CITE AS: Tibbals v. United States, KTC 1966-48 (Ct.Cls. 1966)
UNITED STATES COURT OF CLAIMS
TODD TIBBALS and HELEN A. TIBBALS, Plaintiffs, v. UNITED STATES,
Defendant.
Docket: 346-60 Filed June 10, 1966
OPINION
PER CURIAM:
Before: COWEN, Chief Judge, WHITAKER, Senior Judge, LARAMORE, DURFEE
and DAVIS, Judges.
This income tax refund case, involving the years 1951-1954, was
referred to Trial Commissioner Lloyd Fletcher with directions to make
appropriate factual findings and to submit his recommendation for a
conclusion of law. At this stage there remain two entirely separate issues
in the case, and the commissioner's report contains an opinion, finding,
and recommended conclusion on each aspect. His recommendation is for the
plaintiffs on both issues. The parties accept the commissioner's opinion,
findings, and conclusion on the second issue, involving the sale by the
principal taxpayer of stock in a wholly-owned corporation (Parklawn Manor,
Inc.). Exceptions have been taken by the defendant, briefs filed, and oral
argument had on the first issue, involving gain from the sale of real
estate. On that issue we differ to some extent from Commissioner Fletcher;
our views are set forth in Part I, infra. On the second issue, as to which
no exception has been filed, we agree with the trial commissioner and
adopt the portion of his opinion dealing with that question; it appears in
Part II, infra. On the whole case, we decide that plaintiffs are entitled
to recover in accordance with this opinion, and enter judgment to that
effect. The amount of recovery will be determined under Rule 47(c).
<>
I. TAXPAYER'S SALES OF REAL ESTATE <<2>>
This part of the case raises the recurring question whether certain
parcels of real estate, prior to their sale, were "held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or
business." Int. Rev. Code of 1939, section 117(a)(1)(A). A guiding rule in
this class of tax litigation is that each case must be decided on its own
facts and circumstances. Miller v. United States, 168 Ct. Cl. 498, 504,
339 F.2d 661, 663-64 (1964); Browne v. United States, 174 Ct. Cl. ____,
356 F.2d 546 (February 1966). A detailed recitation of the facts is
therefore necessary.
Plaintiff <> is an architect in Columbus, Ohio. He began
the practice of his profession in 1935 as a sole proprietor but later formed
a partnership with other architects under the firm name of Tibbals, Crumley,
and Musson. The firm has always engaged in a general architectural
business and has designed and supervised the construction of numerous
public buildings, residences, and private commercial buildings in the
Columbus area.
During 1946 and 1947, in addition to the practice of his profession,
plaintiff engaged in the construction of 54 houses on his own account.
These houses were built on various unimproved lots which plaintiff had
acquired in prior years. In 1946 he individually sold 50 such houses, and
in 1947 he sold the remaining four. At no time thereafter has plaintiff,
solely in his individual capacity, engaged in the construction of houses
for sale to customers. Instead, he formed three corporations, Columbus
Southern Development Company in 1946, Martha Washington Builders, Inc. in
1949, and Arlington Ridge Development Company in 1951, all the stock of
which plaintiff has owned during the times material herein. These three
closely-held corporations engaged extensively in the construction of
houses on unimproved land transferred to them either by plaintiff or
others, and they held such real estate primarily for sale to customers in
the ordinary course of their trade or business. Also, during the period
1942 through 1953, plaintiff either owned or controlled numerous other
corporations which engaged in various related activities, such as the
ownership and management of rental properties (including FHA housing
projects), the manufacture and sale of lumber, and the manufacture and
sale of panels for prefabricated houses.
In early 1950 plaintiff entered into the transaction which was to
precipitate the dispute herein. He and his brother, Charles E. Tibbals,
Jr., <> jointly purchased a tract of land previously subdivided
into lots in an area on the outskirts of Columbus known as the River Ridge
Subdivision. <> More than six months later, the brothers
disposed of these lots by three separate sales at different times and to
different purchasers under circumstances related below. In their
respective tax returns, each brother treated his very substantial gain
from these sales as capital gain. The Commissioner of Internal Revenue
disagreed and held the gain to be ordinary income.
In the ensuing litigation, Charles has been successful. The Tax Court
of the United States decided that Charles did not hold his one-half
interest in the lots primarily for sale to customers in the ordinary
course of his trade or business and had properly reported his share of the
realized gain as long-term capital gain. Charles E. Tibbals v.
Commissioner, 17 T.C.M. 228 (1958). Because plaintiffs activities with
respect to the lots were more extensive than, and in part different from,
those of his brother, this court is now called upon to decide whether the
two stand in different tax positions.
