Court Opinion

ID: 4631471
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:09:44.634292+00
Date Added: 2024-06-11T07:57:43.781319
License: Public Domain

Altizer Coal Land Company, a corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.  D. E. Hensley and Nell Hock Hensley, Petitioners, v. Commissioner of Internal Revenue, RespondentAltizer Coal Land Co. v. CommissionerDocket Nos. 63895, 64288United States Tax Court31 T.C. 70; 1958 U.S. Tax Ct. LEXIS 62; October 15, 1958, Filed *62 Decisions will be entered under Rule 50.  On the facts, held, petitioners in the taxable years in question were engaged in liquidating certain capital assets held for more than 6 months, and the gain realized from their sale was capital gain and not ordinary income.  L. E. Woods, Jr., Esq., and Robert K. Emerson, Esq., for the petitioners.Hubert E. Kelly, Esq., for the respondent.  LeMire, Judge.  LeMIRE *70  These consolidated*63  proceedings involve deficiencies in income tax against the respective petitioners as follows:PetitionerDocketYearDeficiencyNo.1951$ 158.5119526,423.42Altizer Coal Land Company, a corporation63895195321,082.801954455.16195261.66D. E. and Nell Hock Hensley642881953886.14The sole issue is whether or not certain pieces of real estate sold during the taxable years were then held primarily for sale to customers in the ordinary course of petitioners' business.FINDINGS OF FACT.The stipulated facts are found accordingly.D. E. Hensley and Nell Hock Hensley, his wife, reside in Man, West Virginia.  They filed joint income tax returns for the periods involved with the collector or the district director of internal revenue for the district of West Virginia.Altizer Coal Land Company, a corporation, hereinafter referred to as Altizer, is a West Virginia corporation organized in 1907.  For the taxable years in question it filed its income tax returns with the collector or the district director of internal revenue for the district of West Virginia on a calendar year basis and the cash receipts and disbursements method of accounting.The*64  purpose for which Altizer was incorporated as stated in its charter is as follows:To acquire by purchase, lease or otherwise, timber and real estate, and to sell, or lease the same; to mine coal, manufacture coke, bore for oil or gas, and to sell or lease the same; and to carry on a general mercantile business in connection with any of said operations, and to do any and all things necessary or consistent with said operations.*71  In the year 1908, Altizer acquired approximately 2,900 acres of land situate on Buffalo Creek, Triadelphia District, Logan County, West Virginia.  Timbering operations were conducted thereon until shortly before 1912 when such operations were concluded.  About 1912, the Chesapeake and Ohio Railway Company extended a branch line up Buffalo Creek for the purpose of serving coal mines in that area.On October 23, 1912, Altizer leased to Avon Coal Company for a term of 40 years ending October 22, 1952, approximately 1,109 acres of the above-mentioned acreage for coal-mining purposes.  This lease is hereinafter referred to as "the 1912 lease."Buffalo Eagle Mines, Inc., a West Virginia corporation, hereinafter referred to as Buffalo, by mesne assignments, *65  acquired the 1912 lease and assumed all the obligations of the lessee thereunder.By the year 1917, Altizer had leased all of its remaining lands on Buffalo Creek for coal-mining purposes to other lessees than Buffalo, and until October 22, 1952, all the lands owned by Altizer were leased for coal-mining purposes.  Since its organization and continuing until the end of 1954, approximately 17,506,000 tons of coal were mined from Altizer's property, from which Altizer realized coal royalties in the approximate amount of $ 1,600,000.  During such period Altizer engaged in collecting coal royalties, wheelage charges, and the proceeds from the sale of timber.Prior to 1951, Altizer did not sell or dispose of any of its lands except for the purpose of straightening boundary lines, clearing up defects in title, and for like purposes.  During the years 1951 through 1954, Altizer did not sell any of its properties other than the lots here in question.By resolution of its stockholders, dated December 14, 1948, it was resolved that Buffalo should be dissolved and liquidated. Thereafter its sole stockholders, J. S. Riley and D. E. Hensley, began the liquidation of the corporation which was *66  finally completed by the transfer on July 1, 1950, of all its remaining assets, including the 1912 lease, to its two stockholders.Upon final liquidation of Buffalo, Riley and Hensley formed a partnership, known as the Buffalo Eagle Mines, and filed partnership returns for the years 1952 and 1953.  1As assignees of the 1912 lease, Riley and Hensley succeeded to the interests of the lessee in all of the dwelling houses and other buildings located on the premises demised under the 1912 lease. These houses and buildings were located in two adjacent coal-mining camps designated as the "Upper Camp" and the "Lower Camp," and for many years were known locally as the Riley Camp or Town of Riley, an unincorporated village without a post office.  