
    W. FAY GARRETT, RUTH HOUSER GARRETT, WIDOW OF THE LATE WILLIS O. GARRETT, MARGUERITE GARRETT ETHERIDGE, EDNA GARRETT WING, EDWARD N. MacWILLIAMS AND HAZEL J. MacWILLIAMS, AND WILLIS E. GARRETT, ADMINISTRATOR OF THE ESTATE OF CLAUDE B. GARRETT v. THE UNITED STATES
    [No. 49593.
    Decided April 6, 1954]
    
      
      Mr. Galvin W. Breit for tlie plaintiffs.
    
      Mr. E. 8. Fessenden, with whom was Mr. Assistant Attorney Generad E. Brian Eolland, for the defendant. Messrs. Andrew D. Sharpe and Ellis N. Slaeh were on the brief.
   Whitaker, Judge,

delivered the opinion of the court:

The plaintiffs sue for a refund of income taxes for a series of years. The major issue is whether the profits from the sales of certain lots, which were a part of the estate of William H. Garrett, deceased, should be treated as capital gains.

William H. Garrett, of Norfolk, Virginia, who died May 13, 1925, owned a large tract of land extending about two miles along the beach of the Atlantic Ocean near Ocean View, Virginia. He also owned rental property in Miami, Florida. Prior to his death Mr. Garrett subdivided this beach property,' referred to as East Ocean View, into 3,000 lots. Before his death sales were not frequent, 162 lots having been sold. He, however, maintained an office for the sale of the lots and they were listed on the open market.

By the terms of his will Mr. Garrett left his property to his six children, naming his two sons, Claude B. Garrett and Walter Fay Garrett, and his son-in-law, Elmer Wing, as .executors and authorizing them to sell any and all lands, and divide the proceeds among his children.

The amount of the proceeds as distributed for the years 1943 to 1946, inclusive, as set out in the fiduciary returns, is shown in finding 3. Amended returns for the years 1943 to 1945 were transmitted to the Collector, but he advised the executors that the so-called “amended returns” were not acceptable. In the amended returns the executors sought to treat the profit from the sale of the lots as capital gains instead of as ordinary income, as they had been treated on the original returns.

The plaintiffs filed, in their respective districts, individual income tax returns for each year as set out in finding 4, reporting the profit from the sale of the lots as ordinary income. Claims for refund were later filed for the years 1943, 1944 and 1945, the dates and amounts being set out in finding 5, on the ground that the profit from the sale of the lots was not ordinary income, but capital gains, and, therefore, that only 50 percent of such income was includable as taxable income under the provisions of section 117 of the Internal Revenue Code, 26 U. S. C. 117 (a) (1).

The Commissioner ruled that because of the method of disposing of the property the gains from the sale of lots was ordinary income from a trade or business, and not transactions which come within the terms of section 117 of the Code.

Thus is presented the principal issue in the case.

The decedent dealt in real estate as a buyer, seller, developer, and builder, and maintained an office for that purpose for about 40 years in the Arcade Building in Norfolk. He bought and sold on his own account rather than as a broker.

Upon the death of William H. Garrett the office in the Arcade Building was continued. William Fay Garrett moved -his residence from Miami, Florida to Norfolk, Virginia, and thereafter devoted the greater part of his time to the sale of the lots constituting the beach property in question. No advertising was done other than to keep a large map of the property on the wall, which map had been; placed there by William H. Garrett prior to his death. Two or three signs were placed on the property. These read “East Ocean View Properties, For Sale, W. Fay Garrett, Arcade Building.” The Telephone Directory carried a listing “East Ocean View Company” and “W. F. Garrett” with the same telephone number. The listings were in the ordinary small type of other subscribers. There was no such company. The term was used for the convenience of prospective buyers of the lots of the estate.

. Substantially all of W. Fay Garrett’s time was devoted to the sale of East Ocean View property and matters connected with the estate. He received a fee of 5 percent as executor of the estate and a 10 percent commission on the price of the lots sold by him for the estate. No real estate agents were employed by the estate, but occasionally a real estate agent would come to Garrett’s office with an inquiry from which a sale would result. On these sales a portion of the 10 percent commission would be paid to the agent who brought in the inquiry.

No improvements were made prior to the construction in 1926 of a State highway between Ocean View and Virginia Beach. This highway bisected the Ocean View properties. After this the plaintiffs constructed clay roads within the subdivision, and when the City of Norfolk extended its water mains to the property they paid for extensions of the mains within the property. Plaintiffs also advanced funds to bring electricity to the property, but the advances were later refunded.