The River Ridge Subdivision was originally acquired and subdivided
into about 1,200 lots sometime during the 1920's by the Arlington Ridge
Realty Company. Plaintiff has never held any stock in that corporation, but
he was acquainted with some of its officers and had a general familiarity
with the area in which the subdivision was located. During the years of
its ownership, Arlington Ridge Realty Company had sold about two-thirds of
the 1,200 lots to individual purchasers, and in the late 1940's the county
had installed a sewer system in the subdivision. Very little other
development took place, however, and the tract continued to look like a
"big briar patch." In early 1950, due apparently to stockholder
dissension, the officers of Arlington Ridge Realty Company decided to sell
the company's remaining lots as a block and then liquidate the
corporation. The company's real estate salesman approached plaintiff, who
was a neighbor and friend, told him that the remaining lots were available
as a block for $20,000, and urged him to buy them. Despite their ragged
appearance and lack of improvements, <> plaintiff concluded
that the asking price was cheap because of the location of the lots
immediately north of one of the most desirable residential areas in
Columbus. Accordingly, on February 21, 1950, he signed an agreement to
purchase the lots, subject, however, to the approval of his brother whose
financial participation he apparently needed. He contacted Charles in
Tennessee, and it was agreed between them that they would join in the
purchase. The transaction was closed on April 27, 1950.
A few days thereafter, plaintiff was approached by an acquaintance who
had recently gone into the real estate business and who had been
circulating a petition among various lot owners for the construction by
the county of water mains in River Ridge. This man asked plaintiff as the
joint owner of the largest single block of lots to sponsor the petition
and to help defray some minor expenses. Plaintiff agreed to do so and
authorized his attorney, George H. Chamblin, to enter into the matter.
Chamblin thereupon prepared new petitions for water, sewer, and street
improvements and presented them to the county officials. In his testimony,
plaintiff tried to make light of his activities in these efforts to get
county improvements, but the record is clear that, acting mostly through
his attorney, he was the moving force behind them. He knew that the
proposed improvements would substantially enhance the value of his and his
brother's holdings in River Ridge. The Board of County Commissioners acted
favorably on the petitions. In the fall of 1951 the county commenced
construction of the improvements and completed the work in early 1953.
When plaintiff and his brother purchased the River Ridge lots, it was
orally agreed between them that, since Charles lived in Tennessee, the
legal title to the property would be held for convenience in plaintiffs
name. <> In April 1951, two of the lots were sold to Cozy
Cottages, Inc., one of plaintiffs wholly-owned corporations, for the
purpose of building two experimental prefabricated homes thereon.
There were no further sales until June 1952. In September of the
previous year plaintiff had organized a wholly-owned corporation under the
name of Arlington Ridge Development Company for the purpose of building
houses on lots in River Ridge. To that end, in June 1952 (the contract of
sale was entered into on September 21, 1951), plaintiff and Charles sold
100 lots for about $80,000 to the Development Company which proceeded,
under plaintiffs general supervision, to build houses on about 60 of the
lots. The county improvements were only partially completed, and the
houses did not sell very well. Of the remaining lots, about 15 were sold
by the Development Company to the Columbus Home Builders Association for a
Parade of Homes; 20 lots were sold by it to a man named Aleshire who was
one of the builders in the Parade of Homes; and ten were sold to Kay
Investments, Inc., the stock of which was owned by plaintiff. Although the
Development Company was the seller in the above sales contracts, in many
instances the deeds to the purchaser, for convenience and to save
conveyancing expense, ran directly from plaintiff to the purchaser, rather
than to Arlington Ridge Development Company and then to the purchaser.
The remaining 333 1/2 <> lots were sold in October 1952 to
Lewis Leader and his nominee corporation for a gross sales price of
$266,800, which amounts to an average price of $800 per lot. In Charles'
case the Tax Court found that the Leader sale and the two preceding sales
were effected without activity on the part of the joint owners; that
neither plaintiff nor his brother were licensed real estate brokers; that
the property was not listed with real estate agents, nor advertised for
sale, and no "for sale" signs were erected thereon. The Tax Court further
found that at the time of the sale to Leader of the 333 1/2 lots,
individual lots in the area were selling at prices ranging from $1,000 to
$1,500. The record here, as well as in the Tax Court, amply supports those
findings. Prior to the sale of the 333 1/2 lots to Leader, plaintiff had
been solicited by a number of people, including real estate brokers, to
sell individual lots, but he and his brother refused to do so. In the fall
of 1952, one McGreevy, an employee of the Guaranty Title and Trust Company
of Columbus, introduced Leader to plaintiff. Prior thereto McGreevy had
been assisting Leader in the obtaining of mortgage loans, and Leader had
informed McGreevy that he would like to buy some land in Columbus on which
to build houses. He asked McGreevy's help in finding some available land
with sewer and water improvements. McGreevy knew of plaintiffs lots in
River Ridge, and he assumed that they might be for sale. He introduced
Leader to plaintiff, and negotiations followed between the two. Plaintiff
consulted his brother with regard to an offer from Leader to purchase the
333 1/2 lots, and while Charles would have preferred to have held the lots
longer for further appreciation in value, he deferred to plaintiff's
judgment that a bulk sale should be made to Leader. In October 1952,
plaintiff and Leader reached an agreement of sale which was closed the
following month.
