Kesicki v. Commissioner

James E. and Wanda Kesicki, Petitioners, v. Commissioner of Internal Revenue, Respondent Kesicki v. Commissioner Docket No. 77682 United States Tax Court 34 T.C. 675; 1960 U.S. Tax Ct. LEXIS 113; June 30, 1960, Filed *113 Decision will be entered under Rule 50. Petitioner James E. Kesicki, a building contractor, was in the business of purchasing vacant properties, erecting buildings thereon, and selling them to customers pursuant to respective agreements with them. In 1954 he entered into an agreement with a doctor to acquire a particular parcel of land, to build thereon a building for doctors' offices, and sell the completed package to the doctor for a stipulated price. After acquiring the land, obtaining building permits, and paying an architect for plans and specifications, the agreement was not carried out because of the inability of the doctor to finance the purchase. Petitioner sold the vacant property in 1955 and reported the net profit as a capital gain. Held, that at the time petitioner sold the property he was holding it for sale to customers in the ordinary course of his business, and the gain realized was ordinary income. James Powers, Esq., for the petitioners. Edward A. Tonjes, Esq., for the respondent. Turner, Judge. TURNER *676 The respondent determined a deficiency in income tax against the petitioners for the taxable year 1955 in the amount of $ 2,827.62. The question for determination is whether a building contractor realized ordinary income or capital gain in 1955 from the sale of unimproved property he had acquired in 1954 for the purpose of erecting a building thereon, pursuant to an agreement with a doctor to purchase the property on completion of the building, but which was not erected because of the inability of the doctor to finance the purchase. FINDINGS OF FACT. Petitioners are husband and wife, and residents of Tucson, Arizona. They filed a joint income tax return for the year 1955 with the director of internal revenue for Arizona. James E. Kesicki, who will be referred to hereafter as the petitioner, was during 1955 *115 engaged in the construction business and had been so engaged since prior to 1942. He has been a licensed contractor since 1948. Prior to 1955, petitioner acquired properties for the purpose of building motels on them for sale and had sold the land and motels as completed packages, but had never bought and sold unimproved property. At an undetermined date previous to January 5, 1954, petitioner entered into an agreement with Frank A. Shallenberger, a physician, pursuant to which petitioner was to acquire a particular parcel of land, construct thereon a doctors' office building, and sell the completed package to Shallenberger at a stipulated price. On January 5, 1954, petitioners entered into a preliminary sales agreement for the purchase of the particular parcel of land on the following condition: This sale shall be subject to the purchaser obtaining permission to build doctors' offices in accordance with the plans and specifications submitted. If said permit to build this type structure on the above described property is not obtained within 90 days from date, this sale shall be null and void and the above deposit shall be returned to the purchaser. The purchase price was stated as*116 $ 8,000 and the deposit made was $ 750. The property was conveyed to petitioners on March 9, 1954. Under the applicable ordinance of the City of Tucson a doctors' *677 office building could be erected on the property only with the prior approval of the City Board of Adjustment, and only if the aggregate ground coverage of all structures did not exceed 20 per cent of the area of the site. The first application for permission to erect the building was turned down by the building inspector for the reason that it was necessary for the City Board of Adjustment to approve the proposed building construction as the ordinance required a site area for the proposed building of 1 1/2 acres. Petitioner filed an application with the City Board of Adjustment on February 1, 1954, and on February 9, 1954, the board published its notice of hearing, including the appeal of the petitioner to erect the doctors' office building, and also mailed a notice of the application to the various adjoining landowners. On February 17, 1954, the board granted permission for the erection of the building in accordance with the plot plan submitted and waived the area requirement. On the next day the board published*117 a memorandum which gave the results of the cases it had heard, including that of the petitioner, which contained the following notice: The Board wishes to remind appellants in cases granted and where architectural approval was given that it is now necessary for them to secure a permit from the Chief Inspector, Warren Walker, within sixty days from the date of this meeting. In April petitioner obtained a building permit for the property covering the footings only, in order to prevent the expiration of the permission granted by the board. On May 6, 1954, petitioner signed an agreement with an architect for the preparation of a complete set of plans for the building. Petitioner paid the cost of the plans in the amount of $ 600. Petitioner dug footings for the building which consisted of trenches 18 inches wide and 18 inches deep running the length and width of the building. This work was done in order to avoid expiration of the permission to build. In July 1954, the building permit was renewed for the construction of the entire building. No work was done under the permit and it expired 60 days later pursuant to the provisions of a city ordinance. Although it was understood that petitioner*118 would arrange for the necessary finances for the cost of constructing the building, the transaction fell through when Shallenberger wanted to pay down only $ 250 for a building that would cost $ 25,000. Petitioner did nothing with the property until he sold it in 1955, except to put a sign on it which read as follows: James Kesicki General Contractor Will build to suit *678 The property was not listed for sale with any real estate broker, but petitioner would have sold it if he had received a good offer. On May 12, 1955, petitioner received and accepted an offer of $ 15,000 for the unimproved property. He had not met the purchaser prior to the sale. Petitioner never worked for a real estate broker and never had a real estate broker's license. During 1955, petitioner's gross receipts from his business was $ 90,593.18. At the time petitioner sold the property he was holding it for sale to customers in the ordinary course of his business. OPINION. The question for decision is whether the profit petitioner realized from the sale in 1955 of the unimproved land is ordinary income or capital gain. Respondent's position is that the land was not a capital asset by reason of section 1221*119 of the Internal Revenue Code of 1954, 1 which excludes from the definition of capital assets "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." He does not contend that the vacant land was "real property used in [petitioner's] trade or business." Petitioner admits that he was in the business*120 of buying vacant properties, erecting buildings thereon in accordance with specifications of the buyers, and selling the improved properties to the respective buyers; that he acquired the land in question for the purpose of erecting a building thereon and selling the improved property to Shallenberger and had the transaction been consummated any net profit realized by petitioner would have been ordinary income. Petitioner contends, however, that because he was unable to complete the transaction when it was ascertained his customer, Shallenberger, could not finance the purchase, petitioner was left holding the vacant land; that he was not in the business of buying and selling unimproved land; that he solicited no one to purchase the property; that it was sold to an unsolicited buyer; that it was the only unimproved *679 land he had sold; and that the buyer was not a customer of petitioner. The property was acquired by petitioner in connection with his business. After acquiring the property he took steps that were related to his business of improving the property. In the course of his business he obtained necessary building permits, paid an architect to prepare plans and specifications*121 for constructing a building, and caused some work to be done on the property preliminary to laying the foundation for the building. Even after the construction was stopped petitioner continued to hold the property for the purpose originally intended. He placed a sign on the land showing his name and business which offered "Will build to suit." He was willing to sell at any time he received a suitable offer. At the time he sold the land he was holding the property for sale to customers in the ordinary course of his business. The fact that he did not sell "a completed package" is not material. The character of the property was not changed by the failure to carry out the original plan. Cf. Alice E. Cohn, 21 T.C. 90, affd. 226 F. 2d 22. See Solomon Wright, Jr., 9 T.C. 173; Carter-Colton Cigar Co., 9 T.C. 219. Respondent is sustained. Decision will be entered under Rule 50. Footnotes 1. 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) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;↩