Most of the lots were sold on installment contracts, a deed not being made until the price was fully paid. The proceeds were deposited in the bank to the credit of the Estate of William H. Garrett.

No other property was ever purchased by the estate, nor was any investment made by the estate with the funds as they accrued^ hut'the funds were distributed to the heirs under the terms specified in the will. .

The office of the estate, was not used for any purpose other than the sale of the lots in the East Ocean View properties, except for the sale of some property of W. Fay Garrett. W. Fay Garrett did not contribute to or pay any of the expenses of maintaining the. office. The estate is still managed as an estate and the property sold is transferred by deeds signed by the executors.

The estate paid a personal property tax to the City of Norfolk on the furniture and fixtures in the Arcade Building for the years involved, but the State of Virginia has not required the estate to pay a capital tax, although real estate businesses are required to pay such a tax in that state. W. Fay Garrett never owned, nor was he required to own any real estate or business license in the City of Norfolk or the State of Virginia.

Section 117 makes a distinction between property held or disposed of by a taxpayer as capital assets, and property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. The application of the principle depends upon the facts of each case. The distinctions are discussed in Farley v. Commissioner of Internal Revenue, 7 TC 198, which held that the disposal of portions of property from time to time did not constitute doing a real estate business, and in Commissioner v. Boeing, 106 F. 2d 305, which held that gains or losses from sales of timber under the facts of that case did not fall within the capital gains provision. The application as to varying facts is discussed in United States v. Robinson, 129 F. 2d 297; White v. Commissioner, 172 F. 2d 629; Brown v. Commissioner, 143 F. 2d Storrow v. United States, 99 F. Supp. 672; Trapp v. United States, 79 F. Supp. 320, and in numerous other cases.

There is no single decisive test as to whether property is held primarily for. sale to customers in the ordinary course of a business, but, ordinarily, where property is sold pursuant to the - liquidation of. an estate, the sale is regarded as a capital transaction. It was said in White v. Commissioner, supra, at p. 630:

The gist of the court’s holding in the Farley case, in which we concur, was that where the liquidation of an asset is accompanied by extensive development and sales activity, the mere fact of liquidation does not preclude the existence of a trade or business; but, where the elements of development and sales activity are absent, the fact of liquidation may not be disregarded.

The property was inherited from William H. Garrett who had divided it into lots 20 years before his death. By the terms of his will the proceeds of the sale of lots were to be distributed to the plaintiffs. There was no provision for reinvestment of the funds, and there was no reinvestment. The property was not operated primarily as a development business. Very few improvements were made. No extensive sales or advertising was engaged in. These plaintiffs lived elsewhere and apparently left the disposition largely to W. Fay Garrett. They apparently were content to receive the proceeds of the liquidation of the lots when and if sold. Under all the circumstances and under the decisions the gains from the sale of the lots were not proceéds from the sale of property in the ordinary course of business, but in the process of liquidating the estate, and, therefore, should have been taxed as capital gains.

W. Fay Garrett should, of course, return his commissions on the sale of the lots and his executor’s fees as ordinary income, but the profit realized from the sale of the lots was not income to him as executor or salesman, but ás an heir. His part of the profit from the sale of these lots should be returned as a capital gain.

Manifestly, the expenses of the- sales should be deducted from the gross receipts before computing the taxable income under section 117. It would be unjust to the Government to treat the proceeds as capital gains- and then deduct the full expenses from the taxable on,e-half.:

The plaintiff Marguerite- Garrett .Etheridge -may not recover for. taxes paid in 1943.siiice:the suit as to that year was -filed more than two years - after- the • Commissioner had notified her of the rejection of the claim. See section 3772 (a) (2) of the Internal Bevenue,(Opde. ■

W. Fay Garrett is given judgment for $402.21 for the year 1943, $734.38 for the year 1944, and $837.33 for the year 1945.

Ruth Houser. Garrett is given judgment for $469.07 for the year 1943, $1,195.66 for the year 1944, and $1,090.77 for the year 1945.

Marguerite Garrett. Etheridge is given judgment for $532.49 for the year 1944 and $779.08 for the year 1945.

Edna Garrett Wing is given-judgment for $649,82 for the year ending April 30, 1944, and $742.43 for the year ending April 30, 1945.

Edward N. MacWilliams and Hazel J. MacWilliams are given judgment for $329.01, $519.10, and $426.43 for the years 1943, 1944, and 1945, respectively.

Interest in each instance is to be added from the dates of payments as provided by statute.

The claim of Willis E. Garrett, as administrator of the estate of Claude B. Garrett, was withdrawn at the time testimony was taken, and his petition is dismissed.

Prettyman, Circmt Judge, (sitting by designation); and Madden, Judge, concur.

