*76 Decisions will be entered for the respondent.
Internal Revenue Code Section 117 (j) -- Residential Properties Rented Upon Construction in 1943 and 1944 and Sold in 1945 and 1946. -- A partnership in which petitioners were members constructed 52 houses in 1943 and 1944 and rented them to defense workers pursuant to agreement with governmental authorities. At the same time and in 1946, additional houses were constructed for immediate sale and were sold. In 1945 and 1946, 51 of the 52 rental properties were sold. Held, that in 1945 and 1946 the 51 houses sold were held for sale to customers in the ordinary course of business and the gains were properly treated by the respondent as ordinary income.
*539 These proceedings, *77 consolidated for the purposes of hearing and report, are brought for the redetermination of deficiencies in income taxes as follows:
| 1945 | 1946 | |
| Albert Winnick | $ 1,716.71 | $ 1,980.20 |
| Ida Winnick | 1,462.79 | 1,793.54 |
The issue presented is whether gains realized on the sales of residential properties were properly treated by the petitioners as capital gains, or whether such gains were correctly determined by the respondent to be ordinary income.
FINDINGS OF FACT.
The petitioners are individuals residing in Detroit, Michigan, and in the years 1945 and 1946 were partners in the Albert Building Company, a Michigan copartnership, each having a 50 per cent interest therein. Partnership returns and individual income tax returns were filed with the collector of internal revenue for the district of Michigan at Detroit, Michigan.
The petitioner Albert Winnick has been engaged in the business of building houses since 1938. Originally he built houses only for sale.
With the advent of World War II, there was a serious housing shortage in Detroit due to the fact that there were many companies engaged in war contract assignments, all requiring the services of defense workers far in excess*78 of the local supply of labor. Shortly after December 7, 1941, officials of the Federal Housing Administration (hereinafter referred to as F. H. A.) called a meeting of the builders in Detroit and undertook to enlist their aid in an effort to have defense housing units built in the Detroit area. The F. H. A. officials advised that the houses were to be constructed for rental purposes, and that the purpose of the program was to provide rental housing for defense workers.
In order to construct the defense housing under the F. H. A. program, it was necessary first to obtain priorities for materials from the War Production Board, then to secure approval from the F. H. A. of the specifications and arrange for any loans that might be made. Albert Building Company filed applications with the War Production Board dated January 14, 1943, and May 25, 1943, for preference rating on materials, which applications were approved, respectively, *540 on March 17 and July 16, 1943. One application covered the construction of seven houses, and the other was for 33 houses. In both applications the applicant agreed to rent the houses at a fixed monthly rental to persons engaged in war activities. *79 On August 12, 1943, the petitioner Albert Winnick acquired building lots as to which an application for preference rating on materials had previously been filed by the then owner. The application was for the construction of 12 houses which the applicant agreed to rent at a fixed monthly rental to persons engaged in defense activities. The application was approved by the War Production Board, and the approval accompanied by the sale of the lot to petitioner Albert Winnick.
The Albert Building Company agreed to take part in the defense housing program, and in the years 1943 and 1944 it built the 52 houses concerning which applications were approved by the War Production Board as described in the preceding paragraph. All of the houses were constructed and rented on a month-to-month basis by August 1944. The rental agreements that were entered into with tenants did not contain any provision giving the tenants the right to purchase the houses that they occupied.
The Albert Building Company also obtained permission from the War Production Board to construct 29 houses for immediate sale. Those 29 houses were constructed and sold in 1943 and 1944.
In its application for preference ratings, *80 the Albert Building Company agreed to abide by the rules of the National Housing Agency under General Order 60-3 of that agency.
The 52 houses constructed for rental purposes were rented through a broker. The petitioner Albert Winnick instructed the broker to rent the houses and to re-rent them when they became vacant. In 1943 or 1944, two persons engaged in the real estate business sought to purchase some or all of the 52 rental properties. Mr. Winnick refused to sell, as the properties were bringing in a good income and he wanted to keep them as rental properties. Some of the 52 houses were re-rented several times as they became vacant.
After the 52 houses had been rented for some time, it became increasingly difficult to find tenants for properties that became vacant. Some of the tenants did not pay their rent and some did not properly care for the properties they occupied. The partnership decided to sell the rental properties and invest the proceeds in an apartment house.
