Wibbelsman v. Commissioner

George J. Wibbelsman, Petitioner et al., * v. Commissioner of Internal Revenue, Respondent Wibbelsman v. Commissioner Docket Nos. 16410, 16411, 16412, 16413, 16414, 16415 United States Tax Court 12 T.C. 1022; 1949 U.S. Tax Ct. LEXIS 171; June 9, 1949, Promulgated *171 Decision will be entered for the respondent. Petitioners in 1943 formed a syndicate to buy and sell several tracts of land, intending to subdivide one tract. They authorized their agent to sell any parcel and to fix the price and terms of sale. Seven sales were made in 1944 from tracts not subdivided. Held, these were not sales of capital assets. Forrest M. Hemker, Esq., and Edward L. Wiese, Esq., for the petitioners. Lawrence R. Bloomenthal, Esq., for the respondent. Arnold, Judge. ARNOLD *1022 The respondent determined deficiencies in income tax for 1944 against the petitioners as follows: George J. Wibbelsman $ 320.17 Marie K. Federer 611.82 Coletta Bouckaert 225.09 Philip Bouckaert 225.08 Peter Bouckaert 256.18 Joseph Heitz and Hanna Heitz 3,327.86 The sole issue presented is whether gain from the sales of certain lands in 1944 was capital gain or ordinary income. *1023 FINDINGS OF FACT. Under date of December 10, 1943, petitioners Peter Bouckaert, Joseph Heitz, Marie K. Federer, and George J. Wibbelsman entered into an agreement to form a partnership, syndicate, pool, or joint venture with respect to certain lands previously*172 owned by Laclede-Christy Clay Products Co. and then held by George J. Wibbelsman. The syndicate agreement provided, inter alia: * * * which said lands they contemplate selling as a whole, in parcels, or as subdivided land, as may be best, it being particularly contemplated that the land described as "Site F" * * * at Macklind Avenue and Chippewa Street, will be the subject of subdivision activities. It is understood that this venture is for this one purpose only and that there is not hereby created a general partnership between the parties. * * * * The parties hereto place Federer Realty Company, a corporation in full charge of above mentioned property for them. The said Federer Realty Company shall be the exclusive agent for the parties for the sale or other disposition of said land, whether as a whole, in parcels or as subdivided land and for the doing of anything which may make the same attractive and enhance the value thereof, and to collect any rentals because of the use thereof for bill or sign board purposes or other purposes. At the discretion of the said Federer Realty Company, it shall arrange for sales of all or portions of said property and shall set the price and*173 the terms at which the same shall be sold. At the discretion of said Federer Realty Company any portion of said land may be laid out as a subdivision and if this is done the said Federer Realty Company shall take full and complete charge and have general supervision of such subdivision * * *. The syndicate agreement stated that the parties contributed a fund of $ 50,000 to be applied toward the purchase of the lands, of which Peter Bouckaert contributed 30 per cent; Joseph Heitz, 30 per cent; Marie K. Federer, 27 1/2 per cent; and George J. Wibbelsman, 12 1/2 per cent; that the parties were to bear other necessary expenses and share in profits in those proportions; that George J. Wibbelsman held title to the lands for the use and benefit of all the parties and should make conveyances for their account; and that his execution of purchase money deeds of trust for $ 50,000 was approved by the parties. Hanna Heitz, wife of Joseph Heitz, joined in the contract, as well as William A. Federer, husband of Marie K. Federer. The Federer Realty Co. joined to evidence its agreement to perform matters entrusted to it. Reasonable commissions up to 20 per cent on sales were stipulated to be *174 paid the Federer Realty Co. for its services. The syndicate filed a partnership information return for 1944 under the name of Laclede-Christy Syndicate with the collector of internal revenue at St. Louis, Missouri. The petitioners filed income tax returns for 1944 with such collector. *1024 Petitioners Peter Bouckaert, Philip Bouckaert, and Coletta Bouckaert are brothers and sister. The brothers own and operate a grocery and meat market. Coletta is a stenographer. The three Bouckaerts from time to time had made investments through the Federer Realty Co. The 30 per cent share in the syndicate taken by Peter Bouckaert was one-third on his own account, one-third for his brother Philip, and one-third for his sister Coletta. Petitioner Joseph Heitz is the owner and operator of a machine shop. Petitioner George J. Wibbelsman is a bookkeeper for the Federer Realty Co. Petitioner Marie K. Federer is the wife of William A. Federer. William A. Federer is president and principal stockholder of the Federer Realty Co. He has been engaged in the real estate business in St. Louis for some 40 years. The corporation acts solely as a broker and does not buy, sell, or hold real estate*175 as an investment. It has handled the subdividing of property in tracts for residential purposes and has not generally handled property for commercial or industrial purposes. Laclede-Christy Clay Products Co. is a corporation which