J ONES, Chief Judge,

dissenting in part:

I agree to the results reached as to all the plaintiffs except W. Fay Garrett, who in the light of all the circumstances should not be permitted to recover.

This may seem a-strange distinction, but we feel it is justified. What is one man’s meat may be another man’s poison. The whole matter was left to his judgment. He had been in the real estate business in Florida. He moved to Norfolk and took charge of the estate. Since 1926 he has been in charge of the sale of these lots. He has had no other business except an occasional investment of his own. True, he had no real estate license and sold no other property except his own. He did not need to do so. He received a 5 percent commission as executor, and a 10 percent commission on the price of any lots sold.. .

The husbands of the other plaintiffs are employed in other places and mostly in other states with the exception of Elmer Wing, who is a member of the Pilots Association engaged in full-time maritime work. We realize that according to some of the decisions the business activity of one who is handling a business may be imputed to others who are interested, but the circumstances here are entirely different.

W. Fay Garrett had practically no other business. Why should he? He has been doing well for many years. The other heirs have confidence in him and apparently he has justified their trust.

True, he has paid an income tax on his commissions, but that is inextricably interwoven with his business of the sale of lots; in fact, that is his business. He can do just enough advertising to keep the business going, which is a good business. Evidently the other heirs are satisfied with the increasing value of the properties and with the regular flow of the proceeds.

In defining the term capital assets, which are taxed at one-half the regular rate, section 117 (a) (1), which is the applicable provision, is as follows:

The term “capital assets” * * * does not include * * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * *.

This provision fits plaintiff W. Fay Garrett’s case like a glove. His tax was paid on the disposal of his interest in the estate. He had made that a part, in fact the major part, of his life business. This he had a fight to do, but in doing so brought himself squarely within the terms of the quoted part of section 117. For 27 years this has been his principal business. It still is.

We think there is a valid distinction in his position and that of the other heirs. .

LittletoN, Judge, concurs in the foregoing dissent.

FINDINGS OF FACT

.The court, having considered the evidence, the report of Commissioner Eichard H. Akers, and the briefs and argument of counsel, makes findings of fact as follows:

■ 1. One William H. Garrett, of the City of Norfolk, Virginia, died on May 13, 1925, possessed of a large tract of land extending for approximately two miles along the beach of the Atlantic Ocean in Princess Anne County near Ocean View, Virginia, and also rental property in Miami, Florida. Prior to his death, Mr. Garrett subdivided this beach property, now being called East Ocean View, into approximately 3,000 lots. Up until the date of his death, sales of the lots were not frequent although they were listed for sale on the open market and Mr. Garrett maintained an office for that purpose. The unsold aforesaid lots were 2,838 in number at the time of William H. Garrett’s death. The tract of land was appraised at a value of $85,000 for estate and inheritance tax purposes.

2. William H. Garrett died testate. Iiis will was proved and duly probated. In his will, William H. Garrett, after providing for payment of his debts and after personal bequests, none of which are relevant here, devised:

Fourth: All the rest and residue of my estate, real, personal or mixed, wherever situated, I give in fee simple equally to my six children, Claude B. Garrett, Walter Fay Garrett, Willis O. Garrett, Hazel J. Mac-Williams, wife of Edward N. MacWilliams, Edna F. Wing, wife of Elmer Wing, and Marguerite A. Etheridge, wife of Harry J. Etheridge.
I appoint my two sons, Claude B. Garrett and Walter Fay Garrett, and my son-in-law, Elmer Wing, as executors of this my last will and until my children shall have seen fit to effect a partition of the real estate hereby devised to them, I give my said executors, or the sur-, vivors or survivor of them, the right to sell any and all my lands and divide the proceeds among my said' children.

3. The aforesaid real estate was never partitioned ámong the heirs by the executors. The executors have regularly filed fiduciary income tax returns for the Estate of William H. Garrett on the fiscal year basis (May 1 to April BO) from 1925 to and including the year 1945, reporting the small amount of rentals from the properties in Florida and the gains realized on the sale of the lots in the tract. The income disclosed on the fiduciary returns for the fiscal years April BO, 1943, 1944, and 1945, and the income disclosed by the Kevenue Agent for the fiscal year ended April 30, 1946, was shown as having been distributed each year as follows:

In September 1946, the executors transmitted to the Collector fiduciary returns of the Estate of William H. Garrett labeled “amended” for the fiscal years ended April 30, 1943, 1944, and 1945, but the Collector advised the . executors that they were not acceptable.