In 1945, there were more prospective purchasers of houses in Detroit than there were prospective tenants. Beginning March 1, 1945, the Albert Building Company started to sell the houses that it had theretofore*81 rented. Sales were made through brokers. Some of the houses were advertised for sale in Detroit newspapers, and for sale signs were placed on some. There were tenants in some of the properties at the time they were sold.
*541 In the year 1945 the partnership sold 34 of the 52 houses that had been rented. In the year 1946 it sold 17 more of the houses, and it sold the last one of the 52 in 1947. Only one of this group of houses was sold to a tenant; all others were sold to non-tenants. At the time the sales were made in 1945 and 1946, the houses has been rented for periods varying from 5 months to 30 months.
For the year 1945 gross rentals from the rented properties amounted to $ 23,616.80, against which deductions were claimed in the amounts of $ 4,091.12 for depreciation, $ 2,827.05 for repairs, and a portion of $ 4,150.33 in city and county taxes. For the year 1946, the gross rentals amounted to $ 4,162.50, the deduction for depreciation was $ 171.16 and for taxes was a portion of $ 2,094.15. 1
*82 In the year 1945 the gains realized from sales in that year of 33 2 of the 52 rental houses amounted to $ 44,700.77. In that year installment basis profit on houses sold prior to 1945 amounted to $ 7,080.57. In the year 1946, gains from the sale of rental houses sold in that year amounted to $ 14,682.58, and installment basis profits from 1945 sales amounted to $ 4,440.60. All of the profits on such sales were reported as long term capital gains.
In addition to the above sales, the partnership in 1946 sold 12 houses upon completion, which were never rented.
Neither of the petitioners had real estate licenses in the years 1945 and 1946.
The 51 houses that were sold in 1945 and 1946, and which had previously been rented, were held in those years by the partnership primarily for sale to customers in the ordinary course of its business.
OPINION.
We are here concerned with the sales in 1945 and 1946 of 51 of the 52 houses that*83 were built in 1943 and 1944 as rental houses and were rented for a time to defense workers in the Detroit area.
The petitioners take the position that the rental properties were not held primarily for sale to customers in the ordinary course of trade or business but, rather, property used in their trade or business and that the gains on the sales are to be treated as capital gains under the provisions of section 117 (j) of the Internal Revenue Code. The respondent has determined that section 117 (j) is not applicable and that the gains are taxable as ordinary income.
Both parties treat the issue as one of fact to be determined by the surrounding facts and circumstances. No one test is decisive of the *542 issue. Over a period of years, the courts have formulated and applied a number of tests to resolve the issue here presented. Most of them are summarized in the case of Boomhower v. United States, 74 F. Supp. 997">74 F. Supp. 997. As stated by the court, they include: continuity of sales or sales-related activity over a period of time; frequency of sales, as opposed to isolated transactions; the activity of the seller or those acting under his instructions*84 or in his behalf; the extent or substantiality of the transactions; and the reasons for, purpose, or nature of the acquisition.
Application of the above tests to the facts in this case requires that the respondent's determination be sustained. There was a continuity of sales of the rental houses extending over the period from March 1, 1945, 3 throughout the rest of that year and into 1946, the last of the group being sold in 1947. There was an obvious frequency of sales, and clearly they cannot be regarded as isolated transactions. The activity of the brokers in the taxable years was not an activity directed toward maintenance of the properties as an investment through rentals, but was directed toward effecting sales through newspaper advertisements and signs on the properties. In extent, the sales activities covered the entire group of 52 rental houses.
*85 One of the statutory elements that removes gain on sales of property from capital gain treatment is that the property be held by the taxpayer primarily for sale to customers "in the ordinary course of his trade or business." On the record in these proceedings, there is no room for doubt that the petitioner Albert Winnick was engaged in the business of constructing houses for sale. He started in the business of building houses in 1938 and until 1943 he built only for sale. In 1943, war-time restrictions required that a certain portion of new construction be for rental purposes as a condition to obtaining priorities for materials. The partnership agreed to abide by the rules of the National Housing Agency in applying for priorities. We have no reason to doubt the good faith of the partners in making such agreement with governmental housing authorities. But at the same time permission was obtained to construct 29 houses for immediate sale, and all of them were constructed and sold in 1943 and 1944. Again, in 1946, shortly after restrictions were lifted, 12 new houses were constructed and sold upon completion. These facts establish the existence of a trade or business consisting*86 of the construction and sale of houses, and that sales of houses were made in the ordinary course of such trade or business.
