Dunigan v. Commissioner

HELEN M. DUNIGAN, ADMINISTRATRIX OF THE ESTATE OF DAVID J. DUNIGAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Dunigan v. Commissioner Docket No. 37149. United States Board of Tax Appeals 23 B.T.A. 418; 1931 BTA LEXIS 1874; May 27, 1931, Promulgated *1874 1. Taxpayer, who was in the business of building and selling houses, in 1919 purchased a tract of land for use in his business and in 1922 and 1923 built houses thereon and sold them for a profit. Held, inasmuch as the land was held for more than two years and was a capital asset within the meaning of section 206 of the Revenue Act of 1921, the taxpayer may elect to have the portion of the profit from the sale which is allocable to the land taxed to him as a capital gain. 2. Since the houses were erected less than two years prior to their sale they were not held by the taxpayer for more than two years and were not capital assets within the meaning of section 206 of the Revenue Act of 1921, and the taxpayer may not elect to have the portion of the profits from the sales which is allocable to the houses taxed to him as capital gain. Stanton C. Peelle, Esq., for the petitioner. J. L. Backstrom, Esq., for the respondent. BLACK *419 This proceeding is for the redetermination of deficiencies of $44,135.56 for the calendar year 1922 and $33,004.22 for the calendar year 1923. The question at issue for both years is whether gains derived*1875 from the sale of certain parcels of improved real estate constitute capital net gains within the meaning of section 306 of the Revenue Act of 1921. There is no other issue. FINDINGS OF FACT. David J. Dunigan, deceased, was, during the years 1922 and 1923 and for several prior years, engaged in the real estate business in the District of Columbia. It was his practice to purchase unimproved parcels of land and erect houses thereon, mostly of the small residential type, which he would sell in single units. During 1919 he purchased two such tracts of land in the northwest section of the District of Columbia, upon which he subsequently built houses. Some of these houses he sold during 1922 and 1923. The proceeds derived from these sales are the items in dispute in this proceeding. All of the lots in question, numbering about 100, were acquired by Dunigan more than two years prior to the date of their sale and all of the buildings on these lots were erected within two years of the date of sale. Most of the sales were made on the installment plan. Complete schedules were offered in evidence at the hearing by the petitioner, which show the cost of each lot, its value at the*1876 time of sale, the cost of the improvements, the sale price and the profits on the transaction. Those schedules are hereby made a part of these findings of fact by reference as completely as if incorporated herein. The aggregate selling price of the houses and lots was $1,027,546.42. The profits realized during the year 1922 were $123,116.83 and during the year 1923 were $92,572.57. The aggregate value of the lots at the time of their sale, exclusive of the buildings, was $172,800. In amended returns filed for 1922 and 1923 the entire profits from the sale of the above described properties were reported as capital net gains within the meaning of section 206 of the Revenue Act of 1921. Respondent disallowed this and treated the profits as ordinary income and asserted the deficiencies described in our opening statement. In the deficiency notice respondent stated: Your contention that the entire profit realized from the sale of completed homes built on land held over two years is taxable at 12 1/2% in accordance with section 206, is also denied. Inasmuch as you are a "dealer" regularly engaged in the real estate business, in accordance with office decision (I.T.)-2297, *1877 Cumulative Bulletin V-2-30-2837-page 109, the real property owned by you constitutes your stock in trade and, therefore, profit realized from the sale can not be subject to tax *420 under the provisions of section 206 but is taxable under sections 210 and 211 of the Revenue Act of 1926. OPINION. BLACK: The governing statute here is section 206 of the Revenue Act of 1921 which reads in part: (a) That for the purpose of this title: (1) That term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921; * * * (6) The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or 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. (b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at*1878 the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows: [Here is set out the method of the computation of the tax.] Respondent in his pleadings and brief makes the following contentions: (1) That the lots sold were the stock in trade of decedent taxpayer; (2) that, if the above reasons are rejected, only the profit derived from the sale of the lots is subject to the capital net gain provisions of the statute. Petitioner also makes