The opinion
Mulroney, J., dissenting: I respectfully dissent. I feel the facts show a gradual liquidation over a 15-year period of property purchased for farmland, with increased sales during the last few years due to fortuitous circumstances rather than an active business operation.
Petitioner, who had 4 years of the study of agriculture in college, ran this sugar plantation up until the land was rendered worthless for farming in 1936. Thereafter 2 or 3 people came to her to buy building sites and she sold small tracts to them. In 1939 she began to plat and subdivide areas of the land and make certain improvements consisting of landscaping, installing water mains, streets, and culverts. She testified: “I was disposing of my property and that is all I thought about. I had to dispose of it, * * * I couldn’t do anything with it.” Thereafter petitioner sold lots and continued to plat, subdivide, and improve other areas and sell the lots in the subdivisions.
The way in which the sales were achieved is revealing. No advertising was done. No real estate agents or other salesmen were employed. Petitioner made no effort to show lots to prospective buyers. Purchasers were unsolicited. All the sales were made in petitioner’s living room, quite informally, and with a minimum of time. There was no office setup in petitioner’s home, nor was there any real estate listing in the telephone directory.
Despondent does not argue that the fact petitioner once held a real estate license and the fact that two pieces of property were purchased in 1951 and subdivided are factors that need be considered. I agree they have no importance. The real estate license was the mere equipment of an employee used but briefly in December 1923 and January 1924.
In the two purchases of property in 1951 petitioner acquired a small triangular piece of property (later subdivided into 14 lots) which was almost a bisecting wedge between the two major portions of her platted property. She testified this purchase was necessary “to protect the rest of my property. I had to buy it to keep somebody else from putting something objectionable right in the middle of my property.” A glance at the plat in evidence will bear out her testimony in this respect. The other purchase in 1940 was of an abandoned railroad right-of-way which crossed her property. Such purchases, made under the circumstances disclosed in the record, are not inconsistent with the orderly liquidation of petitioner’s property.
The factors, which respondent argues show that petitioner was engaged in the real estate business, are (1) the development of the area consisting of surveying, platting, landscaping, and installing water mains, streets, and culverts; (2) the continuity and frequency of sales; (3) the high profit petitioner realized from sales of lots during the years in question; and (4) the fact that the profits from the sale of lots were about her only income during the years in question.
The fact that petitioner undertook to plat and subdivide the area into lots and streets and install water mains and culverts would not, alone, put her into the business of selling real estate. W. T. Thrift, Sr., 15 T. C. 366 ; Boomhower v. United States, 74 F. Supp. 997 ; and Smith v. Dunn, 224 F. 2d 353 .
In Smith v. Dunn, supra, an architect determined to liquidate real estate, which he acquired by inheritance, by having it subdivided into lots. lie employed an engineer who made the surveys and subdivision and engaged a licensed real estate broker to handle the sale of lots for 10 per cent commission. The property was improved to the extent of constructing streets, water mains, and other improvements at a total cost of $«32,000. All of the sales of lots were made by the real estate broker who carried on a continuous advertising campaign, advertising taxpayer’s property with other property he handled. It was held taxpayer’s activities with respect to the sales of the lots were not enough to put the taxpayer in the real estate business.
In the course of the opinion, the court held:
The court below seems to have had the idea that any taxpayer who seeks to make a better sale of a capital asset consisting of land forfeits the right to claim profits as capital gain by the mere fact of subdividing and seeking out purchasers, even though he does this by a regular real estate broker acting in the capacity we have described. We rejected that concept in Fahs v. Crawford, supra [ 161 F. 2d 315 ], and held that a lawyer who disposed of real estate originally purchased as an investment by selling it through a broker in subdivided lots was entitled to treat the profits as capital gain. * * *
It is clear that petitioner could achieve an advantageous liquidation of this useless farm by platting and subdividing the lands so that it could be sold in lots to many purchasers, which often is the only feasible way of disposing of such land. In order to carry out sales of small lots to many purchasers, it is obviously necessary to make a few basic improvements such as roads and water mains. The platting, subdividing, and improving here carried out were efforts directed toward that end. Such activity was, I feel, consistent with the orderly liquidation of a large tract of land by sales of small lots to many purchasers.
