or sold by him at a gain had been held by him primarily for sale to customers in the ordinary course of his business.
First, those involving sale or exchange by the taxpayer of real estate to which he had legal title. As to these transactions taxpayer contends that the real estate was held by him as an investment, and not for sale to customers in the ordinary course of business; that he was entitled to nonrecognition of gain under Int.Rev.Code of 1954, § 1031(a),2 (as to property exchanged), or to capital gain treatment under Int.Rev.Code of 1954, § 12213 (as to property sold).
Third, those involving sale by the taxpayer not of the real estate itself but of beneficial interests in trusts or corporations which held real estate and of a note secured by real estate. As to these transactions the taxpayer contends that he was not in the business of selling such interests and that they were not held for sale; that he was, therefore, entitled to capital gain treatment under § 1221.
"For a long period of years petitioner has operated extensively in the real estate business in all its phases, and has engaged in over 4,000 real estate transactions. These transactions were undertaken in a variety of ways and his interests were held in many different forms. In a number of instances, trusts were created as a convenient means of holding real property pending sale and petitioner and his associates acquired beneficial interests therein in proportion to the amounts they contributed to acquire the property. In other instances the property was held by corporations in which petitioner owned stock, by partnerships of which petitioner was a member, and by petitioner individually. The real estate involved in his transactions ranged from individual lots to tracts containing several hundred acres, from raw acreage to unimproved and improved lots, from lots zoned for single or multiple residences to lots zoned for commercial usages, and from improved lots with residential dwellings to lots with business buildings. His dealings with respect to real estate have been of such comprehensive character, that he may properly be considered to be in the real estate business in all its aspects."
"Where the taxpayer is an admitted dealer or trader in real estate, he may still, however, hold particular property as investment property not for sale. The problem here is thus one of identifying the character of the particular holdings, and naturally the difficulty is intensified by the existence of other holdings as a dealer or trader."
In 3B Mertens, Law of Federal Income Taxation, § 22.139 (1958), it is stated:
"But a dealer in real estate may hold certain properties for investment rather than for resale, and accordingly it is necessary in each instance not only to show that the taxpayer is a `dealer' in real estate but also that the property is primarily held for sale to customers in the ordinary course of the taxpayer's trade or business."
"Petitioner considers raw acreage acquired to be held for appreciation as an investment property as contrasted with raw acreage ready for and acquired for subdivision purposes."
"This Court has held that a person may be both a dealer and an investor with respect to his real estate holdings. * * * Where a person has been active as a dealer in the purchase and sale of real property, the burden is plainly upon him to establish that properties sold by him, particularly where they are non-income producing, were held for investment and not primarily for sale. * * * His mere testimony that his intent was to hold those properties for such a purpose may not be enough to sustain that burden where it is unsupported by other convincing evidence. * * * Moreover, the fact that he held some of them for many years prior to sale does not necessarily establish an intention to hold them for investment rather than sale."
"It is quite apparent from [his] testimony that petitioner regards investment property as including property acquired and held for the purpose of resale whenever it appreciates in value to such an extent that a satisfactory profit can be realized. * * * But a real estate dealer who acquires and holds property with the intention of selling as soon as such a profit can be realized is holding it primarily for sale and not for investment."
"The fact that he might have been able to sell some or even all of them at an earlier date is not inconsistent with a deliberate purpose to hold them for sale at a later time on more satisfactory terms. * * * That he may have intended to hold them until they appreciated sufficiently in value and carried out that intention does not detract from the fact that his essential purpose in holding them was ultimate sale at a profit."
"The evidence does not show that any of these lots were income producing or that petitioner held them with the intention of converting them into income-producing properties. Nor does it show that he was not holding them for disposition when the time was ripe. * * * And when he had the opportunity to sell (or exchange) them for a consideration which assured him a satisfactory profit he took advantage of that opportunity."
