Court Opinion

ID: 4627950
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:02:20.493668+00
Date Added: 2024-06-11T07:59:53.262525
License: Public Domain

J. Stewart Mathews and Viola I. Mathews v. Commissioner. J. Stewart Mathews v. Commissioner.Mathews v. CommissionerDocket Nos. 83593, 83594.United States Tax CourtT.C. Memo 1961-213; 1961 Tax Ct. Memo LEXIS 136; 20 T.C.M. (CCH) 1058; T.C.M. (RIA) 61213; July 19, 1961*136  Held, respondent did not err in determining that properties sold by petitioner were held by him primarily for sale to customers in the ordinary course of business.  K. G. Seitz, Esq., 4321 Hamilton Ave., Cincinnati, Ohio, and William H. Nieman, Esq., for the petitioners. Donald P. Krainess, Esq.  , and Gene E. Hutson, Esq., for respondent.  BLACK Memorandum Findings of Fact and Opinion Respondent has determined deficiencies in the income tax of*137  petitioners for the years 1955 and 1956, as follows: Dkt. No.YearPetitionerDeficiency835931955J. Stewart Mathews and Viola I. Mathews$ 19,231.12835941956J. Stewart Mathews168,812.89The adjustment giving rise to the deficiencies was explained in the statutory notice for 1955, as follows: (a) and (b) It is held that Florida real estate sold during the year in question was not a capital asset as defined by section 1221 of the 1954 Internal Revenue Code as the property was held primarily for sale to customers in the ordinary course of your trade or business, and that the gains resulting from such sales should be treated as ordinary income, as computed in the attached exhibits A and B. A similar explanation appears in the statutory notice for 1956, except that it refers also to some real estate sales in California. The issue, then, is whether respondent erred in determining that profits realized by the petitioners from sales of real estate in Florida and California during 1955 and 1956 are taxable as ordinary income. Findings of Fact A stipulation of facts filed by the parties is incorporated herein by this*138  reference. 1Petitioners J. Stewart Mathews and Viola I. Mathews, husband and wife residing in Wyoming, Ohio, filed a joint income tax return for the taxable year 1955, and petitioner J. Stewart Mathews filed an individual income tax return for the taxable year 1956, with the district director of internal revenue, Cincinnati, Ohio. For convenience, J. Stewart Mathews will hereinafter be referred to as petitioner. Petitioner is engaged in the general practice of medicine in Wyoming, Ohio, a suburb of Cincinnati. He has practiced medicine for about 35 years, and is now associated with nine other doctors. Petitioner is one of the senior partners of the association. He is a member of the staffs of five hospitals, and has been and is active in many public service and charitable organizations closely related to the practice of medicine. Since about 1926, petitioner has vacationed*139  in Florida, generally several times a year. As a consequence, he became familiar with real estate in that state. In 1945, petitioner purchased three lots in Delray Beach, Florida, with the intent to erect a home for himself on one of the lots. In 1949, petitioner purchased another lot in Delray Beach. Commencing in 1951, petitioner purchased numerous properties in Florida and in California either in an individual capacity, in joint ventures with other persons, or as a member of and/or trustee for various syndicates. The number of such purchases during the years 1951 through 1959, is as follows: Indi-JointSyndi-vidualVenturecatePur-Pur-Pur-YearchaseschaseschasesTotal1951600619527018195333061954911111955102416195645615195700331958201319592226Total43131874These purchases included individual lots, blocks of lots, and tracts of land ranging in size from 5 to 4,200 acres. The lands purchased in Florida were located in Brevard, Hendry, Indian River, Martin, Palm Beach, Putnam, St. Lucie, and Volusia Counties in or near such towns*140  or cities as Boca Raton, Boynton Beach, Delray Beach, Jupiter Island, Lake Worth, New Smyrna, Palatka, Palm Beach, San Mateo Heights, St. Augustine, St. Lucie, Stuart, Titusville, and Vero Beach. The lands