
    MRS. ALEXANDER (ELIZABETH C.) GORDON (1) AND ELIZABETH C. GORDON TRUST, MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, TRUSTEE (2) v. THE UNITED STATES
    [No. 461-55.
    Decided March 5, 1958]
    
      
      Mr. David W. Richmond for plaintiffs. Messrs. Frederick O. Graves and Miller & Chevalier were on the brief.
    
      Mr. Theodore D. Peyser, /r., with whom was Mr. Assistant Attorney General Charles K. Rice for defendant. Mr. James P. Garland was on the brief.
   Opinion

fer curiam:

This case is before us on the report of Mastin G. White, a trial commissioner of our court, on exceptions to his report, and to his recommendation for the conclusion of law to be entered. The commissioner wrote an opinion expressing the opinion that neither Mrs. Alexander Gordon nor the trust was engaged in the real estate business in 1950 and 1951. He was of the opinion that the lots sold in those years did not constitute “property held by * * * [plaintiffs] primarily for sale to customers in the ordinary course of * * * [their] trade or business.” They were sales made by plaintiffs in the process of liquidating property received by devise.

We agree with the commissioner’s opinion, and concur in his recommendation. Plaintiff Mrs. Alexander (Elizabeth C.) Gordon (1) is entitled to recover $6,348.84, together with interest thereon as provided by law, and Elizabeth C. Gordon Trust, Mercantile-Safe Deposit and Trust Company, Trustee (2), is entitled to recover $6,122.42, together with interest thereon as provided by law.

It is so ordered.

OPINION OP THE COMMISSIONER

This case involves the question whether the profits realized by the plaintiffs in 1950 and 1951 from the sale of lots in a subdivision of the City of Baltimore, Maryland, should be regarded as capital gains or as ordinary income for income tax purposes. Under the pertinent statutory standard, the answer to the question depends upon whether the lots constituted “property held by the * * * [plaintiffs] primarily for sale to customers in the ordinary course of * * * [their] trade or business”.

The subdivision referred to above was originally part of a 125-acre tract of land known as “The Orchards”, which was acquired about 1900 by Douglas H. Gordon, Sr., as a site for a summer home. An attractive house was built by Mr. Gordon on the tract in 1902, and thereafter The Orchards was used as a summer home by the Gordon family from April to November of each year until September 1921.

Shortly after the house was built at The Orchards, Mr. Gordon gave the house and a 24-acre parcel of land surrotmd-ing it to his wife, Mrs. Elizabeth Clarke Gordon, who is one of the two plaintiffs in the present case.

Mr. Gordon died on April 8,1918. His will, after providing for a number of legacies, bequeathed one-third of the residuary estate to Mrs. Gordon “for her sole and separate use”, and he left two-thirds of the residuary estate in trust for Mrs. Gordon’s benefit during her lifetime. The trust that was created by Mr. Gordon’s will for the benefit of Mrs. Gordon is known as the Elizabeth C. Gordon Trust. It is the second plaintiff in the present suit, and will usually be referred to hereinafter as “the Trust”.

The Orchards, except for the 24-acre portion that Mr. Gordon had given to Mrs. Gordon many years earlier, comprised part of Mr. Gordon’s residuary estate. Hence, under his will, the 101 acres of The Orchards in the residuary estate were owned after Mr. Gordon’s death by the plaintiffs in common, Mrs. Gordon having an undivided one-third interest and the Trust having an undivided two-thirds interest in the property.

In 1921, the plaintiffs (i. e., Mrs. Gordon and the Trust) leased approximately 46 acres of The Orchards to the Elk-ridge Hunt Club for a term of 99 years. The lease contains a provision whereby it may be perpetually renewed.

After September 1921, when Mrs. Gordon married again, The Orchards was no longer used as a summer home by Mrs. Gordon or by any of the five children that had been born to Mr. and Mrs. Gordon.

During the period from September 1921 until 1928, the residence at The Orchards was rented to various persons from time to time by Mrs. Gordon, the owner. Such rentals were unsolicited by Mrs. Gordon, and were made by her without the assistance of a real estate agent. Persons desiring to rent the property customarily approached the corporate trustee under Mr. Gordon’s will, and that company (which will usually be referred to hereinafter as the “Trust Company”) handled the details of the rentals for Mrs. Gordon.

In the spring of 1928, Mrs. Gordon sold the house at The Orchards and the 24-acre parcel of land surrounding it (which she had received from Mr. Gordon as a gift many years earlier) to the Bryn Mawr School for $150,000. When it became known that the house at The Orchards had been sold, numerous inquiries were received by the Trust Company regarding the possibility of purchasing the remaining acreage at The Orchards, or parts of the land. . As a result of one such inquiry, a tract of five acres was sold by the plaintiffs in 1928 for use as a home site.

Among those approaching the Trust Company regarding the possibility of purchasing all the remaining acreage of The Orchards was Gillet & Company, a real estate development company, which made an offer of $7,000 per acre for the property. That offer was accepted, and in 1929 the remaining 50 acres of The Orchards were sold by the plaintiffs to Gillet & Company for $350,000. The purchaser paid $50,000 in cash and gave a mortgage to secure the payment of the remainder of $300,000 due on the purchase price. The principal of the $300,000 indebtedness was payable in five years, and the interest rate was 5% percent.

Gillet & Company subdivided the portion of The Orchards which it had purchased from the plaintiffs, constructed four concrete streets, with curbs and sidewalks, through the greater part of the property, and installed sewers and utilities. A fifth street was constructed except for paving the surface of the street. These improvements cost more than $102,000. Gillet & Company used “The Orchards” as the name of the subdivision.

Gillet & Company became hopelessly insolvent in the early part of 1933. At that time, the company had paid only $60,000 on the principal of its indebtedness to the plaintiffs and was in arrears on the payment of interest, and it had sold only six lots in The Orchards subdivision.

The mortgage on The Orchards subdivision was foreclosed by the plaintiffs on June 29, 1933, except for the six lots that had been sold by Gillet & Company (the mortgage had previously been released as to these six lots by the plaintiffs). The remaining 40% acres of The Orchards subdivision were purchased by the plaintiffs at the foreclosure sale for $85,000, plus costs in the amount of $3,245.98, or a total of $88,245.98. Mrs. Gordon and the Trust again acquired the respective interests of one-third and two-thirds in the property.

