
    WILLIAM J. MILLER AND ELIZABETH P. MILLER v. THE UNITED STATES
    [No. 337-60.
    Decided December 11, 1964.
    Plaintiffs’ motion for reconsideration denied March 12, 1965]
    
      
      George H. Bowers, Jr., and William, O. Baskett for plaintiffs.
    
      Cynthia Holcomb, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. C. Moxley Featherston, Lyle M. Turner, Edward 8. Smith, and Philip B. Miller were on the the briefs.
    Before CoweN, Chief Judge, Dureee, Davis, and ColliNS, Judges, and Whitaker, Senior Judge.
    
   Whitaker, Senior Judge,

delivered the opinion of the court:

The question presented in this case is whether the gain derived by plaintiffs in 1956, 1957, and 1958 from the sale of certain lots in a subdivision of a tract of land in Princess Anne County, Virginia, constituted ordinary income or long-term capital gain. It was ordinary income, if the property from the sale of which it was derived was “held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” (26 U.S.C. §1221 (1958)). The question is, was plaintiff in the real estate business.

Plaintiff, a Mennonite, was born on his father’s farm on March 12,1907, and worked on it until he was about 20 years old, when he went to Indiana, where he worked for about 18 months in a factory and later with a road contractor. Thereafter, for about 8 or 9 years, he worked on various farms, sometimes as a laborer for wages and sometimes as a sharecropper. But in 1937, when he was 30 years old, he was given a one-half interest in a coal mine. Two years later he bought the other one-half interest. The running of this coal mine occupied his entire time except during the summer months when he worked on a Mr. Blake’s farm. In 1941 he went into the business of buying and selling turkeys and chickens in addition to running the mine. He was so engaged until the year 1948.

The city limits of Norfolk, Virginia, were expanding in the direction of plaintiff’s property. In 1949, the year in which plaintiff agreed to purchase the farm, the city passed an ordinance to annex a large part of Norfolk County and Princess Anne County, which brought the city limits close to a 94-acre tract of land which plaintiff agreed to purchase in the same year from one Swartzentruber. Plaintiff made no payment at that time on the purchase price of $50,000 and no conveyance was made. It was agreed that the vendor would continue to occupy the premises until he could relocate his family.

Plaintiff made the first payment on December 27, 1951, when 40 acres were conveyed to him. Later, on September 22, 1952, an additional 36 acres were conveyed to him. On May 1, 1953, 4 acres were conveyed,' and on October 1, 1953, the balance of 14 acres was conveyed. Plaintiff paid the purchase price, $20,000 in 1951, $10,000 in 1954, $20,000 in 1957, and the accrued interest in 1958.

Plaintiff says that he purchased the land for the purpose of farming it, and our commissioner so found. Under our rules the findings of our commissioner are prima, facie correct and they are adopted by the court in the absence of exceptions thereto. However, the law casts the ultimate burden of making findings on the judges of the court, and wherever we are convinced that the weight of the testimony is contrary to the finding of the commissioner, it is our duty to substitute for the commissioner’s finding what we consider to be the correct finding. In this case we think the commissioner failed to give to the testimony of plaintiff’s neighbor, Hutchison, the weight to which it is entitled. Hutchison’s testimony was not rebutted by plaintiff and it contradicts what plaintiff said was his purpose in purchasing the land. Hutchison’s testimony, taken in conjunction with what plaintiff did immediately after he made the first payment on the land, convinces us that plaintiff did not purchase it for the purpose of farming it.

When plaintiff was considering purchasing the land, he asked his neighbor, Hutchison, if he would like to go in with him in buying it, saying that they could make $100,000 on it “right quick.” Later on, after plaintiff had sold a good many of the lots, he told this same man, who had declined to join in the venture, that he had “really missed the boat.” At the same time he told him that when he had sold two more lots, he would have the farm fully paid for and then he was going to borrow $50,000 and make $200,000 with it. He did not explain how he was going to do it, but, presumably, by the purchase of other land and subdividing it into lots.

