Court Opinion

ID: 8593805
Source: CourtListenerOpinion
Date Created: 2022-11-23 15:58:43.931525+00
Date Added: 2024-06-11T14:09:35.183911
License: Public Domain

Skelton , Judge,
dissenting:
I feel that I must dissent from the opinion of the majority because I cannot agree with the result it reaches.
The majority opinion correctly states the law that in a case of this kind the statutory test and issue is whether the *671property sold by the plaintiffs was held “primarily for sale to customers in the ordinary course of * * * [their] trade or business.” If so, the profits were taxable as ordinary income, but if not they were taxable as long term capital gains. The problem is one of fact to be decided on the circumstances of the particular case. Browne v. United States, 174 Ct. Cl. 523, 356 F. 2d 546 (1966), and no one fact or circumstance is controlling. Bauschard v. Commissioner, 279 F. 2d 115 (6th Cir. 1960). The word “primarily” as used in Section 1221 (1) of the Internal Eevenue Code of 1954 means “of first importance” or “principally.” It does not mean that a purpose may be “primary” if it is a “substantial” one. Individuals may have more than one business at a time and each business will be taxed accordingly and separately. There is no one formula for determining whether property is held for sale or investment. All of the facts and circumstances in a given case must be looked to in order to determine how the profits from sales are to be taxed.
I do not quarrel with these principles of law which the majority says should control this case. I disagree with the application of these rules by the majority to the facts of the case.
The commissioner found that the plaintiffs were not licensed real estate brokers and did not hold themselves out by advertisement or otherwise as such. They were licensed attorneys at law and were engaged in the practice of law. They were invited from time to time by their clients to make investments in realty partnerships, corporations, and mortgages. Their investments in these ventures ranged from 2 to 50 per cent, but were usually 15 to 25 per cent. During the 3 years in question, the plaintiffs liquidated 17 of these investments which they had held for more than 6 months by selling them. This averaged less than 6 per year. The plaintiffs never had title to any of the real properties or mortgages in their own names. They took part in only 3 to 5 per cent of the real estate transactions in which they acted as lawyers. Their clients were the sponsors of the investments and invited plaintiffs to participate. Eent was collected on some of the properties from time to time. The plaintiffs say *672the profits on these investments should be taxed as long term capital gains.
The majority has unfortunately allowed two factors to control the decision against the plaintiffs, both of which, in my opinion were erroneously applied. First, they say that the income from the sale of the interests in the partnerships, corporations, and mortgages during the three years in question (1953,1954, and 1955) was ordinary income because the sales were frequent. I do not consider that the 5 to 6 sales per year during these three years could reasonably be said to be so excessive in number as to be “frequent” within the prohibited zone of the Internal Bevenue Service so as to subject the profit therefrom to the ordinary income tax. Any successful businessman could reasonably be expected to dispose of at least a half dozen investments in the period of one year. The cases cited by Judge Nichols in his dissenting opinion, namely, Dunlap v. Oldham Lumber Co., 178 F. 2d 781, 784-85 (5th Cir. 1950); Lazarus v. United States, 145 Ct. Cl. 541, 549, 172 F. Supp. 421, 426 (1959); Abe Pickus, 22 TCM 1791,1796 (1963), support the proposition that the few sales per year involved here are not “frequent or great.”
