*1802 CAPITAL GAIN. - Land essentially different in character from the improved building sites customarily acquired and used by petitioner in his business of an operative builder is shown by the evidence to have been purchased by him in a transaction unrelated to the business and to have been held as an investment until sold more than two years thereafter. Held that gains realized in 1923, 1924, and 1925 from such sales are subject to the optional tax rate provided for capital gains by the Revenue Acts of 1921, 1924, and 1926.
*724 This proceeding seeks a redetermination of deficiencies in income tax of $25,466.13 for 1923, $23,169.11 for 1924, and $9,290.1s for 1925. Only one issue is assigned, this being respondent's refusal to tax, at the capital gain rate provided by the Revenue Acts of 1921, 1924, and 1926, certain portions of petitioner's income for each of the three years in question, and representing gains accruing to him from sales made in those years of real estate alleged*1803 to have been purchased as an investment and held as such for more than two years. The amounts of such income are not in dispute, being $108,327.24 for 1923, $101,980.56 for 1924, and $94,332.54 for 1925.
FINDINGS OF FACT.
The petitioner is a resident of Philadelphia, Pa., and was engaged during the taxable years here involved, and since 1914, as an "operative builder," his activities being confined to that city and its suburbs. The term "operative builder," has a distinct meaning in Philadelphia and vicinity, and denotes one who is essentially a builder of houses which he sells to the public. One engaged in this business acquires a block of lots in property already subdivided and improved with streets, water and sewerage, and erects a number of houses in one operation, selling these to the public as completed. Such operations usually require little capital, most of the funds necessary being borrowed and a quick turnover realizing the profit of the builder.
Petitioner had at all times prior to the year 1921 conducted his business as above described, his purchases of land being always confined to improved property sufficient for the building operation he *725 had*1804 in mind, and his sales being confined to the lots which he had bought, improved with the houses which he had constructed. In January, 1921, petitioner was engaged in a building operation at 69th Street, which was at that time the limit of the improved area of the Philadelphia district, and was approached by a real estate agent having for sale a tract of rough, unimproved land about a mile farther in distance from the city. It was represented to petitioner that the purchase of this land could be made at a figure representing a good investment as the extension of developments already progressing in that direction would, before long, enhance its value.
Petitioner at that time had certain funds available for investment, and after considering the possibilities of this property for investment purposes, he finally, in April, 1921, acquired it, paying 20 per cent of the purchase price in cash and giving the seller a mortgage for the balance.
The property in question was at that time unsuited to petitioner's needs in his business and at the time of its acquisition he had plans perfected and a contract negotiated with the owner of some improved lots, in the vicinity in which he was then*1805 operating, to acquire these for the erection of a further group of houses which would occupy him two years. However, about August, 1921, a dispute arose between petitioner and the owner of the lots in question and the arrangement between them fell through. Petitioner had just finished his operations near 69th Street and through the failure of his plans, was faced with the necessity of obtaining somewhere additional property to occupy his building organization and none being then available in that vicinity, he conceived the idea of improving an acre of the tract which he had recently bought and erecting on this a group of houses, as this would occupy his force, and would tend to improve the value of the additional property in the tract. This he proceeded to do, about one acre of the 35 acres being utilized in this operation.
In 1923, and subsequent to April of that year, and in 1924 and 1925, petitioner sold the remainder of the 35-acre tract in question. These sales were of the property unimproved and in the same condition as when he acquired it. These sales of the approximately 34 acres of unimproved property resulted in gains of $108,327.24 in 1923, $101,980.56 in 1924, and*1806 $94,332.54 in 1925. In none of these amounts in included profit accruing through the operation set out in respect to the one acre of the tract improved and built on by petitioner in the course of his business.
The sales of this unimproved land by petitioner were to several operators for subdivision and improvement and after such sales *726 petitioner in two instances joined with the purchasers in improving a block of the land and erecting houses on it in the customary manner in which his business was carried on, none of the income from such operations being here in dispute.
