“It is appropriate, in circumstances such as these, to see whether the taxpayer uses his controlled company — for instance, as agent, co-participant, or joint venturer — to implement or further his own personal business, as he easily can.”
How later courts described this case
- “It is appropriate, in circumstances such as these, to see whether the taxpayer uses his controlled company — for instance, as agent, co-participant, or joint venturer — to implement or further his own personal business, as he easily can.”
- "A taxpayer's purpose can change during the course of his holding of property, and in such cases it is the dominant purpose of his holding during the period prior to the sale which is critical."
Written by the judges who cited it.
The opinion
WHITAKER, Senior Judge
(dissenting in part):
I cannot agree with that portion of the opinion of the court which denies plaintiff capital gains treatment on the gain realized from the sales to Cozy Cottages, Inc. and Arlington Ridge Development Co.
To attribute to plaintiff the activities of the Arlington Ridge Development Co. on the ground that it acted as plaintiff’s agent seems to me tantamount to a complete disregard of the separate entity of the corporation.
Plaintiff organized the corporation to construct houses on the vacant lots and to sell them to customers in the ordinary course of the corporation’s trade or business. He apparently did not want to engage in this business in his individual capacity as he had done in 1946 and 1947. That he had a legal right to do this admits of no doubt.
Once the lots were transferred to the corporation, everything that was done toward constructing houses on the lots and selling them was a corporate activity. Whatever plaintiff may have done with regard to the lots after they had been transferred to the corporation was, and could only have been, as an officer of the corporation. He did not act, and could not have acted, in his individual capacity with regard to them. Since he had no control, in his individual capacity, over the construction of houses on the lots and the sale of the lots by the corporation, it could not be said to have acted as his agent, in the sense that the acts of the agent are the acts of the principal.
Trial Commissioner Fletcher’s opinion deals adequately, and I think correctly, with the question presented in part I of the majority opinion. I would adopt his opinion as the opinion of the court. The portion of his opinion not contained in the majority opinion follows:
“Are the activities by plaintiff sufficient to warrant the inference that, despite his assertions to the contrary, he actually intended to and did hold his one-half interest in the River Ridge lots ‘primarily for sale to customers in the ordinary course of his trade or business’ ? Judge Whitaker has recently phrased the question more succinctly when he said, ‘The question is, was plaintiff in the real estate business.’ William J. Miller v. United States, 168 Ct.Cl. 498 , 339 F.2d 661 (1964). In answering that question, he noted that ‘other cases are not very helpful’ but went on to observe [ 168 Ct.Cl. at 504 , 339 F.2d at 663 ] that a few useful tests have been judicially developed, 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. * * * ’ [Citing cases]
“When these tests are applied to plaintiff as an individual taxpayer, it is reasonably clear that he was not engaged in the real estate business and did not hold his interest in River Ridge for sale to *279 customers in the ordinary course of his trade or business. Putting to one side for the moment any consideration of the activities being carried on by plaintiff’s closely-held corporations, the record supports plaintiff’s assertion that he and his brother acquired the property in question as an investment. They were motivated by the conviction that the land would rapidly increase in value due to its favorable location, a conviction which proved to be well-founded. Consistent with their claim of investor status was the method of selling the land. Neither plaintiff nor his brother spent any significant time or effort in promoting sales. Except for the small sale to Cozy Cottages for experimental purposes, the two main sales were in bulk and were accomplished without solicitation. This is not the type of retailing operation which one expects to find in the case of a real estate dealer. In fact, the record shows that had plaintiff and his brother desired to undertake the expense and trouble of a retailing operation by selling individual lots rather than in bulk, they would have realized approximately one-third more gain from such a method of selling. As the Tax Court observed in Charles’ ease, the absence of motive to make a greater profit is an element indicating that the property was not held primarily for sale to cusomers in the ordinary course of a trade or business.
