*43 Decision will be entered under Rule 50.
1. Gains on the sale of real estate by a corporation engaged exclusively in purchasing, renting, and selling real estate with its income about equally divided between rentals and gains on sales, held, ordinary income rather than long-term capital gains.
2. Respondent held not estopped from treating as ordinary income installment payments received in taxable years on sales made in prior years and treated as sales of capital assets in prior returns.
*44 *20 This proceeding involves income tax deficiencies for the calendar years 1954 to 1958, inclusive, as follows:
| Year | Deficiency |
| 1954 | $ 17,016.39 |
| 1955 | 4,239.51 |
| 1956 | 4,499.87 |
| 1957 | 9,371.37 |
| 1958 | 2,932.94 |
The sole question in issue is whether the gains realized by petitioner on sales of real estate are taxable as long-term capital gains or as ordinary income.
Some of the payments received during the taxable years 1954 to 1958, inclusive, were on installment sales of real estate made in prior years. A further question is raised as to whether the payments on those sales can now be taxed as ordinary income, notwithstanding that in petitioner's prior returns such payments were reported, and accepted by respondent in his audit of the returns, as long-term capital gains.
FINDINGS OF FACT
Petitioner is a corporation engaged in the real estate business. Its returns for the years involved were filed with the district director of internal revenue at Kansas City, Mo., where its office was located.
*21 At all times here material, Charles F. Curry, hereinafter referred to as Curry, was petitioner's principal stockholder and chief executive officer.
During the taxable*45 years petitioner had outstanding 2,310 shares of capital stock par value $ 1 each, of which 2,063 shares were owned by Curry; 5 shares by him and his wife, Janet B. Curry, jointly; and 228 shares by his son, Charles E. Curry.
During some or all of the years involved there were several other corporations engaged in some phase of the real estate business in the Kansas City area which were owned, wholly or in part, or controlled by Curry or members of his family.
Charles F. Curry Real Estate Co. was engaged in buying, selling, and managing real estate for others. It acted as managing agent for the properties held by petitioner and was paid by petitioner for such services. It did not buy or sell real estate on its own account. At all times here material a majority of its stock was owned by Curry, and minority interests were held by his son, Charles E. Curry, and his son-in-law, Donald R. Elbel.
Vineyard Investment Co., organized in 1950, was engaged in subdividing and developing real estate and selling building lots. In 1950 Curry, or his nominee, owned 40 of its 100 shares of stock and Elbel owned 30 shares.
Vineyard Residences, Inc., organized in 1951, was engaged in subdividing*46 real estate and building and selling houses and lots. Originally, its 100 shares of stock were owned equally by Curry and Elbel. After 1951, minority interests were owned by Curry's nephew, Robert McAllister, and others. After 1955 a majority of the stock was owned by Elbel Enterprises, Inc. The other stockholders were officers or members of Elbel Construction Co. which did the building for Vineyard Residences, Inc. Curry was not a stockholder after 1957.
Elbel Construction Co. was organized about 1948. Its stock was owned in equal shares by Curry and Elbel until 1957 when Curry disposed of his interests. The company built houses, mostly residences, for Vineyard Investment, Inc., Vineyard Residences, Inc., and others.
E. K. Carter Development Co., organized in 1923, constructed and operated apartment buildings and also purchased properties, both improved and unimproved. It was owned about equally by E. K. Carter and Curry, or his wife, until 1953. In that year all of its stock was acquired by Curry. The company operated on a limited scale. It built and purchased properties only occasionally for investment purposes.
*22 Kansas City Ground Investment Co. was engaged *47 principally in purchasing income-producing real estate for investment purposes. Since 1947 a majority of its stock has been owned or controlled by Curry or members of his family. The minority interests were held by members of the Elbel family.
Baltimore Avenue Realty Co. was owned in about equal shares by the Currys (Charles F. and Charles E.) and the Elbels. It purchased real estate properties for investment and owned a number of rental properties, including a supermarket, an A & P store, a motor terminal, parking lots, and residences.