After the reacquisition of the property in 1933, the plaintiffs did not sell or attempt to sell any part of The Orchards subdivision during a period of approximately three years. No offer for the purchase of the property was received during the three-year period, although the Trust Company received numerous inquiries as to whether the property was for sale. Among those displaying an interest in The Orchards was The Roland Park Company, which repeatedly approached the Trust Company and indicated a desire to handle the sale of lots in The Orchards for the plaintiffs.

At one time, The Roland Park Company had been the great real estate development company of Baltimore, engaged in the business of purchasing large tracts of land, improving them, and subdividing the tracts for sale. The company was renowned for its restrictive covenants, the beauty with which its streets were laid out and landscaped, and the great care that it took in passing on architectural plans for homes in its subdivisions. During the period 1933-1936, however, The Eoland Park Company was “broke” and in reorganization. It was no longer financially able to purchase, develop, and subdivide tracts of land itself, and, for that reason, it had begun to handle sales of real estate for other persons.

The plaintiffs ultimately decided to entrust the sale of lots in The Orchards subdivision to The Eoland Park Company, because conditions began to seem favorable for the disposition of the property and the plaintiffs desired to maintain, in connection with such disposition, standards comparable to those previously maintained by The Eoland Park Company in the development and disposition of its own subdivisions.

At the plaintiffs’ expense, The Eoland Park Company changed the lot lines previously established by Gillet & Company for The Orchards (as it was thought that the lots established by Gillet & Company were too large to be marketed successfully under the economic conditions that prevailed when The Eoland Park Company was given the task of selling the property), completed the street that had been partially constructed by Gillet & Company, and extended into a theretofore unimproved portion of The Orchards another street that had been constructed by Gillet & Company.

An agreement between the plaintiffs and The Eoland Park Company was signed by the parties on July 20,1936. There was attached to the agreement a list fixing minimum prices for the sale of lots in The Orchards. These prices had been proposed by The Eoland Park Company and approved by the plaintiffs. It was provided in the agreement that The Eoland Park Company could not sell lots at prices lower than the prescribed minimum prices without the plaintiff’s permission, although the company could increase the minimum prices without permission. In connection with the sale of vacant lots, the company was to receive a commission of 15 percent of the sale price if it did not exceed the pi’escribed minimum price; and in the event of a sale at a price higher than the minimum price, the company was to receive the customary 15 percent on the portion of the sale price equivalent to the minimum price and, as added compensation, 50 percent of the increase above the minimum price.

Action was taken by tlie plaintiffs to make all unsold lots in The Orchards subject to covenants and restrictions similar to those that The Eoland Park Company had customarily used in connection with its own subdivisions. These included provisions prohibiting the maintenance of nuisances on the property, the occupancy of the land by any Negro or person of Negro extraction (except Negroes employed as domestic servants by householders in The Orchards), the erection or use of buildings for business purposes (except at two specified locations), and the maintenance of “For Sale” or “For Eent” signs. No construction of any sort could be undertaken in The Orchards without first submitting the plans and specifications to, and securing the approval of, the plaintiffs.

The Eoland Park Company owned a small piece of land that jutted into The Orchards at one point. The resulting jog in the boundary line of The Orchards at this point was eliminated as a result of an agreement between the company and the plaintiffs whereby the former sold this small piece of land to the plaintiffs for a nominal sum. The land thus purchased by the plaintiffs from The Eoland Park Company was combined with contiguous land to form two lots in The Orchards.

The sale of lots in The Orchards by The Eoland Park Company for the plaintiffs began in 1936 and extended through 1951. The plaintiffs did not participate in or supervise tin, company’s sales activities, and they rarely consulted with the company. Although the plaintiffs had the power to disapprove prospective purchasers of lots in The Orchards and to disapprove plans for the construction of homes and other buildings in The Orchards, this power was never exercised, inasmuch as the plaintiffs had confidence in The Eoland Park Company’s judgment respecting these matters.

During the period 193A-1956, the plaintiffs expended a total of $61,902.25 in connection with the maintenance, development, and disposition of The Orchards subdivision. These expenditures were, for the most part, occasioned by maintenance and development work performed by The Roland Park Company at the expense of the plaintiffs.

The figure of $61,902.25 mentioned in the preceding paragraph included the sum of $700 that was spent by the plaintiffs on advertising relative to The Orchards. In addition, The Roland Park Company expended out of its earned commissions a total of $5,210.66 in advertising The Orchards. All advertising, including the expenditure of the $700 provided by the plaintiffs, was handled by The Roland Park Company. Most of the advertisements were run in the company’s own magazine, a monthly that was distributed by the company gratis. The plaintiffs did not approve or review any of the advertisements, including those paid for out of the $700 provided by the plaintiffs.

Two signs were placed by The Roland Park Company on strategically located corner lots in The Orchards. These signs, which mentioned The Orchards and The Roland Park Company, were quite dignified in appearance, being attractively made and beautifully lettered.

During the period 1936-1951, there were 75 sales transactions in connection with the disposition of The Orchards by The Roland Park Company for the plaintiffs, and these transactions involved the sale of 112 lots or parts of lots. Sales of partial lots were usually due to the fact that persons who had previously purchased lots in The Orchards sometimes decided that they would like to have larger areas and, if there was an adjoining vacant lot, would purchase part of it.

Only 9 lots in The Orchards have been sold since 1951, 7 lots having been sold in 1952 and 2 in 1953. Approximately 9 acres of The Orchards remain unsold at the present time. Since 1954, this area has been held by the plaintiffs for sale as a single parcel.

The profits realized by the plaintiffs from the sale of lots in The Orchards were invested or applied to indebtedness. None of the profits was invested in real estate.

No land (other than the small area acquired from The Roland Park Company for inclusion in The Orchards) has ever been purchased by the plaintiffs. Except for the sale of The Orchards and the sale to the defendant during recent years of several thousand acres of land in Virginia at $3.15 an acre for inclusion in the Jefferson National Forest (the Virginia land was also acquired by the plaintiffs under Mr. Gordon’s will), the plaintiffs have never sold any real estate.