As soon as the 40 acres were conveyed to him, plaintiff contracted with a surveyor to survey 20 of the acres, lay out streets and sidewalks, and divide the land into lots. After this had been done, he entered into an exclusive contract with a certain real estate agent, Bratton, to sell the lots for' him. Within a month plaintiff hired another real estate agent to sell his lots as Bratton had been able to sell only one lot. Thus, plaintiff subjected himself to liability for commissions to two real estate agents for the sale of the same lots. The following year he divided the other 20 acres into lots, and a few months later he divided into lots an additional 36 acres which had been conveyed to him. The first 20 acres were known as Section 1, Kempsville Heights, the second 20 acres, Section 2, Kempsville Heights, and the 36 acres, Section 3, Kempsville Heights.

Although the city limits of Norfolk had not been extended to plaintiff’s property, he nevertheless made the improvements required by ordinances of the city, such as streets, drainage facilities, etc., at a total cost of $60,186.99. This was $10,000 more than the purchase price of the land.

But even though it be conceded that plaintiff’s purpose in agreeing to purchase the land was for the purpose of farming it, it cannot be denied that during the tax years in question he “held” the land primarily for sale to customers in the ordinary course of his business. The purpose for which held is the test rather than the purpose for which purchased.

The 94 acres were divided into 182 lots. From 1952 to 1960 plaintiff had sold a total of 135 of them. Eight sales were made in 1952, 22 in 1953, 5 in 1954, 11 in 1955, 16 in 1956,11 in 1957,16 in 1958, 20 in 1959, and 26 in 1960.

Plaintiff himself did not solicit purchasers for the lots but employed real estate agents to do so. Plaintiff himself determined the price at which each lot was to be sold, he signed the contracts of sale, he collected the purchase price of each lot, and executed the deeds.

Plaintiff never farmed any part of the land. He did have a vegetable garden on it, kept a cow or two to provide milk for his family, and raised hay to feed the cows on five acres. He also received a small rental income from two houses on it and from a car storage shed on it.

During the taxable years in question, plaintiff had no occupation except to tend his vegetable garden, harvest his hay, feed and milk his cows, feed his neighbor’s hogs, and do what was required of him in connection with 'the sale of these lots. He was not a very busy man, but he had a nice income. He had abandoned his coal mine and poultry business, and the extent of his activities was as mentioned above.

In 1956 plaintiff reported income of $361.20 as interest, $1,546.06 from rents, and one-half of $15,975.96 from the sale of these lots. In 1957 he reported $2.30 income from farming, $435.89 as interest, $493.44 from rents and royalties, $600 from loan exchange, $160 from the sale of property other than these lots, and one-half of $13,668.44 from the sale of the lots. In 1958 he reported a farm income of $915.79, $179.34 from interest, $329.72 from rents and royalties, $100 from the sale of a dairy bam, and one-half of $21,772.34 income from the sale of these lots.

During the years in question, 93 percent of plaintiff’s income was derived from the sale of these lots.

During the tax years in question, one would hardly say that plaintiff was very busy about anything, but, if he had any business at all, it was the business of buying property, subdividing it, and selling off the lots. As his conversation with Hutchison shows, after he paid for this tract he intended to buy another tract, subdivide it, and sell those lots. From this real estate venture, this farm laborer had derived a nice income in these tax years, and he hoped to do the same thing in the future. That he had to spend but little of his own time in doing so, would seem to be immaterial under the circumstances of this case. Nor is it material that he did not advertise the property; the lots were so located that they almost sold themselves, with some help from two real estate agents plaintiff employed. From the lots sold he was realizing an income he had never before enjoyed and, hence, he was not impelled to push for more. It was perhaps a slothful business, but a business nonetheless.