All of these houses and *72  buildings were constructed prior to 1929 at the expense of the coal-mining lessee, it being the practice of coal operators in Logan County to make available rental houses*67  to their employees to assure an adequate labor supply.During the years 1951 through 1954, the Riley Camp contained 83 dwelling houses, an office building utilized by Hensley, two churches, a powerhouse, a shop, and a few other minor outbuildings.Article 15 of the 1912 lease provides as follows:Article 15. At the termination of this lease, otherwise than by a forfeiture, all the improvements placed upon the surface of the demised premises by the lessee shall be valued by two disinterested persons, one to be chosen by each of the parties hereto, and in case of a disagreement by the two thus chosen, they shall select a third, and the three thus chosen, or any two of them agreeing, shall value said improvements, and the lessor shall have the privilege of purchasing said improvements at such valuation, after thirty (30) days' notice thereof, in writing.  If the lessor shall not, within thirty (30) days after service of said notice, accept said improvements at such valuation, the lessee shall have the right and privilege of removing the same from the leased premises within six (6) months from the expiration of the said thirty (30) days; but at the expiration of this lease (forty years), *68  if there is any merchantable or minable coal left under the demised premises not mined, and the lessee does not elect to renew this lease, as hereinafter provided, then, and in that event, all improvements put upon the demised premises shall become the property absolutely of the lessor, its successors or assigns, without any compensation being paid by the lessor or lessee therefor.The liquidation of Buffalo was brought about because the coal lying under the land covered by its 1912 lease was approaching exhaustion.  Under article 15 of the 1912 lease it became incumbent upon Altizer and Riley and Hensley, d.b.a. Buffalo Eagle Mines, to enter into negotiations with respect to the disposition of the houses and buildings in Riley Camp.  In the negotiations Altizer was represented by C. A. Joyce, its general managing officer, and Hensley represented the partnership.During the negotiations Hensley, on behalf of the partnership, offered to purchase all of the surface land underlying Riley Camp for $ 75,000, or to sell to Altizer all the houses and buildings in Riley Camp for $ 75,000.  Altizer had no facilities for operating a rental business and was not interested in purchasing the houses*69  and buildings, but made a counteroffer to sell all the surface land to the partnership for $ 125,000.  Altizer selected an appraiser to value the buildings and land for the purposes of negotiation. Thereafter, the parties being unwilling to agree upon a price, tentatively agreed to sell the houses and lots jointly.Altizer thereupon employed the McCall Engineering Company, a firm of mining engineers which had previously done work for it and for Riley and Hensley, to make maps of the Lower Camp and the Upper Camp.  McCall was instructed in making said maps to follow *73  exactly the existing fences which had been erected by the coal-mining lessee at the time the houses were originally constructed. Insofar as the street lines were concerned, McCall was instructed to follow the courses of the existing unimproved dirt roads laid out at the time the houses were originally constructed. The maps prepared by McCall carried out the instructions of the parties.On August 30, 1951, Altizer and Riley and Hensley entered into a contract whereby they agreed to sell all the lots in the Lower Camp of the Town of Riley, at a scale of prices to be fixed by them.  The contract, in substance, *70  provided that the value assigned to the land was to be 60 per cent and the value assigned to the improvements thereon was to be 40 per cent of the sales price. The proceeds from the sale of the property were to be collected by some person or firm designated by the parties and divided at least annually on the basis of the above percentages.On December 20, 1952, Altizer and Riley and Hensley entered into a similar contract with respect to the lots in the Upper Camp of the Town of Riley.  This contract contained an additional provision to the effect that all electric power facilities located on the premises covered by the 1912 lease were to be sold and the proceeds to be derived therefrom were to be divided on the basis of 50 per cent to Altizer and 50 per cent to Riley and Hensley.  The contract also provided that all rentals earned from the property subsequent to November 1952, were to be accounted for as the property of both parties and if any balance remained after the expense of maintaining the properties pending sale it was to be divided on the basis of 60 per cent to Altizer and 40 per cent to Riley and Hensley.It had been agreed between Altizer and Riley and Hensley that the*71  present occupants of the houses in Riley Camp, practically all of whom were former employees of Buffalo, were to be given a preference in purchasing the houses.The surveying of the Town of Riley aroused the interest of the occupants of the houses as to what was taking place.  Many individuals went to the former payroll office at Buffalo which was still maintained by Riley and Hensley in connection with other business interests, and inquired whether the houses were to be for sale, and were informed by Hensley or his bookkeeper, Dorine Brown, that when the survey was completed, the houses and other buildings in the Town of Riley would be for sale.Pursuant to the contracts dated August 30, 1951, and December 20, 1952, Hensley was designated to handle the sale of the lots and improvements, and to account for the proceeds.  