The two years involved in this suit are 1950 and 1951. In 1950, Mrs. Gordon realized a profit of $4,366.56 from the sale of 2 full lots and 9 partial lots in The Orchards (this being approximately 13 percent of her total income for that year, exclusive of the income that she received from the Trust), and the Trust realized a profit of $9,141.86 on these sales (this being approximately 14 percent of the Trust’s total income in 1950). In 1951, Mrs. Gordon realized a profit of $8,300.62 from the sale of 10 full lots and 5 partial lots in The Orchards (which was approximately 25 percent of her total income for that year, exclusive of the income that she received from the Trust), and the Trust realized a profit of $17,312.64 on the sales in 1951 (this being approximately 27 percent of the Trust’s total income for that year).

In preparing their income tax returns for 1950 and 1951, Mrs. Gordon and the Trust reported the profits derived from the sale of lots in The Orchards as capital gains, and they computed and paid their respective income taxes on that basis. Subsequently, the Internal Revenue Service concluded that such profits constituted ordinary income rather than capital gains. The Internal Revenue Service thereupon assessed against Mrs. Gordon deficiencies of $1,597.95 and $3,741.97 for 1950 and 1951, respectively, and it assessed against the Trust respective deficiencies of $1,662.29 and $3,503.03 for those years.

Except for the plaintiffs’ actions in treating the profits from the sale of lots in The Orchards as capital gains rather than as ordinary income, the Internal Revenue Service did not question — and the defendant in this litigation has not questioned — the correctness of any portion of the plaintiffs’ income tax returns for 1950 and 1951.

The deficiencies were paid by the plaintiffs on February 4, 1955, together with interest payments by Mrs. Gordon in the amounts of $369.10 and $639.82 for 1950 and 1951, respectively, and interest payments by the Trust in the respective amounts of $375.65 and $581.45 for those years. Subsequently, on May 26, 1955, the plaintiffs filed claims for refund with the Internal Revenue Service. Then, no action having been taken by the Internal Revenue Service on their claims, the plaintiffs filed the present suit on December 5, 1955, seeking to recover $6,348.84 (plus interest) for Mrs. Gordon and $6,122.42 (plus interest) for the Trust.

The sales of the lots involved in this case were parts of a long-continued course of action adopted by the plaintiffs for the liquidation of a 101-acre tract of land which they had . acquired under Mr. Gordon’s will. During the process, the land was converted into cash and the cash was used for the payment of indebtedness and for investment in assets other than land. The essential nature of the project as a program of liquidation is not altered by the circumstances that the 50-acre parcel out of which the lots were carved was originally sold by the plaintiffs as a single parcel to Gillet & Company, that the plaintiffs, after the area had been subdivided by Gillet & Company, reacquired it through the process of foreclosing a mortgage that they held on the property to secure the payment of the major portion of the purchase price under their contract of sale with Gillet & Company, and that the plaintiffs thereafter proceeded to dispose of the land again in subdivided form. McConkey v. United States, 131 C. Cls. 690, 694 (1955).

Where sales are made by a taxpayer in the process of liquidating property received by bequest, devise, or inheritance, the taxpayer is ordinarily entitled to treat such sales as the disposition of capital assets. McConkey v. United States, supra, at p. 693; Garrett v. United States, 128 C. Cls. 100, 104 (1954). The fact that land received by devise or inheritance is disposed of piecemeal in the form of lots rather than by means of a single transaction does not affect this principle. Smith v. Dunn, 224 F. 2d 353, 357 (C. A. 5, 1955).

That the ordinary rule stated in the preceding paragraph should be followed in the present case seems clear when it is considered that the plaintiffs, in conducting the liquidation program, entrusted the disposition of the property to an independent real estate broker and did not themselves take an active part in the sales campaign (Smith v. Dunn, supra, at p. 356; Phipps v. Commissioner of Internal Revenue, 54 F. 2d 469, 470-471 (C. A. 2, 1931); Falls v. Crawford, 161 F. 2d 315, 317 (C. A. 5, 1947)); that the sales transactions respecting the lots in The Orchards were not numerous or frequent, averaging less than five per year during the period 1936-1951 (Dunlap v. Oldham Lumber Co., 178 F. 2d 781, 784-785 (C. A. 5, 1950)) ; and that the plaintiffs’ profits from the sale of lots in The Orchards represented relatively small proportions of the plaintiffs’ total incomes (Camp v. Murray, 226 F. 2d 931, 933 (C. A. 4, 1955); Berberovich v. Menninger, 147 F. Supp. 890, 893 (E. D. Mich., 1957); cf. Thompson v. United States, 136 C. Cls. 671). In view of the factors just mentioned and the liquidation aspect of the case, it can hardly be said that the plaintiffs themselves were engaged in the business of selling lots. As previously indicated, this is the ultimate question under the statutory standard of whether the lots involved in this case constituted “property held by the * * * [plaintiffs] primarily for sale to customers in the ordinary course of * * * [their] trade or business.”

The fact that the plaintiffs made rather extensive expenditures in order to facilitate the sale of lots in The Orchards is entitled to consideration as a possible indication that the plaintiffs were engaged in the business of selling lots. Thompson v. United States, supra; Shearer v. Smyth, 116 F. Supp. 230, 232 (N. D. Calif., 1953), affirmed 221 F. 2d 478 (C. A. 9, 1955), cert. denied 350 U. S. 840. However, this factor does not compel a conclusion different from that previously stated, since there is no single test that is determinative in all cases dealing with the problem of whether profits derived from sales of subdivided realty constitute capital gains or ordinary income. Garrett v. United States, supra, at p. 104; Mauldin v. Commissioner of Internal Revenue, 195 F. 2d 714, 716 (C. A. 10, 1952).

It is the policy of the income tax law “to relieve the taxpayer from * * * excessive tax burdens on gains resulting from a conversion of capital investments, and to remove the deterrent effect of those burdens on such conversions”. Burnet v. Harmel, 287 U. S. 103, 106 (1932). In the present case, I believe that it would be inconsistent with the quoted policy to tax as ordinary income the profits realized by the plaintiffs in the course of liquidating an area of land that they had received by devise.

It is my opinion, therefore, that the profits realized by the plaintiffs in 1950 and 1951 from the sale of lots in The Orchards should be regarded as capital gains, rather than as ordinary income, for income tax purposes. It necessarily follows that the plaintiffs are entitled to recover in the present action.

