Welch v. Commissioner

*395 These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for the years 1924, 1925, and 1926 in the amounts of $6,697.64, $1,687.41, *2408 and $2,199.47, respectively. The question in issue for all years is whether certain installment payments of real estate sold by the petitioner received in the taxable years constituted capital gains within the meaning of section 208 of the Revenue Acts of 1924 and 1926.

FINDINGS OF FACT.

The petitioner, a resident of Detroit, Mich., became interested in the real estate business in 1892. In that year he entered into an oral partnership with his brother, T. H. Welch, under the name of Welch Brothers, for the purpose of engaging in the real estate brokerage business in and about the city of Detroit. This partnership continued until about 1916.

The petitioner's health became impaired a few years prior to 1916, which caused him to travel considerably. He had three sons who were reaching manhood and he desired to train them in the real estate business. The partnership with his brother, T. H. Welch, was disolved in 1916, and the petitioner with his three sons formed a partnership under the name of John M. Welch & Sons to do a real estate brokerage business.

Prior to 1916 the petitioner had purchased numerous parcels of unimproved land just outside of the city limits of Detroit. *2409 He believed that there would be a demand for them for residential purposes within the course of 10 to 15 years. He had been advised by physicians that he had probably only a few years to live. He made these purchases in the expectation that if he did not live to realize profits from the sale of them his estate would obtain the benefit of the enhancement in value.

The partnership of John M. Welch & Sons continued until about 1926. It did an active real estate brokerage business. The petitioner subdivided some of his property and the partnership sold some of the lots from the different subdivisions created by the petitioner. The petitioner paid the partnership the regular real estate commissions in respect of sales of his property made by it. The earnings of the partnership were split four ways, the petitioner receiving one-fourth thereof.

The petitioner devoted such time as was necessary, up to the limit of his strength, in assisting his three sons in the real estate business. *396 He suggested prospective purchasers and gave them leads upon persons to interview. The partnership advertised in newspapers, in city directories, and with signs upon property listed*2410 with it for sale.

The petitioner purchased additional parcels of land subsequent to 1916 and many of the parcels owned by him were platted and subdivided during the period 1916 to 1926. The sales of lots in a particular subdivision were much greater in some years than in others. The petitioner's land was sold by many different real estate agents.

The petitioner found it necessary on account of his health to be away from the city of Detroit for long periods and he left the running of the partnership office more and more to his sons. In 1926 the partnership of John M. Welch & Sons was dissolved, but the petitioner continued to be associated with his sons in the real estate business. They occupied the same suite of offices. The petitioner had many properties for rent and he found it necessary to have the assistance of one or more of his sons in carrying on his real estate operations. After the dissolution of the partnership in 1926, he employed his son Harold as his special assistant. The real estate business carried on by the petitioner after the dissolution of the partnership was carried on under the name of Thomas M. Welch & Son. The son was paid a salary and a commission*2411 upon any sales of real estate made by him.

The petitioner was an active member of the Detroit Real Estate Board for approximately 30 years prior to 1927. He was listed as a realtor in the poster of the Detroit Real Estate Board. On page 459 of Polk's Directory of the City of Detroit for 1926 appears an advertisement of John M. Welch & Sons, listing as members of the organization John M. Welch, John M. Welch, Jr., Raymond A. Welch, and Harold A. Welch. This advertisement extends across the page of the directory and in large letters is the following:

GROSSE ILE

Only 6 miles From Detroit City Limits

FOR 1926

We've been selling property on this beautiful island for the past 29 years.

Then follows the telephone numbers of the partnership office.

During the years 1924, 1925, and 1926, the petitioner received large installment payments upon the sales of his lots. In 1924 the petitioner received installment payments from the sale of land in 14 different subdivisions; in 1925 from 15 subdivisions; and in 1926 from 10 subdivisions.

Petitioner's income-tax returns for 1924, 1925, and 1926, show as follows:

*397

*2412 The "Gain on installment collections" column represents gains on installment collections on sale of real estate which had been owned by the petitioner for more than two years prior to sale.

The petitioner returned the installment collections above listed as capital gains and paid tax thereon accordingly. In the computation of the deficiencies involved herein the Commissioner has treated the amounts as profits from the sale of real estate subject to normal and surtaxes at the ordinary rates and not as capital gains.

OPINION.

SMITH: The question presented by these proceedings is whether the gains on certain installment collections from the sale of real estate owned by the petitioner constitute taxable gains under the provisions of section 208 of the Revenue Acts of 1924 and 1926. This claim is made only with respect to installment collections upon sales of real estate made subsequent to 1920. Although the petitioner claimed the amount of capital gains in his returns for 1924, 1925, and 1926 as $61,782.94, $71,235.19, and $41,002.36, respectively, he now contends that the evidence of record shows capital gains from installment collections in the following amounts:

*2413 The respondent in computing the deficiencies made certain adjustments in the net installment collections to which no exception is taken by the petitioner. The only point for our decision is whether the net installment collections in the amounts claimed in the petitioner's brief for the years 1924, 1925, and 1926 constitute "capital gains" within the meaning of the taxing acts.

Section 208(a) of the Revenue Acts of 1924 and 1926 provides in part as follows:

For the purposes of this title -

(1) The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921;

* * *

(8) The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind *398 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 taxpayer primarily for sale in the course of his trade or business.

The Revenue Act of 1921 contains substantially the same definition of "capital assets" without the concluding clause*2414 contained in the later acts. The reason for the addition of the last clause to the definition of the term "capital assets" in the Revenue Act of 1924 was explained by Mr. Green, Chairman of the Committee on Ways and Means, in his report accompanying H.R. 6715, as follows:

The last part of the definition of capital assets is changed to emove any doubt as to whether property which is held primarily for resale constitutes a capital asset, whether or not it is the type of property which under good accounting practice would be included in the inventory. (Rept. 179, 1st sess., 68th Cong.)

A similar explanation is found on page 18 of "Statement of Changes" made in the Revenue Act of 1921 by H.R. 6715 and reasons therefor prepared for the use of Committee on Finance March 6, 1924, which incorporates the preceding excerpt from Mr. Green's report.

It may at once be admitted that real estate is not property to be included in the inventory. We so held in , and . As we see the problem prosented by these proceedings, it is whether the real estate owned by the petitioner and sold partly*2415 during the taxable years and partly in prior taxable years constituted property held by the petitioner primarily for sale in the course of his trade or business. What connotation is to be given to this language of the taxing acts as applied to the instant proceedings?

We think that it means that where a person is engaged in business and in the conduct of that business sells property which is held for sale in the business, such person may not claim the benefit of the capital gains provision of the statute. The question here is whether the petitioner was engaged in a real estate business during the years 1924, 1925, and 1926. We think that he was. He was a member of a partnership which was actively engaged in a real estate business and which was selling and endeavoring to sell the property held by the petitioner. Clearly, he was engaged in the real estate business in which the partnership was engaged. But the evidence shows further that the petitioner had over a series of years subdivided different tracts of land and held the lots in such subdivisions for sale. We think, indeed, that as an individual the petitioner was engaged within the meaning of the statute in a real estate*2416 business.

There can be no question that the real estate owned by the petitioner was property within the meaning of section 208(a)(8) of *399 the Revenue Acts of 1924 and 1926 and that the property was held primarily for sale. That was the determination of the respondent and the evidence does not show the contrary. We are therefore of the opinion that the petitioner is not entitled to the benefit of the capital gains provision of the Revenue Acts of 1924 and 1926 for the taxable years involved in respect of the installment collections here in question.

Reviewed by the Board.

Judgment will be entered for the respondent.

TRUSSELL dissents.