Jach Investment Co. was organized in 1940 to hold title to a single piece of real estate in downtown Kansas City at 1013 Walnut Street. The property was owned by Curry and his wife and they held equal shares of the company stock.
The several corporations above described, as a group, will be referred to hereinafter sometimes as the related companies.
Petitioner had no office of its own during the 1954-58 period, but occupied, rent free, space in the office of Charles F. Curry Real Estate Co. In some of the years involved it had no regularly paid employees. Its clerical work was sometimes performed by employees of the related companies.
The properties*48 which petitioner acquired were for the most part in the low price range. Some were improved and some were vacant lots. Petitioner acquired most of them by first purchasing tax certificates at distress sales. The improved properties were usually rented for several years before they were sold. Petitioner made a practice of selling the rented properties when the houses could no longer be rented without extensive repairs or when the sale values exceeded the rental values. Sales of the properties were often made to tenants already in possession.
Petitioner never at any time maintained a sales force or regularly engaged in sales activities. Many of its sales resulted from inquiries made by prospective purchasers.
On December 31, 1945, petitioner's real estate holdings consisted of 15 parcels with a total cost of approximately $ 39,350 and an average cost of $ 2,623 each.
At December 31, 1953, petitioner owned 25 parcels of real estate with a total cost of $ 222,620.08, and an average cost of approximately $ 8,900 each.
*23 Petitioner's sales of real estate in each of the years 1954 to 1958, inclusive, were as follows:
| Property | Date purchased | Date sold |
| 916 East 8th St | October 1948 | August 1954 |
| 5-acre tract in Blue Valley (vacant | ||
| land) | February 1947 | May 1954 |
| 7.91-acre tract in Blue Valley (vacant | ||
| land) | February 1947 | June 1954 |
| 914 East 8th St | October 1948 | May 1954 |
| 924 East 8th St | October 1948 | May 1954 |
| Lots 1 and 4, block 3, resurvey of | ||
| Perwin Pl | August 1949 | January 1955 |
| 1308 Locust | April 2, 1947 | January 1955 |
| 4502 Elmwood | January 1950 | January 1955 |
| 1720 Walnut St | December 1946 | August 1955 |
| 4601 Elmwood | January 1950 | September 1955 |
| 4609 East 45th St | March 1954 | |
| 4600 Lister | April 1954 | |
| 0.92-acre tract in Blue Valley | February 1947 | January 1956 |
| 2-acre tract in Blue Valley | February 1947 | May 1956 |
| East 200 feet of the south 556.7 feet of | ||
| the NW. quarter of SW. quarter of | ||
| sec. 25, T49, R. 33 | January 1952 | May 1956 |
| Lots 10 through 21, block 1 in North | ||
| Blue Banks | January 1950 | July 1956 |
| 1500-06 Walnut St. (vacant land) | September 1948 | February 1956 |
| 47th and Elmwood (vacant land) | January 1952 | May 1957 |
| Tracts -- 47th and Elmwood | January 1952 | August 1957 |
| 5801 East 50 Highway | Apr. 3, 1950 | June 1, 1957 |
| Sale of Vineyard Vista tracts | 1958 |
| Property | Sale | Cost | Profit |
| price | |||
| 916 East 8th St | $ 6,750 | $ 607.82 | $ 6,160.58 |
| 5-acre tract in Blue Valley (vacant | |||
| land) | 20,000 | 420.85 | 19,579.15 |
| 7.91-acre tract in Blue Valley (vacant | |||
| land) | 31,640 | 700.98 | 30,939.02 |
| 914 East 8th St | 3,500 | 428.85 | 3,071.15 |
| 924 East 8th St | 4,700 | 660.50 | 4,039.50 |
| Lots 1 and 4, block 3, resurvey of | |||
| Perwin Pl | 1,500 | 1,311.65 | 188.35 |
| 1308 Locust | 20,000 | 3,430.49 | 16,569.51 |
| 4502 Elmwood | 1,750 | 1,351.13 | 398.87 |
| 1720 Walnut St | 3,100 | 2,970.51 | 129.49 |
| 4601 Elmwood | |||
| 4609 East 45th St | 27,650 | 27,378.42 | 271.58 |
| 4600 Lister | |||
| 0.92-acre tract in Blue Valley | 3,680 | 77.44 | 3,602.56 |
| 2-acre tract in Blue Valley | 8,000 | 168.34 | 7,831.66 |
| East 200 feet of the south 556.7 feet of | |||
