*1380 1. Profits from the sale of an interest in lots in a subdivision which the taxpayer acquired and held primarily for sale to customers, not for sale as a whole, held, not capital gains.
2. In determining whether profits of an individual member of a group from sales of land are taxable as capital gains, it is irrelevant whether the group constitutes a partnership and also whether the taxpayer is in the real estate business entirely or only to some extent.
3. An interest in real property acquired by the taxpayer as an incident of his business and for the purpose of sale for profit, held, not a capital asset, although for the time being rented and yielding an income.
4. General testimony by the taxpayer before the Board as to how an amount deducted as "general expenses" was spent, without specification, is not sufficient to prove deductibility of the portion disallowed by the Commissioner because not substantiated.
5. Amounts paid by a father to a minor son for services performed are not deductible, and are included in the father's gross income in the absence of proof that the son was emancipated.
6. Advanced rents received in one year which, by general custom*1381 in the community include the rent of the final month of the term occurring in the following year, held, taxable in the year received, even though the accrual method is used.
*147 The Commissioner determined the following deficiencies in income tax:
| 1935 | 1936 | 1937 | |
| Neils Schultz | $82.38$2,491.04 | $527.88 | |
| Ellen Schultz | 82.38 | 2,475.00 | 527.88 |
Petitioners contend that in the determination of their community income the Commissioner erred (1) in treating profit from the sale of lots in a subdivided tract as ordinary income and not as capital gain; (2) in so treating profit from sale of an interest in another tract; (3) in treating loss in the sale of a third tract as a capital loss; (4) in disallowing the deduction of alleged business expenses; (5) in disallowing part of a deduction for depreciation of the furnishings of rented apartments; (6) in including in income amounts paid by petitioner to his minor children for services; and (7) in including in income rents received for months falling in a succeeding year.
*1382 FINDINGS OF FACT.
Petitioners, husband and wife, are residents of Millbrae, California. Neils Schultz was a building contractor. They prepared separate income tax returns for 1935, 1936, and 1937, on an accrual basis.
1. In November 1926 Neils Schultz (hereinafter called petitioner) paid $5,000 to Moeller & Sons for an undivided one-half interest in a contract to purchase 286 acres of land at Millbrae for $228,800. Moeller & Sons had paid $10,000 of the price and had agreed to pay $28,133.33 more on July 1, 1927, and the remainder in 5 serial notes, secured by a deed of trust on the property. It was "understood that the purchasers herein contemplate subdividing the property into tracts and lots." Petitioner agreed to pay one-half of the purchase price and of all other expenses and money "expended or to be expended in the development of said tract", and to join in execution of the deed of trust; he was to receive an undivided one-half interest *148 in the deed and "one-half of all moneys received from the sale of said tract or any portion thereof." The purchase was made; petitioner received a deed for a half interest in the land, and Moeller & Sons subdivided, improved, *1383 and sold portions of it. They were real estate brokers and charged the usual commissions for their services in accounting for the operating expenses of the venture. Petitioner bore half of these expenses. Petitioner separately acquired and built houses on some of the lots and did work in putting in streets. The cost of the street work and the sale commissions were accounted for as expenses of development.
In 1931 Moeller & Sons were becoming financially embarrassed, and petitioner, to gain control of the Millbrae development, purchased 25 percent of their interest in the tract and business. In 1932 he acquired the remainder. He procured a real estate broker's license, engaged salesmen, and continued the operations himself. During 1935, 1936, and 1937, he sold many lots, on which he realized profits of $11,340.46, $36,170.36, and $23,193.43, respectively. The property was held by petitioner primarily for sale to customers in the ordinary course of his trade or business.
2. On December 9, 1930, petitioner and four others entered into an agreement to acquire land known as the Marina property "for the general purpose of subdivision and sale." Each agreed to contribute specified*1384 amounts, of which petitioner's was $10,000, and to contribute further funds needed for handling the property, and each was to share proportionately in proceeds from "the sale, subdivision or other disposition thereof." J. B. and S. V. Rothschild, two of the parties, were vested with title to the land and management of the enterprise, the rights of the others "being to receive their proportion of proceeds, if any, as and when realized." The property was purchased, subdivided, and sold in parcels. In 1935 and 1936 petitioner received $2,044.20 and $516.13, respectively, as his share of the income. The property was held by petitioner primarily for sale to customers in the ordinary course of his trade or business.