purchased in California were located in San Clemente, Palm Springs, and Santa Barbara, in Orange, Riverside, and Santa Barbara Counties, respectively. Petitioner sold no properties in 1951, but made numerous sales in the years 1952 through 1959, either in an individual capacity, in joint ventures, or as a member of the various syndicates. The number of such sales made during the years 1952 through 1959 is, as follows: Indi-JointSyndi-vidualVenturecateYearSalesSalesSalesTotal1951000019524004195361071954901101955121013195612231719571348195852291959351220Total52142288The holding periods for all Florida and California properties sold by petitioner during the years 1952 through 1959 are summarized as follows: NumberHolding Periodof Sales0-6 months06 months to 1 year171 year to 2 years212 years to 3 years233 years to 4 years16Over 4 years11*141  The properties so sold were pieces of lots, single lots, single or several lots sold out of larger blocks of lots which had been purchased, footage or small acreage sold out of larger tracts, and whole tracts or large segments thereof. When petitioner had insufficient cash to make a purchase of property in his own name, he would make a cash deposit and then contact other parties who had previously indicated interest for the purpose of forming a syndicate to purchase the land. During the years 1952 through 1959, petitioner organized 13 syndicates. The years of organization, names of the syndicates, properties purchased, number of members, purchase price of properties, and petitioner's interest in those syndicates are as follows: No. ofTotalSyndicateMem-PurchasePetitioner'sYearNameProperties PurchasedbersPriceInterest1952IslandN 4000feet, Sec. 21 & 22,T. 36, R. 41, St.Lucie City, Fla.6$100,955.721/61954Missile94 Acres, Brevard Co., Fla.558,229.2710.00%1955Indiantown2700 Acres, Martin Co.,7136,875.721/3Fla.Ranch1955Sugarland3350 Acres, Palm Beach Co.,4168,364.2835.00% *Fla.1955Warfield1061 Acres, Martin Co.,880,309.8956.00%Fla.Highway1955Twenty Mile1240 Acres, Palm Beach Co.,499,332.502/3Fla.Bend1956PalatkaLots 1-10 Hertyville363,988.0050.00%subdivision, Lots 1-23 &28-52 Wideman subdivision,Putnam Co., Fla.1956Inland2067 Acres, Martin Co.,6105,538.3531.45%Fla.1956Florida1257 Acres (2 tracts)Martin Co., 2465DiversifiedAcres, Palm Beach Co., 3625288,093.8163,697%Acres, Brevard Co., Fla.1957South East3,697 Acres, Martin Co.,3840,287.8367,997%Fla.Florida1957Corner4,200 Acres, Martin Co.,7472,700.991/9Fla.1959Park Ridge1,573 Acres, Martin Co.,3211,695.0050.00%Fla.1959Cambridge620 Acres, Martin Co., Fla.476,531.951/3*142 Petitioner served as sole trustee and manager of each of the syndicates. Each syndicate was organized to purchase and hold "property for investment and resale, and not for improvement or development." As sole trustee for each of the syndicates, petitioner looked after the maintenance of the properties, handled any renting or income arrangements, personally executed documents and arranged the details with respect to purchases and sales of properties, kept records of disbursements and receipts maintaining separate bank accounts for each syndicate, handled all correspondence with respect to syndicate properties, and rendered accountings and annual statements to the members with respect to syndicate operations. During the years 1953 through 1959, petitioner also engaged in 13 joint ventures for the purchase and sale of real estate. In these joint ventures, petitioner exercised managerial functions similar to those he performed for the syndicates. During the years 1953 through 1957, Southern Florida experienced a land "boom" and areas in which petitioner purchased properties showed large*143  increases in land values. Although petitioner did not personally advertise properties for sale, he listed many properties for sale either with brokers exclusively or through a real estate listing bureau. He provided brokers with information concerning properties he had for sale, and negotiated with purchasers whom brokers located. In August 1953, petitioner wrote to a real estate broker about one tract of land, saying, "We can hold it for a long pull