| the NW. quarter of SW. quarter of | |||
| sec. 25, T49, R. 33 | 14,000 | 11,377.20 | 2,622.80 |
| Lots 10 through 21, block 1 in North | |||
| Blue Banks | 6,250 | 2,268.52 | 3,981.48 |
| 1500-06 Walnut St. (vacant land) | 17,500 | 10,082.59 | 7,417.41 |
| 47th and Elmwood (vacant land) | 13,200 | 9,394.30 | 3,805.70 |
| Tracts -- 47th and Elmwood | 24,750 | 22,973.81 | 1,776.19 |
| 5801 East 50 Highway | 22,500 | 13,077.67 | 9,422.33 |
| Sale of Vineyard Vista tracts | 37,970 | 27,682.55 | 10,287.45 |
The 1954 sales *50 of the two vacant tracts in the Blue Valley area were to the St. Louis and San Francisco Railroad (hereinafter referred to as the railroad). Two smaller tracts were sold to the railroad in 1956. These tracts were portions of a larger tract of approximately 87 acres which petitioner leased to the railroad January 1953, with an option to purchase. The 87-acre tract was a portion of a 240-acre tract covered by tax certificates which petitioner purchased from Kansas City Power & Light Co. in 1940 for approximately $ 276,000. Petitioner purchased clear title to the tract from a defunct corporation, Blue Valley Development Co., in 1947, for $ 2,500. Petitioner's cost basis for the property was about $ 80 per acre.
The lease to the railroad was for a period of 10 years, with a renewal option of 89 years, at an annual rental of $ 100 per acre, and with a further option to purchase any or all of the property at any time for $ 4,000 per acre. There was a further provision in the lease agreement that the rent was to be reduced to $ 30 per month "until Van Brunt Boulevard was graded and open to the public." The opening of Van Brunt Boulevard, giving access to the property, was expected within*51 a short time. In any event, the reduced rent was to be for a maximum period of 36 months.
Negotiations for the lease or sale of some of this property to the railroad had been under way for several years. The property lay along the railroad tracks for a distance of 1 1/2 miles. Curry and his associates sought the help of the railroad in bringing industries *24 into the area. Petitioner was willing to sell all of the property to the railroad for $ 3,500 per acre, but the railroad did not want to buy. It was interested only in exercising control over the industrial development for the best interests of the railroad. Curry and his associates envisioned the development of a "commercial park" in which they might construct buildings for lease or sale to industries. They wanted the help of the railroad in bringing in new industries and also hoped to obtain financial aid for the development from the railroad.
As assurance of its continuing interest in the development, the railroad agreed to purchase from petitioner at least 5 acres of the leased premises at the price of $ 4,000 per acre.
The provision of the lease agreement giving the railroad company the option to purchase any*52 of the leased tract was inserted at the insistence of the railroad so that space might be made available for prospective industries desiring full ownership of their business sites. Purchases of some of the property for this purpose were made by the railroad in 1954 and 1956.
After the execution of the lease agreement of January 1, 1953, the railroad entered into an agency agreement making Charles F. Curry Real Estate Co. its agent in any negotiations for sale or lease of any of the leasehold property. No sales or rentals were made under this agency agreement and it was canceled at the end of 1 year.
The other three properties sold by petitioner in 1954 also had been acquired through purchase of the tax certificates from the Kansas City Power & Light Co. They were rented by petitioner during its period of ownership and produced rental income in the aggregate amount of $ 6,534.50. Petitioner sold the properties in 1954 after receiving what it considered a very attractive offer. Petitioner learned after the sale that the properties lay in the path of a proposed new freeway.
