Court Opinion

ID: 9459733
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:30:27.845582+00
Date Added: 2024-06-11T17:36:19.002045
License: Public Domain

GIBBONS, Circuit Judge
(dissenting).
The taxpayer is a corporation engaged in the business of real estate development and home building. In 1955 it purchased a 100-acre tract of land in Bridgewater Township, New Jersey, intending to develop and sell. Shortly thereafter taxpayer filed subdivision maps and had some engineering work done. Preliminary approval for a subdivision of the entire tract was obtained in 1956. That preliminary approval conferred on the landowner only the limited right, during a three-year period, to submit the whole or parts of the plan for final approval upon the same general terms and conditions of the preliminary approval. N.J.Stat.Ann. § 40:55-1.18. Final approval of sections of the entire tract was requested and obtained in 1957. Only a small part of the 16.5 acres of the tract, sale of which produced the gain involved in this case, was included in such final approval. During 1958 the taxpayer learned that the State of New Jersey contemplated acquiring approximately 16 of the 100 acres for use in the construction of a highway, Route 287. After learning of the State’s plans the taxpayer ceased further development of the 16.5 acre tract. The preliminary subdivision approval as to all of the 16.5 acres for which final approval had not been obtained expired in 1959 under the terms of the Municipal Planning Act. N.J.Stat.Ann. § 40:55-1.18. Thé State’s highway plans were not *50formalized until 1960. It was not until 1962 that the taxpayer and the State began discussions respecting condemnation. In 1965 the Commissioners of Condemnation made an award of approximately $50,000 for the 16.5 acres. The taxpayer appealed this award to the Superior Court of New Jersey, and in 1965 obtained a judgment in condemnation of $97,650.63. The sale pursuant to the condemnation judgment was not closed until January 7, 1966, and on its 1966 tax return the taxpayer reported a capital gain on that sale in the amount of $70,950.30. The remaining 83.5 acres were developed in accordance with its final subdivision approval and sold or leased. The Tax Court, rejecting the Commissioner’s deficiency notice for 1966, found:
“Ultimate Findings of Fact
After the petitioner was notified by the state that 16.5 acres of the 100 acre tract held by the petitioner were subject to condemnation, the petitioner was not holding that portion of the tract ‘primarily for sale to customers in the ordinary course of his trade or business’ within the meaning of section 1221(1). The 16.5 acre portion of the tract was a capital asset at the time of its sale to the state.”
Under section 1221 of the Internal Revenue Code the term capital asset does not include “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. . . .” The word “primarily” means of first importance or principally. Malat v. Riddell, 383 U.S. 569, 86 S.Ct. 1030, 16 L.Ed.2d 102 (1966) (per cur-iam) . When the taxpayer first acquired the 100 acres it did so primarily for sale or lease to customers in the ordinary course of its business as a real estate developer and home builder. Thus, in 1955 no part of the 100 acres was a capital asset. But the nature of the asset, for tax purposes, is determined not at the time of its acquisition, but at the time its sale produces for the taxpayer a taxable gain or loss.
A taxpayer may, for example, acquire a farm intending to operate it. At the time of acquisition it is a capital asset. If years later the taxpayer obtains a subdivision approval and begins selling off lots, the Internal Revenue Service will insist, quite correctly, that at the time of sale the farm was held not as a capital asset but primarily for sale in the former farmer’s new trade or business of land development. The converse is equally true. Land once held primarily for resale may be withdrawn from the market and held for another purpose. See Nadalin v. United States, 364 F.2d 431, 176 Ct.Cl. 1032 (1966); Ackerman v. United States, 335 F.2d 521 (5th Cir. 1964) ; Ridgewood Land Co., Inc. v. Commissioner, 31 CCH Tax Ct. Mem. 39 (1972); Tri-S Corp. v. Commissioner of Internal Revenue, 48 T.C. 316 (1967), aff’d, 400 F.2d 862 (10th Cir. 1968). The Tax Court found as an ultimate fact that such a change in the taxpayer’s purpose for holding the 16.5 acres had taken place.
Such an ultimate finding of fact, representing as it does an inference drawn from other facts, is not in the view of this Circuit subject to the clearly erroneous rule. See Heebner v. Commissioner of Internal Revenue, 280 F.2d 228 (3d Cir.), cert. denied, 364 U.S. 921, 81 S.Ct. 285, 5 L.Ed.2d 260 (1960); Pennroad Corp. v. Commissioner of Internal Revenue, 261 F.2d 325 (3d Cir. 1958), cert. denied, Madison Fund Inc. v. Commissioner of Internal Revenue, 359 U.S. 958, 79 S.Ct. 797, 3 L.Ed.2d 766 (1959); Kaltreider v. Commissioner of Internal Revenue, 255 F.2d 833 (3d Cir. 1958); Philber Equipment Corp. v. Commissioner of Internal Revenue, 237 F.2d 129 (3d Cir. 1956). But see Yara Engineering Corp. v. Commissioner of Internal Revenue, 344 F.2d 113 (3d Cir. 1965) (per curiam). In reviewing such ultimate findings of fact:
“where the ultimate fact reasonably flows from the basic facts and especially where the basic facts are persuasive of the ultimate fact so found, this court will not disturb the finding *51of the trial court.” Pennroad Corp. v. Commissioner of Internal Revenue, supra, 261 F.2d at 328.
The determination whether real property is held primarily for sale to customers in the ordinary course of business is, of course, a factual determination. E.g., Yara Engineering Corp. v. Commissioner of Internal Revenue, supra; Brough-ton v. Commissioner of Internal Revenue, 333 F.2d 492, 494-495 (6th Cir. 1964); Kaltreider v. Commissioner of Internal Revenue, supra. Several factors, no one of which is determinative, have been said to be significant in making the determination.
“No single factor or test is disposi-tive. 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) listings of the property for sale directly or through brokers.” Kaltreider v. Commissioner of Internal Revenue, supra, 255 F.2d at 838. (footnotes omitted).
In this case (1) the property was originally acquired for resale in the ordinary course of business; but (2) the resale purpose terminated with respect to 16.5 acres by force of necessity, and for eight years the taxpayer held that portion for a purpose other than resale in the ordinary course of business; (3) no improvements were made to the 16.5 acres and even the preliminary subdivision approval expired five years before the sale; (4) there were no sales from the 16.5 acres; (5) the only transaction was the sale pursuant to the judgment of condemnation; (6) retention of the 16.5 acres for eight years was inconsistent with the nature of the taxpayer’s business; (7) the taxpayer did not advertise or promote sale of the 16.5 acres; and (8) the taxpayer did not list the property for resale through brokers. Under these circumstances I simply cannot agree with the majority that the Tax Court’s ultimate findings of facts do not flow from the basic facts or that the basic facts are unpersuasive of the ultimate facts so found. See Pennroad Corp. v. Commissioner, supra. There is no reason for this court to be so zealous of guarding the revenue that we should arrogate to ourselves the task of fact finding which Congress entrusted to the Tax Court. I would affirm.