The record amply supports this statement as to the residential lots. As to the lots retained for their commercial and industrial potential, however, petitioner's testimony was that he did not hold them for sale, but was primarily interested in converting them into income-producing properties. The record supports this. There is uncontradicted evidence that the petitioner, whenever possible, retained commercial lots from his subdivisions and would have kept all if he had been financially able to do so; that at the time of the exchange he had developed fifteen commercial lots into income-producing properties; that he had never sold either an improved commercial property or an unimproved commercial lot retained from a subdivision, despite many offers and opportunities to sell; that he had never put a "For Sale" sign on a commercial lot owned by him, although he had put "For Lease" signs on several. Finally, the commercial properties here involved (in the Sachs and Levikow exchanges) were exchanged for properties zoned commercial or industrial which in turn were later rented or offered for lease by the petitioner rather than sold.
We conclude as to the commercial properties involved in the Sachs and Levikow exchanges that the findings of the Tax Court were clearly erroneous; that prior to exchange they were held by petitioner as investments and not for sale to customers; that gain realized upon the exchange of these, under § 1031(a), is not to be recognized.
"The ultimate effect of the transaction was sale of land by the petitioner and his associates to the purchaser."
The fact that the means by which the properties were held and sold by taxpayer were not those usually utilized by him in his business is not sufficient to place these transactions beyond the scope of taxpayer's "ordinary course of business." In that respect we are concerned with the nature and subject matter of the transaction rather than with the mechanics by which it was accomplished.
"The transaction here involved does not differ materially from that considered by this Court in S. Nicholas Jacobs, 21 T.C. 154 [165], affirmed, 244 [224] F.2d 142 [412] (C.A. 9). In that case the taxpayer, who had been engaged in the subdivision and sale of real estate for several years, reactivated a dormant corporation, conveyed land to it in exchange for its stock, and subsequently sold all of the stock for $175,000 to a newly formed corporation which was owned by a person desiring to purchase land. We found as a fact, and held, that these steps were component parts of a single transaction, by which the taxpayer effected a sale of land in the ordinary course of business. We also found as a fact that the corporation served no business purpose and performed no business function other than to act as a conduit to transfer the title to the land from the taxpayer to a purchaser of such real estate."
Other cases following the "step transaction" doctrine are Virginia W. Stettinus Dudley (1959) 32 T.C. 564, aff'd. per curiam (2 Cir. 1960) 279 F.2d 219; Willett v. Commissioner (6 Cir. 1960) 277 F.2d 586, cert. denied (1960) 364 U.S. 914, 81 S. Ct. 276, 5 L. Ed. 2d 226. The rule is stated in 7 Mertens, Law of Federal Income Taxation, § 38.11 (Supp.), as follows:
"A corporation will be disregarded where, as part of a prearranged sale, property desired by a third party is transferred to it and then its stock is sold to the third party. In such case the price received for the stock represents, in substance, a profit from the sale of the property desired."
We agree with the Tax Court that this is an appropriate case for application of the step-transaction doctrine as recognized by this court in Jacobs. While at the time the corporation was reactivated and taxpayer formed his plan to transfer property to it taxpayer may not have contemplated any particular sale, this was not the case at the time the transfer to the corporation took place. The corporation then served simply as a conduit for the passing of title from taxpayer and his associate to Heartland Hills.
On April 9, 1953, Kearney Park Development Corporation entered into a contract to purchase certain unimproved real property in the City of San Diego, pursuant to which it subsequently took title. To cover a portion of the purchase price it gave two notes secured by trust deeds to the purchased property — one in the sum of $80,000 and a second in the sum of $553,750. The property was subject to the prior lien of improvement bonds for sewer and water connections. The property was located near the Miramar Naval Air Station. In August, 1955, newspapers publicized the fact that the Navy was proposing to enlarge the Miramar flight pattern and that additional land, including the Kearney Park property, would have to be acquired for this purpose.
In January, 1956, taxpayer, together with certain associates, purchased the $80,000 note for $30,000, with taxpayer taking a one-third interest. In February, 1956, the associates created trust 473, a "simple holding trust," and transferred the note and trust deed to it.
"We have already noted the wide range encompassed by petitioner's real estate business, and we think that in the circumstances these notes occupied a status in relation to petitioner similar to real estate itself. He held his interest in them (whether by trust or otherwise) for the purpose of realizing a profit from their payment or from acquiring an interest in the land securing them, or both."