FINDINGS OF FACT

The court, having considered the evidence, the report of Commissioner Mastin G. White, and the briefs and argument of counsel, makes findings of fact as follows:

1. This case involves the question whether the profits realized by the plaintiffs in 1950 and 1951 from the sale of lots in a subdivision of the City of Baltimore, Maryland, constituted capital gains or ordinary income for income tax purposes.

2. The subdivision referred to in finding 1 was originally part of a 125-acre tract of land known as “The Orchards”. This tract was acquired about 1900 by Douglas H. Gordon, Sr. (usually referred to in these findings as “Mr. Gordon”), through the foreclosure of a mortgage.

3. Mr. Gordon was a banker, the owner of The Baltimore News, and a general business promoter. He was prominent in Baltimore as a leader in both civic and business affairs. Mr. Gordon was interested in city planning, and one of his civic activities was the reform and modernization of Baltimore. He utilized The Baltimore News as an instrumentality for molding public opinion in support of this project.

4. An ancestor of Mr. Gordon had made a very large fortune in 1807. Thereafter, this fortune was invested to a large extent in mortgages on real estate in the State of Virginia and in the Baltimore area. Through the years, land was acquired by Mr. Gordon’s progenitors as a result of mortgage foreclosures. Mr. Gordon inherited a substantial amount of real estate, and he acquired other land through the process of foreclosing mortgages.

5. Mr. Gordon acquired The Orchards as a site for a summer home. It was one of the most beautiful pieces of land in Baltimore, and was known for its beautiful trees. The Orchards was situated on the main street of the city as it ran into the country. An attractive house was built there by Mr. Gordon in 1902 and, in time, the house was surrounded with beautiful gardens.

6. Shortly after the house was built at The Orchards, Mr. Gordon gave the house and a 24-acre parcel of land surrounding it to his wife, Mrs. Elizabeth Clarke Gordon (who will usually be referred to in these findings as “Mrs. Gordon”). Mrs. Gordon is one of the two plaintiffs in the present case.

7. The Orchards was used as a summer home by the Gordon family (Mr. and Mrs. Gordon had five children) from April to November of each year, beginning in 1902 and continuing until after Mr. Gordon’s death.

8. Mr. Gordon died on April 8,1918. His will, after providing for a number of legacies that amounted to approximately $132,500, bequeathed one-third of the residuary estate to Mrs. Gordon “for her sole and separate use” and two-thirds of the residuary estate to the International Trust Company of Baltimore, as trustee, “to hold, invest, re-invest and manage the same * * * and to collect and pay the net income thereof to my wife, Elizabeth Clarke Gordon, during her life.” The trust that was created by Mr. Gordon’s will for the benefit of Mrs. Gordon is known as the Elizabeth C. Gordon Trust. It is the second plaintiff in the present suit, and will usually be referred to in these findings as “the Trust”.

9. The Orchards, except for the 24-acre portion mentioned in findiug 6, comprised part of Mr. Gordon’s residuary estate. Hence, under his will, the 101 acres of The Orchards in the residuary estate were owned after Mr. Gordon’s death by the plaintiffs in common, Mrs. Gordon having an undivided one-third interest and the Trust having an undivided two-thirds interest in the property. This particular parcel of land represented, in value, approximately 10 percent of Mr. Gordon’s entire estate at the time of his death. His residuary estate also included other realty holdings that were quite substantial in area, but the evidence does not disclose their aggregate value.

10. Mrs. Gordon was given the power by Mr. Gordon’s will to remove the trustee of the Trust and appoint a new trustee at any time. She was also given the power to dispose of the trust property by will to the five Gordon children (and the descendants of any child who might predecease her) in such proportions as she might think appropriate; and it was provided in the will that if she should die intestate, the trust property was to be divided after her death among the Gordon children in equal parts, per stirpes (with the descendants of any child who might predecease Mrs. Gordon taking that child’s part).

11. On April 27, 1918, Mrs. Gordon exercised her power of removal and appointment with respect to the trustee of the Trust by removing the International Trust Company of Baltimore as trustee and appointing in its stead the Safe Deposit and Trust Company of Baltimore, a corporation that maintained its principal office in Baltimore, Maryland. The latter company subsequently took many of the actions that are of importance in connection with the present case, and it will usually be referred to in these findings as “the Trust Company”. Sometime after 1951, the Mercantile-Safe Deposit and Trust Company became the successor to the Safe Deposit and Trust Company of Baltimore, and it is the present trustee of the Trust.

12. After Mr. Gordon’s death, the Gordon family continued to use The Orchards as a summer home until September 1921, when Mrs. Gordon married again and moved to Philadelphia.

13. In 1921, the plaintiffs (i. e., Mrs. Gordon and the Trust) leased approximately 46 acres of The Orchards to the Elk-ridge Hunt Club for a term of 99 years. The lease contains a provision whereby it may be perpetually renewed.

14. During the period from September 1921 until 1928, the residence at The Orchards was rented to various persons from time to time by Mrs. Gordon. Such rentals were unsolicited by Mrs. Gordon, and were made by her without the assistance of a real estate agent. Persons desiring to rent the property customarily approached the Trust Company, knowing it to be the trustee under Mr. Gordon’s will, and that company handled the details of the rentals for Mrs. Gordon.

15. In the spring of 1928, the Bryn Mawr School decided to move from the old residential part of Baltimore to the country. The Gilman School adjoined The Orchards on the south, and the Bryn Mawr School inquired of the Trust Company whether the house at The Orchards could be bought. Shortly thereafter, the house and the 24-acre parcel of land surrounding it were sold by Mrs. Gordon, the owner (see finding 6), to the Bryn Mawr School for $150,000.

16. When it became known that the house at The Orchards had been sold, numerous inquiries were received by the Trust Company regarding the possibility of purchasing the remaining acreage at The Orchards, or parts of the land. As a result of one such inquiry, a tract of five acres was sold by the plaintiffs in 1928 for use as a home site.

17. Among those approaching the Trust Company regarding the possibility of purchasing all the remaining acreage of The Orchards was Gillet & Company, a real estate development company, which made an offer of $7,000 per acre for the property. That offer was accepted, and in 1929 the remaining 50 acres of The Orchards was sold by the plaintiffs to Gillet & Company for $350,000. The purchaser paid $50,000 in cash and gave a mortgage to secure the payment of the remainder of $300,000 due on the purchase price. The plaintiffs took the same proportionate interests of one-third and two-thirds in the indebtedness and mortgage as they had previously held in the land. The principal of the $300,000 indebtedness was payable in five years, and the interest rate was 5y2 percent.

