*97 Decision will be entered for the respondent.
T entered into two contracts to purchase separate undeveloped tracts of land. In each instance the contract of sale provided for conveyance of the property to a trustee. The trust agreement recited that it was the intention of the buyer to subdivide the property. The trustee undertook to advance funds for development of the property, and the sellers subordinated their liens for the unpaid purchase price to the trustee. Provision was made for delivery of deeds to T by the trustee of portions of the properties selected by T in proportion to payment of the purchase price and repayment of advances. Between 7 and 9 months after execution of the contracts of sale, T assigned his interest in the contracts to a corporation controlled by him. Held, gains realized by T as a result of payments received by him from the corporation were ordinary income rather than capital gain since the properties were held by him "primarily for sale to customers in the ordinary course of his trade or business" within the meaning of sec. 1221, I.R.C. 1954.
*1476 The Commissioner determined a deficiency in the income tax of petitioners for the year 1963 in the amount of $ 19,405.46. Petitioners claim an overpayment for that year in the amount of $ 3,663.65. At issue is whether amounts received in respect of petitioner Royce W. Brown's assignment of interests in certain real properties to a controlled corporation are capital gains or ordinary income.
FINDINGS OF FACT
Some of the facts have been stipulated*99 and are incorporated herein by this reference.
Royce W. Brown and Patty L. Brown are husband and wife. They resided in Bethany, Okla., at the time they filed their petition herein. They filed their 1963 income tax return on the cash receipts and disbursements basis with the district director of internal revenue, Oklahoma City, Okla. Royce W. Brown will sometimes be referred to as Brown or petitioner.
During and prior to the year 1958 Brown was engaged in the real estate business; in particular, his activities consisted of buying developed lots, building houses thereon, and selling the lots and houses. In 1957 he formed two corporations, Royce Brown Homes, Inc., and Enchanted Homes, Inc., to engage in these activities. He and his wife each owned 50 percent of the stock in these corporations. Brown became the dominant officer of the corporations and was primarily responsible for all their activities. He received a salary from the corporations and did not build any new houses as an individual developer after 1958. He has never held a real estate broker's license.
On June 6, 1958, Brown entered into a contract to purchase 40 acres of unimproved farmland from George W. G. Emmons, *100 Lorane E. Petel, Albert Petel, Marion W. Emmons, and Ann Emmons. This property will be referred to herein as the Emmons property. It was located about 1/2 to 1 mile from other developed property and about 8 miles from downtown Oklahoma City. Brown agreed to pay a purchase price of $ 120,000. He made a downpayment of $ 1,000 in respect of the purchase price at the time he entered into the contract and an additional $ 38,000 at the time (June 24, 1958) he entered into the trust agreement hereinafter described. The balance of the purchase price was payable in three annual installments together with 5 1/2-percent interest on the unpaid balance, the buyer to have the privilege of paying any part of the balance without penalty or additional interest. The contract of sale stated, among other things, that, upon approval of title by the buyer (Brown), the sellers would convey the title to the property *1477 to the American First Title & Trust Co. (hereinafter sometimes referred to as American) to hold under the terms of a trust agreement to be entered into by the parties. The contract of sale also provided:
6. The property hereinabove described shall be platted and divided into*101 lots and blocks to provide for building sites and adequate traffic ways to be dedicated for public use. After the land is platted and subdivided, and the plat filed for record, the American First Title and Trust Company shall convey to the Buyer at the request of the Buyer such lots or blocks as shall be from time to time designated by the Buyer until the total area including the adjoining streets is equal in proportion to the total area of said property as the money paid under this contract is equal in proportion to the total contract price. Thereafter upon request of Buyer, American First Title and Trust Company shall convey to Buyer any building site designated by Buyer upon the payment to said American First Title and Trust Company of a sum of money equal to $ 3,000.00 per acre based upon the area of lots or building sites as it bears in proportion to one acre, all of the above to be included in the trust agreement hereinabove mentioned.
On June 24, 1958, the parties to the foregoing contract entered into the trust agreement contemplated by the contract. The sellers, as "Seller Trustors," Brown, as "Buyer Trustor," and American, as "Trustee," agreed that American would hold*102 legal title to the Emmons property while Brown made payment for the property in the manner described in the trust instrument. The trust agreement provided in part as follows:
Whereas, it is the desire of Buyer Trustor to subdivide said property for residence and/or business purposes, and to provide for building sites, and public streets and ways in said area, and in order to keep proper and accurate records of the subdivision, and to handle the purchase price money, Trustors are desirous that Trustee take title to said real property as Trustee for the use and benefit of Trustors, all in accordance with the terms and conditions hereinafter set out.
