Paul v. Commissioner

M. A. Paul, Petitioner, v. Commissioner of Internal Revenue, Respondent Paul v. Commissioner Docket No. 29798 United States Tax Court 18 T.C. 601; 1952 U.S. Tax Ct. LEXIS 159; June 23, 1952, Promulgated *159 Decision will be entered under Rule 50. 1. Section 117 (a) (1) (B) -- Depreciable Property Used in Trade or Business. -- Apartment building held to be depreciable property which the petitioner "used in his trade or business" where the petitioner constructed the building with the intention of renting apartments and in fact did rent apartments until the building was sold. 2. Section 117 (j) (1) -- Holding Period. -- Petitioner had not "held" for more than 6 months a newly constructed apartment building that was sold less than 6 months after completion. Leonard Shapiro, Esq., for the petitioner. Fortescue W. Hopkins,*160 Esq., for the respondent. Arundell, Judge. ARUNDELL *601 The respondent has determined a deficiency of $ 35,249.36 in the petitioner's income tax liability for the taxable year ended December 31, 1946. The petitioner contests that part of the deficiency resulting from the respondent's determination that $ 66,329.91 of the $ 77,021.62 gain on the sale of a building and land was gain from the sale of a noncapital asset and taxable as ordinary income rather than as capital gain. FINDINGS OF FACT. The petitioner is an individual residing in Pittsburgh, Pennsylvania. His income tax return for the year in question was filed with the collector of internal revenue for the twenty-third district of Pennsylvania at Pittsburgh. The petitioner's principal business is the ownership and operation of a lumber and building supply company. On February 11, 1944, the petitioner purchased a parcel of land in Pittsburgh to be used as a site for an apartment building. Within a few months thereafter petitioner consulted an architect and plans were drawn by May 15, 1944. In October 1945 construction of the *602 apartment building commenced. On May 11, 1946, the apartment building was*161 in a stage of partial completion. The plastering, plumbing and tiling were finished in the period May 8 to June 20, 1946. Prior to May 15, 1946, construction had not progressed sufficiently to permit occupancy of the building by tenants. On August 16, 1946, prior to the completion of the building, the petitioner commenced renting the apartments to tenants. On November 1, 1946, the building was inspected by the Bureau of Building Inspection of the City of Pittsburgh and found to be completed. The petitioner acted as his own general contractor and hired craftsmen for the carpenter work, general labor, and painting. He contracted for all other types of work necessary in the construction of the building. By May 12, 1946, the petitioner entered into various contracts for construction of the building, which contracts totaled approximately $ 59,000, and payments were made by the petitioner on those contracts in the approximate amount of $ 28,000. By November 6, 1946, an additional sum of approximately $ 45,000 was paid on the contracts. All of the contracts were executory and payment was conditioned upon performance. The petitioner constructed the building for rental purposes. From*162 the time the land was acquired until shortly after the completion of the building, the petitioner intended to retain the building for the production of rental income. However, he was approached by a real estate broker whose client offered to purchase the land and building for approximately $ 183,000. On November 11, 1946, the building was sold for $ 183,539.75. The petitioner's gain on the sale was $ 77,021.62; $ 10,691.71 of the gain related to the land and $ 66,329.91 related to the building. For the taxable year in question, the petitioner reported $ 5,382 as rental income from the apartment building and claimed $ 667.50 as operating expenses incurred in collection of the rental income. The apartment building was depreciable property that was constructed and held by the petitioner in the trade or business of earning rental income and was not held by the petitioner for more than 6 months prior to the date of sale. OPINION. The broad issue before us is whether the petitioner's gain of $ 66,329.91 on the sale of an apartment building 1 is taxable as a capital gain or as ordinary income. The respondent argues that the building was not a capital asset but was instead *603 *163 depreciable property which the petitioner "used in his trade or business," section 117 (a) (1) (B), Internal Revenue Code, and, further, that the capital gains provisions of section 117 (j)2 are not applicable because the building was not held for more than 6 months. *164 The evidence clearly establishes that the building, a depreciable asset, was property which the petitioner "used in his trade or business." Section 117 (a) (1) (B). The petitioner admitted he constructed the apartment building with the intention of renting the apartments and that the apartments were rented during the time he held the building. For the taxable year in question, the petitioner reported $ 5,382 as rental income from the apartment building and claimed $ 667.50 as operating expenses incurred in the collection of rental income. The fact that the petitioner was primarily engaged in another trade or business does not negative the fact that the building was "used in his trade or business." A taxpayer may be engaged in more than one trade or business. Fackler v. Commissioner, 133 F. 2d 509, affirming 45 B. T. A. 708; John E. Good, 16 T. C. 906; Leland Hazard, 7 T. C. 372. We therefore hold that the building was not a capital asset. Section 117 (a) (1) (B), Internal Revenue Code. The second question before us is whether the gain on this noncapital asset*165 is taxable as capital gain under the provisions of section 117 (j) of the Code. Section 117 (j) (1) provides that "For the purposes of this subsection, the term 'property used in the trade or business' means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months * * *." Hence, to secure the benefits of section 117 (j), the petitioner must show that he held the property in question more than 6 months. It has long been established that for the purposes of Federal taxation the common law rule of merger of land and buildings is inapplicable, and the two are treated separately. In affirming our *604 holding on this point, in Helen M. Dunigan, Administratrix, 23 B. T. A. 418, the Court of Appeals of the District of Columbia pointed out, among other instances, that land and buildings are taxed separately for state tax purposes and are considered separately for depreciation purposes under Federal tax laws. Dunigan v. Burnet, 66 F. 2d 201.*166 We think the rule of the Dunigan case is a sound one for the purpose of determining the holding period of newly-constructed buildings. Under that rule, the holding period does not necessarily begin from the time the taxpayer acquired the land. Therefore, to mark the beginning of the holding period, we must look to another event, namely, the date the building was completed. Until that event occurs, the taxpayer has not "acquired" the building. See McFeely v. Commissioner, 296 U.S. 102, rehearing denied 296 U.S. 664, wherein the Supreme Court pointed out that "to hold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then, that from which to compute the duration of ownership or the length of holding." The petitioner concedes that the building was not completed and a substantial amount of labor and materials were still to be applied within the 6 months' period preceding the sale. However, the petitioner contends that the holding period begins not from the date of completion but from the time when he entered into contracts for the construction of the building and binding*167 obligations accrued. In effect, the petitioner contends that the holding period began before the building came into being. We find no merit in this unusual position. The petitioner refers us to the rule that the holding period for securities begins from the time the taxpayer "acquired an unconditional right to the shares." W. F. Marsh, 12 T. C. 1083. See also Regulations 111, sec. 29.117-4. Obviously this rule has no application here. The parties have stipulated that the contracts were executory. As such, they gave the petitioner no "unconditional rights." Furthermore, the tangible property in question here was not even in existence at the time the contracts were entered into. We therefore conclude that the building was not held by the petitioner for more than 6 months prior to the sale. The building was a depreciable noncapital asset that was not held for more than 6 months prior to the sale and the gain on the sale is taxable as ordinary income. Sections 117 (a) (1) (B), 117 (j), and 22 (a). Decision will be entered under Rule 50. Footnotes 1. The respondent allocated $ 10,691.71 of the gain on the sale of both the building and land to the land and has taxed that gain at capital gains rates. The petitioner does not question the accuracy of the allocation and raises no issue as to the gain allocated to the land.↩ 2. Sec. 117. CAPITAL GAINS AND LOSSES. * * * * (j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. -- (1) Definition of property used in the trade or business. -- For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months * * *. (2) General rule. -- If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business * * * exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. * * *↩