18. Gillet & Company subdivided the portion of The Orchards which it had purchased from the plaintiffs, erected a rather elaborate stone gateway to the subdivision, constructed four concrete streets, with curbs and sidewalks, through the greater part of the property, and installed sewers and utilities. A fifth street was constructed except for paving the surface of the street. These improvements cost more than $102,000. Gillet & Company used “The Orchards” as the name of the subdivision.

19. Gillet & Company became hopelessly insolvent in the early part of 1933. At that time, it had paid only $60,000 on the principal of its indebtedness to the plaintiffs and was in arrears on the payment of interest, and it had sold only six lots in The Orchards subdivision. The plaintiffs’ mortgage had been released as to the six lots in connection with their sale by Gillet & Company.

20. The mortgage on The Orchards subdivision (except for the six lots sold by Gillet & Company) was foreclosed by the plaintiffs on June 29, 1933. The remaining 40*4 acres of The Orchards subdivision were purchased by the plaintiffs at the foreclosure sale for $85,000, plus costs in the amount of $3,245.98, or a total of $88,245.98. The only bidder at the public foreclosure sale was a representative of the Trust Company, acting for the plaintiffs. The bid price was low in relation to the value of the property. By virtue of the purchase, Mrs. Gordon and the Trust again acquired the same respective interests of one-third and two-thirds in the property. In connection with the foreclosure of the mortgage, the plaintiffs obtained a deficiency judgment against Gillet & Company for more than a quarter of a million dollars.

21. On February 20, 1936, the Circuit Court of Baltimore City, pursuant to a petition theretofore filed by Mrs. Gordon, entered an order appointing her son, Douglas H. Gordon, Jr., and the Trust Company as trustees of Mrs. Gordon’s individually owned property, including her one-third interest in The Orchards subdivision. Mrs. Gordon assented to the order. Under the court order, Mrs. Gordon retained the power to withdraw any property from this court-created trust and the power to. make a testamentary disposition of the property in her separate estate affected by the trust. The court order provided (among other things) for commissions to be paid to the trustees on the sale of any land included in Mrs. Gordon’s separate estate, the commissions to be those allowed by the rules of the Supreme Bench of Baltimore City.

22. After the reacquisition of the property in 1933, the plaintiffs did not sell or attempt to sell any part of The Orchards subdivision during a period of approximately three years. No offer for the purchase of The Orchards subdivision was received during the three-year period, although the Trust Company received numerous inquiries as to whether The Orchards was for sale. Among those displaying an interest in The Orchards was The Eoland Park Company, a corporation, which repeatedly approached the Trust Company and indicated a desire to handle the sale of lots in The Orchards for the plaintiffs.

23. (a) At one time, The Eoland Park Company had been the great real estate development company of Baltimore, engaged in the business of purchasing large tracts of land, improving the tracts, and subdividing them for sale. The company was renowned for its restrictive covenants, the beauty with which its streets were laid out and landscaped, and the great care that it took in passing on architectural plans for homes in its subdivisions. Its major developments were Eoland Park, Guilford, and Homeland. The lots in these subdivisions were sold at relatively high prices. Homeland, the company’s most recent development, consisted of 400 acres and was located quite near The Orchards. In one section, for a distance of approximately 100 yards, the two subdivisions were on opposite sides of a street.

(b) Mr. Gordon had owned a substantial amount of The Eoland Park Company’s capital stock, and, on his death, the ownership of such stock passed to Mrs. Gordon and the Trust in the respective portions of one-third and two-thirds.

24. During the period 1933-1936 mentioned in finding 22, The Eoland Park Company was “broke” and in reorganization. It was no longer financially able to purchase, develop, and subdivide tracts of land itself, and, for that reason, it had begun to handle sales of real estate for other persons. The value of the company’s stock had fallen to $1 per share. The Trust sold its shares of stock in The Eoland Park Company at that price in 1946. However, Mrs. Gordon retained the ownership of her shares of stock in The Eoland Park Company at all times pertinent to this case.

25. The plaintiffs ultimately decided to entrust the sale of lots in The Orchards subdivision to The Eoland Park Company, because economic conditions began to seem favorable for the disposition of the property and the plaintiffs desired to maintain, in connection with such disposition, standards comparable to those previously maintained by The Eoland Park Company in the development and disposition of its own subdivisions.

26. The Eoland Park Company, at the plaintiffs’ expense, changed the lot lines previously established by Gillet & Company for The Orchards, as it was thought that the lots established by Gillet & Company were too large to be marketed successfully under the economic conditions that prevailed when The Eoland Park Company was given the task of selling the property. Also, the street that had been partially constructed by Gillet & Company (see finding 18) was completed by The Eoland Park Company, and another street that had been constructed by Gillet & Company was extended into a theretofore unimproved portion of The Orchards, all at the plaintiffs’ expense.

27. The relations between the plaintiffs and The Eoland Park Company were governed by an agreement which was originally signed on July 20, 1986 for a three-year period and which was subsequently extended from time to time, with the result that the agreement continued in existence through December 31, 1951. The parties to the agreement were The Eoland Park Company, on the one hand, and the Trust Company, as trustee of the Trust, and the Trust Company and Douglas H. Gordon, Jr., as trustees of Mrs. Gordon’s separate estate under the court order of February 20, 1936 (see finding 21), on the other hand.

28. The agreement of July 20, 1936 gave The Eoland Park Company exclusive sales rights in The Orchards subdivision. The services to be performed by the company were stated in the following language:

(a) Active solicitation and sales by salesmen employed by the Company.
(b) Payment of all commissions:
1. To the Company’s salesmen on the same basis as the Company is paying to the salesmen for sales of Company land in Homeland, Guilford, and Northwood.
2. To properly licensed brokers in Baltimore City at the rate established by the Eeal Estate Board of Baltimore.
(c) Consultation, at tbe Owner’s discretion, on all matters relating to the conduct of the business, in addition to sales problems; for example, management, physical development, advertising and financing.
(d) Approval of plans by the Company’s officers. If the Owners desire that any plans be submitted to the Architectural Committee of the Boland Park Company before approval or disapproval is given, there shall he an additional charge.
(e) Approval of purchasers.
(f) The writing of restrictions and supervision of the enforcement of same, except expense incidental to legal enforcement thereof. It is understood that the Company is not obligated to employ a man to supervise enforcement of the restrictions, but will use ordinary care and ability in watching for violations, without specific obligation on its part.
(g) Preparation of contracts of sale, subject to the Owners’ approval as to form.
(h) Engineering work and the supervision of maintaining the land, such as cutting weeds, sidewalk lawns, removal of snow, etc., may be done by the Company under special agreement as to compensation and will not include accounting, collection of monthly payment contracts, and employment of counsel.
(i) In addition to the specific services to be rendered, it is recognized that the reputation and good-will of the Company in associating itself with the enterprise are considerations of importance to the project.