The first of petitioner's five sales of real estate in 1955 was of lots 1 and 4, block 3, resurvey of Perwin*53 Place, sold to E. K. Carter Development Co. in January 1955. That company owned lots 2 and 3 and was negotiating with a prospective tenant for a lease of the entire four-lot tract. After acquiring lots 1 and 4, E. K. Carter Development Co. had a filling station constructed on the property and leased it to the Clark Oil & Refining Co. for a period of 20 years at a rental of $ 400 per month.
Petitioner sold 1308 Locust to the American Red Cross for a parking lot. The Red Cross had its Kansas City office on an adjoining lot. On learning that petitioner owned 1308, an officer of the Red Cross approached Curry regarding its purchase. Curry was not anxious to sell the property but finally agreed to do so. The sale price was *25 $ 20,000 on which petitioner's profit was $ 16,569.51. Petitioner had never previously offered the property for sale or contemplated selling it. During petitioner's ownership of the property, 1947-54, it had produced rentals of $ 5,830.
The property at 4502 Elmwood, a vacant lot, was sold to Elbel Construction Co., in which Curry then owned a 50-percent interest. That company owned the property on both sides of the lot and wanted to develop the entire*54 tract.
Petitioner sold 1720 Walnut Street to Jach Investment Co. which was wholly owned by Curry and his wife. This was a vacant lot being used as a parking lot by a machinery distributing agency under a lease from Jach Investment Co. The sale was for the purpose of bringing the entire property under a single lease.
The other three properties sold by petitioner in 1955, 4601 Elmwood, 4609 East 45th Street, and 4600 Lister, were all sold in a single transaction to Elbel Construction Co. They were all vacant lots on which Elbel Construction Co. planned to build houses. In 1954 petitioner had paid Elbel Construction Co. $ 7,476 for the installation of water and sewerage facilities and street improvements on the properties.
The first two of petitioner's 1956 sales were of two tracts, one of 0.92 acre and one of 2 acres, in the Blue Valley area which were sold to the railroad at $ 4,000 per acre under the option of the lease agreement referred to above.
The third 1956 sale was of the tract described as "East 200' of the South 556.7' of the N.W. 1/4 of the S.W. 1/4 of section 25, T. 49, R. 33." The sale was to a resident who had lived just across the street from the property for a number*55 of years. He wanted to build a new home on the property and also be able to bring in neighbors of his own selection. Petitioner was not anxious to sell the property and had not previously offered it for sale.
Lots 10 to 21, block 1, North Blue Banks, were sold to the Southeast Baptist Church as a site for a new church building. This was a mission church of the Calvary Baptist Church of which Curry was a member. Officials of the church selected the site and requested Curry to arrange for its purchase from petitioner. The property had not previously been offered for sale by petitioner.
The remaining sale in 1956 was of a vacant lot, 1500-1506 Walnut Street, sold to E. K. Carter Investment Co. This property had been rented for several years to a stationery company as a parking lot for its employees. E. K. Carter Investment Co. owned an adjoining property and was negotiating with Goodyear Tire & Rubber Co. for a long-term lease of both properties. Petitioner's sale of the property to E. K. Carter Investment Co. was for the purpose of bringing the entire leasehold property under a single lease agreement. Such a lease *26 agreement was executed soon after the sale. It provided*56 for a rental of the property at $ 700 per month for an initial term, April 1, 1956, to October 31, 1959, with two renewal options of 5 years each.
In 1957 petitioner sold three parcels of real estate and also certain easement rights to several other tracts. One of the properties, a vacant lot at 47th and Elmwood Street, and the easement rights, were sold to Kansas City Power & Light Co. for a switching station and a right-of-way for a new powerline. The proposed powerline extended over a tract in the Blue Valley area which, in 1956, had been platted for garden-type apartments, or a shopping center, or both, to be known as Vineyard Gardens Subdivision. The plat was filed in the name of E. G. Huston, who held the title as petitioner's nominee, but for the benefit of Vineyard Residences, Inc., the then equitable owner of the property under a contract for its purchase from petitioner. The sale of the property and right-of-way to Kansas City Power & Light Co. was initiated by representatives of the company. Petitioner made the sale reluctantly and with knowledge of the power of the utility to acquire the property by condemnation.