engaged in the mining of clay from land in and near St. Louis. Prior to 1943 this company acquired various tracts of land for mining purposes. In 1941 and 1942 it was endeavoring to sell a number of tracts no longer desired by it, comprising 19 "sites" and amounting to some 64 acres. In 1943 it made a special effort to sell all these tracts before November 30, the close of its fiscal year. William A. Federer was approached in 1942 by agents of the company. He expressed an interest in a tract of 21 acres at Macklind and Chippewa Streets, designated as "Sites F and N," which he considered might be improved and subdivided for residential purposes and sold as such after the war. He was not interested in the other tracts offered by the seller. For various reasons he considered the other parcels undesirable. Most of the tracts were usable only for industrial or commercial purposes. Some were below grade, others were sloping, or adjacent to active clay*176 mines, or had no street frontage or access, or were used as dumps, or had inadequate drainage, or required piers to reach solid ground. Other sites were of residential lots, but there had been no sales nearby for some years. The seller declined to sell its lands separately. Federer suggested to Peter Bouckaert, Heitz, Wibbelsman, and Marie Federer that they put up the money needed to buy the entire group of properties in the hope that the later sale of lots from sites F and N would bring a profit from the whole transaction, even if the other undesirable parcels might result in a loss. The parties inspected the property, agreed to make the investment, and the land was purchased in November 1943. Notes aggregating $ 60,000, due two years thereafter, *1025 were given for part of the purchase price. The syndicate agreement was later drawn up and executed. The petitioners took no action whatever to effect sales of any of the parcels in 1943 or 1944. The Federer Realty Co., as agent for the petitioners, did not advertise the tracts or solicit sales in those years. Seven unsolicited sales of parts of the 17 undesired sites were effected during 1944. Four were parcels out of*177 one site, two were residential lots, and one was a site for commercial use. The Federer Realty Co. effected the sales. The sales aggregated 5.563 acres, or about 8.69 per cent of the 64 acres acquired by the syndicate. The entire proceeds were applied to the payment of the $ 60,000 debt secured by the deed of trust. The syndicate purchased no other properties. Taxes for 1944 were paid on all the properties. The sales made in 1944 were not sales of capital assets. OPINION. The petitioners in their income tax returns for 1944 reported capital gains upon the seven sales of real estate effected in 1944 from lands held by the syndicate of which they, or their representatives, were members. The gains were reported as long term gains, except as to a sale made in March, the gain from which was reported as short term. The respondent determined deficiencies, holding that the gains were not from the sale of capital assets. Petitioners contend that the land sold in 1944 was not held for sale to customers in the ordinary course of trade or business, but constituted capital assets, because the property when acquired was not desirable and not salable, having been on the market for years; it*178 was acquired involuntarily because its acceptance was a condition of the purchase of the property desired by the petitioners; they made no attempt themselves, or by their agent, to sell it; the volume of sales in 1944 was insignificant; the sales were casual and isolated and not frequent enough to constitute doing business; and the petitioners were engaged in their respective occupations alone during 1944, none being in the real estate business. Their argument is that they, through the syndicate, intended to subdivide at some future time and sell the 21-acre tract, sites F and N, but that the other property they were required to take with the purchase constituted capital assets and was not property held for sale to customers in the ordinary course of their trade or business. Concededly, a taxpayer may hold certain property for sale to customers and other property of a similar character as an investment. Schaefer v. Helvering, 299 U.S. 171. *1026 The sole purpose of the venture was to buy and sell the lands for a profit -- not to hold them for investment. As soon as the lands were disposed of and the proceeds distributed, the purposes of the*179 syndicate were accomplished. The agreement limited the venture to the lands acquired from the Laclede-Christy Clay Products Co. As to all such lands, the agreement recited: "which said lands they contemplate selling as a whole, in parcels, or as subdivided lands as may be best." While the agreement goes on to say that it was particularly contemplated that site F be the subject of subdivision activities, it does not anywhere negative an intent to dispose of the other parcels. The agreement further recited: "At the discretion of the said Federer Realty Company, it shall arrange for sales of all or portions of said property." (Emphasis supplied.) Petitioner Joseph Heitz, in testifying as to his understanding of the intended handling of the