On these facts the trial commissioner -- treating together all three
sales by plaintiff (and his brother) -- determined that the River Ridge
property was not held by Todd Tibbals primarily for sale to customers in
the ordinary course of his trade or business. Our discussion starts from
the fundamental premise that "primarily" means "of first importance" or
"principally". Malat v. Riddell, 383 U.S. 569 (1966). We also consider the
three sales individually since "the taxpayer's purpose of holding property
may vary with respect to different tracts. Upon the capital gain issue,
purpose or intention must be determined with respect to each tract and
such purpose may vary with respect to the different tracts." Municipal
Bond Corp. v. Commissioner, 341 F.2d 683, 689-90 (C.A. 8, 1965). Also,
"[i]t will not be questioned that a property owner may hold some of it for
sale to customers in the ordinary course of business and hold the
remainder as capital assets." Wood v. Commissioner, 276 F.2d 586, 590-91
(C.A. 5, 1960). See, for further examples, Margolis v. Commissioner, 337
F.2d 1001, 1005 (C.A. 9, 1964); Burgher v. Campbell, 244 F.2d 863, 864
(C.A. 5, 1957); Lobello v. Dunlap, 210 F.2d 465, 469 (C.A. 5, 1954).
With regard to the sale of the two lots (in April 1951) to Cozy
Cottages, Inc. and the sale of one hundred lots (in June 1952) to the
Arlington Ridge Development Company, we disagree with the trial
commissioner and rule that that property was held by Todd Tibbals
primarily for sale to customers in the ordinary course of his trade or
business. Several factors lead us to the conclusion that, from the
acquisition of the land up to these sales, this part of the River Ridge
real estate was acquired and held for resale in a real estate venture.
Plaintiff was no stranger to real estate development. He had previously
built houses on his own account (in 1946 and 1947); from that time on, he
had formed closely held corporations which engaged extensively in
development and in the real estate business, and he had often transferred
unimproved land (at his cost) to these controlled companies. He was
sufficiently connected with real estate that he had once been president of
the Columbus Home Builders Association. Immediately upon acquisition of
River Ridge land in 1950, plaintiff became the "moving force" in a project
to have the county put in water, sewer, and street improvements. This work
began in the fall of 1951 and was completed in the early part of 1953. The
sale to Cozy Cottages, Inc., one of plaintiff's wholly-owned corporations
-- in April 1951, even before the improvement work began -- was for the
purpose of building two experimental prefabricated houses (obviously to
see whether they would evoke consumer interest). The Arlington Ridge
Development Company, likewise wholly-owned by plaintiff, was created in
September 1951 for the specific purpose of building houses on 100 lots in
the River Ridge subdivision. When the lots were sold by plaintiff to it,
the Development Company proceeded, under plaintiffs general supervision,
to build houses on about 60 lots, for sale to home-owners.
In all of these respects, the sales to Cozy Cottages, Inc. and to the
Development Company are remarkably close to the sale by stockholders to
their controlled corporation, the profits from which we recently held in
Browne v. United States, supra, 174 Ct. Cl. at ____, 356 F.2d at 547, to
be taxable as ordinary income. The plaintiffs background is similar to
that of the taxpayers in Browne and his dealings with the property were
quite comparable. As in that case, "here, we have substantial personal
developmental activities, plus use of and sale to a controlled corporation
which continued the development, plus some comparable purchases by
taxpayer[s] of other real estate for development." 174 Ct. Cl. at ____,
356 F.2d at 547. These elements add up to an acquisition, holding and sale
primarily in the ordinary course of a real estate business carried on by
plaintiff in his individual capacity, with the aid of his controlled
corporations. See, also, Engasser v. Commissioner, 28 T.C. 1173 (1957).
<>
To reach this conclusion we do not disregard corporate entities or say
that the business of plaintiffs wholly-owned companies was automatically
his business. It is established that, in determining the trade or business
of an individual taxpayer, the business activities of his closely-held
corporation will not be attributed to him (see, e.g., Whipple v.