Whether income is a capital gain or income in the ordinary course of business of the taxpayer must be decided on the facts and circumstances of the particular case, and other cases are not very helpful. However, a few tests have been thought to be helpful, such as the purpose for which the property was acquired, the motive for selling it, the taxpayer’s method of selling the land, his income from the sale of it compared with his other income, the extent of the improvements made to facilitate the sale of it, the frequency and continuity of sales, and the time and effort expended by taxpayer in promoting the sales in relation to his other activities. See Oahu Sugar Co. v. United States, 156 Ct. Cl. 546, 300 F. 2d 773 (1962); Cebrian, et al. v. United States, 149 Ct. Cl. 357, 181 F. Supp. 412 (1960); Lazarus v. United States, 145 Ct. Cl. 541, 172 F. Supp. 421 (1959); Boeing v. United States, 144 Ct. Cl. 75 (1958); McConkey v. United States, 131 Ct. Cl. 690, 130 F. Supp. 621 (1955); Fahs v. Crawford, 161 F. 2d 315, 317 (5th Cir. 1947) ; Dillon v. Commissioner, 213 F. 2d 218, 220 (8th Cir. 1954), and Curtis Co. v. Commissioner, 232 F. 2d 167, 170 (3d Cir. 1956).

We have no doubt plaintiff bought the property for the purpose of subdividing it and selling the lots, from which he hoped to derive a nice profit. In order to do this he expended on improvements $10,000+ more than the purchase price. During the tax years in question he spent very little of his own time in connection with the sales, but in preparing for them he had spent considerable time, in financing the project, in having it surveyed, laid off into streets and lots, employing people to build the streets, etc., fixing the price of each lot, preparing and recording the plats, and employing real estate agents. While but little of his time was required in the tax years in question, he spent hut little time on any other gainful activity.

Plaintiff places great reliance on Lazarus v. United States, 145 Ct. Cl. 541, 172 F. Supp. 421 (1959), but the facts of the two cases are substantially different. Lazarus bought the property for a farm and operated it as a farm for 5 years. He decided to sell it in order to raise needed cash in the operation of bis motion picture business, in which business he had been engaged for many years. He first tried to sell the land as a single parcel and decided to subdivide it only after he found that this could not be done. As it was sold, the money was used in his motion picture business. These facts do not exist in the case at bar.

It is not worthwhile to discuss the other cases relied on by plaintiff, since each one must be decided on its own particular facts.

Plaintiffs’ petition is dismissed.

Davis, Judge,

concurring in the result:

The Trial Commissioner has found that, when plaintiff purchased the land in 1949, he intended to farm it. Under the standards we employ to review factual findings of this this type by our Commissioners (Wilson v. United States, 151 Ct. Cl. 271, 273 (1960); Davis v. United States, 164 Ct. Cl. 612, 617 (1964); Commerce Int'l Co. v. United States, 167 Ct. Cl. 529, 536-37, 338 F. 2d 81 (1964); Litchfield Mfg. Corp. v. United States, Ct. Cl. 167 Ct. Cl. 604, 612, 338 F. 2d 94 (1964), n. 13), I would not overturn this express finding. However, it is clear to me from the record, including among other tilings plaintiff’s own statements, that by the time of the transactions reflected in the income of the taxable years (1956-1958), he held the property primarily for sale to customers in the ordinary course of a real estate business. He was no longer engaged in farming, and to a substantial extent he was actively involved in the sale of the lots which was his primary occupation. He was not merely an investor passively accepting the proceeds of his capital.

FINDINGS OE FACT

The court, having considered the evidence, the report of Trial Commissioner Paul H. McMurray, and the briefs and arguments of counsel, makes findings of fact as follows:

1. William J. Miller and Elizabeth P. Miller, husband and wife, are residents of Princess Anne Comity, Virginia.

2. This suit was instituted by plaintiff to recover individual Federal income taxes with respect to calendar years 1956, 1957, and 1958, totaling $5,301.55.