In August 1957, petitioner sold a house and lot, 4656*57 Elmwood, and an adjoining vacant lot to Vineyard Residences, Inc. The house had been rented by petitioner for about 3 years.
The property at 5801 East 50 Highway was sold to a tenant pursuant to an option to purchase contained in a lease agreement which was in existence at the time petitioner acquired the property.
Petitioner's only sale of real estate in 1958 was of a tract of undeveloped land located at 39th and Chelsea in the Blue Valley area to the school district of Kansas City as a site for a new school building. The tract consisted of about 5 acres, most of which was owned by petitioner. The balance was owned by Vineyard Investment Co. Petitioner had paid out in 1958 a total of $ 17,160 for street improvements on the property of which $ 15,380 was paid to Elbel Construction Co. This tract had been platted as a subdivision, Vineyard Vista, in 1923 by a previous owner, John W. Vineyard. A portion of the Vineyard Vista tract was replatted in 1958 by petitioner and the other owners to conform to petitioner's contract with the school district.
The tract selected by the school board contained several of the lots and sections of streets previously platted for the subdivision. *58 The sale price of $ 37,970 included an easement on a 10-foot strip to be used as a pedestrian walkway. The sale contract required petitioner to install improvements such as streets, curbing, water, and sewerage. A replat of the area was filed by petitioner and other owners to bring the property in conformity with the sales agreement with the school district.
*27 Petitioner purchased two parcels of real estate in 1954, none in 1955, none in 1956, one in 1957, and three in 1958. The two parcels of real estate purchased by petitioner in 1954, listed as 46th and Lister and 4609 East 45th Street, were vacant lots. The purchase prices were $ 7,147 and $ 10,053.80, respectively. Petitioner purchased these properties because they were being misused by the owners in a manner detrimental to petitioner's adjoining properties. Petitioner sold both parcels to Elbel Construction Co. in 1955, along with another lot, in a single transaction for $ 27,650. It reported a gain on the sale of $ 271.58.
Petitioner made no purchases of real estate in 1955 or 1956.
In 1957 petitioner purchased two Vineyard Vista lots which had been chosen for a proposed shopping center at a cost of $ 2,100. *59 Those lots, and the three other Vineyard Vista lots purchased in 1958 at a cost of $ 3,240, were needed to complete the replatting of the property after the sale of the tract to the school district. The next purchase in 1958 was of lot 108, Lawrence, Kans., for which petitioner paid $ 27,570. It was a vacant lot adjoining an improved property leased by petitioner to an A & P store. Petitioner acquired the vacant lot for use as a parking lot by the store. The remaining parcel, described as 4601-4609 Blue Parkway, purchased for $ 54,846.98, was adjacent to property already owned by petitioner and formed part of a tract which had been chosen for a proposed shopping center.
Many of the properties in the Blue Valley area were acquired by the related companies. It was the plan of Curry and his associates, through one or more of these companies, to develop all of this area. Vineyard Investment Co. and Vineyard Residences, Inc., were both organized for that purpose.
During the taxable years 1954 to 1958, inclusive, petitioner received installment payments on 15 sales of real estate made in the prior years 1946 to 1953, inclusive, on which it reported taxable gains of $ 17,271.06 in *60 1954, $ 6,878.91 in 1955, $ 4,737.58 in 1956, $ 11,264.55 in 1957, and $ 14,393.22 in 1958.
In its returns for such prior years petitioner reported the gains from those sales as long-term capital gains and this treatment of the sales was accepted by respondent in his audit of the returns.
Of the 15 properties involved in the installment sales, 9 were acquired through petitioner's purchase of tax certificates from the Kansas City Power & Light Co. in 1940. Nine of the 15 properties were improved with residential type buildings and 3 with commercial buildings. Petitioner held the property for periods of 9 months to 8 years. The average holding period was about 4 1/2 years.
Petitioner made other installment sales of real estate over the 1946-53 period, in addition to those mentioned above, in which no payments were received in the taxable years.