The petitioners present the argument that it would be inconsistent for the petitioners to represent in the applications for priorities that *543 they would hold the properties for rental and at the same time have the purpose of holding them primarily for sale. They cite memorandum opinions of this Court in which we took into consideration the intent of the taxpayers in statements made to governmental housing agencies. We have said above that we do not doubt the good faith of the agreement to abide by the housing regulations, and we do not question the soundness of the decisions which took into consideration such agreements or the representations made to the housing agencies. However, such agreements or representations, and the fact of rental of the properties in prior years, are not necessarily controlling in determining the purpose for which the properties were held in the taxable years. Lucille McGah, 15 T. C. 69 (on appeal, C. A. 9). There may be a change of intent between the time of acquisition and the time of sale, *87 and if property originally acquired for investment is held in the taxable year primarily for sale to customers in the regular course of trade or business, the gain realized in the taxable year is not subject to capital gain treatment. This conclusion is based on the language of section 117 which, in the definition portions of both subsections (a) and (j), speaks of "property held by the taxpayer" rather than property "acquired" or "purchased." Richards v. Commissioner, 81 F.2d 369">81 F. 2d 369. This view was expressed clearly in the McGah case supra, where we said:
It has been held that an original status of property is not determinative of the question of whether it was, at the time of its sale, held for investment purposes or for sale to customers. See Carl Marks & Co., 1196">12 T. C. 1196, 1202, where this Court said that the "crucial factor to consider in determining the character of" the property in question is the purpose for which it was held during the period in question, i. e., in the taxable year.
In the case of Carl Marks & Co., cited in the above quotation, the taxpayer transferred securities, which had been*88 held primarily for sale, from its dealer account to its investment account. We held that such transferred securities became capital assets, and said in part:
Certainly, it cannot be argued that securities once acquired for resale to customers must forever retain their dealer status, when in fact there has been a conversion of those securities from a dealer to an investment account.
The principle followed in the above-quoted cases is that the purpose for which property is originally acquired does not stamp it with a permanently fixed and unalterable status. The taxpayer may change his objective with respect to his property, and thereby change the status of the property, tax-wise, from capital assets to non-capital assets or vice versa. While the purpose of the original acquisition may be a factor to be considered in determining the status of the property in a subsequent period, Boomhower v. United States, supra, it is not necessarily controlling. Even though we accept as a fact the position of the petitioners that the houses were constructed for investment *544 purposes in 1943 and 1944, the evidence establishes that that purpose did not *89 persist through the years 1945 and 1946. The tests most frequently applied in recent cases are those of continuity and frequency of sales, the activity of the seller or his agents, and the extent of the transactions. The application of these tests, as developed by the evidence, convinces us that beginning not later than the year 1945, the primary purpose for which the 52 rented houses were held was for sale to customers in the ordinary course of business.
We recognize that not all sales of property previously rented are outside of the capital gain provisions, and the petitioners cite decisions to that effect. Upon examination, the decided cases involved factual situations different from those in the present proceedings. For the most part, the sales in those cases were isolated transactions and involved only a comparatively small portion of the investment or rental properties. They are not helpful in the decision of this case, which is essentially a fact case. Rubino v. Commissioner, 186 F.2d 304">186 F. 2d 304.
For reasons above stated, we find no error in the respondent's determination.
Decisions will be entered for the respondent.
Footnotes
1. These figures are contained in a stipulation which does not explain what portion of taxes was deducted nor how the apportionment was made.↩
2. Thirty-four rental houses were sold in 1945, but one had been held for less than 6 months.↩
3. The parties have stipulated that the partnership commenced selling the rental properties on March 1, 1945. A tabulation included in the stipulation shows a sale on January 2, 1945, of a rental house that had been held for less than 6 months.↩