The main factors upon which respondent relies to show petitioner was in the real estate business are the continuity and frequency of sales. In the first 10 years after the platting commenced in 1930. petitioner sold 30 lots. In 1949, 7 lots were sold in 5 sales: in 1950, 5814 lots were sold in 37 sales; in 1951, 94 lots were sold in 44 sales; in 1952, 3814 lots were sold in 22 sales; and in 1953, 35 lots were sold in 22 sales.
It has often been said in cases like this that the continuity and frequency of sales is an important factor to be considered when the inquiry is as to whether the taxpayer was in the business of selling real estate. That is understandable for a high frequency of sales is usually indicative of an efficient business. But the frequency and continuity of sales factor is significant only so far as it reasonably justifies the conclusion that the continuity or high frequency of sales in certain years was the product of the promotional or sales activity of the owner. Frieda E. J. Farley, 7 T. C. 198 . Here there was no effort to sell lots, no solicitation or sales drive. The very plausible explanation of the continuity and frequency of sales is shown by petitioner’s testimony.
Petitioner stated this plantation borders Houma, Louisiana, a town of about 15,000. She said a good many industries moved into Houma during and after the war years; that the town had about doubled in population in the years since 1939; and that by 1948 there became a considerable demand for residential lots. She also testified there were not any good residential areas around Houma other than her property, as the other land surrounding the town was largely swampland. The sale of 30 lots in the first 10 years is not a very high frequency of sales. The increased frequency of sales in the later years was due to the increased demand that worked to her advantage. I feel the continuity and frequency of sales, as shown by this record, are not a significant factor showing petitioner was in the real estate business. Under all of the facts the sales in the tax years in question, though it might be said they were continuous and frequent, were consistent with liquidation.
In Consolidated Naval Stores Co. v. Fahs, (C. A. 5) 227 F. 2d 923 , timberland was acquired and used by the taxpayer for the production of turpentine. When the land was worked out the taxpayer sold the cutover land over a period of years without solicitation. The sales ranged from 2 in number totaling 117 acres in 1952 to over a hundred sales aggregating nearly 200,000 acres in 1937 and 241,000 acres disposed of in 40 odd transactions in 1942. The court held: “That there were a number of sales is true, but after sixteen years of selling, the taxpayer had over 400,000 acres remaining. It is hardly to be expected that a million and a half acres of land in separate tracts could be disposed of in a single sale.” The court held the property was not held primarily for sale to customers in the ordinary course of trade or business.
Respondent points to the high profit realized in the years in question by the sales of lots in this area. In the year 1951 when 94 lots were sold for $87,950, the profit was $49,056.60. In the year 1952 when 38½ lots were sold for $42,700, the profit was $36,846.68. In the year 1953 when 35 lots were sold for $36,825, the profit was $25,169.03. This factor is related to the continuity and frequency of sales factor. She made more profit in these years because she made more sales. She made more sales because of fortuitous circumstances of a growing community and excellent location heretofore mentioned — not because of increased sales activity on her part. The high profit is no more of a significant circumstance than the continuity and frequency of sales factor.
Finally, respondent argues that the money from the sale of lots constituted her and her husband’s only source of income, as shown by their joint income tax returns. I fail to see how this is a very significant factor under the facts of this case. Respondent argues from this testimony, “it appears the only business petitioner had during such years was that of selling real estate lots.” Petitioner was a housewife, taking care of her husband, a veterinary doctor who was in his last illness during most of this period. If petitioner ever had any business it was that of farming her own farm. No doubt that was once the only source of her individual income. It is stipulated the land was abandoned as a farm in 1936. It is understandable that thereafter the only source of her individual income would be the sales of the land previously used for farming. The “only source of income” factor has its place where some businessman-taxpayer is asserting he is not in the real estate business but in some other business and it appears the real estate sales are his only or his chief source of income. It has no place in a case like this where the question is whether a housewife and operator of her own farm is in the real estate business when selling her land after it was rendered useless for farming.
Petitioner’s role in the sales during the tax years involved was a passive one, and necessarily so, since she was a housewife with an ill husband during all these years. Moreover, I think that the period of time, 15 years, is consistent with a comparatively gradual and passive liquidation of the property originally bought for cultivating sugar cane. D. L. Phillips, 24 T. C. 435 . I do not think that petitioner’s sales of the lots under these circumstances in the years 1951, 1952, and 1953 constitute a ti’ade or business. I would hold that these lots were not held in the years involved primarily for sales to customers in a trade or business.
Pierce, J., agrees with this dissent.