Commissioner, 373 U.S. 193 (1963)), but it is also true that a taxpayer
may be individually in the same business as his corporation, may make that
business his own, or may utilize the company in his own business. It is
therefore 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. <> That type of inquiry
has often been made by the courts, including this one, in cases testing
(under section 117(a) of the 1939 Code or section 1221 of the 1954 Code)
whether profit from a sale of property was ordinary income or capital
gain. See Boeing v. United States, supra, 144 Ct. Cl. at 84-87, 168 F.
Supp. at 767-69; Browne v. United States, supra; Burgher v. Campbell,
supra, 244 F.2d at 864-65; Lakin v. Commissioner, 249 F.2d 781 (C.A. 4,
1957); Kaltreider v. Commissioner, 255 F.2d 833, 836, 837, 838-39 (C.A. 3,
1958); Bauschard v. Commissioner, 279 F.2d 115, 118 (C.A. 6, 1960)
(individual joint venturer); Heebner v. Commissioner, 280 F.2d 228 (C.A.
3, 1960), cert. denied, 364 U.S. 921; Patterson v. Belcher, 302 F.2d 289,
294, 297 (C.A. 5, 1962), cert. denied, 371 U.S. 921; H-H Ranch, Inc. v.
Commissioner, 357 F.2d 885 (C.A. 7,1966); Engasser v. Commissioner, supra,
28 T.C. 1173. That is what we do in this case, and why we consider it
proper to take account of the nature and activities of the controlled
companies, Cozy Cottages, Inc. and the Arlington Ridge Development
Company, in deciding that plaintiffs sales to them brought him ordinary
income rather than capital gain.
With respect to the sale to Lewis Leader, in October 1952, we have a
different view. When plaintiff purchased the River Ridge land early in
1950, he may have intended to develop and sell all or most of it. But we
judge that by the time of the organization of the Arlington Ridge
Development Company in September 1951, plaintiff had probably narrowed his
development objectives to the 100 or 102 lots with which his Development
Company and Cozy Cottages, Inc. were to be concerned (and which we have
just discussed). <> At any rate, it seems to us that by
October 1952, when the last sale (the Leader transaction) occurred,
plaintiff no longer held the remaining 333 1/2 lots primarily for sale to
customers in the ordinary course of a real estate business. Apparently,
the 50 to 60 houses being built on the land transferred to the Development
Company had not been selling well, and we infer that plaintiff, if he had
originally intended to develop or retail all of his 436 lots in River
Ridge, had given up that intention and had contended himself with the 102
lots previously sold to his controlled corporations. If he had wished to
sell the 333 1/2 lots individually, he could have made a considerably
greater profit than he obtained from the disposition in bulk to Leader.
<> However, neither plaintiff nor his companies made any
effort to develop or retail this land. Leader was, of course, wholly
independent of plaintiff, and plaintiff had no interest in Leader's use or
development of the property.
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. See Palos Verdes
Corp. v. United States, 201 F.2d 256, 258-59 (C.A. 9, 1952); Goldberg v.
Commissioner, 223 F.2d 709, 712 (C.A. 5, 1955); Miller v. United States,
supra, 168 Ct. Cl. at 506, 339 F.2d at 664-65 (concurring opinion). We
find that, by the time of, and for some time prior to, the sale to Leader
in October 1952, plaintiff held the remaining 333 1/2 lots as an
investment, and that his financial interest was in "the realization of
appreciation in value accrued over a substantial period of time"
(Commissioner v. Gillette Motor Co., 364 U.S. 130, 134 (1960)), rather
than in the profits "arising from the everyday operation of a business"
(Corn Products Co. v. Commissioner, 350 U.S. 46, 52 (1955)). This is borne
out by the circumstances we have mentioned, as well as by the fact that
plaintiffs brother Charles would have preferred to hold these lots longer
for further appreciation in value. Plaintiff has therefore overpaid his
tax with respect to the gain on this sale.
II. SALE OF PARKLAWN STOCK
Commissioner Fletcher's opinion on the second question, to which
neither party excepts and which the court adopts, is as follows:
The other remaining issue in this case involves the proper tax
treatment to be accorded plaintiffs realization of gain on the sale of his
stock in Parklawn Manor, Inc. (Parklawn) The resolution of this question
requires consideration of a complicated statutory enactment whereby, in
1950, Congress cast a shadow over "the rainbow leading to the capital gain
pot of gold" <> by turning its attention to an
ordinary-income-to-capital-gain conversion device known to the tax bar by
the picturesque name of the "collapsible corporation."