29. (a) The agreement of July 20,1936 between the plaintiffs and The Boland Park Company contained the following provision entitled “General Sales Plan”:

The Company, in offering the property for sale, will put it on the same basis as the other developments the Company is now handling, i. e., the Company sales force will be instructed to offer the land and push the sale of it exactly as if the Company were the sole owner of the property and without any discrimination as to the Company’s other developments. The Company’s Sales Manager will have general supervision of all work of salesmen and agents and spend such time on these matters as in his and The Company’s judgment seem necessary.
The acceptability of any prospect as a resident of “The Orchards” will be recommended to the Owners by the Company at the time the Company presents a contract of sale to the Owners and the Company will furnish the Owners, as requested, any information regarding the personal character, reputation, and social standing of the applicant.

(b) There was attached to the agreement a list of the minimum prices that were to be charged for the lots in The-Orchards. These minimum prices, which totaled $895,020,, had been proposed by The Eoland Park Company and approved by the Trust Company and Douglas H. Gordon, Jr.,, representing the plaintiffs. It was provided in the agreement that The Eoland Park Company could not sell lots at prices lower than the minimum prices without the plaintiffs’’ permission, although the company could increase the prices of lots without permission. In connection with the sale of vacant lots, the company was to receive a commission of 15-percent of the sale price if it did not exceed the minimum, price fixed in the attached schedule; and in the event of a sale at a price higher than the minimum price, the company was to receive the customary 15 percent on the portion of the-sale price equivalent to the minimum price and, as added' compensation, 50 percent of the increase above the minimum price.

(c) It was further provided in the agreement that the-plaintiffs were to furnish The Eoland Park Company with $500 to be used for preliminary advertising, and that the-company was to reserve from commissions earned 2 percent of the gross sales for further advertising.

30. (a) For the purpose of making the unsold lots in The-Orchards subdivision subject to covenants and restrictions, similar to those that The Eoland Park Company had customarily used in connection with its own subdivisions, the-Trust Company, as trustee of the Trust, and the Trust Company and Douglas H. Gordon, Jr., as trustees of Mrs.. Gordon’s separate estate under the court order of February-20, 1936, executed on October 22, 1936 a deed as grantors to-Douglas H. Gordon, Jr., as grantee. This deed and the accompanying plat were recorded in the land records of Baltimore City.

(b) Among other things, the deed of October 22, 1936; prohibited the maintenance of nuisances on the property,. provided that no part of the land might be occupied by any Negro or person of Negro extraction (except Negroes employed as domestic servants by householders in The Orchards), regulated the emission of smoke, prohibited the erection or use of buildings for business purposes (except at two specified locations), prohibited the maintenance of “For Sale” or “For Kent” signs, and provided that:

No building, fence, wall or other structure shall be commenced, erected or maintained on said tract, nor shall any addition to or change or alteration therein (including any retreatment by painting or otherwise of any exterior part thereof) be made, until the plans and specifications, showing the nature, kind, shape, height, materials, floor plans, color scheme and location of such structure * * * shall have been submitted to, and approved in writing by the Grantors * * * .

(c) The deed of October 22, 1936 provided that the restrictions were to be in perpetuity, except for the right of the majority of landowners in the subdivision to make certain changes in 1966 and in each 20th year thereafter.

(d) The deed of October 22, 1936 contained a provision requiring the payment to the grantors of an annual Community Maintenance Charge on all the lots in The Orchards at the rate of 30 cents per hundred square feet of area for each year, commencing with the year 1936. The plaintiffs’ unsold lots were made subject to the annual Community Maintenance Charge along with the lots owned by other persons. It was provided in the deed that the amount of the charge might be adjusted from year to year by the grantors as the needs of the property might require, but such amount could never be raised above 30 cents per one hundred square feet of area for any one calendar year. The money derived from the Community Maintenance Charge was to be used for certain prescribed purposes, including: lighting, improving, and maintaining the streets, parks, and playgrounds; operating and maintaining storm-water drains, and sanitary sewers; removing grass and weeds from and otherwise caring for unimproved and improved but unoccupied land; examining and approving building plans; and: enforcing covenants and restrictions.

31. An agreement (separate from the agreement mentioned in findings 27, 28, and 29) was made between The Eoland Park Company, on the one hand, and the Trust Company, as trustee of the Trust, and the Trust Company and Douglas H. Gordon, Jr., as trustees of Mrs. Gordon’s separate estate, on the other hand, whereby The Eoland Park Company, for a fee, undertook the collection of the annual Community Maintenance Charge referred to in finding 30 (d), and the administration and expenditure of the funds derived from that source. This agreement is still in effect.

32. The Eoland Park Company owned a small piece of land that jutted into The Orchards at one point. The resulting jog in the boundary line of The Orchards at this point was eliminated as the result of an agreement between the company and the plaintiffs whereby the former sold this small piece of land to the plaintiffs for a nominal sum. The land thus purchased by the plaintiffs from The Eoland Park Company was combined with contiguous land to form two lots in The Orchards.

33. (a) During the period from 1936 through 1951, sales of lots and parts of lots in The Orchards were made by The Eoland Park Company for the plaintiffs as follows:

Number of Number of lots or Near sales parts of lots sold
1936_ 5 5
1937_13 22
1938_ 8 9
1939_ 2 6
1940_ 3 6
1941_ 5 9
1942_ 0 0
1943_ 0 0
1944_ 1 1
1945_ 2 3
1946_ 1 1
1947_ 8 16
1948_ 2 3
1949_ 4 5
1950_ 7 11
1951_14 15

(b) Sales of partial lots were usually due to the fact that persons who had previously purchased lots in The Orchards sometimes decided that they would like to have larger areas and, if there was an adjoining vacant lot, would purchase part of it. The partial lots that were sold during the period 1986-1951 varied in size from very narrow strips of land to half of a lot, or even more than half of a lot.