3. On March 12, 1925, petitioner, Harry J. Oser, and Walter T. Welsch entered into an agreement to acquire improved real estate in San Francisco, known as the Fillmore property. Each was to have an interest equal to his contribution to cost, and Oser was to hold the property in trust for the participants in proportion to their respective interests. The property was used chiefly for stores. For sale or other disposition, the consent of all participants was necessary. *1385 Petitioner invested in it as a speculation and for the purpose of resale. He expected to get a profit from resale and not from the current income. He contributed 25 percent of the cost. The property was purchased subject to a mortgage for $75,000, and in *149 1936 it was conveyed to the mortgagee in satisfaction of the loan to avoid foreclosure and a deficiency judgment. On his 1936 income tax return he reported a cost of $40,417.57 and a sale price of $25,595.23, claiming 30 percent of the difference of $14,822.34, or $4,446.70, as a deductible loss. The property was held primarily for sale to customers in the ordinary course of petitioner's trade or business.
4. During the taxable years petitioner cashed checks for amounts ranging $10from to $150, aggregating $1,178.40 for 1935, $1,428.47 for 1936, and $1,034.74 for 1937. No record was kept. Petitioner does not know specifically what these cash amounts were spent for. Generally speaking, the money was spent for such things as hardware, stationery, photographs, hotel accommodations, parking, telephone, and entertainment. Petitioner entertained prospective lot purchasers; gave his salesmen money for such entertainment; *1386 and made purchases for his business. These amounts were, on petitioner's returns, included in "general expenses" of $1,571.20, $1,947.05, and $1,379.65, which in turn were included in total amounts claimed as deductions for "rent, repairs and other expenses," $11,011.81, $18,595.62, and $17,035.57, respectively.
5. In 1930 petitioner purchased the Pennwell Apartments, comprising twenty-two furnished apartments. Of the purchase price of $65,000 he allocated $2,500 to the furnishings. The following additional amounts were paid for new furniture, carpets, rugs, and a regrigerating system:
| 1930 | $1,664.79 |
| 1931 | 3,160.32 |
| 1932 | 53.65 |
| 1933 | 196.65 |
| $5,075.41 | |
| 1935 | $178.60 |
| 1937 | 48.59 |
Of the $3,160.32 expended in 1931, $1,778.40 represented the cost of a central regrigeration system providing each apartment with an independent box. Petitioner also spent $949.75 on repair of furnishings in 1931.
6. Petitioner had a minor son whom he supported. In 1935 he paid the son $265 and in 1936 $275 for work performed by him. This was at the rate of $1.50 to $2 a day for cleaning and general assistance. In 1937 the son became a carpenter's apprentice, and petitioner*1387 paid him $100 at the rate of $3.50 a day. The son deposited the earnings in a savings account.
7. In 1936 petitioner leased storerooms to the Bank of America for a three-year period. The stipulated rent of $2,520 was payable monthly in advance at the rate of $60, $70, and $80 a month for the *150 first, second, and third years of the term. respectively. The lease recited that the lessee had altered the premises with petitioner's consent and provided that "in discharge of all damage" by reason of the alterations the lessee should pay the lessor $500 in addition to the rent. Petitioner received the $500 in 1936. He also received under other leases $47.50 in 1936 and $1,000 in 1937, representing advance rent payments for the last month of the term, which fell in a later year.
OPINION.
STERNHAGEN: 1. The Commissioner denied the petitioner's claim that the Millbrae profits were capital gains and held that the profits were ordinary gains because the property was "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business", Revenue Acts of 1934 and 1936, sec. 117(b). This is true, as shown by the evidence upon which the finding*1388 has been based, . The petitioner suggests that this opinion be withheld until decision on review of (on appeal C.C.A., 9th Cir.). However, that case is distinguishable and would not require a decision upholding the petitioner's contention even if the Board's decision should be reversed. This is not to be expected, see ; . The petitioner acquired his interest in the land and the venture for the sake of the profit to be derived from its exploitation. He bought it and held it primarily for sale to customers and not to deal with as a whole or as an investment. The Commissioner's determination is sustained.