*28 There was no material change in petitioner's operations over the 1946-58 period.
Following is a summary of the income and deductions reported by petitioner in its returns for the taxable years 1954 to 1958, inclusive.
| 1954 | 1955 | 1956 | ||
| Dividends | $ 363.00 | $ 670.00 | $ 670.00 | |
| Interest on loans, notes, mortgages, bonds, | ||||
| bank deposits, etc | 9,201.81 | 8,602.15 | 7,357.78 | |
| Rents | 26,956.06 | 27,586.76 | 25,215.28 | |
| Short-term capital gains | 1,793.59 | 169.55 | 189.55 | |
| Long-term capital gain: | ||||
| From sales during year | 58,420.99 | 17,557.80 | 19,867.49 | |
| From installment payments received | ||||
| during year | 17,271.06 | 6,878.91 | 4,737.58 | |
| Other income: | ||||
| Income from servicing tax deeds | 157.50 | 160.00 | ||
| Miscellaneous | 10.00 | |||
| Gross income | 114,164.01 | 61,625.17 | 58,047.68 | |
| Less deductions | 25,270.41 | 22,338.94 | 18,561.69 | |
| Taxable income | 88,893.60 | 39,286.23 | 39,485.99 | |
| Less dividends received deduction | 308.55 | 569.50 | 569.50 | |
| Net taxable income | 88,585.05 | 38,716.73 | 38,916.49 |
| 1957 | 1958 | ||
| Dividends | $ 670.00 | $ 670.00 | |
| Interest on loans, notes, mortgages, bonds, | |||
| bank deposits, etc | 10,424.34 | 5,613.48 | |
| Rents | 25,637.00 | 26,050.31 | |
| Short-term capital gains | 254.82 | 235.39 | |
| Long-term capital gain: | |||
| From sales during year | 28,958.98 | 10,287.45 | |
| From installment payments received | |||
| during year | 11,204.55 | 14,393.22 | |
| Other income: | |||
| Income from servicing tax deeds | 550.00 | 150.00 | |
| Miscellaneous | |||
| Gross income | 77,699.69 | 57,399.85 | |
| Less deductions | 18,661.18 | 24,108.07 | |
| Taxable income | 59,038.51 | 33,291.78 | |
| Less dividends received deduction | 569.50 | 569.50 | |
| Net taxable income | 58,469.01 | 32,722.28 |
The properties sold by petitioner during the years in question were, at the time of sale, held by petitioner primarily for sale in the ordinary course of its trade or business.
OPINION
The question here in issue is whether petitioner's gains on the sale of real estate are taxable as capital gains or as ordinary income. It is respondent's contention that petitioner purchased and held the real properties primarily for sale to customers in the ordinary course of its business and that such properties are therefore excluded from capital assets*62 under the provisions of section 1221 (1) and (2) of the Code of 1954. 1
In addition to the gains on the sales made during the taxable years in issue, respondent has included in petitioner's ordinary income for those years the installment payments on sales made in the years 1946 to 1953, inclusive. Petitioner contends that any adjustment for*63 those transactions of the prior years are barred by the statute of limitations and, further, that respondent, having accepted petitioner's returns for *29 the prior years in which the gains from such sales were reported as capital gains, is now estopped from treating them as ordinary income in the taxable years 1954 to 1958, inclusive.
The quoted provisions of the statute granting favorable tax treatment to gains on the sale of capital assets held for 6 months or more being relief provisions are to be strictly construed. Corn Products Co. v. Commissioner, 350 U.S. 46">350 U.S. 46 (1951); Commissioner v. P. G. Lake, Inc., 356 U.S. 260 (1958).
