Brief for the Respondent in Opposition — Frankenstein v. Commissioner (No. 675)

\

*®

I iia sideeeclsessicvigimesn casos Lhaictvndh

| CiC«*«CN AER RS RNY RR (ORI OE. Se oe

MIE I sii ices ciesaasot taienonteecH

ESERIES. LE eee a ne eee ee eee

Statement Ae

Argument .

er eee eee eee ee

Conclusion soisiletntamaitomanantsinatipendi ESTEEM Venere aor

* ° CITATIONS

Cases:

Bistline v. United States, 260 F. 2d 80..

Di Lisio v. Vidal, 233 F. 2d 909... Rate aoet

‘ Gamble v. Commissioner, 242 F. 2d 586.

Gruver Vv. Commissioner, 142 F. 2d 363... Be

Kaltreider v. Commissioner, 255 F. 2d 833...

Lobello v. Dunlap, 210 F. 2d 465.00...

Marsch v. Commissioner, 110 F:; 2d 423...

Pool V. Commissioner, 251 F. 2d 233," certiorari

denied, 356 U.S. 939.

Saltzman. v. Commissioner, ‘decided January 27,

1955, (T.C.), affirmed, per curiam, 227 F. 2d 49.. '

Statutes :- | ea 8

- Internal Revenue Code of 1939: = 5

Sec. 117 (26 U.S.C., 1952 ed., 117)... ...

Internal Revenue Code of 1954: S*

Sec, 1221 (26 U.S.C. 1221)... os ee.

Page

NyNauwwnw wn = =

AAAAAAD

a

ro)

ae - e a t

: ey

Iu the Supreme Court of the United States

ee > OCTOBER TERM, 1959

No. 675

-*\ SotLy K. FRANKENSTEIN AND JULIA a

' FRANKENSTEIN, PETITIONERS

vw.

COMMISSIONER OF INTERNAL REVENUE

: 8

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES\COURT OF APPEALS FOR THE

SEVENTH CIRCUIT,

BRIEF FOR THE carne 2 IN OPPOSITION

OPINION BELO

The opinion of the Tax Court | (Pet. 24-83) is re-

ported at 31 T.C. 431. The opinion, of the Court of

Appeals (Pét. 19-23) is reported) at 272 F. 2d 135.

JURISDICTION

The judgment of the Court of, Appeals was curived

on November 18, 1959 (Pet. 19). A>pétition-fer re-

hearing was denied on Dece mber 22, 1959. The peti-

tion for writ of certiorari was fi! 1.on February 4, |

etites

(1)

,

. .

Ce tt it tt ts

i.

1960. . The jurisdiction of this Court is teveleed

under 28 US.C. 1254(1).

QUESTION PRESENTED

Whether the record warrants the conclusion reached

by both courts below that certain parcels of real

estate sold by the taxpayer during the years 1950

_ through 1954 were’ held by him primarily for sale to-

customers in the ordinary course of his business, and

' that consequently the profits derived the: zfrom were

Y

taxable as ordinary income rather than as capital

gain. = 24 : 7

STATUTES INVOLVED

Internal Revenue Code of 1939:

SEC. 117. CAPITAL GAINS AND. LossEs:

(a) [és amended by Section 210(a) of the

‘Revenue Act of 1950, c. 994, 64 Stat. 906 |.

Definitions. —As used ‘in this chapter—

(1) Capital assets.—The term “capital

assets” means property held by the taxpayer

(whether or not connected with his trade or

business) but’ does not include— .

(A) stock in trade of the taxpayer .

or other property of a kind which would

properly be included in the inventory

of the.taxpayer if on hand at the close

of the taxable year, or property held

by the — primarily for sale to

1 The iaxpayer’s wife, Julia E. Frankenstein, is a party

only by virtue of having filed a Joint return with the tax-

payer.

ae .

a

es

.

customers in the ordinary course of his

trade or business;

©

. .

(26 U.S.C., 1952°ed., 117.) —

Section. 1221(1) of the Internal Revenue Code of

1954 (26 U.S.C. 1221), applicable to the year 1954,

is substantially identical to the exclision clause in

Section 117 (a) (1) of the 1939 Code.

STATEMENT.

The taxpayer has been a practicing lawyer in Fort

Wayne, Indiana, for many years: He inherited some —

lots and purchased a considerable: number of others,

mostly in the city of Fort ‘Wayne. The following |

schédule shows the real estate acquired by him dur-”

ing the years 1941 ee 1956, exclusive of rental

—- (Pet. 26):

7 tenhin ot Parcels of

Year Real Estate Purchased

ARPT rice nes eee ee eee kere 2

a ES eS ee ae SS 87

SES Ee eee eee ee ee Seo 3

RES: #

RE Rn” aera sn tn 4

ae ALG eeeoeen ee eens 356

RG IATA MOREE ALSO RIL LOO OD 38

a halal nieaianineienenale 347

a oeiabesanananl . 104 ,

—__ EEE IE ARTEL Fae 12

CE sR re ene 58

aoe ee) ccuensumsesmniiniicninies 6

IIIT hii hcan-einbeinhn sanienuininnnatenntinpebieanitaninnincnnnaieel 9

RCE IR vere aan near AA Ae a -LN a 5

EERIE ae ree IN eRe” Hee STEN 3

4

- The lots purchased during the’ years 1946 through

1949 were acquired at various tax auctions. Others

-. were purchased at, regular tax: sales. The taxpayer

- never platted or improved his lots, but did pay the

cost of installing improvements required to be made ~

by the city of Fort Wayne. The taxpayer placed

homemade “For Sale” signs on some of his lots, and

advertised the lots from 1948 until March 1950 in a

_ Fort Wayne paper. (Pet. 27.) The value of the lois

increased. by -reason of conditions in the community.