“During the four-year period over which plaintiff received his share of the sales proceeds, he was actively engaged in the practice of architecture and in managing his several corporations. His gain from the River Ridge sales only amounted to a little less than 30 percent of his total income from all sources.
“It is true, of course, that plaintiff was quite active in the successful effort to persuade the Franklin County officials that water, sewer, and road improvements should be installed in River Ridge. While such activity frequently taints the owner with the status of a dealer or developer, it is also consistent with the desire of an investor to enhance the market value of his property as a whole and to make his capital asset more readily salable. See Fahs v. Crawford, 161 F.2d 315 (5th Cir. 1947); Boomhower v. United States, 74 F.Supp. 997 (D.Iowa 1947); and Ayling v. Commissioner, 32 T.C. 704 (1959). Unlike those cases where the taxpayer himself installed and paid for the improvements (see, for example, William J. Miller v. United States, supra 1 ), the River Ridge, improvements were installed not by plaintiff but by the county and were paid for by special assessments against all lot owners. It is also significant to recall that the subdividing of River Ridge into lots was not done by plaintiff but by the prior owner.
“Thus, when viewed strictly in his individual capacity, plaintiff has carried the burden of showing that, like his brother, he did not hold the property in question primarily for sale to customers in the ordinary course of his trade or business. However, this does not end the inquiry. Defendant vigorously asserts that, in determining plaintiff’s status the court must look also to the activities of plaintiff’s closely-held corporations. The argument is that there then comes into view the true nature of plaintiff’s overall business, namely, a completely integrated construction and real estate business.
“There would be considerable merit to defendant’s contention were it permissible for the court either to disregard the corporate entities involved or to say that their businesses were plaintiff’s businesses. Through a combination of his individual talents as an architect with the building supply and construction capacities of several closely-held corporations, plaintiff can, and has, developed real estate projects from the design stage to the sale of the finished product. Several of his corporations are engaged solely in the construction and holding of houses for sale to their customers. In short, they are in the real estate business.
*280 “To defendant, these facts lead inexorably to the conclusion that plaintiff is also individually engaged in the real estate business. Yet, no suggestion is made that these corporations are sham organizations with no business purpose. So far as the record shows, they have been treated as separate taxable entities, and no effort has been made to attribute their income, losses, deductions, etc. to plaintiff. It is only their business which defendant would attribute to plaintiff.
“However, it has long been settled that, in determining the trade or business of a taxpayer, the business activities of his closely-held corporation will not be attributed to the taxpayer. See for example, Whipple v. Commissioner, 373 U.S. 193 [ 83 S.Ct. 1168 , 10 L.Ed.2d 288 ] (1963); Burnet v. Clark, 287 U.S. 410 [ 53 S.Ct. 207 , 77 L.Ed. 397 ] (1932); Watson v. Commissioner, 124 F.2d 437 (2d Cir. 1942); Jarvis v. Commissioner, 32 T.C. 173 (1959); Gordy v. Commissioner of Internal Revenue, 36 T.C. 855 (1961) Acq. 1964- 2 C.B. 5 ; and Fink v. Commissioner, 23 C.C.H. Tax Ct.Mem. 475 (1964). In the Gordy case, supra, the Tax Court had occasion to consider the status of a taxpayer who, like plaintiff, was the controlling stockholder in a number of corporations engaged in the real estate business. In holding that the taxpayer’s sale of a tract of land to one of his residential development corporations resulted in capital gain, the Tax Court stated at 36 T.C. 859 -860:
‘All that we have here are two isolated transactions. They are transfers of property by petitioner, the president of two corporations, to each of the two corporations both of which were engaged in the business of real estate development, including the sale of lots to individual purchasers and both of which were controlled (60 percent) by petitioner. We see nothing in this record which would warrant the conclusion that at the time of the transfer petitioner held this property primarily for sale to customers in the ordinary course of his trade or business.