a contention similar to the latter contention of respondent in his fourth assignment of error in his brief, in which he says: "Even though it should be determined that the improvements can not be included with the lots as capital assets, still the lots are clearly capital assets and the appropriate part of the entire gain which is attributable to the enhancement in the lots is capital net gain within the fair intent of section 206 of the Revenue Act of 1921." Contention (1) of respondent must be rejected on the authority of *1879 John S. Phipps,19 B.T.A. 1293. Cf. Ben L. Carroll,21 B.T.A. 724; Albert F. Keeney,17 B.T.A. 560; Atlantic Coast Realty Co.,11 B.T.A. 416. The Commissioner acquiesced in the Phipps case, supra, in weekly bulletin dated January 19, 1931, and issued I.T. 2555, reading as follows: In view of the Commissioner's acquiescence in the decision of the United States Board of Tax Appeals in the Appeals of John S. Phipps, et al. (19 B.T.A. 1293), I.T. 2297 (C.B. V-2, 109) is overruled in so far as it holds that the profit derived from the sale of real property owned by real estate dealers (and held for more than two years) does not constitute capital gain within the meaning of section 206 of the Revenue Act of 1921. *421 We think respondent's contention (2), also made by petitioner in his alternative contention, rests on much sounder ground than respondent's contention (1). Petitioner's decedent was in the regular business of purchasing undeveloped lands and subsequently developing them by building houses upon the lots after the land was subdivided and improved for building. Manifestly*1880 he built these houses to sell at a profit and certainly these houses entered into the profit consideration as much as the land upon which they were built. Perhaps more so. None of the houses sold by petitioner's decedent in the taxable years had been constructed for as long a period as two years, and we think it would be going beyond the clear intendment of the statute to hold the profit properly allocable to the sale of these houses, as capital gain within the meaning of the statute, merely because they were situated on land which the decedent had owned for more than two years. As bearing upon the purpose which Congress had in mind in enacting section 206 of the Revenue Act of 1921, we quote from the report submitted by the Ways and Means Committee of the House of Representatives to accompany H.R. 8245. On page 10 of the report it is stated: Section 206: The sale of farms, mineral properties, and other capital assets is now seriously retarded by the fact that gains and profits earned over a series of years are under the present law taxed as a lump sum (and the amount of surtax greatly enhanced thereby) in the year in which the profit is realized. Many such sales, with their*1881 possible profit taking and consequent increase of the tax revenue, have been blocked by this feature of the present law. In order to permit such transactions to go forward without fear of a prohibitive tax, the proposed bill, in section 206, adds a new section (207) to the income tax, providing that where the net gain derived from the sale or other disposition of capital assets would, under the ordinary procedure, be subjected to an income tax in excess of 15 per cent, the tax upon capital net gain shall be limited to that rate. It is believed that the passage of this provision would materially increase the revenue, not only because it would stimulate profit-taking transactions but because the limitation of 15 per cent is also applied to capital losses. Under present conditions there are likely to be more losses than gains. Substantially the same statement as to the purpose of the section is stated on page 12 of the Senate Finance Committee report accompanying the same bill. Therefore, in view of the language of section 206 of the Revenue Act of 1921 and the purpose which Congress evidently had in mind in enacting the statute, we hold that the profit attributable to the sale*1882 of the houses was not capital gain. On authority of John S. Phipps et al.,19 B.T.A. 1293, we hold however that the lots upon which petitioner's decedent built the houses were capital assets within the meaning of section 206 of the Revenue Act of 1921 and taxpayer has a right to elect to have the portion of the profit from the sales *422 which is allocable to the lots taxed to him as capital gain under that section. Since the houses were erected less than two years prior to their sale, they were not held by the taxpayer for more than two years and were not capital assets within the meaning of section 206. Therefore, the taxpayer may not elect to have the portion of the profits which is allocable to the houses taxed to him as capital gain under section 206, but such profits should be taxed as ordinary income. Reviewed by the Board. Decision will be entered under Rule 50. SMITH, STERNHAGEN, and MATTHEWS dissent.