if necessary, but if there is any [good offer] coming down that way we might as well grab it." On December 8, 1953, petitioner listed two lots for sale with the Real Estate Listing Bureau, Inc., of Delray Beach, Florida. In May 1954, he notified a real estate broker that he had removed a property from the Listing Bureau and given the broker an exclusive listing "so that you may feel justified in erecting a sign on the property." On May 1, 1954, petitioner contacted a real estate subdivider offering certain property for sale. On September 2, 1955, petitioner wrote a real estate broker in Florida that "[it] would be alright to arrange for closing the deal on the 10 acre tract on Military Trail which you sold some months ago, but which*144  I did not want closed until after Sept. 25th, because it will not be six months until the 25th." On the same day he wrote to another broker, asking: "What do you think is wrong with the lot on MacFarlane Ave.? It seems to me it should move." On September 9, 1955, petitioner listed two separate tracts of land for sale with another broker. Petitioner purchased properties in San Clemente, California, in May 1954 and 1955. In July 1956, he wrote a real estate broker in San Clemente offering several properties in San Clemente for sale. Petitioner engaged in extensive correspondence with real estate brokers and others regarding various aspects of the purchase and sale of his real estate. He utilized the services of an accountant to assist him in the maintainance of books and records relative to the properties, and in the preparation of annual reports to the members of syndicates. Petitioner frequently financed his purchases of real estate by small down payments and large mortgages. Upon occasion he found it necessary to sell properties in order to meet payments due on others or to purchase new ones. Substantially all of petitioner's money was tied up in real estate. During the years*145  1955 and 1956, petitioner made 30 completed or installment sales of property in Florida and California. The properties, the periods for which they were held prior to sale, whether they represented sales out of larger tracts which petitioner had originally acquired, the nature of petitioner's interest in the property, the percentage of cost which the gain represented, 2 the method of payment (if known), and sales commissions paid, were as follows: Holding PeriodPart ofLargerPropertyYrs.Mos.DaysTract195515 acres on BarwickRoad, Fla.0823Yes60 acres on McDonaldTract, Fla.2225NoS 1/2 of W 1/2 of SW1/4, Sec. 11, Fla.0721No17.28 acres, ThompsonTract, Fla.01021YesLots 25 & 26, YachtClub Beach, Fla.338YesBalance of ThompsonTract, Fla.1912Yes40 acres, Gauge Tract,Fla.0112NoInstallment Sales5 acres, Gauge Tract,Fla.0112NoLot 27, Yacht ClubBeach, Fla.21127YesKlingensmith Tract,Fla.094No200feet govt. lands, Lot 3382Lots B & C, PitchfordNoLands312850 acres, BoyntonNoBeach, Fla.082NoCedar Knolls Tract,Fla.246No195618 acres, Palm BeachCo., Fla.2725YesReid Village lot, Del-ray Beach, Fla.41014Yes100feet W. Side U.S. #1,Jupiter Island, Fla.194Yes400feet W. Side U.S. #1,Jupiter Island, Fla.211YesLots 154-159, JupiterIsland, Fla.183NoS. 165feet govt. lot #4,sec. 27072No36 lots, San Clemente,Calif.2418No320 acres, Sec. 28 &33, Palm BeachCo., Fla.1610YesSec. 15 & 32, S.W.Martin Co., Fla.1023NoInstallment Sales100feet W. Side U.S. #1,Jupiter Island, Fla.272YesHood Road property,Palm Beach, Fla.0927No64 acres, Palm BeachCo., Fla.1610Yes329feet W. Side U.S. #1,Jupiter Island, Fla.2721YesLot #7, Gomes Grant,E. India River061No2200feet, St. Augustine,Fla.2116No1320feet Titusville, Fla.1125No125feet in Sec. 20 & 21, 43100Yes& 49, Palm Beach Co., Fla.