Louisiana Western Lumber Co. v. Commissioner

Louisiana Western Lumber Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent Louisiana Western Lumber Co. v. Commissioner Docket Nos. 38643, 48798 United States Tax Court 22 T.C. 954; 1954 U.S. Tax Ct. LEXIS 136; July 19, 1954, Filed July 19, 1954, Filed *136 Decisions will be entered for the respondent. Held, on the facts, that the lots sold were held primarily for sale to customers in the ordinary course of a business and that the resulting gain is taxable as ordinary income. A. Leon Hebert, Jr., Esq., for the petitioner. Jackson L. Bailey, Esq., for the respondent. Johnson, Judge. JOHNSON *954 These proceedings were consolidated for hearing and involve the following deficiencies in income tax: Docket No. Year Deficiency 38643 [1947] $ 2,367.25 48798 [1948] 6,569.15 [1949] 6,670.66 [1950] 7,869.51 The primary issue is whether profit realized from sales of real estate is taxable as ordinary income or as capital gain. Another question, dependent upon the conclusion reached under the principal issue, is whether petitioner is entitled to a capital loss deduction of $ 2,800. FINDINGS OF FACT. Petitioner, a Louisiana corporation with its principal office in Lake Charles, Calcasieu Parish, Louisiana, filed its income tax returns for the taxable years with the collector of internal revenue for the district of Louisiana. The principal business of petitioner at all times since its organization in 1919 has*137 been the retail sale of lumber and other building material. It was the largest of about 12 building supply businesses within its trading area, which had a population of about 50,000. Petitioner owned no real estate prior to 1940 other than the property it used in connection with its primary business. Since 1940 a housing shortage has existed in and around Lake Charles. From about 1940 until 1945 or 1946 the Federal Government had restrictions on the sale of building materials, which required petitioner to obtain a priority for the purchase and sale of its products. To obtain an outlet for its products petitioner acquired in 1940, with cash reserves, a tract of land for the purpose of improving it with rental housing. In 1941 petitioner subdivided the land into lots and improved the property by constructing streets, sidewalks, sewers, and installing utilities. The subdivision was known as Victory Terrace. In 1941 petitioner transferred 120 lots in the Victory Terrace subdivision, at cost, to the Western Development Company, a subsidiary *955 of petitioner organized in 1941 for the construction of houses for rental to defense workers under a priority granted by the Federal*138 Housing Administration. The houses were constructed by the Western Construction Company, another subsidiary of petitioner, with materials sold to it by petitioner at retail prices. The Western Development Company had an agreement with a corporation to pay rent on each house upon completion. During 1941 and 1942 the Western Development Company constructed 120 rental units in the subdivision. Permits granted by the Federal Housing Administration to construct the housing contained a provision prohibiting the sale of the property for 2 years. In 1942 or 1943 F. L. Peters, president of petitioner, purchased all of the stock of the Western Development Company. Thereafter Peters exchanged the stock for stock of petitioner in a deal with another officer of petitioner. Petitioner had no interest in the Western Development Company during the taxable years. In August 1946 petitioner acquired another tract of land, which it subdivided in 1947 into lots, and constructed streets, sidewalks, and sewer lines. The subdivision was known as East Side Addition No. 3. At undisclosed times between 1940 and 1950 petitioner purchased not less than 120 lots in about 4 other subdivisions, of which*139 35, located in Sulphur, Calcasieu Parish, Louisiana, were acquired in 1950. None of the Sulphur lots were sold in 1950. It never purchased a lot with a house on it. On January 1, 1947, petitioner had 351 unsold lots. During the taxable years it made the following sales of the lots: [1950] Sold to -- Lots Sales Lots Sales Lots Sales Lots Sales Lawesco Corporation [1] 1 55 1/2 [1] F. L. Peters [1] Contractors [30] Other 35 1/4 [29] 55 3/4 [30] 34 2/5 [27] 17 3/4 [18] Total 65 1/4 [33] 120 1/4 [39] 50 2/5 [41] 50 3/4 [49] The sales to Lawesco Corporation, a subsidiary of petitioner, and Peters were at book value. The Lawesco Corporation had houses constructed on the lots transferred to it. The sales to contractors were at 10 per cent less than market value as an inducement to purchase from petitioner their requirements of building materials to improve the lots. The general policy of petitioner at all times was to endeavor to tie the sale of a lot with an agreement to purchase building material*140 from it to improve the land. All of the contractors, except one purchaser in 1950, built houses on the lots with material bought from petitioner. *956 Deeds to lots purchased by contractors were not delivered to the buyers until the completed houses were sold and the Federal Housing Administration loans were closed. Some of the contractor-purchasers were unable to