4. The plaintiffs filed timely individual income tax returns with the Collector of Internal Kevenue in their respective districts, reporting net income and tax liability as subsequently adjusted for the years as follows:

By stipulation filed July 8, 1953, the parties have shown the dates on which the various payments were made of the amounts, set out above.

5. The plaintiffs filed, on Form 843, with the various Collectors of Internal Revenue, claims for refund of taxes for the taxable years 1943, 1944, and 1945, and the action of the Commissioner of Internal Revenue thereon was as follows:

The basis of the aforesaid claims for refund was that the greater portion of the income which each taxpayer received1 from the Estate of William H. Garrett was the gain from the sales of land and real estate of which only 50 percent was includible as taxable income under the provisions of section 117 of the Internal Revenue Code. The Commissioner subsequently advised the taxpayers that by reason of the method and manner of disposing of the property, the gains from the sale of the lots was ordinary income from a trade or business and not transactions within the purview of the provisions of section 117 of the Internal Revenue Code.

6. The plaintiff, Walter Fay Garrett, resides in Norfolk, Virginia. The plaintiff, Ruth Houser Garrett, resides in Fort Valley, Georgia, and the plaintiff, Marguerite Garrett Etheridge, resides in Miami, Florida. Her husband is employed full time with Burdine & Company. The plaintiff, Edna Garrett Wing, resides in Norfolk, Virginia, and is the wife of Elmer Wing, one of the executors of the Estate of William H. Garrett. Mr. Elmer Wing is employed as a member of the Pilots Association, engaged in full time maritime work. The plaintiffs, Edward M. MacWilliams and Hazel J. MacWilliams reside in Esmont, Virginia. Edward M. MacWilliams is retired but, prior to his retirement, was an entertainer.

7. The tract of land, now called East Ocean View, involved in this suit, was subdivided into lots on or about 1904 by William H. Garrett, deceased.

8. The decedent, William H. Garrett, dealt in real estate as a buyer, seller, developer and builder. He bought and sold on his own account rather than as a broker, and maintained an office for that purpose for 40 years in the Arcade Building, Norfolk, Virginia.

9. Upon the death of William H. Garrett, the office previously maintained by him in the Arcade Building was continued and taken over by Walter Fay Garrett who, at or about that time, moved his residence from Miami, Florida, to Norfolk, Virginia, and thereafter devoted the greater part of his time to the sale of the lots involved in this proceeding. A sign was placed upon the door which read: “East Ocean View Properties, For Sale, W. Fay Garrett.” No advertising of any type was done within the office other than to have a large map of the property on the wall which was in a frame and covered with glass. That map was placed on the wall by William H. Garrett prior to his death. Two or three signs were placed on the property itself which read: “East Ocean View Properties, For Sale, W. Fay Garrett, Arcade Building.” In the classified section of the telephone directory, under the title of real estate, there were listed “East Ocean View Company” and “W. Fay Garrett” with the same telephone number. These listings were in the ordinary small type of other subscribers. There was no such company in existence but the name was merely a trade name for the convenience of prospective buyers of lots in the East Ocean View tract of land held for sale by the Estate. The two listings in the telephone directory were made at the request of W. Fay Garrett to enable prospective purchasers of the lots to find the seller thereof. Advertisements were placed in various publications, showing the availability of lots for sale in the tract.

10. Substantially all of Walter Fay Garrett’s time was ■devoted to the sale of the East Ocean View properties referred to above and other matters connected with the Estate of William H. Garrett. He received a fee of 5 percent as executor of the estate and a 10 percent commission on the sale price of the lots sold by him for the estate. No real estate agents were employed by the estate for the sale of these lots but occasionally a real estate agent would come to the office with an inquiry from which a sale would result and as to such sales a portion of the commission of 10 percent would be made to the agent who brought in the inquiry in regard to the sale.

11. No improvements of the properties were made prior to the construction in 1926 of the State highway commonly called “The Shore Drive,” a highway connecting Ocean View and Virginia Beach. That highway bisected the plaintiffs’ East Ocean View properties. The right-of-way for such highway is 70 feet wide and extends for a distance of approximately two miles through the plaintiffs’ property. After the construction of the highway, the plaintiffs constructed clay roads within the subdivision at a cost of about 30 cents a running foot and also paid for extensions of water mains within the subdivision when the City of Norfolk extended its water mains to the property. Plaintiffs also advanced funds to bring electricity to the property but the advances were subsequently refunded.

12. An inventory of the lots available for sale was kept in a book and a marked-up plat was also kept. When the lots Were sold, a regular written real estate contract was entered into. Most of the lots were sold on a time basis, with the buyer paying so much down and the balance paid off monthly, many contracts running three or four years. A deed conveying the lot to the purchaser was never given until the buyer finished paying the purchase price. The names on the deed as grantor were Walter Fay Garrett and Elmer Wing, Executors of the Estate of William H. Garrett. The payments made by the purchaser of the lots in each instance were deposited in the bank in the account carried in the name of the Estate of William H. Garrett.