Petitioner has never engaged in a general real estate business or that of real estate broker or contracting builder. He has never purchased improved or unimproved land for purposes of sale as such with the exception of the purchase of the 35-acre tract as detailed. All of his other purchases of real estate have been of improved lots for the purpose of erecting houses thereon, and aside from the 34 acres as heretofore detailed, all sales of real estate by him have been of such lots and made as necessary incidents of his sales of the houses which he has built.
OPINION.
TRUSSELL: The question*1807 here presented, in so far as income for the year 1923 is concerned, requires little discussion as the Revenue Act of 1921 applies and provides in section 206(a)(6):
That for the purpose of this title:
* * *
(6) The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or 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.
In view of the above quoted provision, if the land in question does not represent 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, it constitutes a capital asset and the gain accruing from its sale more than two years after its acquisition is subject to the optional rate as a capital gain. In respect to this question the record shows clearly to our satisfaction that the land in*1808 question can not be considered as stock in trade of this petitioner, whose business had never consisted of the sale of real estate other than as an incident to the disposal of houses which he erected, and we have held in each case in which the question has been presented to us heretofore that real estate can not be included in inventory. ; . The $108,327.24 of income for the year 1923 is accordingly subject, at petitioner's option, to the rate provided for capital gain.
*727 In respect to the years 1924 and 1925, the condition is somewhat different as those years are controlled by the Revenue Acts of 1924 and 1926, the applicable provisions of which read:
SEC. 208. (a) For the purposes of this title:
* * *
(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 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*1809 primarily for sale in the course of his trade or business.
It will be noted that this section, in addition to the exceptions provided in the 1921 Act, excepts from classification as a capital asset property held by the taxpayer primarily for sale in the course of his trade or business. We must here determine whether or not this property was so held by petitioner and this question is a matter of his purpose or intention in its acquisition and during his term of ownership. This is to be ascertained from his testimony as to such intention, the circumstances surrounding the acquisition, use and disposal of the property, the nature of his business, and the character of the property. Petitioner testifies positively that the property was unsuited to his business uses, was purchased not with funds used in his business, but accumulated in business and available for personal investment. He states that the transaction was one outside of his line of business and a pure investment of a character never before or since made by him. He states that in the acquisition of the property he never anticipated building upon it and that the subsequent use of one of the 35 acres in building operations*1810 of his business was to meet a situation arising after the acquisition of the tract and not anticipated at that time and that the gain derived from the portion so used is not included in the gains here in controversy, which were realized wholly from the sale of the balance of the property in its unimproved state.
If these facts are true, petitioner is correct in his contention that the sales in question were of capital assets, and a careful examination of the record fails to show either a specific contradiction of this testimony or circumstances and conditions inconsistent with the intention of petitioner as testified to by him. The fact that petitioner was essentially a builder and his purchase of land was limited to improved building sites is not contradicted and we do not think there is any indication in the record that following the acquisition of the 35-acre tract his business operations were changed in character to include acquisition and sale of land. In fact it is affirmatively shown that he has at no time carried on a real estate purchase and sale business. We have not here a question similar to that presented *728 in *1811 , where the taxpayer had for many years conducted such a business, in the course of which he had bought various tracts of land, improved and subdivided them into lots which he had advertised and sold to the public, and in which we held that the taxpayer's contention, that the sale of a tract so bought and subdivided was one of a capital asset, could not be maintained in view of the evidence as to the character of his business, his actual dealings in the property and the fact that it was a transaction similar in character to his other business purchases and developments.
We are satisfied that the acquisition of the property in question represented a personal investment by petitioner outside of his business of operative builder, and that following such acquistition the property was not held primarily for sale in the course of that business. Petitioner is entitled to have the gain accuring in 1924 and 1925 from the sales computed at the rate provided for capital gains by the Revenue Acts of 1924 and 1926. Cf. *1812 ; ; ; ; .
Judgment will be entered pursuant to Rule 50.