(c) The lack of sales during 1942 and 1943 was largely due to wartime building restrictions.

(d) Only nine lots in The Orchards have been sold since 1951. Seven lots were sold in 1952, and two in 1953.

(e) Approximately nine acres of The Orchards remain unsold at the present time. Since 1954, this area has been held by the plaintiffs for sale as a single parcel. The plaintiffs’ asking price for the parcel is $112,500.

34. In addition to paying the prescribed commission to The Noland Park Company (see finding 29 (b) ) on all sales during the period 1936-1951, the Trust paid the Trust Company a commission of 7% percent on its two-thirds share of the proceeds from such sales, and Mrs. Gordon paid on her one-third share of the proceeds a commission of 7!4 percent to the Trust Company and Douglas H. Gordon, Jr., as co-trustees of her separate estate (see finding 21).

35. (a) The seven sales that were made in 1950 (one of the two years involved in this suit) disposed of 2 full lots and 9 partial lots. After commissions and other minor selling expenses had been deducted, Mrs. Gordon realized a profit of $4,366.56 and the Trust realized a profit of $9,141.86 on these sales. The profits were calculated as follows:

Mrs. Gordon The Trust
Proceeds of sales-$7,988.99 $16,386.72
Less basis_ 3,622.43 7,244.86
Profit_$4,366.56 $9,141.86

(b) The 14 sales in 1951 (the other year involved in this suit) disposed of 10 full lots and 5 partial lots. After the deduction of commissions and other minor selling expenses, Mrs. Gordon realized a profit of $8,300.62 and the Trust realized a profit of $17,312.64 on the sales in 1951. The profits were arrived at as follows:

Mrs. Gordon 3 <a ^ 1 g
Proceeds of sales_$15,091. 37 co
Less basis_ 6,790.75 Crc
Profit_$8,300.62 $17,312.64

(c) The basis for determining profit or loss on the sale of lots in The Orchards consisted of the following items:

Amount paid at foreclosure sale_ $85,000. 00
Foreclosure costs_ 98
Estimated development costs_ 70,000.00
Basis-$158,245. 98

This basis of $158,245.98 was allocated among the lots in the same proportion as the selling price of each lot bore to the total selling price of all lots, as set forth in the agreement of July 20, 1936 between the plaintiffs and The Roland Park Company (see finding 29 (b)).

36. (a) The profit of $4,366.56 realized by Mrs. Gordon in 1950 from the sale of lots in The Orchards constituted approximately 13 percent of her total income for that year (exclusive of the income that she received from the Trust), and the Trust’s 1950 profit of $9,141.86 from the sale of lots in The Orchards represented approximately 14 percent of the Trust’s total income in 1950.

(b) Mrs. Gordon’s profit of $8,300.62 in 1951 from the sale of lots in The Orchards represented approximately 25 percent of her total income for that year (exclusive of the income that she received from the Trust), and the Trust’s profit of $17,312.64 from the sale of lots in The Orchards during 1951 represented approximately 27 percent of the Trust’s total income for that year.

37. The profits realized by the plaintiffs from the sale of lots in The Orchards were invested or applied to indebtedness. None of the profits was invested in real estate.

38. (a) The plaintiffs expended a total of $61,902.25 during the period 1934-1956 in connection with the maintenance, development, and disposition of The Orchards subdivision. These costs are summarized as follows:

Maintenance_
7,825.40 Engineering_
31 Mixed_
64 Fees_
700. 00 Advertising_
50. 54
2,208.16 Miscellaneous_
17,270.09 Construction_
$61,902.25

(b) Of the $28,468.11 spent by the plaintiffs during 1934-1956 for maintenance, the sum of $27,181.02 represented annual Community Maintenance Charges paid by the plaintiffs with respect to unsold lots under the deed of October 22, 1936 (see finding 30 (d)), and the remainder represented maintenance expenditures made by the plaintiffs prior to October 22,1936. Throughout most of the period 1934 — 1956, the maintenance work paid for by the plaintiffs was performed by The Noland Park Company under the agreement mentioned in finding 31.

(c) The engineering item primarily covered the establishing of new lot lines in The Orchards (see findings 26 and 33 (b)) and the providing of descriptions so that the deeds to buyers of lots in The Orchards could be accurately prepared. The engineering work was done by The Roland Park Company at the plaintiffs’ expense.

(d) The construction item covered the completion of a street that had been partially constructed by Gillet & Company, the extension of another street into a theretofore unimproved portion of The Orchards, the repair of a bridge, and perhaps other small expenditures. The construction work was performed by The Roland Park Company at the expense of the plaintiffs. (See finding 26.)

(e) The item relating to fees covered legal fees that were paid to Douglas H. Gordon, Jr., for the preparation of agreements and deeds, and for litigating one case that arose during the course of the sales program.

39. (a) In addition to the $700 that the plaintiffs spent for advertising (see finding 38 (a)), The Roland Park Company expended the following amounts (out of its earned commissions) in advertising The Orchards during the period 1986-1951:

1936 (July 1 to December 31)_ $76.73
1937_ 833.78
1938_ 588.58
1939_ 752.74
1940_ 843. 04
1941_: 410.02
1942_ 136. 82
1943_ 0
1944_ 0
1945_ . 48
1946_ 14.17
1947_ 777.63
1948___ 135.73
1949_ 281.20
1950_ 107.29
1951_ 252.45
$5,210. 66

(b) All advertising, including the expenditure of the.' $700 provided by the plaintiffs, was handled by The Eoland Park Company. Most of the advertisements were run in the company’s own magazine, a monthly called The Eoland Park Magazine, which was sent gratis to people who lived in The Orchards and in other subdivisions developed or handled by The Eoland Park Company, or who had indicated an interest in any of the subdivisions.

(c) The plaintiffs did not approve or review any of the advertisements, including those paid for out of the $700 provided by the plaintiffs.