properties, said that Federer approached him about the deal; that Heitz looked at the property; that Federer said he would plan to develop the 21-acre tract and if there were losses on the other land it would be made up on the developed tract. On cross-examination Heitz testified as follows about the conversations with Federer: Well, he said the Kingshighway tract is a possible losing proposition. Q. Did he say that everything else in the*180 deal was a losing proposition too? A. Well, he had mentioned that certain outlying land -- as he termed it, "cats and dogs" -- we would lose money on those because we would try to get rid of them to realize whatever we could. Q. Well, in other words, there was no idea on your part or on Mr. Federer's part that you were going to hold those pieces of property for income? You were going to try to sell them, and he, being in the real estate business, was going to try to sell them for you? Is that right? A. That's right. [Emphasis supplied.] Petitioner George J. Wibbelsman testified that to him there appeared a possibility of making money out of the 21-acre tract. As to the rest of the land, "it might be a loss or it might be a little profit." Federer testified that he thought the syndicate might make from $ 100,000 to $ 150,000 profit on the 21-acre tract, and as to the other parcels "I suggested that they liquidate the other property as rapidly as anyone offered a price for it." (Emphasis supplied.) While the petitioners had other full time occupations, they may have been engaged in the real estate business within the meaning of section 117 (a) (1), Internal Revenue Code, *181 through their agent, the Federer Realty Co. Snell v. Commissioner, 97 Fed. (2d) 891; Fackler v. Commissioner, 133 Fed. (2d) 509; Brown v. Commissioner, 143 Fed. (2d) 468. The respondent determined that the gain to the petitioners on the sales in 1944 was ordinary income, in effect determining *1027 that the tracts so sold were held for sale to customers in the ordinary course of the trade or business of the petitioners. The burden is on the petitioners to show error in this determination. They argue that, while they intended to engage in the business of subdividing and selling the 21-acre tract at some future time and they did return income so realized in subsequent years as ordinary income, the other parcels, from which the 1944 sales were made, were not held for sale to customers in the ordinary course of this trade or business. They do not say for what other purposes such land was held. It was not held as an investment, for they say the property was obviously undesirable from that point of view and it would require the payment of taxes to hold it. They did not intend*182 to abandon it, for they paid the taxes. They do not say it was held for rental purposes, although it appears that rents were collected with respect to some of the lands. So far as the record shows, they intended to sell as early as possible and get what they could from it. They went into this venture in reliance upon Federer's advice, and this is the course he says he advised them to take. The evidence supports the respondent's determination. Petitioners argue that the undesired parcels were not held for sale, since their acquisition was involuntary, as the petitioners were forced to take these parcels in order to get the tract they desired. We think this is not a case of lack of volition. The parties deliberately undertook to acquire and dispose of all the tracts. The situation is not similar to involuntary acquisitions such as through foreclosure of a mortgage, as in Kanawha Valley Bank, 4 T. C. 252, or Thompson Lumber Co., 43 B. T. A. 726; or to prevent loss to a trust, as in Boomhower v. United States, 74 Fed. Supp. 997; or upon default of a loan, as in Guthrie v. Jones, 72 Fed. Supp. 784.*183 The written agreement evidences a positive intent to dispose of all the lands and the testimony introduced likewise shows such intent. The case of Frieda F. J. Farley, 7 T. C. 198, cited by petitioners, is distinguishable. There the land was used for many years as a nursery and sales were made upon solicitation by purchasers when the use of the land for nursery purposes was becoming difficult. The land in that case was not acquired for purposes of sale at a profit. The petitioners say also that the sales were so few in number, and so small a part of the total acreage was sold in 1944, as not to constitute doing business. They went into this venture in 1943 for the sole purpose of buying and selling certain lands at a profit. They expected that several years would be required to accomplish this. They desired to dispose of the unwanted parcels as quickly as possible. The sales might be small in number at first, but they were all in accordance with *1028 the announced intention to dispose of all the lands as a business venture. We think they were engaged in business in the taxable year. See Spanish Trail Land Co., 10 T. C. 430.*184 The respondent's determination is sustained. Decision will be entered for the respondent. Footnotes *. Proceedings of the following petitioners are consolidated herewith: Marie K. Federer; Coletta Bouckaert; Philip Bouckaert; Peter Bouckaert; and Joseph Heitz and Hanna Heitz.↩