The proceeds were deposited in a bank account captioned "D. E. Hensley, Agent." There was no advertising and no "For Sale" signs were erected upon the property.*74  Altizer was not a licensed real estate broker.  Neither Riley, Hensley, nor Dorine Brown was a licensed salesman of the State of West Virginia.When a prospective purchaser decided that he wanted *72  to buy one of the houses or buildings in the Town of Riley, he went to Hensley's office in order to effect the purchase.  Almost all the sales were made on the installment basis.  A downpayment of 25 per cent of the purchase price was required.  Later the downpayment was reduced to 10 per cent.  Upon making the downpayment, a deed was executed by Altizer, Riley, and Hensley conveying title.  The unpaid balance of the purchase price was secured by a note bearing 6 per cent and a deed of trust to the grantors was executed by the purchaser.Neither Altizer nor Riley and Hensley at any time undertook to grade, improve, or maintain any streets, within the Riley Camp, or to make any improvements to any of the houses in preparation of or in conjunction with the sale.  As was customary, the coal-mining lessee, while in active operation, had maintained a water system, an electric system, and a crude sewage system.  When Riley and Hensley ceased mining operations in January 1953, maintenance of the water system was taken over by some of the occupants of the houses, and the electric system was sold in 1953 to the Appalachian Electric Power Company for $ 3,200.Until the houses were sold they *73  were maintained in a tenantable condition.The number of lots sold during the years 1951 through 1954, the number of transactions, the aggregate contract price, and the total collections received by Altizer and Riley and Hensley, and the shares of the proceeds received by each, respectively, are shown in the following schedule:Numberof salesNumberTotal salesYearhouse,of transactionspricelots, etc.19511310$ 19,5501952131334,10019531 5242110,8001954225,600Total8067170,050Share of sales priceShare of collectionsYearAltizerRiley andAltizerRiley andHensleyHensley1951$ 13,110$ 6,440$ 4,227.00$ 1,448.00195220,46013,6409,466.676,037.12195366,16044,64032,055.6520,113.2419543,3602,24011,954.387,752.26Total103,09066,96057,703.7035,350.62Note: This schedule does not include the fair market value of lots and houses received by Altizer and Riley and Hensley from Amherst Coal*74  Company in 1953.Without taking into consideration the 3 vacant lots, and the lots exchanged with Amherst Coal Company, there were 66 houses and buildings sold in Riley Camp during the years 1951 through 1954, of *75  which 59 sales were made to either occupants and former employees, or former employees of Buffalo.In the latter part of the year 1952, Amherst Coal Company, which was then engaged in mining operations on lands near the Riley Camp, approached Altizer and Riley and Hensley and requested an exchange of a tract of land owned by it for a part of the Riley Camp.  The portion of the Riley Camp which Amherst proposed to acquire consisted of 1.05 acres of land and is designated on the map of the Lower Camp as lots 37 to 47, inclusive, on which were located 4 dwellings and 2 other buildings.  The tract of land offered in exchange by Amherst consisted of 0.435 acres and was divided into 5 lots, upon which there were 5 dwellings. Altizer and Riley and Hensley agreed to the exchange upon the condition that Amherst would pay $ 5,000 additional consideration, and the exchange was consummated by the execution of a deed dated December 31, 1952, and the payment of said $ 5,000 by*75  Amherst.  The deed from Amherst passing title to Altizer and Riley and Hensley was delivered early in 1953 and the payment was also made in that year.The real properties sold by petitioners in the taxable years in question were not held primarily for sale to customers in the ordinary course of any trade or business.OPINION.The question presented is whether the profits accruing to the respective petitioners from the sale of certain real estate in the taxable years should be taxed as ordinary income or as capital gain.  Sec. 117 (a) and (j) of the Internal Revenue Code of 1939 and secs. 1221 (1) and 1231 (b) (1) (B) of the 1954 Code.  So far as here material, the applicable sections of the 1939 and the 1954 Codes are substantially the same.  If the real estate was held primarily for sale to customers in the ordinary course of petitioners' trade or business, the profits are to be taxed as ordinary income as determined by the respondent.The record establishes that Altizer had acquired 2,900 acres of timber and coal lands in Logan County, West Virginia.  Aside from the transactions here in controversy, the business of Altizer was the collection of royalties, and wheelage from its properties. *76  In 1912, it leased approximately 1,100 acres of Avon Coal Company for a term of 40 years for the purpose of mining coal. By various assignments, Buffalo became the owner of the lease.Throughout the years but prior to 1929, the various lessees under the 1912 lease constructed houses and other buildings which they rented to miners to insure a labor supply.  The area was known as Riley *76  Camp or the Town of Riley.  By 1950, the coal underlying the land covered by the 1912 lease was approaching exhaustion.  Because of this situation, Buffalo was liquidated, and its assets including the 1912 lease were transferred and conveyed to its two stockholders, Riley and Hensley, who thereupon formed a partnership.The 1912 lease contained a provision to the effect that upon its termination, the lessor had the option to purchase the buildings erected by the lessees upon the leased properties.  