Whether assets are held primarily for sale to customers in the ordinary course of a taxpayer's trade or business and, consequently, are excluded from capital assets, is essentially a factual question to be determined from the evidence in each particular case. D. J. Phillips, 24 T.C. 435 (1955). Extensive litigation on this question has developed no single test of general applicability. Randolph D. Rouse, 39 T.C. 70 (1962).*64
The term "primarily" as used in the statute has been construed to mean "substantial." Rollingwood Corp v. Commissioner, 190 F. 2d 263; Joseph A. Harrah, 30 T.C. 1236">30 T.C. 1236; American Can Co., 37 T.C. 198">37 T.C. 198. This construction permits recognition of the dual purpose concept inherent in some types of business operations. In petitioner's real estate operations, its dual purpose is obvious. Petitioner acquired and held real estate for the dual purpose of both investment and sale to the public. And while the sales purpose, in some instances, may not have been predominant over the investment purpose, it was, nevertheless, substantial throughout the entire period under review. Petitioner's gains from the sale of properties in some years exceeded its gains from all other sources. They were substantial in each of the years involved. On an overall basis the gains from real estate sales and from rentals, petitioner's two principal sources of income, were about equal.
It may be, as petitioner urges, that it acquired some of the properties for rental purposes and some as long-term investments with no immediate*65 plan of offering them for sale. At the same time, however, it appears that petitioner was ready and willing to sell whenever favorable offers were received. For instance, as Curry testified, three properties were sold in 1954 because petitioner received what it considered "a very attractive offer." The low cost rental properties which comprised a substantial portion of petitioner's real estate holdings were usually sold when they required extensive repairs or when the sale values exceeded the rental values. Undeniably, they were held for sale after they were deemed unsuitable for rental.
There is no question that petitioner's gains from the sale of real estate were profits arising from the everyday operation of a business as *30 distinguished from casual or incidental sales which Congress intended to tax as ordinary income. Corn Products Co. v. Commissioner, supra.
The parties attach considerable importance to petitioner's activities in the Blue Valley area, particularly with respect to the 67-acre tract the petitioner leased to the railroad with an option to purchase. Petitioner argues that its reasons for the lease arrangement demonstrate*66 that it did not hold the property for sale while respondent argues the opposite. It has been held that the existence of an option to purchase constitutes a continuing offer to sell. Joseph A. Harrah, supra.
In weighing the effect of petitioner's reasons for the lease of the Blue Valley tract to the railroad, we give attention to Ehrman v. Commissioner, 120 F. 2d 607 (C.A. 9, 1941), affirming 41 B.T.A. 652">41 B.T.A. 652, certiorari denied 314 U.S. 668">314 U.S. 668 in which the court said at page 610:
We fail to see that the reasons behind a person's entering into a business -- whether it is to make money or whether it is to liquidate -- should be determinative of the question of whether or not the gains resulting from sales are ordinary gains or capital gains. The sole question is -- were the taxpayers in the business of subdividing real estate? If they were, then it seems indisputable that the property sold falls within the exception in the definition of capital assets in the statute above quoted -- that is, that it constituted "property held by the taxpayer primarily for sale to customers*67 in the ordinary course of his trade or business."
See also American Can Co., 37 T.C. 198">37 T.C. 198. In Joseph A. Harrah, supra, we said (p. 1241):
While the underlying purpose of the original acquisition of property is to be given consideration, it is clear that such purpose may change over a given period of time. Where this has been the case, the original purpose necessarily must give way to the purpose for which the property is held at the time of its sale. Mauldin v. Commissioner, 195 F. 2d 714 (C.A. 10, 1952), affirming 16 T.C. 698">16 T.C. 698 (1951). * * *
In the Harrah case we quoted from Rollingwood Corp. v. Commissioner, supra, as follows:
Suppose the taxpayer in the instant case intended to rent the houses for as long as he was required to do so under existing regulations and then to sell them. Or suppose his intention was to pursue whichever of these activities proved to be the most profitable, that is, if the rental market were good he would continue to rent but if the sales market were high he would sell. In either of these*68 suppositions we think it is fair to say that one of the essential purposes (in acquiring or holding the houses) is the purpose of sale. Under such circumstances, if the taxpayer does dispose of the houses by sale, is it within the legislative purpose to allow him to treat the proceeds of these sales as a capital gain? We think not.
The petitioner here was not in the process of liquidating its real estate business. Cf. Frieda E. J. Farley, 7 T.C. 198">7 T.C. 198.