Now Therefore, in consideration of the terms, conditions, and considerations herein set out, the parties hereto do agree as follows:
* * * *
2. Trustee shall, in its name, and upon demand from Buyer Trustor, do all things necessary to complete the proper platting and subdividing of said tract at the expense of the Buyer Trustor. Buyer Trustor shall furnish Trustee, as needed, necessary instructions including Engineer's notes and records regarding the subdividing and platting of said property. Buyer Trustor shall furnish Trustee with Engineer's*103 certificates showing the dimensions of all lots or building sites, and if any be irregular in shape, shall furnish said Engineer's certificate showing the area thereof.
* * * *
4. Buyer Trustor shall pay all taxes as the same falls due on said land, and Trustee shall have no liability therefor. Seller Trustors shall have the privilege of advancing sufficient funds to pay such taxes in case of default of the Buyer Trustor and such payments shall be added to the debt of the Buyer Trustor, and shall be repaid as hereinafter set out.
5. After the property herein has been subdivided and the plat filed for record, the Trustee shall convey to the Buyer Trustor or his designee such lots or blocks *1478 or building sites as said Buyer Trustor or his designee shall designate from time to time, until there has been conveyed sufficient property in area in proportion to the total area of the property herein as $ 39,000.00 is to $ 120,000.00. Thereafter, upon request of Buyer Trustor, Trustee shall convey any property to Buyer Trustor, or his designee upon the payment to Trustee of a sum of money equal to $ 3,000.00 per acre based upon the area of the property so conveyed as it bears in *104 proportion to one acre.
In determining the area of the property conveyed at the request of Buyer Trustor, the area of said property shall include the area to the center of any adjoining or abutting street or public way dedicated hereunder.
6. Buyer Trustor shall pay to Trustee the remaining $ 81,000.00 in three annual installments, together with 5 1/2 per cent interest on the unpaid balance, the first installment to be on or before one year from the date hereof, and like installments payable two years and three years respectively from the date hereof, provided however, that Buyer Trustor shall have the privilege of paying any part or all of said balance at any time without penalty or additional interest.
7. Trustee shall keep a complete record of all conveyances made hereunder, and all moneys received and disbursed, and shall account for all funds paid to Trustee, and after paying certain items of expense as hereinafter set out, shall distribute said money [to Seller Trustors] in the following ratio: * * *
Sometime prior to January 8, 1959, Brown ordered American to have the Emmons property subdivided and platted. The subdivision, referred to on the record plat as "Royce Brown's Holiday*105 Village Addition," was approved by the Oklahoma City Planning Commission on January 8, 1959, and the portions of the property dedicated to Oklahoma City were accepted and the subdivision annexed by resolution of the City Council of Oklahoma City on March 3, 1959.
In a letter addressed to "Royce Brown, Royce Brown Development Co.," dated December 24, 1958, the Hughes Engineering Co. estimated the cost of constructing streets, a sanitary sewer, storm sewer, and pumping station in the Royce Brown Holiday Village subdivision.
On a letterhead of "Royce Brown Construction Company" Brown submitted to American the following statement of his personal financial condition as of December 31, 1958:
| ROYCE BROWN, PERSONAL | |
| Financial Statement | |
| December 31, 1958 | |
| Cash invested in land for building purposes | $ 47,750.00 |
| Interest in Brown McClure Lumber Co. at net | |
| worth | 100,000.00 |
| Profit in building companies | 62,852.80 |
| Deferred sales revenue -- share accounts in Local | |
| Federal | 166,750.00 |
| Equity in homes (cost less amount owed) | 4,800.00 |
| 1 382,152.80 | |
| Amount of life insurance | 166,000.00 |
*106 *1479 Sometime in December 1958, Brown decided to form a corporation to develop the Emmons property. Accordingly, Royce Brown Development Co. (Development Co.) was incorporated under the laws of Oklahoma on January 13, 1959. Its authorized capital was 200 shares of common stock with an assigned par value of $ 50 per share. Ten shares were issued to Brown and three shares were issued, one each, to unrelated parties who worked for Brown. A total of $ 650 was thereby received by the corporation in respect of the issued stock.
On January 19, 1959, Brown executed a document which purported to assign to the Development Co. all of his "right, title, interest, claim, or demand of whatsoever nature" in the Emmons trust agreement. In consideration of this transfer Brown received an unsecured promissory note from the Development Co. (signed by himself on behalf of the Development Co.) for $ 80,000, payable in three installments as follows: $ 20,000 on September 1, 1959, and $ 30,000 each on January 19, 1960 and 1961, together with interest on each installment at the annual rate of 6 percent. In addition, the Development Co. made the remaining payments due to the sellers under the *107 contract of sale as the land was developed and sold.
