Before Hastings, Chief Judge, Duffy and Schnackenberg, Circuit Judges.
We are asked to review the decisions of the Tax Court of the United States entered on May 9, 1960 in Docket Nos. 65856, 65857, 70624 and 70625.
These petitions for review raise the question whether there is substantial evidence to support the determination of the Tax Court that certain property sold by taxpayers-petitioners was held for sale in the ordinary course of business so that the receipts from the sales are taxable as ordinary income rather than capital gains. Section 117(a)(1)(A), Internal Revenue Code of 1939, 26 U.S.C.A.; Section 1221(1), Internal Revenue Code of 1954, 26 U.S.C.A.
The tax years involved were 1953, 1954, and 1955. The Tax Court issued four decisions: one finding deficiencies for 1953 and 1954 against joint taxpayers Harlan O. Carlson and his wife, Mildred C. Carlson; one against the same parties for 1955; one finding deficiencies for 1953 and 1954 against joint taxpayers Joseph N. Futowsky and his wife, Jean Futowsky; and finally, a decision against these latter parties for 1955.
Petitions for review were taken to this court from each decision, and the four petitions were consolidated in the case before us. Mildred Carlson and Jean Futowsky are parties solely because joint returns were filed; herein, the term "taxpayers" will refer only to their husbands, Harlan O. Carlson and Joseph N. Futowsky.
In 1948, taxpayers organized Harjo Corporation to construct and sell homes. Each taxpayer, with his respective spouse, owned a one-half interest in that corporation. Carlson, an electrical engineer, supervised all building operations while Futowsky, an attorney, handled the administration of the business, including financing, selling and subcontracting. Since 1948, Futowsky has held a real estate broker's license. Also, he devoted about five percent of his time to the active practice of law.
From 1948 through 1958, Harjo Corporation constructed 324 homes which were sold for a total sales price of $4,772,994.98. Of these homes, 129 were sold for $1,920,121.99 during the taxable years in issue. The corporation also bought and sold other real estate during this period.
From 1952 through 1954, taxpayers together also owned a fifty percent interest in Harjo Realty Company, Inc., a corporation which they organized with another individual as a real estate brokerage firm, primarily to handle the sales of homes constructed by Harjo Corporation.
In April, 1950, taxpayers formed a partnership in which each held a fifty percent interest. Partnership returns were filed on a fiscal year basis for the years ending March 31, 1953, 1954 and 1955. During its existence, the partnership acquired and sold seven parcels of property, four of which are the subject of the instant controversy.
Of the seven properties, the first was a rooming house consisting of about thirty rental units which was purchased on April 12, 1950 and sold in January, 1953. The rooming house was completed and was almost entirely occupied by tenants when purchased. This property was operated by a resident manager. The Tax Court stated that taxpayers' activities in relation to this property "were characteristic of one's dealing with investment property." The Commissioner admitted that this property was held by the partnership for investment purposes, and the gain realized on its sale was entitled to long term capital gains treatment. There is no dispute about this transaction.
The remaining six properties were unimproved lots which taxpayers purchased in 1952. One lot was sold to a controlled corporation which in turn constructed an apartment building on the land. Taxpayers subsequently sold their stock in the corporation for a gain. The gain on this sale was taxed as ordinary income realized upon the sale of stock in a collapsible corporation. This transaction is not in dispute.
The partnership itself commenced and completed construction of an eight-family apartment building on each of the remaining five lots. The following chart describes the relevant information concerning the ...