Through an intensive development of this sophisticated device,
Hollywood had proved that its expertise in the art of make-believe was by
no means confined to the entertainment industry. An outstanding actor,
producer, and director would form a corporation to produce a single motion
picture with a view toward liquidating the corporation as soon as the
picture could be realistically appraised but before realization of any
appreciable profits at the corporate level. Upon completion of the picture
and after negotiation of a contract for distribution, the corporation
would be liquidated, or "collapsed," its assets being transferred in kind
to its stockholders as joint owners. The collapsed corporation paid no
tax, of course, on the distribution in liquidation, and the stockholders
reported the difference between the cost of their stock and the fair
market value of their interest in the corporate assets as long-term
capital gain. The fair market value of the picture was then amortized over
the estimated life of the film, and, accordingly, only the excess of the
distribution receipts over such amortized basis was taxed at ordinary
income rates. Hence, nearly all the profits which the actor, producer, and
director had earned by their services in the production and distribution
of the picture were taxed as capital gain. See Pat O'Brien v.
Commissioner, 25 T.C. 376 (1955). The same pattern was employed in the
building construction industry. See Freeman, Collapsible Corporations, 11
N.Y.U. Inst. 407, 408 (1953); Mertens, Law of Federal Income Taxation,
Vol. 313, Sec. 22.55.
Congress attempted to foreclose this practice by the addition of
section 117(m) to the 1939 Code. <> That section provides,
with certain limitations not applicable here, that the gain from sale or
exchange of stock of a collapsible corporation shall be considered a gain
from the sale or exchange of property which is not a capital asset, and
hence taxable at ordinary income rates. Insofar as pertinent to this case,
the section goes on to define a collapsible corporation as:
* * * a corporation formed or availed of principally for the
construction, of property, * * * with a view to--
(i) the sale or exchange of stock by its shareholders * prior to the
realization by the corporation * * * constructing * * * the property of a
substantial part of the net income to be derived from such property, and
(ii) the realization by such shareholders or gain attributable to such
property.
The pertinent parts of the Regulations promulgated under this section
are contained in Reg. 118, Section 39.117(m)(1)(b) and are set forth in
the footnote below. <>
It is at once apparent that both the statute and the interpretative
regulations speak, at least partially, in subjective terms. "Thus the
process of psychoanalysis has spread to unaccustomed fields". <> By conveying its message in terms of the taxpayer's subjective
motive, the statute leads one irresistibly to the conclusion that the
problem to be solved must be essentially a question of fact. See Rev. Rul.
56-50, 1956-1 C.B. 174, 175. Did plaintiff form, or avail himself of,
Parklawn "with a view to" selling his Parklawn stock before Parklawn had
realized a substantial part of the net income to be derived from its
housing project?
In determining whether plaintiff had the proscribed "view," it is
necessary to inquire into the history of his dealings with, and ultimate
sale of, his stock in Parklawn, the corporation alleged by defendant to be
collapsible. Parklawn was formed by plaintiff in October 1950 for the
purpose of engaging in the business of constructing, owning, and operating
rental residential property. He acquired all of its common stock for
$1,000, and the Federal Housing Administration (FHA) acquired all of the
preferred stock for $100. Plaintiff was the president of the corporation,
and his attorney, George H. Chamblin, was its secretary.
Shortly after its incorporation, Parklawn acquired from another one of
plaintiffs corporations nearly 41 acres of vacant land in Columbus for the
purpose of constructing thereon what was known as an FHA 608 housing
project. With financing guaranteed by FHA, Parklawn constructed the
project under the name of Parklawn Manor. It consisted of 384 family units
contained in 156 buildings. The construction of all the housing units was
completed, and they were occupied in their entirety, before the end of
1951.
Meanwhile, on April 5, 1951, C. E. Tibbals, Sr., plaintiff's father,
had formed a corporation under the name of Lincoln Management Co.
(Lincoln) to engage in the rental and management of rental real estate.
Lincoln set up the original rental program for Parklawn Manor and procured
all the original tenants under a management contract with Parklawn which
expired in April 1952.
As president of Lincoln, Tibbals Sr. directed its activities in renting
the Parklawn Manor units until the expiration of the management contract.
He owned all of Lincoln's outstanding stock until January 12, 1953. On
that date he created an inter vivos trust in which he appointed George H.
Chamblin as trustee, named plaintiffs children as primary beneficiaries,
and transferred to the trust all his shares of Lincoln stock.
Thereafter, in August of the same year, Chamblin suggested to plaintiff
that he sell his stock in Parklawn to Lincoln. In making this suggestion,
Chamblin appears to have been motivated by several considerations. For one
thing, as secretary of Lincoln he was aware that it had excess assets
available, and he believed that using those assets to acquire Parklawn
would be beneficial to the Tibbals Sr. trust whose interests he was
obliged, as trustee, to promote. Also, Tibbals Sr. had complained that
neither Lincoln, nor he as its president, had enough to do, and as
Chamblin saw it, the acquisition of Parklawn would remedy this situation.