2. The Commissioner held that the profit received by petitioner as his share of the proceeds of sales of lots in the Marina tract was not capital gain. The evidence establishes and the finding has been made that the property was held by petitioner and his associates primarily for sale to customers in the ordinary course of trade or business. *1389 The Commissioner's determination was correct. There is no reason to debate whether the group constituted a partnership, for that is irrelevant; and it is also unimportant whether petitioner may have been in the real estate business completely or only to some extent. The question is whether the evidence shows that the property from which the particular income was derived was within the description of the statute, . We hold that it was within the statutory exception to the definition of capital assets. The determination is sustained.
3. The Fillmore Street property was treated by the Commissioner as within the definition of a capital asset, the loss on the sale of which was limited to $2,000. The evidence shows, however, that the *151 petitioner's interest was acquired by him as an incident of his business and for the purpose of sale for a profit. Although it was, for the time being, rented and yielded an income, this was not the primary purpose for which it was acquired or held. It was conveyed to avoid foreclosure and a deficiency judgment. This was a sale, *1390 , but not of a capital asset. The loss is deductible without the limit of capital losses. The determination is reversed.
4. The petitioner on his returns deducted $11,011.81 for 1935, $18,595.62 for 1936, and $17,035.57 for 1937, as "rent, repairs and other expenses," $1,571.20, $1,947.05, and $1,379.65, respectively, were called "general expenses." The Commissioner disallowed $1,178.40, $1,428.47, and $1,034.74 of these amounts because they were "not substantiated." In other words, he allowed about one-fourth of the amounts deducted as general expenses. All that the evidence shows is petitioner's general statement of how the amounts were spent. Presumably the Commissioner had as much information as this when he made the determination and was unable to verify it. It can not be said that petitioner's reiteration on the witness stand gives the claim any greater support. This is not like the situation in , for the Commissioner has not disallowed the entire deduction. He has recognized that "something was spent", and has made presumably "as close an approximation" *1391 as he could. There is nothing upon which the Board can base a different or greater approximation. The determination is sustained.
5. The Commissioner reduced the deduction for depreciation of furnishings of the Pennwell Apartments by $619.57, $610.64, and $621.96, respectively. For no reason stated in the deficiency notice, he apparently adopted a computation based on the depreciation already deducted for the prior years, a remaining life of six years for the furnishings on hand, and a life of ten years for the current additions, thus allowing deduction of $66.24, $75.17 and $77.59, respectively. tively.
We can find no justification for the Commissioner's disallowance. As shown by the evidence, six or seven years is not too short an estimated life for the furnishings of these apartments as a basis for a reasonable allowance for depreciation. This should properly include the cost in 1931 of the refrigeration system, irrespective of whether that system may for some legal purposes be regarded as part of the realty. The amounts deducted by the petitioner in the years in question are shown to be reasonable. The determination is reversed and the deductions taken by the petitioner*1392 are sustained.
*152 6. The Commissioner included in petitioner's income the earnings of his minor son. These amounts were paid to the son by petitioner. It is not clear in the record how these amounts are accounted for in the returns. The deficiency notice states that a deduction of $265 was taken on the 1935 return for compensation paid by petitioner to two minor sons; that for 1936 petitioner failed to report $275 salaries or wages received by a minor son; and that for 1937 $100 was included by the Commissioner as the earnings of a minor son.
Ever since the Revenue Act of 1918, Regulations 45, article 291, through the current regulations, Regulations 103, section 19.24-1, the regulations have consistently provided that allowances of a father to a minor child to whose services he is entitled are not deductible. This long unquestioned existence is alone a strong support for the rule. However, it is manifestly correct. There is nothing besides the payments themselves to suggest that the petitioner may have emancipated the child, and the argument to that effect can not be adopted.
The Commissioner's treatment of the payments to petitioner's minor son is sustained.
*1393 7. The Commissioner included in petitioner's income $547.50 in 1936 and $1,000 in 1937, being advanced rents received. Petitioner argues that because his accounts are kept on the accrual basis and these amounts were by California custom the advance payments for the last month of the tenancy, they must be accounted for as income in the year in which that last month occurs. The argument must be rejected. The amounts, having been received by petitioner in the earlier years, were his income in those years, even though the accrual method was used, . The determination is sustained.
Decision will be entered under Rule 50.