On February 18, 1959, by an amendment to the trust agreement, the sellers of the Emmons property subordinated their lien for the unpaid balance of the purchase price to American so that American would finance the development of the property. The amendment to the Emmons trust provided in part as follows:
AMENDMENT TO TRUST AGREEMENT
Know All Men By These Presents: that
Whereas, on the 24th day of June, 1958, George W. G. Emmons, a widower, Lorane E. Petel and Albert Petel, wife and husband; and Marion W. Emmons and Ann Emmons, husband and wife, therein collectively called "Seller Trustors"; Royce W. Brown, therein called "Buyer Trustor" and American First Title and Trust Company, a corporation, therein called "Trustee" made and entered into a certain trust agreement whereby seller trustors conveyed to trustee the following described real estate, situated in Oklahoma County, State of Oklahoma, to-wit:
The Southwest Quarter of the Northwest Quarter of Section 11, Township 12
North, Range 4 West of the Indian Meridian, containing 40 acres, more or less, for the uses and purposes and subject to the terms and condition of said trust*108 agreement; and
Whereas, at the time of the execution of said trust agreement it was contemplated by the parties thereto that buyer trustor would develop the 40 acres, more or less, above described by parcels in stages rather than as one tract, and
Whereas, buyer trustor now desires to develop the entire real estate as one tract and in order to develop same and install the required utilities and streets, buyer trustor desires to borrow from trustee a sum not to exceed $ 150,000.00 for such purposes, and
*1480 Whereas, in order to advance and loan said sum of money to buyer trustor for such purposes trustee must be secured by a first and prior lien on said real estate for all sums by it loaned or advanced to buyer trustor, and
* * * *
Whereas, all parties to said trust agreement have authorized the filing for record of a plat of said land dividing same into lots and blocks, easements and streets;
Now, Therefore, in order to induce trustee to make such development loan and advances to buyer trustor and in consideration of the mutual covenants herein, the parties hereto AGREE as follows:
1. Seller trustors do hereby specifically subordinate their aforesaid purchase price lien to *109 the lien of trustee to the extent of all advances made to buyer trustor hereunder, but in no event to exceed $ 150,000.00, with interest thereon, charges and fees as will be expressed in said promissory note, as aforesaid, and said seller trustors do hereby convenant that said purchase price lien shall be junior and inferior in all respects to the aforesaid lien in favor of trustee;
Provision was also made for repayment of the trustee's advances out of the proceeds of sale of each lot or building site conveyed by it to the buyer trustor under the trust agreement, and a $ 14-per-front-foot formula was substituted for the $ 3,000-per-acre formula in the trust agreement.
American was unwilling to lend money to the Development Co. for the development and improvement of the Emmons property, and insisted that Brown become personally liable for such advances. Accordingly, Brown signed, as maker, three notes to American on the dates and in the amounts as follows:
| Date | Amount |
| Mar. 12, 1959 | $ 150,000.00 |
| June 30, 1960 | 50,000.00 |
| Mar. 2, 1961 | 15,591.51 |
The last two notes reflect advances in addition to the $ 150,000 advances contemplated in the trust agreement and were executed*110 when it became apparent that $ 150,000 would not be sufficient to develop the property.
American began advancing money for the development of the Emmons property on March 12, 1959. The total amount advanced, as reflected by the above notes signed by Brown, was $ 215,591.51. These amounts were paid directly by American to the respective creditors upon authorization from Brown.
On March 20, 1959, Brown sent the following letter to American:
American-First Title & Trust Company
219 Park Avenue
Oklahoma City, OklahomaAttention: R. R. Green
Re: Royce Brown's Holiday Village Addition
Gentlemen:
This is to advise that I understand that I am to pay to American-First Title & Trust Company, the sum of $ 3,328.13 for each lot or building site in the above *1481 addition, conveyed to me by you until 39/120ths of the property has been conveyed, and then the same sum to you for each lot, until I have repaid in full, all moneys advanced by you for the development of said addition. After 39/120ths of the property has been conveyed, I understand I am also to deposit with you a sum equal to $ 14.00 per front foot of lots conveyed to accumulate to pay to seller trustors, in accordance*111 with trust agreement dated June 24th, 1958, and amendment thereto dated February 18th, 1959.
I also understand that I am obligated to pay the annual payments when due, representing the balance due the seller trustors, pursuant to the terms of a Trust Agreement, dated June 24th, 1958, on file in your office.
Sincerely yours,
(S) Royce W. Brown
Royce W. Brown
Approximately 82 lots were developed on the Emmons property. Between May 12, 1959, and September 13, 1962, all of the lots were sold. Approximately 60 of such lots were deeded by American to Enchanted Homes, Inc.
On December 18, 1958, Brown personally contracted to purchase 108.59 acres, more or less, of unimproved land from Lloyd W. Anderson and Elma Anderson. (This property will hereinafter be referred to as the Anderson property.) The total purchase price, based on a rate of $ 1,500 per acre, was $ 162,238.52. The language contained in the contract of sale was similar to that used in the Emmons contract. The contract provided that title was to be conveyed to American in trust to hold during the payment of the purchase price. Brown paid $ 1,000 at the time of signing of the contract; he obligated himself to pay an additional*112 $ 9,000 upon execution and delivery of the deed and to pay the balance of the purchase price in five equal annual installments beginning January 2, 1960. The contract also stated:
5. The property hereinabove described shall be platted and divided into lots and blocks to provide for building sites with adequate traffic-ways to be dedicated to public use absolutely. After the land is platted and the plat filed for record, the American First Title and Trust Company shall convey to buyer at the request of buyer, or his designee, such lots or blocks as shall be from time to time designated until a total of $ 10,000.00 worth of property, computed at the rate of $ 1,500,00 per acre has been conveyed to buyer, thereafter upon request of buyer, American First Title and Trust Company shall convey to buyer any building site, or sites, designated by buyer upon the payment to said American First Title and Trust Company a sum of money equal to $ 1,500.00 per acre, based upon the area of building site, or sites, as it bears in proportion to one acre. All of the above shall be included in the Trust Agreement as aforesaid.
