Opinion ID: 374699
Heading Depth: 1
Heading Rank: 2

Heading: the addison, texas project

Text: 4 Taxpayers seek an ordinary loss deduction under § 165 of the Internal Revenue Code 1 on a loss incurred by them upon the disposition of a partially completed building in Addison, Texas. They claim that the loss is deductible either under § 165(c)(1) as a loss incurred in a trade or business, or under § 165(c)(2) as a loss resulting from a transaction entered into for profit. The Tax Court held that the loss was deductible under § 165(c)(2) as a loss incurred in a transaction entered into for profit, but also held that the loss resulted from the sale of a capital asset and therefore was limited by the capital loss provisions of §§ 165(f) and 1211 of the Code. 5 Taxpayers claim the Tax Court erred in holding that the property was a capital asset. They contend the property falls within one of the exceptions to the definition of capital asset set forth in § 1221. 2 Additionally, they contend that the loss cannot be a capital loss because the disposition of the property was not a sale or exchange as required by § 165(f) and § 1222(4). 3
6 From 1967 to 1970, William Reese was president, treasurer, chairman of the board and a principal stockholder of the Industrial Instrument Corporation (IIC). In 1968, Reese arranged for the construction of a new plant for IIC to be built on a tract of land owned by him in Addison, Texas. Reese planned to sell the building, upon completion, to investors who would agree to lease it back to IIC. 7 Reese financed the construction of the plant himself. Most of the funds expended on the plant were from Reese's own bank account, but some funds were paid from the account of Marcan Corporation, which Reese described as a shell corporation owned by him. Funds paid from the account of Marcan were contributed by Reese. Reese's total investment in the new plant was more than $162,000, including a $26,000 basis in the land on which it was constructed. 8 Although the Tax Court found that Reese did no more than finance the project, Reese testified at trial that he personally acted as the general contractor of the project. Reese stated that he decided to undertake the general contracting work himself because he believed that he could perform the work more cheaply than could an outside contractor and that he could thereby provide IIC with a more economical lease-purchase arrangement. 9 The plant was never completed. In 1969, a creditor in an unrelated transaction obtained a judgment on a note against both IIC as primary obligor and Reese as guarantor. IIC had gone into bankruptcy in the latter part of 1969, and thus the creditor proceeded against Reese. In 1970, the partially completed building and the land were sold for $25,000 at a sheriff's sale in execution of the judgment against Reese. 10 In the Tax Court, taxpayers unsuccessfully argued that $137,000 4 of the $162,000 investment in the land and building was deductible as an ordinary loss.
11 We affirm the Tax Court's determination that the loss sustained upon disposition of the Addison project was a capital loss. Section 1221 defines as capital asset all property held by the taxpayer, and the Addison property falls within neither of the two possibly relevant exceptions to that definition. 12 First, the Addison project does not fall within the exception provided by § 1221(1) for property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. The Tax Court found, and taxpayers do not contest, that Reese was primarily engaged in the business of a corporate executive. A taxpayer, of course, may engage in more than one trade or business. See Snyder v. Commissioner, 295 U.S. 134, 55 S.Ct. 737, 79 L.Ed. 1237 (1935); Ackerman v. United States, 335 F.2d 521 (5th Cir. 1964). Hence, our inquiry focuses on whether the Tax Court correctly held that Reese's activities in connection with the Addison project did not rise to the level of a trade or business. 13 The Tax Court found that Reese financed the project. Mere investment in a single project, however, does not constitute a trade or business. See, e. g., Thomas v. Commissioner, 254 F.2d 233 (5th Cir. 1958). Reese claims, however, that in addition to financing the project, he acted as its builder, developer and general contractor. Taxpayers thus contend that the Tax Court clearly erred 5 in finding that Reese did no more than finance the project. 14 We decline to review the Tax Court's finding, for assuming arguendo that Reese was the builder, developer and general contractor of the Addison project, we conclude that Reese was not engaged in a trade or business with respect to the project. 15 This court has often emphasized that the lack of continuity and frequency of activity in a particular field of endeavor is a strong indicia that a taxpayer is not engaged in a trade or business in that field. See, e. g., Thomas v. Commissioner, 254 F.2d 233, 237 (5th Cir. 1958); Dunlap v. Oldham Lumber Co., 178 F.2d 781, 784 (5th Cir. 1950); Fahs v. Crawford, 161 F.2d 315, 317 (5th Cir. 1947). Prior to the Addison project, Reese admittedly had never been engaged as a general contractor, builder or developer, nor has he been so engaged since. Nevertheless, taxpayers strenuously urge that the extent of Reese's involvement in this single project is sufficient to constitute a trade or business. 16 We reject taxpayers' contention. While there may perhaps be extraordinary circumstances in which a taxpayer's devotion of time and resources to a non-recurring venture constitutes a trade or business, 6 a single transaction ordinarily will not constitute a trade or business when the taxpayer enters into the transaction with no expectation of continuing in the field of endeavor. See Commissioner v. Williams, 256 F.2d 152 (1958), aff'd on rehearing, 285 F.2d 582 (5th Cir. 1961); Beach v. Shaughnessy, 126 F.Supp. 771 (N.D.N.Y.1954); Herwig v. United States, 105 F.Supp. 384, 122 Ct.Cl. 493 (Ct.Cl.1952). Thus, we have held that a taxpayer who purchased a partially constructed ship, completed the construction and then sold the ship was not engaged in the trade or business of buying, constructing and selling ships because there was no evidence indicating that any other such projects had been contemplated. Williams, supra at 155. Similarly, here there is no evidence indicating Reese entered into the Addison project with the idea that it would be the first of other such projects by him. To the contrary, Reese himself admits that he developed this single piece of property for the specific purpose of providing IIC with a new manufacturing facility and that he decided to undertake the project himself only after discovering that he could perform the work more cheaply than could an outside contractor. 17 The project was clearly an isolated, non-recurring venture. Reese cannot be considered to be engaged in the trade or business of building, developing and general contracting with respect to the venture because there was neither prior or subsequent activity on his part in this field of endeavor, nor an intention to devote his time and effort in the future to activities in this field. Accordingly, we affirm the Tax Court's determination that, with respect to the Addison project, Reese was not engaged in a trade or business within the meaning of section 1221(1). 7 18 Apart from § 1221(1), § 1221(2) excludes from capital asset treatment real property used in (a taxpayer's) trade or business. The Addison plant, however, was to be used in IIC's manufacturing business, not in Reese's business of a corporate executive. Since taxpayers point to no circumstances which would require us to impute the business of IIC to Reese, see, e. g., Whipple v. Commissioner, 373 U.S. 193, 83 S.Ct. 1168, 10 L.Ed.2d 288 (1963); Burnet v. Clark, 287 U.S. 410, 53 S.Ct. 19, 77 L.Ed. 511 (1932), § 1221(2) has no applicability to the Addison property. 19 Finally, taxpayers contend that the Addison project cannot be accorded capital loss treatment because there was no sale or exchange. See I.R.C. § 1222(4). Taxpayers claim that the disposition of the Addison property at the sheriff's sale in execution of a judgment against Reese was not a sale or exchange. We find no merit in this contention. It is well settled that a sale need not be accomplished by voluntary action of the taxpayer to be a sale or exchange. See Helvering v. Hammel, 311 U.S. 504, 61 S.Ct. 368, 85 L.Ed. 303 (1941). 8 20 In summary, the Addison property qualifies for neither of the two possibly relevant exemptions from capital asset treatment, and the disposition of the property constituted a sale or exchange. We therefore conclude that the Tax Court correctly held that the loss sustained upon disposition of the property was a capital loss.