sell the properties as promptly as they desired to after completion of the improvements, and sold their equities to the petitioner at agreed prices. Five of the sales made by petitioner in 1949 were of such properties, for which it had paid $ 28,417 for the improvements thereon. Sales to individuals other than contractors were not conditioned upon the purchase of building material from petitioner. Of such purchasers, 15 of the buyers in 1947, 8 in 1948, 10 in 1949, and 4 in 1950 purchased building material from petitioner to improve the lots. The gross sales of merchandise by petitioner, the net income reported in its returns, the total sales price of lots sold, and net gain thereon were as follows, omitting cents: [1950] Gross sales $ 1,035,954 $ 1,553,385 $ 1,518,030 $ 1,460,644 Net income 107,523 158,373 143,709 159,520 Sales lots 1 30,897 59,220 89,295 72,205 Gain on lots 18,209 32,684 40,952 44,976 *141 Petitioner claimed $ 2,534.13 in its return for 1949 and $ 3,584.28 in 1950 as commission expenses incurred in connection with sales of the lots. It was not necessary to obtain a priority to purchase building materials during the taxable years. There was no shortage of lumber and other building materials during that period and petitioner had a good market for its products. It declined to accept some orders to insure a supply of material for regular customers. The demand for houses was so good that it was not necessary to do much advertising to sell them. Most of the houses built by contractors on lots acquired from petitioner were sold before completion. The subdivisions developed and lots acquired by petitioner were located in the old city limits of Lake Charles, whose school system was better than the one in the parish. This feature was attractive to prospective buyers and was regarded by petitioner as justification for conditioning sales to some purchasers by an agreement to buy building material*142 from it to improve the lots. Petitioner did not have a license to sell real estate or advertise the sale of lots by means of signs, mail, or classified advertisements. Most of the sales made by it resulted from unsolicited offers. It did not maintain a real estate department known as such. All sales made by it were handled by its employees under the general supervision of the corporation's treasurer. *957 Petitioner never borrowed money specifically to purchase lots. It listed the lots for sale with the White Agency, a subsidiary of petitioner, subject to an agreement that the buyer purchase his requirements of building material from it. In addition to real estate brokerage, the White Agency handled insurance and mortgage loans. Sales made after about 1947 without an agreement to purchase material from petitioner were handled by Peters. In 1946 petitioner sold 79 lots in 49 transactions. Petitioner continued to sell lots in 1951 by the methods described herein. The respondent held in connection with his determination of the deficiencies that the gain realized from the sales of lots was taxable as ordinary income. The lots sold by the petitioner during the taxable years*143 were held by it primarily for sale to customers in the ordinary course of its business. OPINION. The sole difference between the parties under the principal issue is whether the gain realized each year from sales of lots is taxable as ordinary income or as capital gain. The issue is a factual question and turns upon whether the lots constituted "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." Sec. 117 (a) (1), I. R. C. We said in W. T. Thrift, Sr., 15 T. C. 366, 369, in connection with a like question: The governing considerations have been the purpose or reason for the taxpayer's acquisition of the property and in disposing of it, the continuity of sales or sales related activity over a period of time; the number, frequency, and substantiality of sales, and the extent to which the owner or his agents engaged in sales activities by developing or improving the property, soliciting customers, and advertising. Boomhower v. United States, 74 F. Supp. 997. No one of these tests can be regarded as determinative but the question must be viewed in the light*144 of all pertinent factors and particularly the facts of the individual case. See also, Martin Dressen, 17 T. C. 1443; Dunlap v. Oldham Lumber Co., 178 F. 2d 781; and Nathan D. Goldberg, 22 T. C. 533. The acquisition of parcels of land and their improvement as subdivisions for sale of lots to purchasers are evidences of intention to engage in the real estate business. Petitioner had two of such land developments, and in addition purchased lots in other subdivisions for sale in the ordinary course of its activities, the last of which acquisitions, consisting of 35 lots, was made in 1950, 10 years after the first tract of land was purchased for subdivision purposes. The second tract of land for subdivision purposes was acquired in 1946, when at least 60 lots were unsold in the first subdivision, known as Victory Terrace, the last of the lots in which were not disposed of until 1948. The extent of petitioner's holdings and activities in the sale of real *958 estate is shown by the fact that it held 351 lots in about 6 