On January 13, 1959, the Andersons as seller trustors, Brown as buyer trustor, *113 and American as trustee, entered into a trust agreement similar to the Emmons trust agreement. The trust agreement provided in part:
Whereas, it is the desire of the Buyer Trustor to subdivide said property for residence and business purposes and to provide for building sites and public *1482 streets and ways in said area, and to generally improve said area by paving or hard topping said streets and installing certain public utilities, the expense of which Buyer Trustor will obtain a loan from Trustee to finance said improvements, and
* * * *
1. Coincident with the execution hereof, Buyer Trustor has delivered to Seller Trustors the sum of $ 9,000.00, and Seller Trustors have executed and delivered to Trustee their Warranty Deeds to the hereinabove described real property, less, save, and except an undivided one-half interest in the minerals in the first above described property, and less and except an undivided 1/80 interest in the second above described property, same being mineral rights heretofore conveyed, the receipt of all of which is hereby acknowledged.
2. Trustee shall in its name, and upon demand of Buyer Trustor, do all things necessary to complete the proper platting*114 and subdividing of said tracts, or either of them, or portions thereof, at the expense of Buyer Trustor. Buyer Trustor shall furnish Trustee as needed necessary instructions, including engineer's notes and records regarding the subdividing and platting of said property. Buyer Trustor shall furnish Trustee with engineer's certificates showing the dimensions of all lots or building sites, and if any be irregular in shape, said certificate shall show the area thereof.
3. Trustee shall dedicate for public use absolutely all streets or public ways in said plats without any restrictions or liens whatsoever.
4. If and when Trustee shall advance necessary moneys to develop said property, Trustee shall have the first and prior lien upon said property for all money so advanced, regardless of the time of such advance or advances, and in case of default of payment in accordance with the terms of the promissory note or notes to be executed by Buyer Trustor at the time of said advance or advances of funds, Trustee shall have the right to sell and convey for such prices and on such terms as it may deem mete and proper any and all lots or building sites of said land as may be necessary to satisfy*115 the indebtedness owed to it by Buyer Trustor under said note or notes, as aforesaid, including all lawful interest or lawful charges, attorney's fees, and costs, and such sales shall be made free and clear of all claims or demands of any of the parties to this Trust Agreement. Nothing contained herein shall be construed as to obligate the Trustee to make any advances hereunder.
5. Buyer Trustor shall pay all taxes and special assessments on said land as the same falls due, and Trustee shall have no liability therefor.
6. After the property, or any portion thereof, herein has been subdivided, and the plat filed for record, the Trustee shall convey to Buyer Trustor at the request of Buyer Trustor such lots, blocks, or building sites as may be from time to time designated until the total of $ 10,000.00 worth of property to be computed on the basis of $ 1,500.00 per acre has been conveyed. Thereafter, upon request of Buyer Trustor, Trustee shall convey any property to Buyer Trustor or his designate, upon the payment to Trustee of a sum of money equal to $ 1,500.00 per acre, based upon the area of the property so conveyed as it bears to one acre. In determining the area of the property*116 conveyed at the request of Buyer Trustor, the area of said property shall include the area to the center of any adjoining or abutting street or public way dedicated hereunder. Nothing herein contained, however, shall require said Trustee to convey any property to Buyer Trustor until the terms and conditions of any agreement entered into by Trustee and Buyer Trustor in relation to repayment of any funds advanced by Trustee for the development of said property.
*1483 The Anderson property was located approximately 10 1/2 miles from downtown Oklahoma City and about 1 mile from the nearest developed property. Upon Brown's direction, American had 50 acres of the property subdivided, platted, and incorporated into the city limits of Bethany, Okla., a suburb of Oklahoma City, as "Royce Brown's Tropicana Village, an Addition to Bethany, Oklahoma." The Planning Commission of the City of Bethany approved the final record plat on October 5, 1959.