3. Plaintiff filed timely income tax returns for each of the years 1956, 1957, and 1958. In each of those returns plaintiff reported gain from the sale of lots as long-term capital gain. The District Director of Internal Revenue, Richmond, Virginia, upon audit, determined that the gam from the sale of lots during the 3-year period involved in this action constituted ordinary income, and assessed deficiencies on those years as follows:

Year Deficiency Interest
1956___$1,134.72 $196.82
1957_ 978.24 110.98
1958_ 2,734. 62 146.17

Plaintiff paid the deficiencies and filed timely claims for refund. The claims for refund were disallowed by defendant and, thereafter, plaintiff brought this suit.

4.(1) The income tax return for the year 1956 shows plaintiff declared as income $9,895.14. This includes $361.20 income from interest, $1,546.06 income from rents and royalties. His total gain on the sale of lots was $17,526.20, but tinder the law plaintiff was required to report as income only 50 percent of his net gain, which was $7,987.98.

(2) Plaintiff’s income tax return for the year 1957 shows that he declared, as income, $8,525.85. This includes $2.80 income from farming, $435.89 income from interest, $493.44 income from rents and royalties, $600 income from loan exchange, $160 income from the sale or exchange of other than capital assets, and $6,834.22 income from the sale or exchange of capital assets, which is 50 percent of the gain derived from the sale of lots at a gross sales price of $19,650.

.(3) Plaintiff’s income tax return for the year 1958 shows plaintiff declared as income $12,411.03. This includes $915.79 income from farming, $179.35 income from interest, $329.72 income from rents and royalties, $100 from the sale of dairy barns sold as junk, and $10,886.17 income from the sale or exchange of capital assets, which is 50 percent of the gain derived from the sale of lots at a gross sales price of $30,200.

5. Plaintiff William J. Miller was bom March 12,1907, in London, Ohio. His father was a farmer, and plaintiff worked on his father’s farms until he was about 20 years old. For a period of about 2 years after leaving his father’s farm, plaintiff worked at nonfarm labor. Most of plaintiff’s adult life, prior to the purchase of the farm, had been spent earning a living working on farms or on jobs which are farm-oriented. By 1944, when plaintiff was 37 years old, he ceased doing any farming, except to provide food for his family’s consumption. From then on he engaged in several commercial enterprises, the coal business and the retail and wholesale buying and selling of poultry, the operation of a service station and a place for the storing of cars. In the taxable years in question, plaintiff was not engaged in any activity other than what was necessary in connection with his car storage garage and the collection of rental from some buildings which were on the land when he acquired it from his vendor. During this time plaintiff also was engaged in fixing the sales price of each lot in his subdivisions, the signing of the contract of sale, receiving the proceeds thereof, and executing deeds.

6. Sometime in June 1949 plaintiff and Mr. Swartzen-truber entered into a parol contract for the sale of Mr. Swartzentruber’s 94-acre farm. The agreed price was $50,000.

At the time plaintiff agreed to purchase the farm from Swartzentruber in 1949, the parties agreed that Swartzen-truber would live in the dwelling house and operate the farm rent-free until he could relocate his family, and that Swartzentruber would not charge plaintiff any interest on his indebtedness for the farm as long he he lived there. In 1949 plaintiff apparently thought Swartzentruber would move off the farm in a short time so that he could take possession of the farm.

7. Plaintiff made his first payment on the farm on December 27, 1951, in the sum of $20,000. On that same day Swartzentruber executed the first of the deeds of the farm land transferring to plaintiff approximately 40 acres out of the total of 94 acres. The various deeds executed by Swartzentruber and the various payments made by plaintiff were as follows:

Date oí deed Number of acres Date of payment Amount
Dec. 27,1051». Dec. 27, 1951. $20,000.
Sept. 22,1962-
May 1, 1953_
Oct. 1, 1953_ Oct. 1953.. Gave $10,000 note and $20,000 note.
1954.. Paid $10,000 note with interest.
1957.. Paid $20,000 note.
1958-Paid interest on $20,000 note.