Plaintiffs initial reaction to Chamblin's suggestion was one of
surprise. Prior to this time he had given no thought to selling his
Parklawn stock. However, upon considering the suggestion further and after
discussing it with his father, he concluded that the idea was a good one
and should be executed.
Consideration was then given to the matter of a selling price. Because
of the family relationships involved, both plaintiff and Chamblin (who
bore a fiduciary relation to plaintiffs children under the Tibbals Sr.
trust) felt that the price paid by Lincoln for the Parklawn stock should
be a fair and reasonable one. The opinion of a leading real estate
appraiser in the area was obtained as to the fair market value of
Parklawn's land and improvements. The appraiser's estimated total value
for land and buildings was fairly close to the total cost figure as shown
on the corporation's books, but his breakdown values as between land and
buildings differed considerably from the book figures. In any event,
plaintiffs ultimate decision was that the book value of his common stock,
i.e., $46,200, <> reflected its fair value. Chamblin agreed.
Consequently, on August 31, 1953, plaintiff sold his stock to Lincoln
for $46,200. On his income tax return he reported his profit of $45,200 as
long-term capital gain. The Commissioner of Internal Revenue, however,
included the entire $46,200 in plaintiffs ordinary income on the ground
that it was either a dividend or gain from the sale of stock in a
collapsible corporation, and assessed a deficiency which plaintiff duly
paid. Following disallowance of his claim for refund, plaintiff filed suit
in this court.
<>
In its brief and requested conclusions of laws relating to this issue,
defendant appears to have abandoned any contention that the $46,200 paid
to plaintiff by Lincoln constituted a dividend to him. <>
Hence, the only remaining issue between the parties is whether plaintiff
had the requisite view to sell his stock in Parklawn prior to the
realization by that corporation of a substantial part of the net income to
be derived from its property so that his gain is taxable as ordinary
income rather than as capital gain.
In my opinion, the facts in this case clearly show that plaintiff did
not entertain the "view" proscribed by the statute, and, therefore,
Parklawn cannot be deemed a collapsible corporation as defined in section
117(m). Despite some early indications to the contrary by the Courts of
Appeals for the Second and Fourth Circuits, <> it now appears
to be settled that the view to sale contemplated by section 117(m) must
have existed before completion of the construction work for which the
corporation was formed. Jacobson v. Commissioner, 281 F.2d 703 (3d Cir.,
1960); Coates v. United States, 6 A.F.T.R.2d 5200 (D. Ore., 1960); Elliott
v. United States, 205 F. Supp. 384 (D. Ore., 1962); Charles J. Riley, 35
T.C. 848 (1961); Maxwell Temkin, et al., 35 T.C. 906 (1961); and Southwest
Properties, Inc., 38 T.C. 97 (1962). In its opinion in the Jacobson case,
supra, the court stated the correct rule as follows:
On the face of the statute Congress is here indicating a state of mind
which must attend and gives significance to certain action. That action,
as specified in the statute, is not merely any formation or use of a
corporation but rather the formation or use of a corporation to construct
or produce property. The "view" with which a corporation is used for a
particular purpose must necessarily be a view entertained at the time of
such use. Thus, only by a distorting disregard of the phrase "for the * *
* construction * * * of property" is it possible to reach the conclusion
that the "view to * * * sale" contemplated by the statute can arise for
the first time in connection with corporate activity after the work of
construction is completed.
* * * * *
Thus, the regulation, adopting what is certainly not an arbitrary
interpretation of the statute, treats a corporation as collapsible only if
"the view to sale" shall have existed at the time of the construction in
which the corporate entity was used, or if circumstances which
subsequently induce sale were themselves within contemplation during the
period of construction. We are guided by and shall apply the statute as
thus reasonably interpreted in the regulations. 281 F,2d 705-6.
There is no dispute in this case that "construction" of Parklawn was
completed, and its housing units were fully occupied, not later than the
end of the year 1951, or some twenty months prior to plaintiff's sale of
his Parklawn stock. <> He testified that he had never given
any thought to selling the stock prior to Chamblin's suggestion in August
1953, and nothing in the record justifies an inference to the contrary.