At the time Brown purchased the Anderson property the land was not served by a sanitary sewer system. The City of Bethany was interested in providing a sewer system to that area, but could not afford to do so at the time of Brown's purchase. *117 On March 17, 1959, the City of Bethany formed a trust, the Bethany Public Works Authority, to finance the construction of a sewerline to the Anderson property and the surrounding area. On December 6, 1960, the Bethany Public Works Authority contracted with the Oklahoma County Utility Service Authority to provide further financing for the construction of a sanitary sewer line to the Anderson area. Additional financing for the building of a sewer was provided by landowners in the area to be served. The Development Co. and Western Oaks Development Co. (hereinafter described) helped finance the construction of such sewerlines. At the time Brown purchased the Anderson property, his attorney, Wilford G. Smith, was also the attorney for the City of Bethany. Smith was familiar with the problems of providing a sewer system to the area of the Anderson property and was active in establishing a means by which the City of Bethany could finance the construction of a sewerline to this area.
On September 1, 1959, Brown executed a contract with the Development Co. whereby he purported to assign to the Development Co. all his right, title, and interest in and to the Anderson trust agreement in*118 exchange for the sum of $ 118,400, payable in three installments: $ 30,000 on March 1, 1961, and the remainder in two installments on March 1, 1962 and 1963. In addition, it was understood that the Development Co. would make the remaining payments to the sellers as required under the contract of sale. Hughes Engineering Co., by letter dated September 30, 1959, and addressed to "Mr. Royce Brown, Royce Brown Development Co." submitted estimates for street improvement, sewer system, and other development of the land referred to as Royce Brown's Tropicana Village.
American undertook the financing of the development of the 50 acres of the Anderson property which it had platted on behalf of Brown. On December 14, 1959, American began advancing money for the development of the 50 acres. For this purpose, American advanced $ 256,000 to the Development Co., by making payments *1484 directly to the creditors for services in connection with the development of the property. Such payments were made upon Brown's direction. The loan was evidenced by a note signed by Brown as president of "Royce Brown Development Co., Inc." and Patty L. Brown, in the amount of $ 256,000, dated December*119 11, 1959.
The lots included in Royce Brown's Tropicana Village addition (50 acres) totaling approximately 202 lots, were sold between May 13, 1960, and June 24, 1965. Approximately 20 of such lots were deeded by American to Enchanted Homes, Inc.
The remaining undeveloped 58 acres of the Anderson property were sold by Brown in two separate transactions. The smaller part of the remaining property was sold to Lawrence E. Faulkner for $ 17,200 pursuant to a contract entered into between Brown and Lawrence E. Faulkner dated January 3, 1962. The contract of sale made no reference to Brown's earlier assignment of his interest in the property to the Development Co. Brown signed the contract of sale simply as "seller." In a letter dated January 4, 1963, 2 Brown instructed American to deed to Faulkner the acreage sold to him. This letter was signed "Royce Brown Development Company, Royce Brown, President." The remainder of the undeveloped 58 acres not sold to Faulkner was sold to W. R. Terry for $ 119,976.95 pursuant to a contract between Brown individually as "seller" and Terry as "buyer" dated February 7, 1962. The contract of sale made no reference to Brown's earlier assignment of *120 his interest in the American property to the Development Co. By letter dated February 27, 1962, Brown individually instructed American to deed to Terry that portion of the Anderson property covered by the foregoing contract.
During March 1959, Brown entered into a contract to purchase a tract of land of 131 acres, in the Oklahoma City area. The sellers of separate portions of the tract were Frank E. Braniger, Bessie B. McManus, and Howard B. Lynn and his wife, Katherine Lynn. (This property will be referred to hereinafter as the Braniger-Lynn property.) The contracts of sale were similar to the Emmons and Anderson contracts. The Braniger-Lynn contracts provided, inter alia, that (a) the sellers were to transfer the property to American as trustee; (b) the land was to be subdivided and platted into lots, blocks, and building sites; (c) portions of the land were to be dedicated for streets, alleys, public ways, and utility*121 easements; and (d) American was to have the privilege of advancing the funds necessary for the improvement of the property.
Braniger and McManus, as seller trustors, Brown, as buyer trustor, and American, as trustee, entered into a trust agreement on April 13, *1485 1959. The Lynns, as seller trustors, entered into a similar trust agreement on May 1, 1959. Both trust agreements contained similar language to the effect that it was the buyer's desire to subdivide and plat the property for residence or business purposes.
Of the 131-acre Braniger-Lynn tract, Brown sold approximately 40 acres to the Southern Service Co. in 1962, and reported the gain from this sale on his 1962 Federal income tax return as a long-term capital gain.
On January 15, 1963, Brown transferred his rights in 71 of the remaining 91 acres of the Braniger-Lynn tract to the Development Co. Fifty acres of the land transferred were platted, subdivided into lots, developed, and improved. The money used for the development of this land was advanced by the First National Bank of Oklahoma City. As the lots were sold the First National Bank was repaid specified amounts. The Development Co. held 20 acres of the original*122 Braniger-McManus tract at the time of the trial herein.
On July 8, 1958, Brown and his brother, Donald I. Brown, contracted to purchase 65 acres of undeveloped land, also in the Oklahoma City area, from H. A. Heckard and Eva Heckard, husband and wife. The contract of sale was similar to the Emmons and Anderson contracts. On August 4, 1958, the parties entered a trust agreement, naming American as trustee, which was similar in all relevant respects to the Emmons and Anderson trusts.