*146 SalesNature% ofMethod of PayCommissionPropertyof InterestGainment (if shown)Paid195515 acres on BarwickRoad, Fla.Individual75.39$ 835.65 *60 acres on McDonaldTract, Fla.Individual102.71Cash3,242.59 *S 1/2 of W 1/2 of SW1/4, Sec. 11, Fla.Individual76.55586.25 *17.28 acres, ThompsonTract, Fla.Individual99.8915.30 *Lots 25 & 26, YachtClub Beach, Fla.Individual216.870Balance of ThompsonTract, Fla.Individual48.263,871.42 *40 acres, Gauge Tract,Fla.Individual67.16Cash & Mortgage2,000.00Installment Sales5 acres, Gauge Tract,Fla.Individual65.91Cash & Mortgage250.00Lot 27, Yacht ClubBeach, Fla.Individual110.63Cash & Mortgage300.00Klingensmith Tract,Fla.Individual77.47Cash & Mortgage1,980.00200feet govt. lands, Lot 3Lots B & C, PitchfordIndividual **Lands194.34Cash & Mortgage4,615.0050 acres, BoyntonIndividualBeach, Fla.Individual66.11Cash & Mortgage1,950.00Cedar Knolls Tract,Fla.Joint Venture102.64Cash & Mortgage1,800.00195618 acres, Palm BeachCo., Fla.Individual128.190Reid Village lot, Del-ray Beach, Fla.Individual80.63Cash$ 974.88 *100feet W. Side U.S. #1,Jupiter Island, Fla.Individual117.37869.75 *400feet W. Side U.S. #1,Jupiter Island, Fla.Individual120.133,372.51 *Lots 154-159, JupiterIsland, Fla.Individual102.12***27,737.90 *S. 165feet govt. lot #4,sec. 27Individual19.543,381.51 *36 lots, San Clemente,Calif.Individual70.252,879.22 *320 acres, Sec. 28 &33, Palm BeachCo., Fla.Individual167.8110,302.02 *Sec. 15 & 32, S.W.Martin Co., Fla.Syndicate40.35Cash & Mortgage15,500.00Installment Sales100feet W. Side U.S. #1,Jupiter Island, Fla.Individual192.11Cash & Mortgage0Hood Road property,Palm Beach, Fla.Individual31.55Cash & Mortgage7,800.0064 acres, Palm BeachCo., Fla.Individual398.38Cash & Mortgage3,600.00329feet W. Side U.S. #1,Jupiter Island, Fla.Individual219.06Cash & Mortgage3,575.00Lot #7, Gomes Grant,E. India RiverJoint Venture78.95Cash & Mortgage2,600.002200feet, St. Augustine,Fla.Joint Venture123.84Cash & Mortgage11,000.001320feet Titusville, Fla.Syndicate83.61Cash & Mortgage11,935.00125feet in Sec. 20 & 21, 43Syndicate78.78Cash & Note2,000.00& 49, Palm Beach Co., Fla.*147 The average holding period for properties sold in 1955 was approximately 1 year 9 1/2 months. The percentage of total cost of all properties sold in that year which the total gain thereon represented was 94.67 percent. 3 The average holding period for the properties sold in 1956 was approximately 1 year 10 1/2 months. The percentage of the total cost of all properties sold in that year which the total gain thereon represented was 88.91 percent. 4 During the years in issue, petitioner reported income from real estate sales, the practice of medicine, and miscellaneous sources, as follows: Sales ofPractice ofMiscel-YearReal EstateMedicinelaneous1955$ 72,306.05$29,701.39$13,711.491956284,406.2433,433.2314,998.47*148  Payments received on leases of mineral rights and other rentals derived from the properties in Florida and California (which are included in the figures for miscellaneous income) were $1,015 and $1,145.09 for 1955 and 1956, respectively. Petitioner acquired all of the Florida and California properties sold during 1955 and 1956 in 1951 or subsequent years. He held them primarily for sale to customers in the ordinary course of his business. Opinion BLACK, Judge: The sole issue presented is whether respondent erred in determining that profits realized by petitioner from sales of real estate in Florida and California during the taxable years 1955 and 1956 are taxable as ordinary income, rather than as long-term capital gains. Respondent has determined that the properties were not capital assets as that term is used in section 1221(1) 5 of the 1954 Code in that they were held primarily for sale to customers in the ordinary course of business. Petitioner contends that the properties were not so held and that he was not engaged in the business of selling properties. *149 "It is well settled that the question of whether property sold by a taxpayer at a profit was property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, within the meaning of the statute, is essentially a question of fact."  