_ (Pet. 27, .34.). _

In the years indicated the taxpayer sold the follow-

ing number of lots (Pet. 27, 34) : |

Number of Lots Number of Lots

Year Sold Outright Sold: Contract

A eS ER, ae oe ne

RS ae coisa * wnat

TEMES Re eee 2 aes

AE aati 1

Ae 7 1

drcnniciclsiiishicnicabenasdé 4 2

ee eea 9

SS 11 _9

aS 36 5 ’

Ce A ee 27 26

. _ AES 28 15

RRS ER aa : 20 28

z

During the years. here involved ihe “sales were re-

‘ported on the.taxpayer’s income tax returns as sepa-

rate sales of individual lots. (Pet. 27.)

The taxpayer never held a rea] estate license and

never engaged in the real estate business other than.

-the sale of his personal holdings. As i eported on his

-

~~

'§

income tax returns, the taxpayer’s gains from the

sale of real estate greatly exceeded his income from

the practice of law for each of the years here at issue.

(Pet. 28.) }

The taxpayer repor ted the gains on the sale of the

_ lots as resulting from the sale of capital assets. The

Tax Court determined that the lots were held by the

taxpayer primarily for sale to customers-in the ordi-

nary course of business, within the meanjng of the

exclusionary provision of Section 117(a)(1)(A) of

the Internal Revenue Code of 1939 and Section 1221

' (1) of the Internal Revenue Code of 1954, and that

’ the profits realized from their disposition were there-

fore taxable as ordinary income. (Pet. 28-31.) The

—Court-of Appeals affirmed, (Pet. 19-23.)

ARGUMENT

The decisions of the courts below that the lots in

question were held by the taxpayer primarily for

sale to customers in the ordinary course of business,

within the meaning of the exclusionary provisions of

Section 117(a) (1) (A) of the Internal Revenue Code

of 1939 and Section 1221(1) of the Internal Revenue

Code of 1954, supra, pp. 2-3, and that the profits

realized from their disposition were therefore taxable .

as ordinary income, are in accord with the facts of.

record and settled legal principles. Absent any show-

_ ing that improper legal criteria have been applied,

the question whether property is held primarily for

sale to customers in the ordinaiy course ‘of husi-

ness must be resolved in the light of the particu-.

lar facts. Pool v. Commissioner, 251 F. 2d. 233

6

(C.A. 9), certiorari" denied, 356 U.S. 938, rehearing

denied, 356 U.S. 978; Bistline v. United States, 260

F. 2d 80 (C.A. 9); Di Lisio v. Vidal, 233 F. 2d 909

(C.A. 10); Lobello v. Dunlap, 210 F. 2d 465, 468,

fn. 3 (C.A. 5); Kaltreider v. Commissioner, 255 F.

2d 833 (C.A. 3). Among the relevant factors to be

considered are the frequency and continuity of the

real estate transactions (Marsch v. Commissioner,

_ 110 F. 2d 423 (C.A. 7)), whether the gains from real 7

estate activity exceeded the taxpayer’s income from >

other businesses (Gamble v. Commissioner, 242 F. 2d

586 (C.A. 5)), personal effort and activity in con-

. nection with the real estate transactions (Gamble v.

Commissioner, supra), and the intention of the tax-

payer in acquiring the property (Marsch v. Commis-

- sioner, supra; Saltzman v, Commissioner, decided

January 27, 1955 (1955 P-H T.C. Messorandusn

‘Decisions, par. 55,018), affirmed per curiam, 227 F.

2d 49 (C.A. 3); Gruver v. Commissioner, 142 F. 2d

362 (C.A. 4)).

Applying these principles here, it is clear, as the

Tax Court (Pet. 29) and the Court of Appeals (Pet.

22) held, that the frequent and regular purchase and

sale of individual lots in scattered areas of Fort

Wayne—involving a continuity extending over a

number of years, as distinguished from isolated or

casual sales—in conjunction with the fact v.:at- the

taxpayer’s ‘income from real estate transactions

greatly exceeded his income from the practice of law

support the finding that the lots were held by the

taxpayer primarily for sale to customers in the ordi-

9 elk we

| prime

.

7 ‘

nary course of his trade or business. There is no

conflict of decisions and’ manifestly no question is

presented which warrants review by this Court.

~CONCLUSION

For the reasons stated, the petition for a writ of

certiorari should be denied.

: Respectfully submitted,

J. LEE RANKIN,

Solicitor General.

CHARLES K. RICE,

Assistant Attorney General.

ROBERT N. ANDERSON,

CARTER BLEDSOE, —

Attorneys.

-

MARCH 1960.

.

DR ov. 8. SOvERWwENT Painting OFrice, 1960 s4ie2! 1134