On April 23, 1960, Brown and his brother assigned their interest in the Heckard trust, to the extent of 40 acres, to the Development Co. and Western Oaks Development Co., equally. They retained individually the remaining 25 acres. Western Oaks Development Co. is owned principally by Donald I. Brown and its business activities were similar to those of the Development Co.
The 40 acres assigned to the Development Co. and Western Oaks Development Co. were developed into building sites. Brown and his brother borrowed $ 350,000 from American to finance the development and improvement of the 40 acres.
Of the remaining 25 acres retained by the Brown brothers, approximately 13 were developed as the DeVille *123 Shopping Center, a partnership between Brown and his brother. Parts of the remaining 12 acres were sold on November 1, 1966, and in October 1967.
Enchanted Homes, Inc., and Royce Brown Homes, Inc., were merged into Royce Brown Development Co. pursuant to articles of merger dated March 28, 1963. The Development Co. became the surviving corporation. On March 29, 1963, the Development Co. purchased the three shares of stock not issued to Brown for $ 750.49 per share.
*1486 In 1963, the year here in issue, Brown received $ 36,000 from the Development Co. as the balance due with respect to the assignment of his interest in the Emmons property. He reported such amount as a long-term capital gain. On September 14, 1963, Brown received $ 31,500 from the Development Co. as a partial payment due pursuant to the assignment of his interest in the Anderson property. He reported this amount as a long-term capital gain in his 1963 return. The aggregate thus reported in respect of these two items was $ 67,500. In his notice of deficiency the Commissioner determined that the aggregate received from the Development Co. during 1963 in respect of the Development Co.'s notes was $ 71,636.31*124 rather than $ 67,500 as reported, and that such "gains from collections on these notes constitute ordinary income on property held primarily for sale to customers in the ordinary course of your trade or business rather than long-term capital gain as reported on your return." The petitioners concede that during the year 1963 they received payments on notes from the Development Co. totaling the amount of $ 71,636.31 rather than the amount of $ 67,500 reported in their return, but they challenge the classification of such receipts as ordinary income rather than as long-term capital gain.
OPINION
In 1963 petitioner realized an aggregate gain of $ 71,636.31 in respect of his 1959 assignments of his interests in the Emmons and Anderson properties to his controlled corporation, the Royce Brown Development Co., and he challenges the Commissioner's classification of such gain as ordinary income rather than capital gain. The issue is whether such interests are excluded from the term "capital assets" because they represented "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business" within the meaning of section 1221, I.R.C. 1954. 3
*125 We set forth at the outset several preliminary guides. Whether petitioner held the property "primarily" for the purpose stated in the statute depends upon whether he held it "principally" for such purpose. Malat v. Riddell, 383 U.S. 569">383 U.S. 569, 572. But since the capital gains provision represents "an exception from the normal tax requirements of the Internal Revenue Code, the definition of a capital asset must be narrowly applied and its exclusions interpreted broadly" in order *1487 "to effectuate the basic congressional purpose." Corn Products Co. v. Commissioner, 350 U.S. 46">350 U.S. 46, 52; Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260, 265; Kaltreider v. Commissioner, 255 F.2d 833">255 F. 2d 833, 838 (C.A. 3). Moreover, the issue is entirely factual, the transaction must be examined in the light of all the surrounding circumstances, and no one circumstance or factor is controlling. Bauschard v. Commissioner, 279 F. 2d 115, 117-118 (C.A. 6); Tibbals v. United States, 362 F. 2d 266, 268 (Ct. Cl.); *126 Browne v. United States, 356 F. 2d 546 (Ct. Cl.); Kaltreider v. Commissioner, 255 F. 2d at 838; S. O. Bynum, 46 T.C. 295">46 T.C. 295, 299; Ralph J. Oace, 39 T.C. 743">39 T.C. 743, 747.
Bearing the foregoing considerations in mind, we have reached the conclusion that petitioner did hold the properties in issue principally for sale to customers in the ordinary course of his business, and we reject his contention that he held them merely for "investment."
As background, we start with the fact that petitioner for some years prior to 1958 had been engaged in the business of buying developed lots, building houses thereon, and selling the lots and houses. In 1957 he organized two corporations, wholly owned by himself and his wife, and, as the officer who dominated the affairs of these corporations, he continued such activities after 1958 in corporate form. To be sure, he had never theretofore acquired raw land for subdivision and development purposes. But it is clear to us that beginning in 1958 he expanded his real estate business to include this closely related activity.