Some time during the period that plaintiff was considering the purchase of this farm, he asked his neighbor, Hutchison, if he would like to go in with him in buying it, saying that they could make $100,000 on it “right quick,” but he did not explain just how he was going to make $100,000 on it, although Hutchison knew that he meant in some way other than farming it. Hutchison declined to go into the venture and in 1958 plaintiff told him he had “really missed the boat.” He also told him that when he had sold two more lots, he would have the farm paid for, and then he was going to borrow $50,000 and make $200,000, but he did not explain how he was going to do it.

8. Shortly after the first 40 acres of the farm were deeded to plaintiff in December 1951 (following a payment of $20,-000) a real estate agent, W. E. Bratten, approached plaintiff with regard to selling parcels of the farm. At the time Bratten approached plaintiff, Swartzentruber was pressing plaintiff for payments on the farm.

•9. Mr. Bratten and plaintiff went to see a surveyor, C. A. Bamforth, and plaintiff hired Bamforth to plat 20 acres of plaintiff’s farm. On April 2, 1952, plaintiff entered into an exclusive sale contract with Bratten for the 20 acres (known as Section 1, Kempsville Heights). Until the time plaintiff breached this contract, Bratten sold only one lot.

10. On August 2, 1949, the area within a two-mile radius of plaintiff’s land began to be “opened up” as a suburban residential area. This activity increased after 1952. On February 28,1949, the city of Norfolk had adopted an ordinance to provide for extension of the city eastward by annexation of a large portion of Norfolk and Princess Anne Counties. Various suits were filed, and on January 1, 1955, the city was awarded 7,143 acres of Norfolk County; on January 1, 1959, the city was awarded 135 square miles of Princess Anne County. Because of the geographical situation of the city of Norfolk, the logical expansion of its city limits is east, towards plaintiff’s farm, and by 1959 the city limit was less than two miles from the land in question.

11. Because of the nature and location of plaintiff’s land, it was ideally suited for subdividing. On or about May 1, 1952, Kay Tyree, a realtor, approached plaintiff and informed him that certain builders wished to purchase lots. Plaintiff agreed to sell lots from the platted portion to builders procured by Tyree.

12. After filing a plat on the 20 acres known as Section 1, Kempsville Heights, on March 20,1952, plaintiff filed a plat of approximately 20 acres on December 22, 1952, known as Section 2, Kempsville Heights. On J anuary 22,1953, plaintiff filed a plat of approximately 36 acres known as Section 3, Kempsville Heights. All the land platted was acquired from Swartzentruber. Plaintiff contracted with excavators and road builders to make the minimum improvements to Section 1, as required by local ordinance. The work was begun in the spring of 1952 and completed in 1954, at a total cost of $8,815.56. The improvements of Sections 2 and 3 were begun in 1955. Section 2 was completed in 1958 at a cost of $13,681.88. The improvements made to Section 3 were completed in 1959 at a cost of $19,684.34 (the cost through 1958 being $8,772.67). The final plat, on Section 4, was filed November 16, 1959. The improvements through 1960 totaled $18,005.21.

13. On May 7, 1956, plaintiff granted G. E. Wetherington an exclusive option to purchase 63 lots, specified by section and lot number, at the rate of 20 lots per year for $1,800 per lot, provided that, if Wetherington failed to purchase 10 lots in any one year, the option terminated.

14. All lots sold during the period involved hi this action were from Sections 1,2, and 3. In 1956, Wetherington purchased 15 of the 16 lots sold, the remaining lot being sold to Sylvester Smith, a state policeman who approached plaintiff without solicitation. In 1957, Wetherington purchased all 11 lots sold. In 1958, Wetherington purchased 10 lots, Peacock purchased three lots, and three lots were purchased by A. L. Taylor, Robert Webb, and Arthur Cardillo, who were personal friends of plaintiff.

15. Prior to May 1956, the sale of each lot was handled under a separate contract. Plaintiff assigned a sales price to each lot, signed the contract of sale, received the sale proceeds, and executed the deed at settlement.

