*182 Decisions will be entered for the respondent.
World War II housing was built by Pinecrest Housing, Inc., for rental purposes and was so used by the corporation between 1943 and 1945.
By the beginning of 1946 the nature of Pinecrest's business had changed. It was then holding its properties for sale, and was in the business of selling houses.
Held, the 90 houses sold by Pinecrest Housing, Inc., in 1946 were held by the corporation primarily for sale to customers in the ordinary course of its business.
*533 This proceeding involves deficiencies in income tax for the calendar year 1946, asserted against*183 the petitioners as transferees of Pinecrest Housing, Incorporated, a Texas corporation that was dissolved in 1946. The total liability is $ 6,455.76, which amount has been assessed against each of the petitioners.
On the motion of petitioners the two cases have been consolidated for hearing and disposition. The only question presented is whether the profit realized by Pinecrest Housing, Incorporated, from its sales of 90 houses in 1946 is taxable as ordinary income or as capital gain.
The corporate income tax return of Pinecrest Housing for the calendar year 1946 was filed with the collector of internal revenue for the second district of Texas.
FINDINGS OF FACT.
Pinecrest Housing, Incorporated (hereafter referred to as Pinecrest or as the corporation), was incorporated under the laws of Texas on January 16, 1943. The corporation's purpose was "to erect, construct, or repair any building or improvements, and to purchase, sell, rent, subdivide, and improve real property in towns, cities, villages and their subdivisions * * *." The capitalization of the corporation consisted of 2,000 shares of stock of a par value each of $ 10, and these shares were owned in the following manner:
| S. E. Wood, Jr. | 667 shares |
| James B. Cheek | 667 shares |
| Marion F. Fooshee | 666 shares |
*184 *534 In 1943 the corporation had 111 housing units constructed in Marshall, Texas, consisting of two- and three-bedroom houses. The project was completed in October 1943. The occasion for the organizers of Pinecrest going into this business was the acute need for housing caused by the influx of World War II defense workers in the Marshall, Texas, area. Pinecrest borrowed money from an insurance company to finance the project, and its repayment of the loan was guaranteed by the Federal Housing Administration to the extent of 90 per cent of the appraised value of the project. One of the conditions of the loan guarantee was that the property be designed for residential rental by war workers, and in its application with F. H. A., Pinecrest indicated that its houses would be used for rental purposes. According to F. H. A. regulations Pinecrest could sell its houses at a ceiling price fixed by F. H. A. to war workers who had been in occupancy for 4 months and who agreed in writing to continue occupancy for a specified period after purchase. Effective September 10, 1945, the restrictions on sales were revoked as to housing then or thereafter vacant, provided the vacancy was not*185 created by eviction and that a maximum authorized sales price had been established for the housing sought to be sold.
In April 1944, when Pinecrest was having difficulty meeting its mortgage payments because of insufficient rental income, two of its incorporators, James B. Cheek and Marion F. Fooshee, sold their shares of stock in Pinecrest to the petitioners in such amounts as to make each an owner of 50 per cent of the stock of the corporation. At the same time Pinecrest was granted a 1-year delay in making payments on its loan and a reduction in interest on the loan. By the end of 1944 the rental income of the corporation increased and it was able to resume full current payments on the loan. In each of the 4 years of its existence, 1943 to 1946, Pinecrest reported operating losses from its rentals, although by the end of 1945 the project had almost full occupancy. In the same period it reported the following profits from the sale of houses: $ 134.50 from the sale of 2 houses in 1943; $ 698.83 from the sale of 2 houses in 1944; $ 7,642.16 from the sale of 17 houses and a vacant lot in 1945; and $ 58,675.41 from the sale of 90 houses in 1946. A majority of the sales in 1946 *186 were to tenants of Pinecrest, many of whom were veterans of World War II. Property sales were handled by petitioner Goldberg, whose office received $ 100 a month between 1944 and 1946 for keeping the records of Pinecrest's rentals and sales. The availability of houses in the Pinecrest project for purchase was not formally advertised but was made known by word of mouth; no "for sale" signs were placed on the properties; salesmen were not hired to sell the properties; and no commissions were paid for obtaining sales. In 1946 there was a heavy demand for *535 housing in the Marshall, Texas, area. In December 1946 Pinecrest was dissolved, and the petitioners received all the corporation's assets in equal proportions.
S. E. Wood, Jr., president of Pinecrest throughout its existence, was in the automobile business from 1919 through 1949. He was never in the business of buying and selling real estate and did not have a real estate dealer's license, although he occasionally sold a piece of real estate.
Nathan D. Goldberg, vice president of Pinecrest, was a real estate dealer of 26 years' experience. Prior to 1944 his principal activity in the real estate business was managing properties*187 for others, and he occasionally sold properties for others on a commission basis.
The incorporators of Pinecrest went into business with the intention of building houses for rental, and this purpose was carried out between 1943 and 1945. By the beginning of 1946 the nature of the corporation's business had been changed to selling houses. The 90 properties sold by Pinecrest during 1946 were held by it primarily for sale to customers in the ordinary course of its business.
OPINION.
Petitioners concede that if respondent's determination of deficiencies is correct, the resulting liability is chargeable to them as transferees of the assets of Pinecrest corporation in amounts greater than the deficiencies.
In deciding when property is held for sale to customers in the ordinary course of the taxpayer's trade or business, courts have evolved a number of considerations in the light of which the factual circumstances of each case are to be examined. Among these are the taxpayer's reason for acquiring the property in question, the sales activity *536 of the taxpayer or those acting on his behalf, such as making improvements to the property and soliciting sales by advertising or more direct approach to prospective buyers, the continuity of sales or sales-related activity over a period of time, and the number, frequency, and substantiality of sales.