We recognize, *127 of course, that a taxpayer may select the corporate form as the means for carrying on a business, and that the business of the corporation is ordinarily not to be attributed to that of its shareholders. Cf. Burnet v. Clark, 287 U.S. 410">287 U.S. 410; Whipple v. Commissioner, 373 U.S. 193">373 U.S. 193. But we are satisfied on the record before us that petitioner as an individual acquired and held the Emmons and Anderson tracts for subdivision and sale. The language of the contracts of sale as well as of the trust agreements speak too loudly and insistently in this connection to be ignored. Thus, the contract of sale with respect to the Emmons tract provided that the property "shall be platted and divided into lots and blocks to provide for building sites." (Emphasis supplied.) And the trust agreement relating thereto recites that "it is the desire of Buyer Trustor [petitioner] to subdivide said property for residence and/or business purposes." The corresponding instruments relating to the Anderson tract contain similar language. Moreover, it was petitioner, as an individual, who initiated the platting*128 of the Emmons property and who had estimates made by the Hughes Engineering Co. with respect to the cost of developing the property even before the Development Co. came into existence. Further evidence *1488 of the purpose for which petitioner held the property is the fact that he submitted a personal financial statement dated December 31, 1958, to American, the lender of funds to develop the Emmons and Anderson properties, showing as an asset "Cash Invested in Land for Building Purposes" in the amount of $ 47,750.
We are fully aware that petitioner testified that he purchased these properties only for "investment," 4 and that he disavowed, at least inferentially, the foregoing language in the contracts and trust agreements, which he attributed to his lawyer. In addition, his lawyer gave testimony which tended to corroborate petitioner's testimony. But the short answer is that we did not find petitioner's self-serving testimony or that of his lawyer convincing in this respect. We are satisfied on this record, taking into account not only the facts relating to the Emmons and Anderson tracts but also the facts showing a like pattern in respect of several other tracts, that*129 petitioner, as an individual, had entered upon the business of acquiring land for the purpose of subdivision and sale, and that it is a matter of no consequence that he realized his profit through sales to a controlled corporation. The following cases, while not precisely dispositive of the present controversy, reached a like result in a variety of somewhat similar factual situations. Tibbals v. United States, 362 F. 2d 266 (Ct. Cl); Burgher v. Campbell, 244 F. 2d 863 (C.A. 5); Browne v. United States, 356 F. 2d 546 (Ct. Cl.); Kaltreider v. Commissioner, 255 F. 2d 833 (C.A. 3); Bauschard v. Commissioner, 279 F. 2d 115, 118 (C.A. 6); August Engasser, 28 T.C. 1173">28 T.C. 1173.
*130 In Burgher v. Campbell, supra, the court explicitly stated that it was not "decisive that the customer to which [the tract] was sold was a wholly owned corporation." 244 F. 2d at 864-865. We note also the statement in that opinion that "The trial court was not required to accept the theory advanced by the taxpayer that this particular property for these particular years was held for investment rather than for sale when it was actually sold so soon [2 years] after its acquisition." 244 F. 2d at 865.
Although we hold against petitioner for the reasons stated above, this case could be decided upon even broader lines that were indicated in Tibbals v. United States, 362 F. 2d 266. There the taxpayer who had been carrying on a business of constructing and selling houses organized several corporations for the purpose of carrying on these activities. He and his brother jointly purchased a tract of land previously *1489 subdivided into lots, and after holding the property for more than 6 months, they sold a number of the lots to controlled corporations at a substantial*131 profit. In holding that the gains were taxable as ordinary income, the Court of Claims took into account the nature of the activities of the controlled corporations as well as the taxpayer's personal participation in their affairs. We quote at length from its opinion (362 F. 2d at 271-272):
In all of these respects, the sales to Cozy Cottages, Inc. and to the Development Company are remarkably close to the sale by stockholders to their controlled corporation, the profits from which we recently held in Brown [sic] v. United States, supra, 356 F. 2d at 547, 174 Ct. Cl. at , to be taxable as ordinary income. The plaintiff's background is similar to that of the taxpayers in Browne and his dealings with the property were quite comparable. As in that case, "here, we have substantial personal development activities, plus use of and sale to a controlled corporation which continued the development, plus some comparable purchases by [taxpayers] of other real estate for development." 356 F. 2d at 547, 174 Ct. Cl. at . These elements add up to an acquisition, holding and sale primarily in the ordinary*132 course of a real estate business carried on by plaintiff in his individual capacity, with the aid of his controlled corporations. See, also, Engasser, v. Commissioner, 28 T.C. 1173">28 T.C. 1173 (1957). 9