subdivisions at the beginning of the taxable years and 99 full lots*145 at the close of 1950. The sales were not only continuous during the taxable years and prior thereto since 1941, but were continued under the same plan of activities in 1951. The sales were substantial, ranging from 33 to 49 during the taxable years, of from 50 to 120 lots at a profit equal to from about 20 to 40 per cent of the net income from other sources without adjustment for transfers at cost. The high rate of profit made on the sales of lots is shown in our findings. The fact that petitioner designated no branch of its chief business as real estate department, and did not have a license to sell lots is not decisive. The sales were handled by its employees as effectively as though they had acted under a special employment. A business may be conducted through an agency. Florence H. Ehrman, 41 B. T. A. 652, 663, affd. 120 F. 2d 607. The fact that commissions were claimed in 1949 and 1950 as selling expenses is evidence of employment of brokers to sell lots. No contention is made that petitioner was required to have a license to sell its own property. Sales made to contractors were at a discount and subject to a requirement*146 that the vendees purchase from petitioner their requirements of building material to improve the lots. Except for 1950, as to lots sold, the number of lots sold and sales each year to individuals without a tie-in agreement exceeded sales to contractors subject to such an agreement. While petitioner did not advertise the lots it listed them for sale with the White Agency, a subsidiary corporation, coupled with an agreement to purchase building material from it. Petitioner, which had the burden of overcoming the presumption in favor of the correctness of the respondent's determination, offered no evidence to establish that the White Agency did not advertise the lots or otherwise actively engage in the solicitation of customers. Petitioner asserts that the initial acquisition of property was made as an investment to construct badly needed housing units and that upon the termination of the war the activity was continued to advance its lumber and building material business. Property acquired and held as an investment may in a subsequent year be liquidated in a business venture within the meaning of section 117 (a) (1). Florence H. Ehrman, supra. The important*147 question is the conditions under which it is held and disposed of in the taxable years. The fact that one of the motives for acquiring the property was to sell it under a plan that would advance the lumber and building material business cannot affect the result, for the answer is the same whether the activities were carried on as an integral part of a recognized *959 business, or one separate and distinct from it. If the property is held as prescribed by the statute it is not a capital asset and any gain resulting from sales is taxable as ordinary income. A taxpayer may engage in more than one business. Williamson v. Commissioner, 201 F. 2d 564, affirming 18 T. C. 653. Lots were sold without tie-in agreements and it does not appear that petitioner ever declined an offer of purchase because the offeror refused to agree to buy building material from it. Nothing here is opposed to the idea that at all times during the taxable years the property was for sale to the general public. The restrictions on building material were lifted in 1945 or 1946 and thereafter, while no shortage existed in lumber or other building*148 material and petitioner enjoyed a good market for its products, some business was declined to meet the demand of regular customers and, as already pointed out, petitioner acquired additional lots for sale under its plan. While petitioner admits that the issue is controlled by the peculiar facts and cites no case as controlling, it refers us to several cases in its favor. In W. T. Thrift, Sr., supra, the taxpayer made no effort to sell or subdivide the land prior to the taxable year. The subdivision was made to facilitate the sale of lots to selected builders, pursuant to an agreement with them. No effort was made to sell to the general public and offers of individual purchasers were refused. The property was never listed with a real estate agent. Those facts are not present here. In Dunlap v. Oldham Lumber Co., supra, the sales were made in isolated transactions. No showing was made that the sales promoted the principal business of the taxpayer and there was no continuity of sales, contrary to the facts here. The facts present here support, rather than overcome, the determination of the respondent that the lots*149 in question were held primarily for sale to customers in the ordinary course of a business. Petitioner concedes that a conclusion in favor of respondent under the principal issue will leave it without capital gain from which to deduct a capital loss of $ 2,800 sustained by it. Accordingly, Decisions will be entered for the respondent. Footnotes 1. 54 were the remaining lots in Victory Terrace.↩ 1. The amounts for 1947, 1948, and 1950 include sales totaling about $ 2,000, $ 9,100, and $ 5,600, respectively, at or about cost. There was no transfer in 1949 for less than cost.↩