(d) Two signs were placed by The Eoland Park Company on strategically located corner lots in The Orchards. They were put up in 1936 or 1937 and were maintained until the respective lots were sold. These signs, which mentioned The Orchards and The Eoland Park Company, were quite dignified in appearance, being attractively made and beautifully lettered. They looked more like the sign on some public institution than like an ordinary real estate sign.

40. (a) The Trust Company and Douglas H. Gordon, Jr., acting for the plaintiffs, did not participate in or supervise the sales activities of The Eoland Park Company in connection with the disposition of lots in The Orchards. They rarely consulted with the company. No prospective purchasers of lots that met the approval of The Eoland Park Company were ever disapproved by the plaintiffs, and no building plans that met the approval of the company were ever disapproved by the plaintiffs (although when Douglas H. Gordon, Jr., learned on one occasion that two lot owners were thinking of erecting two houses each on their respective lots, he announced that he would not approve any plans that called for the erection of more than one house per lot).

(b) For several years, a number of lots in The Orchards were withdrawn by the Trust Company and Douglas H. Gordon, Jr., from sale because they had learned that the City of Baltimore was contemplating the construction of a new street through the particular area and they wished to cooperate with the city by making it possible for the street to be built without hindrance from multiple lot owners.

41. No offer was ever received by the plaintiffs for the purchase of The Orchards subdivision as a single unit after the reacquisition of the property in 1933. No effort was ever made by the plaintiffs to' sell the property as a single unit during the period 1933-1953.

42. Except for the purchase of the small piece of land from The Eoland Park Company for inclusion in The Orchards (see finding 32), the plaintiffs have never purchased any real estate.

43. Except for the sale of The Orchards and the sale to the defendant during recent years of several thousand acres of land in Virginia at $3.15 per acre for inclusion in the Jefferson National Forest (this Virginia land was also acquired by the plaintiffs under Mr. Gordon’s will), the plaintiffs have never sold any real estate. However, in 1955 a small corporation, which had been owned to the extent of 50 percent by Mr. Gordon during his lifetime and by the plaintiffs after Mr. Gordon’s death (the Trust owning á one-third interest and Mrs. Gordon owning a one-sixth interest in the corporation), sold as a single parcel some land in Baltimore that apparently constituted the sole corporate asset, and the corporation was then dissolved. The plaintiffs’ respective shares of the proceeds from this sale of land and subsequent distribution of corporate funds were invested in the capital stock of the Aluminum Company of America.

44. The plaintiffs filed their Federal income tax returns for the calendar years 1950 and 1951 with the Collector of Internal Eevenue at Baltimore, Maryland. In these returns, the plaintiffs reported the profits from the sale of lots in The Orchards (see finding 35) as long-term capital gains, and the plaintiffs’ income taxes were computed and paid on that basis.

45. The Commissioner of Internal Eevenue concluded that the profits derived by the plaintiffs from the sale of lots in The Orchards during 1950 and 1951 were taxable as ordinary income, and not as capital gains. On that basis, the Commissioner assessed deficiencies against the plaintiffs as follows:

1&50 1951
Mrs. Gordon_$1,597. 95 $3,741. 97
The Trust_ 1,662.29 3,503.03

46. Except for the plaintiffs’ actions in treating the profits from the sale of lots in The Orchards as capital gains rather than as ordinary income, the Commissioner of Internal Eevenue did not question — and the defendant in this litigation has not questioned — the correctness of any portion of the plaintiffs’ income tax returns for 1950 and 1951.

47. (a) Mrs. Gordon paid the deficiencies totaling $5,339.92 on February 4, 1955, together with interest of $369.10 for 1950 and $639.82 for 1951.

(b) The Trust paid the deficiencies totaling $5,165.32 on February 4, 1955, together with interest of $375.65 for 1950 and $581.45 for 1951.

48. (a) On May 26,1955, Mrs. Gordon filed with the District Director of Internal Eevenue at Baltimore claims for refund respecting the taxable years 1950 and 1951. Mrs. Gordon contended that her income tax had been overpaid in the amount of $1,597.95 for 1950 and $3,741.97 for 1951. This contention was based on the ground that the profits from the sale of lots in The Orchards during 1950 and 1951 were capital gains and not ordinary income, as held by the Commissioner of Internal Eevenue.

(b) On May 26, 1955, the Trust filed -with the District Director of Internal Revenue at Baltimore claims for refund respecting the taxable years 1950 and 1951. It was asserted that the income tax of the Trust had been overpaid in the amount of $1,662.29 for 1950 and $3,503.03 for 1951, since (according to the Trust’s contention) the profits from the sale of lots in The Orchards during those years were capital gains and not ordinary income, as determined by the Commissioner of Internal Revenue.

49. More than six months have elapsed since the claims of Mrs. Gordon and the Trust were filed, and the Commissioner of Internal Revenue has taken no action on the claims.

50. The plaintiffs are the owners of their respective claims against the defendant, and there has been no assignment or transfer of such claims, or of any part of such claims.

51. Mrs. Gordon is a citizen of the United States and a resident of Baltimore, Maryland.

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 the plaintiffs are entitled to recover, and it is therefore adjudged and ordered that the plaintiff Mrs. Alexander (Elizabeth C.) Gordon (1) recover of and from the United States the sum of six thousand three hundred forty-eight dollars and eighty-four cents ($6,348.84), together with interest thereon as provided by law, and that the plaintiff Elizabeth C. Gordon Trust, Mercantile-Safe Deposit and Trust Company, Trustee (2), recover of and from the United States the sum of six thousand one hundred twenty-two dollars and forty-two cents ($6,122.42), together with interest thereon as provided by law. 
      
       Sec. 1221 (1), Internal Revenue Code of 1954 (26 U. S. C., 1952 ed., Supp. IV, 1221 (1)); formerly Sec. 117 (a) (1) (A), Internal Revenue Code of 1939, as amended (26 U. S. C., 1952 ed., 117 (a) (1) (A)). The Quoted phrase, minus “to customers” and “ordinary”, apparently had Its origin In Sec. 208 (a), Revenue Act of 1924 (43 Stat. 253, 263).
     
      
       Hence, the name, “Mrs Alexander Gordon”, used In bringing this suit.
     
      
       However, when a representative of Mrs. Gordon learned on one occasion that two lot owners were thinking of building two houses each on their respective lots, he announced that no plans that called for more than one house per lot would be approved.
     