To reach this conclusion we do not disregard corporate entities or say that the business of plaintiff's wholly-owned companies was automatically his business. It is established that, in determining the trade or business of an individual taxpayer, the business activities of his closely-held corporation will not be attributed to him (see, e.g., Whipple v. Commissioner of Internal Revenue, 373 U.S. 193">373 U.S. 193, 83 S. Ct. 1168">83 S. Ct. 1168, 10 L. Ed. 2d 288">10 L. Ed. 2d 288 (1963)), but it is also true that a taxpayer may be individually in the same business as his corporation, may make that business his*133 own, or may utilize the company in his own business. It is therefore appropriate, in circumstances such as these, to see whether the taxpayer uses his controlled company -- for instance, as agent, co-participant, or joint venturer -- to implement or further his own personal business, as he easily can. 10 That type of inquiry has often been made by the courts, including this one, in cases testing (under § 117(a) of the 1939 Code or § 1221 of the 1954 Code) whether profit from a sale of property was ordinary income or capital gain. See Boeing v. United States, supra, 168 F. Supp. at 767-769, 144 Ct. Cl. at 84-87; Browne v. United States, supra; Burgher v. Campbell, supra, 244 F. 2d at 864-865; Lakin v. Commissioner of Internal Revenue, 249 F. 2d 781 (C.A. 4, 1957); Kaltreider v. Commissioner of Internal Revenue, 255 F. 2d 833, 836, 837, 838-839 (C.A. 3, 1958); Bauschard v. Commissioner of Internal Revenue, 279 F. 2d 115, 118 (C.A. 6, 1960) (individual joint venturer); Heebner v. Commissioner of Internal Revenue, 280 F. 2d 228*134 (C.A. 3, 1960), cert. denied, 364 U.S. 921">364 U.S. 921, 81 S. Ct. 285">81 S. Ct. 285, 5 L. Ed. 2d 260">5 L. Ed. 2d 260; Patterson v. Belcher, 302 F. 2d 289, 294, 297 (C.A. 5, 1962), cert. denied, 371 U.S. 921">371 U.S. 921, 83 S. Ct. 289">83 S. Ct. 289, 9 L. Ed. 2d 230">9 L. Ed. 2d 230; H-H Ranch, Inc. v. Commissioner of Internal Revenue, 357 F. 2d 885 (C.A. 7, 1966); Engasser v. Commissioner, supra, 28 T.C. 1173">28 T.C. 1173. That is what we do in this case, and why we consider it proper to take account of the nature and activities of the controlled *1490 companies, Cozy Cottages, Inc. and the Arlington Ridge Development Company, in deciding that plaintiff's sales to them brought him ordinary income rather than capital gain.
*135 Petitioner relies heavily upon Ralph E. Gordy, 36 T.C. 855">36 T.C. 855, acq. 1 C.B. 4">1964-1 C.B. 4. But as we indicated above, cases in this field turn upon their particular facts, and we do not find Gordy controlling, even though there is a superficial resemblance to the case before us. There the taxpayer acquired an option to purchase a tract of land on a lot-by-lot basis, and later sold the option to a controlled corporation. He also purchased another tract to be used as a dogracing track, not for subdivision or sale. Upon failure of local authorities to legalize dogracing, the taxpayer sold the land to a controlled corporation for development. The Court found that these two transactions were "isolated" and held that neither property was held for sale to customers in the taxpayer's trade or business. That case is not controlling here for a least several reasons. We mention two of them. In the first place, petitioner herein actually entered into contracts to purchase the Emmons and Anderson tracts with the clear intention of subdividing and developing the properties, whereas in Gordy the taxpayer had a mere option to purchase*136 on a lot-by-lot basis. We reject as unsound petitioner's contention that his arrangements with the sellers in this case were in substance merely the equivalent of "options." 5 Secondly, unlike the situation in Gordy, we have concluded here that petitioner was following a pattern of business operation in acquiring land for subdivision and that the transactions before us were not "isolated."
We need not prolong our discussion. The matter is basically one of fact. We have considered the various contentions made by petitioner in the light of the entire record, and we have concluded that petitioner was holding the properties in question primarily for sale to customers in the ordinary course of his trade or business.
Decision will be entered*137 for the respondent.
Footnotes
1. On the exhibit submitted herein the words "net worth" appear in handwriting next to this figure.↩
2. The stipulation of the parties indicates that this date was intended to be Jan. 4, 1962.↩
3. SEC. 1221. CAPITAL ASSET DEFINED.
For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include --
(1) 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 primarily for sale to customers in the ordinary course of his trade or business↩; * * * [Emphasis supplied.]
4. There is no doubt that a taxpayer in the real estate business may purchase property for investment and if such is in fact his purpose the property will not be deprived of its classification as a capital asset merely because the taxpayer is in the real estate business. Cf. Charles E. Mieg, 32 T.C. 1314">32 T.C. 1314, acq. 1 C.B. 5">1960-1 C.B. 5; Maddux Construction Co., 54 T.C. 1278↩ (1970).
9. Cordy v. Commissioner, 36 T.C. 855">36 T.C. 855 (1961), on which plaintiff leans heavily, is distinguished in Browne v. United States, supra.↩
10. Along with many others, this court has pointed out "that one may conduct his business through others." Boeing v. United States, 168 F. Supp. 762">168 F. Supp. 762, 769, 144 Ct. Cl. 75">144 Ct. Cl. 75, 87↩ (1958).
5. Among the considerations pointing to the conclusion that petitioner became the actual purchaser of the property rather than the mere holder of an option to purchase was the provision in the trust agreement placing on him the obligation to pay all taxes falling due on the land.↩