We conclude that the notes were held as investments; that to the extent that taxpayer's share in the unpaid principal of the notes (and interest due at the time of their acquisition) exceeded his acquisition basis, the sums received upon his disposition of his beneficial interest in the trusts constituted capital gain; to the extent of his share in interest on the notes, accrued subsequent to acquisition, the sums received by taxpayer constituted an assignment of income and were taxable as ordinary income. Fisher v. Commissioner (6 Cir. 1954) 209 F.2d 513, cert. denied (1954) 347 U.S. 1014, 74 S. Ct. 868, 98 L. Ed. 1136.
By the agreement of June 15, 1956, the trusts acquired a new interest in the property — a right to share in any gain upon their sale.10 This right, secured by a trust deed to the property, constituted an interest in the equity of the property itself, which interest in property was held for sale by the trusts.
As to the exchanges by taxpayer of commercial and industrial property and as to the sale of taxpayer's interests in trusts 473 and 482 (to the extent herein-before specified), the judgment of the Tax Court is reversed and this matter is remanded for further hearings in accordance with the views here expressed. In all other respects judgment of the Tax Court is affirmed.
"(a) Nonrecognition of gain or loss from exchange solely in kind. — No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including * * * property held primarily for sale * * *) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment."
"§ 1221 Capital asset defined
"For purposes of this subtitle, the term `capital asset' means property held by the taxpayer (whether or not connected with his trade or business), but does not include — (1) * * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * *."
In September, 1955, petitioner consummated an exchange with U. S. Holding Company of San Diego, by which he transferred $26,000 in cash and four residential lots acquired in 1940 and 1942 and retained from two subdivisions in exchange for three-and-a-fraction lots improved with a residence. The property acquired has since been used by petitioner as his residence. The following year petitioner reacquired from U. S. Holding Company one of the transferred lots in exchange for cash plus a commercial lot
Trust R-14066 was created January 4, 1954, to receive the 17.07 acres transferred by taxpayer and his associates from trust R-13316. The trust declaration provides: "This trust is a passive trust only, and the sole duty of the trustee hereunder is to convey and transfer said real and personal property and to disburse any money upon order of the trustors hereunder * * *." At the time the trust was established it was known that the State of California desired to acquire 10 acres of the property for freeway purposes, since the freeway route had been approved the preceding year. In September, 1955, the State completed condemnation of 10 acres and took title from the trust. Taxpayer's gain upon this share of the proceeds was reported as capital gain. On October 12, 1955, the remaining 7.07 acres was transferred back to taxpayer and his associates
Trust S-275 was created June, 1948, to acquire 80 acres of land in the City of San Diego. Taxpayer had a 15-per-cent interest. The trust declaration recited that the trustors were establishing the trust "as a convenient means of selling and disposing of the described real estate and of handling all transactions in connection therewith." Taxpayer was named as sales agent, with the discretion to decide whether the property was to be sold as a unit or in parcels. Three parcels were sold from 1949 to 1956. At the time of the establishment of the trust 52.12 acres were being occupied by the Federal Housing Administration under an exclusive use order of court for which it was paying rent. Although the properties thus produced income, it had been the prospect of their appreciation in value which had induced their purchase by taxpayer and his associates. In 1956, Federal Housing Administration terminated its use, and in September, 1956, the property was sold and the proceeds distributed. Taxpayer's share of this distribution and of the proceeds of an earlier sale were reported as capital gains. Trust S-275 was still in existence at the time of the Tax Court hearing, holding one further parcel of land
Trust 432 was created January 26, 1955, to acquire 44 acres in San Diego County on which taxpayer had an option to buy. Taxpayer had a 20-per-cent interest. The trust declaration recited that it was a "simple holding trust" and that "the trustors shall have possession, management and control of said property and of the income therefrom." On June 14, 1957, the property was sold to the State of California under threat of condemnation, and on that date the proceeds of sale were distributed and the trust closed. Taxpayer's gain was reported as capital gain