Indeed, the evidence is compelling that plaintiffs decision to sell the
stock was attributable, in the words of the regulation, "solely to
circumstances which arose after the * * * construction * * *." It was long
after completion of the construction that plaintiff's father began to
complain of his and Lincoln's inactivity. Similarly, it was not until
January 1953 that the "grandfather trust" was created by Tibbals, Sr. for
the benefit of plaintiffs children. Yet these after-arising circumstances,
according to Chamblin, were the very factors which gave rise to his
recommendation that plaintiff sell his Parklawn stock to Lincoln. These
constitute "compelling facts" which, under the regulation, are sufficient
to negate any prior existence of a "view" to sell. <>
However, defendant insists that in any event the foregoing
after-arising circumstances could and should have been reasonably
anticipated by plaintiff during the construction period. If this be true,
the regulation infers the existence of the proscribed view as contended
for by defendant. The argument is that plaintiff could have taken care of
his father's restlessness by some other type of contractual arrangement,
such as a renewal of the previous management contract, and that plaintiffs
true motive in selling his Parklawn stock to Lincoln was to give the
property to his children at a nominal bargain price.
The relevance of this argument on the question of foreseeability is not
at all apparent. It does not explain why plaintiff, during the Parklawn
construction period, should have either foreseen restlessness by his
father arising out of subsequent events, or should have anticipated that
more than a year after construction was completed his father would create
a trust for plaintiff's children, much less that the Lincoln stock would
be an asset of the trust. There is simply nothing in the record to justify
a conclusion that plaintiff should have reasonably anticipated these
subsequent occurrences which gave rise to Chamblin's recommendation.
It may be, as defendant suggests, that plaintiff was partly motivated
in this transaction by a desire to see his children obtain the beneficial
interest in Parklawn at a "nominal bargain price." <> If so,
however, such estate tax motivation would seem logically to have arisen
after the creation of the Tibbals, Sr. trust, and this is still another
factor negating the existence of the "view" requisite to collapsible
treatment. The taxpayer at whom section 117(m) aims is typically the one
striving to get as much in the way of capital gain proceeds for his stock
as possible, not one bent on giving it away or even selling it at a
bargain.
In short, the evidence in this record shows clearly that, at no time
during the construction of Parklawn Manor, did plaintiff entertain a view
to sell his stock prior to the realization by Parklawn of a substantial
part of the net income to be derived from the property. Accordingly,
Parklawn was not a collapsible corporation, and plaintiff is entitled to
treat the proceeds derived from his sale of its stock as capital gain. It
is, therefore, unnecessary to consider the arguments of the parties
dealing with the subsidiary question of whether, prior to the sale of
plaintiffs stock, Parklawn had realized a substantial part of the net
income to be derived from its property.
----------
VMITAKER, 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 plaintiffs 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 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 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 plaintiffs
closely-held corporations, the record supports plaintiffs 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 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' case, the absence of motive to make a
greater profit is an element indicating that the property was not held
primarily for sale to customers 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 <>), 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 plaintiffs status the
court must look also to the activities of plaintiffs closely-held
corporations. The argument is that there then comes into view the true
nature of plaintiffs 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 plaintiffs 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.
"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 (1963); Burnet v. Clark, 287 U.S.
410 (1932); Watson v. Commissioner, 124 F.2d 437 (2d Cir. 1942); Jarvis v.
Commissioner, 32 T.C. 173 (1959); Gordy v. Commissioner, 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 holding 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 plaintiffs 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 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. <> 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 plaintiffs 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, plaintiffs share of the gain realized from the sale of
the River Ridge lots should be taxed to him as long-term capital gain."
<>
1/ A number of other issues raised by the petition have been disposed
of by an Agreement of Partial Settlement filed prior to the trial. The
effect of this partial settlement on the amount of any final judgment will
be reflected in the subsequent proceedings pursuant to Rule 47(c).
2/ Most of the statement of facts in this Part is taken from
Commissioner Fletcher's opinion although we have another view as to the
taxation of the proceeds of two of the three sales.
3/ The word refers to Todd Tibbals. His wife, Helen, is a party to the
action only because she filed joint tax returns with her husband.
4/ Charles lived in Tennessee where he managed a hardwood flooring
manufacturing company. He and plaintiff owned that company in equal
shares.
5/ The 1950 purchase was of a tract comprising 357 lots. In 1951,
pursuant to an option held by plaintiff, the brothers enlarged their
holdings by the purchase of an additional 79 lots in the subdivision for a
total acquisition of 436 lots.
6/ At this time plaintiff was not aware that there was a considerable
sewer development underground in the subdivision.
7/ The oral agreement between the brothers was later reduced to writing
at Chamblin's suggestion. See finding 6, infra.
8/ The one-half lot discrepancy apparently arose out of the second
purchase of 79 lots by plaintiff and Charles in February 1951. It is of no
moment here.
9/ Gordy v. Commissioner, 36 T.C. 855 (1961), on which plaintiff leans
heavily, is distinguished in Browne v. United States, supra.