We have found that from October 1943 until the beginning of 1946, Pinecrest held its properties for rental. This conclusion is inescapable, we think, since the whole Pinecrest venture was conceived as a rental project. In its application for an F. H. A. loan guarantee the corporation indicated that its purpose was to build rental units and this expressed intention was subsequently carried out between 1943 and 1945. Of course Pinecrest's chances of getting F. H. A. approval were enhanced by its agreeing to build much needed rental housing, and having obtained a loan guarantee from F. H. A. the corporation was restricted in the persons to whom it could sell its property. These factors may suggest some of the reasons why*190 Pinecrest was in the rental business, but the reasons for the corporation's action are material only insofar as they help us to determine what conduct was actually followed. And in this instance they point to the conclusion that Pinecrest held its properties for rental in the early years of its business activity.
We think it is also true that by the beginning of 1946 Pinecrest had changed the nature of its business activity and was then holding its houses for sale. This is best indicated by the large number of sales made by the corporation in 1946, after F. H. A. restrictions on sales had been modified. In this year Pinecrest sold 90 houses, which were all of its holdings, and the corporation then went out of business. Also, some support for this conclusion is to be found in the fact that in each year prior to 1946 Pinecrest lost money from its rental business, even in 1945 when the project, according to petitioner Goldberg, had almost full occupancy. These circumstances indicate to us that, with the easing of F. H. A. restrictions on sales, the corporation decided to discontinue holding the Pinecrest properties for rental and to sell the 90 houses remaining in the project. *191 Finally, the testimony of petitioner Goldberg, an experienced real estate broker, lends support to our finding. When asked whether it would have been practical from *537 a business standpoint to continue to rent Pinecrest's houses in 1945 and 1946, instead of selling them, he replied:
Well, sir, it was a problematical thing; people were buying houses all over town everywhere they could get them, and I don't mind telling you, frankly, that there was a possibility that most of the tenants could have vacated the property out there [referring to the Pinecrest project], and we would have gotten back in the same financial slump we were in before we asked for the moratorium.
* * * *
And that is the way it appeared to us. They [Pinecrest's tenants] were getting out, vacating some of our property and buying property elsewhere, and we had such a difficult time in the early part of '44 -- like I say, only 30 houses were occupied out of 111, and we couldn't even meet the monthly payments due the National Life Insurance [Company], unless we dug in our pockets for the deficiency. [Emphasis supplied.]
There remains the additional question whether Pinecrest's activities were such as *192 to put the corporation in the business of selling real estate in 1946. In determining this our principal concern is with the nature and extent of Pinecrest's activities in selling its properties. Under the circumstances here the original purpose of the corporation to rent the houses in the Pinecrest project loses its significance, inasmuch as we have found that by the beginning of 1946 this purpose had changed to holding them for sale. The petitioners testified that the corporation did not advertise the availability of its houses for purchase, paid no sales commissions, and did not actively solicit sales. As we have pointed out, the activity of the taxpayer in promoting the sale of property is ordinarily an important consideration in determining whether he was in the business of selling real property. Here, however, we think this is a consideration of lesser importance, since the petitioners admit that there was a demand to buy houses in Marshall, Texas, in 1946, and petitioner Goldberg testified that he could have sold more houses than he had available. Under such circumstances there would seem to be no necessity of advertising. The Pinecrest corporation sold 90 houses in the*193 course of 1 year, 1946, realizing a profit of $ 58,675.41. As far as we are aware these sales continued over the whole year, the corporation being dissolved in December 1946. This number of sales over a 12-month period meets the test of frequency earlier laid down as a guide to reaching our decision here. We find it difficult to conceive of the making of 90 sales of real property in 1 year, handled by an experienced real estate broker, petitioner Goldberg, as a casual or sporadic activity, or to say that the sales were passive just because it was easy to sell houses. This number of sales would require, even in a seller's market, considerable activity in talking to prospective customers, showing them the properties for sale, and in entering into the necessary negotiations with those interested *538 in buying. In
Petitioners insist that the sales were passive in that there were no "for sale" signs and no sales force. But the number of sales speak for themselves.
There*194 can be no question of the substantialness of the sales made by Pinecrest in 1946. The 90 houses sold by the corporation in this year were all that it had left from the original 111 in the project. We are of the opinion, therefore, that measured by the test of frequency, continuity, and substantiality, the activities of Pinecrest in disposing of its properties put the corporation in the business of selling real estate. Cf.
The petitioners contend that
a complete absence of any facts supporting the conclusion that petitioner abandoned its rental business and engaged in the real estate business or engaged in the additional activities of a real estate business for the purpose of selling these capital*195 assets in the ordinary course of such new business to its customers.
Here we think there is no absence of such supporting facts. Pinecrest was losing money from its rental activities and in 1946, after the easing of Government restrictions on selling, it sold all of the houses it then owned, and was dissolved. For us the only reasonable inference from these facts is that when the opportunity was presented, the corporation decided to get out of the unprofitable rental business and to dispose of its properties. And, as we have indicated, the making of 90 sales of realty over a 1-year period meets the test of frequency, continuity, and substantiality and puts the corporation in the business of selling real estate. In Victory Housing No. 2, supra, the corporation carried on the dual activity of renting and selling, and continued in the rental business after the sales in question were made, which led the Court of Appeals to conclude that its sales were merely incidental to the corporation's rental business. Also to be distinguished from the instant case is
Decisions will be entered for the respondent.