13. No formal meeting was held by the heirs of William H. Garrett as to the sale of the lots in East Ocean View, but they did have conversations at various times concerning the property. Mr. Walter Fay Garrett was of the opinion that the best way to get the most money out of the sale of the property in East Ocean View was to sell individual lots at retail. The other heirs had full confidence in his judgment to sell the lots in that manner, raised no objection as to the manner in which he was handling them, and left the matter to his judgment.

14. No other property was ever purchased by the estate nor any investment made by the estate with the funds as they accrued. As the funds accumulated, they were distributed to the beneficiaries under the will of William H. Garrett and none of the sums were reinvested.

15. The office of the estate was used for no other purpose than the sale of lots in the East Ocean View properties and the administration of the estate, except for the sale of some property by W. Fay Garrett. W. Fay Garrett did not contribute to or pay any of the expenses to maintain the office.

16. The estate is still managed as an estate and the property sold therefrom is deeded with deeds signed only by the executors of the estate as executors.

17. The estate paid a personal property tax to the City of Norfolk on the furniture and fixtures in the office in the Arcade Building for each of the fiscal years ending April 30, 1943, 1944, and 1945, which amounted to $16.13 for the year 1944. The furniture and fixtures in the office were owned by the estate and the tax was assessed at the rate of $2.70 per $100 valuation. The State of Virginia has not required this estate to pay a capital tax although real estate ventures and certain other businesses are required to pay a capital tax in that State. W. Fay Garrett, individually, and as executor of the estate, never at any time owned or was required to own any form of real estate or business license in the City of Norfolk or State of Virginia.

■ 18. The claim of Willis E. Garrett, as administrator of the Estate of Claude B. Garrett, which appears in the petition in this proceeding, was withdrawn at the time the testimony was taken for the reason it had been satisfied.

19. The parties have filed a stipulation which reads in part •as follows:

2. The income received by the Estate of William H. Garrett from the sale of lots in East Ocean View and the expenses of the office maintained by the Estate principally for that purpose are as follows:
2. (a) The office was required because of the extensive real estate sales in East Ocean View and was used principally in the sale of these properties although the executors of the Estate also used this office for handling other minor details of the Estate.
3. The figures in the last column of the above paragraph 2 — Net Gain on Sales — were the amounts distributed to the plaintiffs during the taxable years 1942 through the year 1945. If the net gain on the sales of the lots in East Ocean View is not ordinary income from a trade or business, as determined by the Commissioner of Internal Kevenue, but long-term gain from the sale of capital assets of which only 50 per centum should be taken into account in computing taxable net income as claimed by plaintiffs, then refunds to the plaintiffs would result as follows:
Column “A” represents the refund claimed by plaintiffs by taking into account, in computing taxable income, 50 per centum of the apportioned amount of the gain from sale of lots before deducting the' office expenses incurred in earning the income and then deducting the amount of the office expenses apportioned among plaintiffs. Column “B” represents the amount of refund claimed by plaintiffs by taking into account, in computing taxable income, 50 per centum of the apportioned net gain from sales after deducting the office expenses as set forth in paragraph 2 above.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiffs W. Fay Garrett, Buth Houser Garrett, Marguerite Garrett Etheridge, Edna Garrett Wing, Edward N. MacWilliams, and Hazel J. MacWilliams are entitled to recover, and it is adjudged and ordered that they recover of and from the United States as follows:

W. Fay Garrett is given judgment for $402.21 for the year 1943, $734.38 for the year 1944, and $837.33 for the year 1945.

Buth Houser Garrett is given judgment for $469.07 for the year 1943, $1,195.66 for the year 1944, and $1,090.77 for the year 1945.

Marguerite Garrett Etheridge is given judgment for $532.49 for the year 1944 and $779.08 for the year 1945.

Edna Garrett Wing is given judgment for $649.82 for the year ending April 30,1944, and $742.43 for the year ending April 30, 1945.

Edward N. MacWilliams and Hazel J. MacWilliams are given judgment for $329.01, $519.10, and $426.43 for the years 1943,1944, and 1945, respectively.

Interest in each instance is to be added from the dates of payments as provided by statute.

Plaintiff Willis E. Garrett, Administrator of the Estate of Claude B. Garrett (whose claim having been satisfied was withdrawn), is not entitled to recover, and as to him the petition is dismissed. 
      
       Judgment amended May 21, 1954.
     