16. The purchase price of the original farm was allocated among the four sections of Kempsville Heights by the plaintiff as follows:

17. The taxpayer eventually subdivided all of the farm. The total number of lots of Kempsville Heights, all carved from the Swartzentruber 94-aere farm, was 182. The number of lots sold each year from 1952 through 1960 was as follows:

1952_ 8

1953_ 22

1954_ 5

1955_ 11

1956_ 16

1957_ 11

1958_ 16

1959_ 20

1960_ 26

135

18. During the period 1952 through 1955, plaintiff reported the gain on the sale of lots carved from the farm as ordinary income. On the 1952 return the gain was reported as gain from the sale of “property other than a capital asset.” On the 1953-55 returns it was reported as business income on Schedule C entitled “Profit (or Loss) from Business or Profession” and under item (I) on Schedule C, “principal business activity”, plaintiff wrote: “Buying property, breaking into lots for resale.” In the 1953-55 returns, plaintiff included a schedule entitled “Computation of Self-Employment Tax.” Under the item “State nature of business, if any, subject to self-employment tax,” plaintiff wrote in as follows:

1953 — Dressing & drawing poultry — Beal Estate dealer — Auto car Storage
1954 — Beal Estate developer; operating automobile car storage; service station; poultry mkt
1955 — Eeal Estate Developer; operating aoto car storage ; Service Station.

19. Plaintiff’s tax returns have been prepared for him since 1941 by K,. L. Burchett, a free-lance bookkeeper, who prepares tax returns at nights and on weekends. In 1953 Burchett asked plaintiff how he described himself for the purpose of reporting the gain from sales of lots. Plaintiff did not understand the legal significance of that question and instructed Burchett to give his occupation as a dealer in real estate.

20. Mr. Burchett was of the opinion prior to 1956 that anyone who subdivided property and sold lots was a real estate dealer. Accordingly, plaintiff was listed variously as a real estate dealer or developer, and Burchett reported the gains as ordinary income.

21. While preparing plaintiff’s 1956 tax return Burchett questioned the procedure previously followed in designating plaintiff’s occupation and computing the tax. He asked plaintiff to find out if he was a real estate dealer. Plaintiff called a real estate office and was advised that they did not think he was a real estate dealer. Accordingly, Burchett reported the gain from the sale of lots in 1956,1957, and 1958 as long-term capital gain. The net gains for the years involved are as follows:

1956_$17,526.20

1957_ 13, 668.44

1958_ 21, 772.34

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are not entitled to recover and their petition is dismissed. 
      
       Mrs. Miller is a party to this action only by virtue of having filed a joint tax return with her husband. As used herein, “plaintiff” refers to William J. Miller.
     
      
      As I read the testimony of Hutchison, on which the court relies so heavily, it is not at all clear that the witness placed the conversation with the plaintiff in 1949, the time when plaintiff first agreed to purchase the land, rather than 1951 (when the first payment was made and the first lots were conveyed to plaintiff) or in 1952. In addition, Hutchison’s testimony as to the conversation was unelaborated and he admitted there was no discussion of subdividing or building, et cetera. Hutchison was the very last witness at the trial and plaintiff was the first. In these circumstances, the trial commissioner, who heard the testimony, could rightly decide that plaintiff was telling the truth when he said that he intended to farm the land when he bought it in 1949.
     
      
       As used herein, “plaintiff” shall refer to William, J. Miller.
     
      
       This figure should have been $9,896.24, apparently a typographical error in return.
     
      
       The $10,000 note was payable in 1 year; the $20,000 note had no specific due date.
     
      
       Because oí tlie previously existing exclusive contract with Bratten, plaintiff was forced to pay Bratten $1,802.50.
     
      
       The lots covered were 1-9, 12, 14, 16-21, 23, 26, 31, 35, and, 38 In Section 2 and lots 31-37 and 40-75, in Section 3.
     