Hensley, on behalf of the partnership, offered to purchase the land occupied by the buildings for $ 75,000, or to sell the buildings to Altizer for $ 75,000.  Altizer had no facilities for operating the rental properties and declined to purchase them but made a counteroffer to sell the land to the*77  partnership for $ 125,000.  Altizer, for the purposes of aiding the negotiations and for the benefit of a report to its stockholders, had an appraisal made.  The land and improvements were appraised at $ 168,000.  Later another appraisal was made which placed the total valuation at approximately $ 200,000.The parties being unable to agree on a price agreed to sell the lands and buildings jointly.  Hensley was selected to make the sale at prices agreed upon and the proceeds were to be divided 60 per cent to Altizer and 40 per cent to the partnership. It was agreed that the present occupants and former employees of Buffalo were to be given preference in purchasing the houses and buildings.The lots were formally platted on the basis of existing fences, streets, and understood boundaries.  The survey aroused the interest of the occupants who made inquiry at the office of the partnership and were informed that upon completion of the survey the houses and buildings would be for sale.During the years 1951 to 1954, 79 sales of houses and buildings were made in 66 transactions for a total sales price of $ 166,850.  Of the sales, 59 were made to occupants or former employees of Buffalo. *78  Most of the sales were upon the installment basis.No capital improvements were made, although the houses were kept in a tenantable condition until sold.  There was no solicitation, no advertising, and no "For Sale" signs erected and no promises to make any improvements.Neither Altizer nor the partnership purchased or sold other real properties.  No agents were employed and no one connected with Altizer or the partnership was licensed as a real estate broker or real estate salesman.Petitioners contend that they were not in the real estate business; that the houses and lots were not property primarily held for sale to customers in the ordinary course of their trade or business, and that they were merely passively liquidating their respective interests *77  in the properties sold in the only feasible way the circumstances of their diverse ownership permitted.The respondent admits that the original purpose for acquiring the land upon which Riley was located was not to engage in any business apart from the production of coal and the collection of royalties, and that the sales in question were brought about by the desire of Altizer and the partnership to liquidate their respective*79  interests.The respondent contends that as the sales were the result of a joint undertaking, Altizer and the partnership were engaged in a joint venture, and the real properties were held primarily for sale to customers in the ordinary course of the business of the joint venture. The necessary element of such a contract is the intent of the parties to create the partnership relationship.  We do not think, under the circumstances existing here, that the mere unification of the respective interests of the parties in order to facilitate an orderly liquidation of their interests warrants the inference that the parties intended to create a joint venture or partnership relationship.The respondent also contends that the liquidation argument made by petitioners loses its potency, since the parties were primarily motivated by the profit that would result from a sale of their interests jointly.  We think the liquidation was in good faith.  Due to the nature of the particular assets involved, it is obvious that they could not be liquidated in any other manner than the method adopted without great financial sacrifice.  In view of the fact that the aggregate sales price received was less than*80  the aggregate of the value the parties placed upon the respective interests while negotiations were in progress, the profit motive seems to lack significance.The respondent also argues that a liquidation may constitute a business.  We recognize that there are many cases which discuss the question whether the liquidation is carried on in such a manner as to constitute a business.  There is no definite formula for deciding cases of that type, and each case must be determined upon its own particular facts.  Under such circumstances, we think it would serve no constructive purpose to attempt to reconcile the cases relied upon by the parties as supporting their contentions.Under the facts and circumstances presented in the instant case, we are convinced that the respective petitioners were engaged in an orderly liquidation of their capital assets, and such properties were not primarily held for sale to customers in the ordinary course of any trade or business.  The assets having been held for more than 6 months, the gains realized from such sales are not taxable as ordinary income.  On this issue the petitioners are sustained.Other issues have been disposed of by concession or agreement*81  and they will be given effect in the recomputations under Rule 50.Decision will be entered under Rule 50.  Footnotes1. The stipulation incorrectly identifies the returns for the years 1951 and 1952.↩1. Includes sale of easement to Appalachian Electric Power Company for $ 3,200 of which $ 1,600 was received by Altizer and $ 1,600 by Riley and Hensley.↩