In the second place, the total earnings of the plaintiffs from all sources have been thrown together as one ball of wax and then the earnings from the practice of law have been set off against plaintiffs’ other earnings to show that the “other earnings” are greater than those from their law practice. Not only has this been done, but the majority has used income figures from years not involved here which increases the averages against the plaintiffs and presents a lopsided picture against them which is not supported by the figures for the three years in question. Furthermore, the majority has added ordinary income other than that from the law practice to the income from the sale of realty interests, not only for the 3 years in question, but for the period 1950-1956 (and for some purposes 1950-1958), and then compares the total with the income from law practice on an average basis over the whole period. This emphasizes that the income of plaintiffs from their law practice was far less than that from other ordinary income sources and from sales of realty interests when added together. For instance, *673in finding 29, the commissioner shows the total income from the law practice from 1950 through 1956 in one column, and the total income for this period as ordinary income from other sources in the second column, and income from the sale of real estate is shown in the third column. The majority uses these figures to hold that during this seven-year period (1950-1956) the average annual income of plaintiffs from the sale of realty interests was $48,261.33 (and in one year 1950 (not involved here) was $91,000); their annual average ordinary income from sources other than the practice of law was $44,919.39; and their average annual income from the practice of law was $35,001.12. The majority then sets off the total of the averages of the sales of real estate ($48,261.33), plus that of the ordinary income other than the practice of law ($44,919.39) against the total average income from the practice of law ($35,001.12). This is wrong for at least two reasons. In the first place, only 1953-1956, inclusive, should be considered and not the period of 1950-1956, inclusive, since only 1953,1954, and 1955 are involved. In the second place, the income from the law practice should be added to the other ordinary income (on all of which plaintiffs paid ordinary income taxes) and this should be considered as against the income from the liquidation of realty investments for the three years involved. If this is done, the facts will show that the plaintiffs had an average annual income during 1953-1955 from the practice of law and from other ordinary income sources of $64,922.40, and an average annual income during the same period from the sale of real estate investments of $40,257.12. This is the fairest way to calculate plaintiffs’ income. It shows that their income from the disposal of realty investments was less than % of their ordinary income. This is not enough to subject their income from the liquidation of their real estate investments during these 3 years to the ordinary income tax.
The Congress has not said that 6 sales of investments of real estate in one year means that the property was held “primarily for sale in the ordinary course of business” by the seller. Nor has it indicated that 5 or 4 or even 3 are all that the law allows in order for the taxpayer to enjoy the benefit of the capital gains tax. If the present policy of the *674Internal Revenue Service in this field is allowed to continue and certainly if it is expanded, all investments will be prohibited. There is nothing wrong with making a profit on an investment. In fact, investments for profit have developed our country beyond all expectations. We should encourage them instead of prohibiting them.
The number of investments in a given year in one kind or several kinds of property should be immaterial, so long as they are really and truly investments. For instance, a man might make a dozen investments in real estate in a year on which upon their liquidation after six months he would realize a total profit of $50,000. The I.R.S., according to the majority opinion, would be justified in saying he was a dealer and subject to a tax on all of his profit as ordinary income. Whereas, another investor could make one large investment during the same year which upon liquidation after six months nets him a profit of a million dollars or more. Even if this is much greater than his other income, he would be entitled to the benefit of the long term capital gains tax because he had only one sale during the year. This is discriminatory and unfair and was never intended.
It is clear that Congress intended that the term “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” would apply basically to goods on the shelf in a mercantile store or in a showroom daily exposed for sale, or in a similar situation. In real estate, it would apply to a dealer who subdivides property and sells lots, or at least has a list of properties which he holds out to the public as being for sale in the ordinary course of his real estate business. This is not the case here.
While it is true that the commissioner and the majority say that all relevant factors have been considered with reference to each realty investment, they hold that it is not necessary to make separate findings and conclusions on each separate tract “where the circumstances of each have been considered and the number of properties and sales thereof is great and frequent.”
The commissioner listed in finding 28 twelve factors, among others, which motivated plaintiffs in their disposal of realty *675interests in addition to or concurrent witbi a desire to make money or avoid losing money. After listing these factors, the commissioner stated in such finding:
It is not possible from the evidence to determine how many of plaintiffs’ transactions were influenced by the foregoing considerations to the complete exclusion of sales for profit. Both profits and losses were occasioned where some of the foregoing factors were present 'but gains far exceeded losses over all.
However, the commissioner on the remand excluded the above quoted portion of finding 28. This indicates that although the commissioner at first believed, and inferentiaJly found some of the transactions were influenced by the twelve listed factors “to the complete exclusion of sales for profit,” he did not finally consider them nor make any separate findings with reference to them. This omission supports my conclusion that at least some, if not all, of the sales should be accorded capital gains treatment.
It is obvious that the two factors which controlled the decisions of the commissioner and the majority were the alleged frequency of sales of investments and the comparison of the income of the taxpayers from the practice of law with their income from other sources. These factors, considered separately or together, should not be dispositive of this case against the taxpayers for all of the reasons stated above.
I would enter judgment for the plaintiffs for the recovery of the taxes sued for, plus interest.