‘Respondent’s argument ignores the corporate entities of which petitioner was merely an executive officer. It attributes the corporation’s sales of lots to individual purchasers, to petitioner. Respondent recognizes no distinction between a taxpayer holding property for sale to his customers and a taxpayer Iiolding property for sale to his controlled corporation engaged in selling such property to its customers. Petitioner’s business was that of a corporate executive. There is no justification for imputing the real estate activities of the many corporations he owns, or controls, to him. Such transactions as are here involved might be vulnerable to a conflict-of-interest charge against the corporate executive but they furnish no grounds for holding the corporation’s business is the executive’s business.
‘The separateness of the corporate officer’s business and the business of the corporation he represents has long been recognized.’
“Accordingly, it is clear that the real estate business being carried on by plaintiff’s closely-held corporations is not to be considered as ‘his trade or business' within the meaning of the statute. Even so, says defendant, it is an accepted principle that a taxpayer may, and frequently does, carry on a real estate business through agents whose activities are clearly attributable to the principal. From this premise, defendant argues:
‘ * * * Tibbals formed a corporation whenever some specific project came along, and specifically formed the Arlington Ridge Development Company to build houses in River Ridge. In addition, when the lots were acquired, taxpayer owned two construction companies, two lumber companies, and a prefabricated housing manufacturing company. Taxpayer may not have spent much time with any one business, but he controlled those corporations, he made a practice of acquiring property in ’ his own name which he later conveyed to his corporations, and he was the one benefiting *281 from their activities. We submit that his corporations acted as his agents in the conduct of his affairs.’
“With one exception, all of the cases relied upon by defendant as supporting its contentions are distinguishable in that they involved either a closely-held corporation, trustee, or independent person acting as agent in the development and subsequent sale of land owned by the taxpayer. For example, in Kaltreider v. Commissioner, 255 F.2d 833 (3rd Cir. 1958), it appears that the bulk of the real estate involved was never sold by the taxpayers to their closely-held corporation. It merely acted as an agent in constructing homes on its stockholders’ land, upon completion of which it advertised the completed homes and negotiated their sale. For the most part, the sales price was paid by the purchaser directly to the stockholders who executed the deeds of conveyance as grantors. 2 In their original tax returns, the stockholders reported the profit on these sales in their individual tax returns rather than in the returns of their corporation. They were held to be engaged in the real estate business with the corporation merely acting as their agent to construct the houses and negotiate the sale thereof.
“The exception referred to is the case of Engasser v. Commissioner, 28 T.C. 1173 (1957). There the sale in question was by the taxpayer to a closely-held corporation which intended to construct houses thereon and sell them in the regular course of its business. In this respect the sale was similar to the sale by plaintiff and his brother of the 100 River Ridge lots to plaintiff closely-held corporation, Arlington Ridge Development Company. However, it was not that one sale which persuaded the Tax Court to place the taxpayer in the real estate business. To the contrary, the taxpayer’s long history of engaging in the general contracting and home construction business placed him individually in the business of buying and selling real estate. In fact, he had no other business. By contrast, plaintiff for the reasons stated above was not individually engaged in the real estate business.
“Accordingly, plaintiff’s share of the gain realized from the sale of the River Ridge lots should be taxed to him as long-term capital gain.”
. The same is true of Browne v. United States, 356 F.2d 546 , 174 Ct.Cl.-(February 1966).
. "It is true that in the present case, record title to many of the 100 lots sold by plaintiff and Charles to Arlington Ridge Development Company remained in plaintiff’s name, and upon a sale by the Development Company the deed of conveyance ran directly from plaintiff to the purchaser although plaintiff did not receive the purchase price. Plaintiff’s local attorney testified that this was merely a short-cut to avoid the trouble and expense of two deeds. In any event, defendant does not appear to dispute the validity of the brothers' sale to the Development Company. Under Ohio law, from the time of that contract of sale, the company was the owner of the land by equitable conversion. See Berndt v. Lusher, 40 Ohio App. 172 , 178 N.E. 14 (1931).”