Bauschard v. Commissioner, 279 F. 2d 115, 117 (C.A. 6, 1960), affirming  31 T.C. 910">31 T.C. 910. A brief restatement of the principles applicable to such a determination was set forth in  Kaltreider v. Commissioner, 255 F.2d 833">255 F. 2d 833, at 838 (C.A. 3, 1958), as follows: No single factor or test is dispositive. Factors considered are: (1) the purpose for which the property was acquired; (2) the purpose for which it was held; (3) improvements, and their extent, made to the property by taxpayer; (4) frequency, number and continuity of sales; (5) the extent and substantiality of the transactions; (6) the nature and extent of taxpayer's business; (7) the extent of advertising to promote sales, or the lack of such advertising; and (8) listing of the property for sale directly or through brokers. [Annotations omitted.] Although petitioner testified that he had acquired some of the properties*150  sold as possible homesites and an agricultural diversion for his retirement years, evidence as to the dates of purchase and sale of some of the tracts, the multiplicity and geographical diversity of such purchases, correspondence concerning some of these properties, and the disparity (and in some cases, the magnitude) of their purchase price, lead us to believe that petitioner's recollection as to the purpose of acquisition was somewhat confused. In any event, "[while] the purpose for which the property was acquired is of some weight, the ultimate question is the purpose for which the property is held."  Bauschard v. Commissioner, supra, 118. We have answered that ultimate question adversely to petitioner's contention in our Findings of Fact. The record, we think, amply supports respondent's determination. Petitioner, a busy and successful doctor, was also a busy and successful dealer in real estate. That a taxpayer actively practices his chosen profession does not prevent him from additionally engaging in another occupation. Cf.   Bauschard v. Commissioner, supra, (involving a clergyman);  Frankenstein v. Commissioner, 272 F. 2d 135 (C.A. 7, *151  1959), affirming  31 T.C. 431">31 T.C. 431, (involving a lawyer). While petitioner made few improvements to the properties, he was not adverse to selling pieces of property out of larger tracts which he had purchased. It is clear from the record that petitioner continuously made numerous and frequent sales of property involving substantial sums of money. Petitioner was not a licensed real estate broker, but he listed numerous properties with such brokers. He did not advertise the properties personally, but he permitted brokers to advertise some of them. Over a 9-year period, he was instrumental in the formation of 13 real estate syndicates, six of which were formed during the years in issue. In both of the years in issue, petitioner realized substantially more income from his dealings in property than from his practice of medicine. Properties were purchased as others were sold; in some cases the sales were made to finance new purchases. In short, the record clearly shows that petitioner over a period of years, in which the years in issue are included, made numerous, frequent, and continuous purchases of real estate in Florida and California which he held for the purpose of selling*152  at the earliest moment for the highest price; and that he so occupied himself to such an extent that he was, in fact, a dealer in real estate, as well as a doctor of medicine. We hold, therefore, that respondent did not err in determining that petitioner's profits upon the sales of real estate in Florida and California were taxable as ordinary income. Decisions will be entered for the respondent.  Footnotes1. Two typographical errors of transposition appear in Exhibit 3-C attached to the Stipulation of Facts. On line 11, the figure in the column headed "Cost" reads "14 014.75", but should read "14 041.75." On line 29, the figure in the column headed "% of Profit" reads "40.9735", but should read "40.7935."↩*. Petitioner's wife, not petitioner, was the member of syndicate; petitioner was trustee.↩2. These figures should not be confused with the "% of profit" used in the computation of taxable gain under the installment method of reporting. a1 Sales expenses, no breakdown for commissions shown. a2 These properties were sold together although acquired separately. a3 Record shows payment of approximately one-half of price by mortgage, method of payment of remainder of purchase price not shown.↩3. See footnote 2, supra. ↩4. See footnote 2, supra.↩5. SEC. 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;↩