Opinion ID: 383772
Heading Depth: 2
Heading Rank: 1

Heading: The purpose for which the taxpayers held their properties.

Text: 33 In Matthews v. Commissioner, 315 F.2d 101, 107 (6th Cir. 1963), we enumerated eight factors to consider in deciding whether property is held primarily for sale. They are: 1) the purpose for which the property was acquired; 2) the purpose for which the property was held; 3) the extent of improvements made to the property; 4) the frequency, number, and continuity of sales; 5) the nature and substantiality of the transactions; 6) the nature and extent of the taxpayer's dealings in similar property; 7) the extent of advertising to promote sales; and 8) whether or not the property was listed for sale either directly or through brokers. See also Broughton v. Commissioner, 333 F.2d 492, 495 (6th Cir. 1964); Gartrell v. United States, supra at 1155-56. 34 In this case, the taxpayers testified that they acquired the properties in order to hold ... and develop them. As we have already noted, they hoped to transfer the properties to a corporation, to be financed and fifty percent owned by two outside investors. The government, in its argument, emphasizes repeatedly that this plan to transfer the real estate to a corporation at costs negates any investment motive on the taxpayers' part. This interpretation ignores that aspect of the proposed transfer which represents, quite simply, sound tax planning. Transfer of the properties at cost instead of at an appreciated figure would have the effect of postponing recognition of a taxable gain. That the taxpayers intended to use this legitimate means of avoiding an imminent tax scarcely obviates the possibility that they did, in fact, regard their properties as an investment. 35 Furthermore, the taxpayers did not make improvements to any of the properties; they merely maintained them in their existing condition. The properties were neither advertised nor listed for sale, and no sales in fact occurred until the state issued its condemnation notices. 36 The District Court was impressed with Morrison's considerable experience in marketing Ohio real estate; it apparently inferred from his background that he was holding these particular properties primarily for sale. The government introduced no evidence whatsoever to support such a finding-a significant omission, since the Code specifically contemplates that dealers may segregate certain transactions in property similar to their stock in trade in order to qualify for capital gains tax treatment. 26 U.S.C. § 1236(a). Buono v. Commissioner, 74 T.C. No. 15, 1980 Tax Ct.Rep., Dec. 36,925; Boykin v. Commissioner, 344 F.2d 889, 894 n. 8 (5th Cir. 1975). 37 In light of the foregoing observations, we are constrained to hold that there was insufficient evidence to support the District Court's conclusion that the taxpayers' properties were held primarily for sale. Cf. Appeal of Bush, 610 F.2d 426 (6th Cir. 1979).B. The effect of the threat of condemnation. 38 The District Court found that the taxpayers changed their purpose in holding the properties; under threat of condemnation, they became investors holding capital assets. The Court based its decision on Ridgewood Land Co., Inc. v. Commissioner, 477 F.2d 135 (5th Cir. 1973); Commissioner v. Tri-S Corp., 400 F.2d 862 (10th Cir. 1968); and a Tax Court case, later reversed as Juleo, Inc. v. Commissioner, 483 F.2d 47 (3rd Cir. 1973). 39 Our reversal of the District Court's ruling that the taxpayers initially held their property primarily for sale eliminates the need to consider the effect of the condemnation notice on these particular litigants. In view of the approach taken below, however, we wish to clarify our position on the legal issue lest this case engender confusion in future cases before the courts of this Circuit. 40 We agree with the Third Circuit's rationale for reversing the Tax Court in Juleo, Inc., supra; as a corollary, we reject the suggestion that, for federal tax purposes, mere receipt of a condemnation notice automatically transforms property held primarily for sale into investment property. As the government notes in its brief, any property owner who receives a notice of condemnation presumably abandons whatever plans he originally entertained in favor of a new, albeit temporary, reason for holding the condemned property. Common sense application of established tax principles mitigates against giving this circumstance conclusive effect. 1 Except as specifically provided by statute, cf. 26 U.S.C. § 1033, we decline to determine the tax consequences of a sale solely on the strength of a finding that the sale was involuntary. 41 Ordinarily, the characterization of an asset as capital or non-capital requires an analysis of several factors; the preceding section of this opinion illustrates just such an exercise. The addition of a condemnation notice to this calculus merely injects one more element to be considered; it does not eliminate the calculus altogether. 42 C. Whether the taxpayers held the B'tawn and Johnson properties for the six-month period prerequisite to preferential long-term capital gain treatment. 43 On appeal, the taxpayers argue that the District Court erred in concluding that gains realized on the sale of the B'tawn and Johnson properties were ineligible for taxation at the long-term capital gain rate. 44 They argue, first, that Ohio law of equitable conversion substantiates their claim to a sufficient holding period. Generally speaking, State law determines what property rights and interests a taxpayer has, but federal law determines the consequences of such rights and interests for tax purposes. Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959). 45 The state law argument can be summarized as follows: in Ohio, the principle of equitable conversion invested the taxpayers with an equitable interest in the two properties. We are asked to treat this equitable interest as a capital asset which, when sold, yielded capital gains. The taxpayers assert that they obtained this equitable interest at the time they signed the purchase contracts for the two tracts, more than six months prior to disposition of the properties. 46 This argument is undoubtedly ingenious; however, Ohio case law does not support its application to the present facts. We quote from Sanford v. Breidenbach, 111 Ohio App. 474, 173 N.E.2d 702 (1960): Equitable conversion does become effective in those cases in which the vendor has fulfilled all conditions and is entitled to enforce specific performance, and the parties, by their contract, intend that title shall pass upon the signing of the contract of purchase. (Emphasis added.) 47 The B'tawn and Johnson contracts, described in Part I of this opinion, clearly intended no such result; on the contrary, the sellers specifically reserved title to the property until they received payment in full. Since payment took place only days before disposition of the properties, the taxpayers' reliance on the principle of equitable conversion is misplaced. 48 In the alternative, the taxpayers advance the practical test announced by this Court in Commissioner v. Baertschi, 412 F.2d 494 (6th Cir. 1969); and Dettmers v. Commissioner, 430 F.2d 1019 (6th Cir. 1970). In those cases we held that ownership of real property is acquired either upon delivery ... of the deed or upon transfer of the benefits and burdens of ownership, whichever occurs first. Dettmers, supra at 1023. The taxpayers point to the fact that they maintained the properties and, in the case of the Johnson tract, applied rental income to offset the interest owed the Johnsons; from this, they ask us to infer benefits and burdens of ownership of a character sufficient to sustain a favorable ruling. Again, however, the purchase contracts are clear. Virtually all the benefits and burdens of ownership remained in the vendors until the purchase price was fully paid. 49 Finally, the taxpayers contend that the purchase contracts created options to buy. 26 U.S.C. § 1234(a) accords gains or losses from privileges or options to buy the same tax treatment as the property subject to those options. Inasmuch as the properties themselves would have been capital assets in the taxpayers' hands, they urge us to treat these options as we would treat the underlying properties. The options the taxpayers claim to possess would, of course, date back to the signing of the purchase contracts. 50 Our review of the meaning of an option for purposes of Section 1234 convinces us that the taxpayers did not, in fact, possess options within the meaning of the statute. What they did possess were bilateral contract rights, to which Section 1234 does not, by its terms, apply. In a scholarly analysis of this issue, the Court of Claims examined the language, legislative history, and Revenue Rulings pertinent to Section 1234; it concluded that an option is, for purposes of the statute, a very narrow concept. United States Freight Co. v. United States, 422 F.2d 887, 894-5, 190 Ct.Cl. 725 (1970). We agree, and affirm the District Court's decision against the taxpayers' claim to a six-month holding period.