10/ Along with many others, this court has pointed out "that one may
conduct his business through others." Boeing v. United States, 144 Ct. Cl.
75, 87, 168 F. Supp. 762, 769 (1958).
11/ The Development Company was organized to build houses on 100 lots
in River Ridge, and plaintiff has denied that either he or his companies
intended to build more.
12/ As the Tax Court observed, in Charles Tibbals' case, regarding the
sale to Leader: "Absence of motive to make a greater profit is an element
indicating that the property was not held primarily for sale to customers
in the ordinary course of trade or business." Tibbals v. Commissioner, 17
T.C.M. 228 (see finding 7).
13/ See Surrey, Definitional Problems in Capital Gains Taxation, 69
Harv. L. Rev. 985, 1002 (1956).
14/ After considerable overhauling, the section now appears as section
341 of the 1954 Code.
15/ "(3) Under section 117(m)(2)(A), the corporation must be formed or
availed of with a view to the action therein described, that is, the sale
or exchange of its stock by its shareholders, or a distribution to them,
prior to the realization by the corporation manufacturing, constructing,
producing, or purchasing the property of a substantial part of the net
income to be derived from such property, and the realization by the
shareholders of gain attributable to such property. This requirement is
satisfied in any case in which such action was contemplated by those
persons in a position to determine the policies of the corporation,
whether by reason of their owning a majority of the voting stock of the
corporation or otherwise. The requirement is satisfied whether such action
was contemplated unconditionally, conditionally, or as a recognized
possibility."
* * * * *
"(4) A corporation is formed or availed of with a view to the action
described in section 117(m)(2)(A) if the requisite view existed at any
time during the manufacture, production, construction, or purchase
referred to in that section. Thus, if the sale, exchange, or distribution
is attributable solely to circumstances which arose after the manufacture,
construction, production, or purchase (other than circumstances which
reasonably could be anticipated at the time of such manufacture,
construction, production, or purchase), the corporation shall, in the
absence of compelling facts to the contrary, be considered not to have
been so formed or availed of. However, if the sale, exchange, or
distribution is attributable to circumstances present at the time of the
manufacture, construction, production, or purchase, the corporation shall,
in the absence of compelling facts to the contrary, be considered to have
been so formed or availed of."
16/ Cardozo, J., dissenting in United States v. Constantine, 296 U.S.
287, 299 (1935).
17/ Actually, this figure was understated by some $3,300 due to an
error by the company's accountant in computing the depreciation deduction.
18/ Presumably, the failure to press the dividend theory is due to the
fact that, under the transaction described above, plaintiff received
nothing from Parklawn when he sold its stock, and he was not a stockholder
of Lincoln. Cf. Rev. Rul. 55-15, 1955-1 C.B. 361, revoked by Rev. Rul.
59-97, 1959-1 C.B. 684.
19/ See Burge v. Commissioner, 253 F.2d 765 (4th Cir., 1958); Glickman
v. Commissioner, 256 F.2d 108 (2d Cir., 1958); and Sidney v. Commissioner,
273 F.2d 928 (2d Cir., 1960). Cf. Braunstein v. Commissioner, 305 F.2d 949
(2d Cir., 1962), affd 374 U.S. 65 (1963) and Commissioner v. Solow, 333
F.2d 76 (2d Cir., 1964). In the latter case, the court refers to its
earlier comments on this subject as "dictum." 333 F.2d 80.
20/ No reported case involving this issue has been found wherein the
lapse of time between completion of construction and the sale of stock was
anywhere near as long. The cases decided adversely to the taxpayer
disclose time intervals ranging from one month (Sidney v. Commissioner,
273 F.2d 928 (2d (Cir., 1960)) to a maximum of twelve months (Tobias v.
Commissioner, 40 T.C. 84 (1963)).
21/ Moreover, had plaintiff been thinking in terms of the collapsible
corporation provisions of the Code, it is logical to infer that he would
have postponed the sale of his Parklawn stock until the end of 1954. By
that time, of course, three years would have elapsed since completion of
construction, and the exception specified in section 117(m)(3)(C) would
have clearly removed the sale from collapsible treatment. Standing alone,
his failure to so postpone the sale might have little significance, but
when coupled with the other facts of record discussed above, it lends
credence to his testimony that prior to August 1953 he had no "view" to
sell.
22/ Subsequent earnings of Parklawn indicate that its stock was
probably worth more than the book value of $46,200. See findings 22,
infra.
<>
1/ The same is true of Browne v. United States, 174 Ct. Cl. 356 F.2d
546 (February 1966).
2/ "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 plaintiffs 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)."