One of the cases upon which petitioner relies strongly is James G. Hoover, 32 T.C. 618">32 T.C. 618. In that case, the taxpayers, James and Charles Hoover, were the individual partners in a partnership engaged primarily, *31 and over a long period of time, in the construction business. James individually was engaged principally in the contracting business and was active in the management and operation of a number of companies engaged in various activities both related and unrelated to his contracting business. The other partner, Charles, had no income except his share of the distributable income of the partnership. The real estate sales in dispute were made either by the partnership*69 or by James individually. The partnership reported ordinary income of approximately $ 70,000 in 1953, $ 30,000 in 1954, and a loss in 1955. It reported long-term capital gains from the sale of real estate in those years of approximately $ 13,700, $ 6,100, and $ 5,300, respectively. James reported ordinary income of approximately $ 99,000 in 1953, $ 103,000 in 1954, and $ 95,500 in 1955. In our opinion in that case we said (pp. 627-628):
About the strongest factor supporting petitioners is the relation of petitioners' other income to the gains derived from the sales of realty. Generally, during the years in question the income of James and the partnership from normal business activities far exceeded income from sales of realty. * * *
We think the instant case is to be distinguished from Hoover in that the taxpayers there were not engaged exclusively (or at all, as found), in the real estate business, but purchased real estate only incidentally and as investments of surplus funds. Here the purchase, sale, and rental of real estate was petitioner's only business.
Also distinguishable are such cases as D. L. Phillips, 24 T.C. 435">24 T.C. 435, Nelson Farry, 13 T.C. 8">13 T.C. 8,*70 and Randolph D. Rouse, 39 T.C. 70">39 T.C. 70, where the taxpayers conducted their real estate business with a clearly defined separation of properties held for sale and properties acquired and held for investment. Some of petitioner's properties were rental properties and some were not, but as we have found, petitioner apparently was willing at all times to sell any of them at a sufficiently profitable price.
We are of the opinion that respondent did not err in determining that petitioner's gains on the sale of real estate are taxable as ordinary income.
The petitioner alleges in his petition that --
(g) The Commissioner is estopped from asserting that gains derived from installments received by petitioner during the years involved were taxable as ordinary income rather than as capital gains from the sale of capital assets, by virtue of the prior determinations of him and his agent.
In its brief, the petitioner reaffirms the position taken in its petition and further submits that the properties which it sold in the prior years, 1947 to 1953, inclusive, like those sold in the 1954-58 period, were held for investment and the production of income and not for *32 *71 sale. Petitioner's operations in the prior years were, in fact, conducted in about the same manner as in the 1954-58 period.
The facts offer no basis for an estoppel. Respondent has not proposed any adjustment of petitioner's tax liability for the prior years 1947 to 1953, inclusive. Those years are admittedly barred by the statute of limitations. What respondent has done is to determine petitioner's tax liability on income received during the taxable years now under consideration. That in so doing he may have reversed his prior action with respect to the payments received on the installment sales in question or that, with even less significance, he accepted without question petitioner's earlier returns in which the payments were treated differently does not in any manner offset the validity of his present determination or afford any basis for estoppel. See Automobile Club of Michigan, 20 T.C. 1033">20 T.C. 1033, affd. 230 F. 2d 585, affd. 353 U.S. 180">353 U.S. 180; Laura Massaglia, 33 T.C. 379">33 T.C. 379, affd. 286 F. 2d 258. In the Massaglia case, the Court said (p. *72 262):
But neither the duty of consistency, nor the principles of equitable estoppel bind the Commissioner to unauthorized acts of his agents, Sanders v. Commissioner, 10 Cir., 225 F. 2d 629, nor preclude him from correcting mistakes of law in the imposition and computation of tax liability, including the power to retroactively correct his rulings, regulations and decisions upon which taxpayers have relied. * * *
The petitioner has suffered no detriment as a result of any action taken by respondent in accepting the returns as filed by petitioner for the prior years.
Decision will be entered under Rule 50.
Footnotes
1. 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;
(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167↩, or real property used in his trade or business;