*2035 A taxpayer who purchased unimproved real property in 1905 as an investment, and later subdivided it into lots, some of which were sold in 1923, is entitled to have his tax on the profit derived therefrom computed under the provisions of section 206, Act of 1921, regardless of whether or not he was a dealer in real estate.
*1045 This is a proceeding for the redetermination of a deficiency in income tax for the year 1923 in the amount of $14,970.90. Of this *1046 amount the petitioner does not dispute $5,530.34, which leaves the amount of $9,440.56 actually in controversy.
The only error assigned is the respondent's refusal to apply the provisions of section 206 of the Revenue Act of 1921 in computing the tax upon the petitioner's income resulting from the sale of certain real estate.
FINDINGS OF FACT.
The petitioner is an individual and is and has been, since 1885, a resident of Los Angeles, Calif.
In 1897 the petitioner and one Callender formed a copartnership under the firm name of Wright Callender Company, and engaged in business as*2036 real estate brokers and in other business activities which are hereinafter set forth. In 1905 the business was incorporated as a personal service corporation under the same name. The office of the firm of Wright Callender Company in 1905 was on Hill Street between Third and Fourth Streets in Los Angeles. The business consisted of various departments as follows: a department for the sale of real estate on commission, one for the collection of rents and the management of properties, one for the writing of insurance, and one for loans. Later one Charles G. Andrews came into the corporation and the name was changed to Wright-Callender-Andrews Company. The petitioner was president of the corporation during its entire existence. Neither he nor any of the other officers received any salary, but when there were profits they were divided equally among the three of them. They built up a considerable business, which had a very good reputation.
The corporation continued in business until 1921 in the same location. At that time the petitioner wished to retire from business, and the corporation was dissolved.
The corporation during its existence did not engage in buying and selling*2037 real estate as dealers, except that occasionally it received commissions in the form of a syndicate interest in property. During all this time it received only about eight or ten commissions in such form. The corporation had only enough invested capital to provide its office facilities and make settlements with insurance companies. The value of its office equipment did not exceed $5,000.
The petitioner did not at any time between 1905 and 1921 engage in any other business and his principal income was derived from the business of the Wright-Callender-Andrews Company. He did not at any time keep an inventory.
After the dissolution of the corporation the petitioner continued in business for about a year in the old quarters, winding up the corporation's affairs and attending to matters for old clients.
*1047 Petitioner was also president of a corporation which owned the Wright and Callender Building in which the brokerage corporation had its offices. In 1927 and succeeding years the petitioner assisted the corporation which owned the Wright and Callender Building in some matters, without any salary, and had an office in that building,
In 1905 the petitioner was living*2038 at 3077 Wilshire Boulevard in Los Angeles. In that year he bought four contiguous parcels of land in the County of Los Angeles, totaling approximately 30 acres. This property was five miles from the central portion of the city and over a mile from Western Avenue, which was practically the western limit of the residential section of the city. The property was then covered with a growth of mustard. There were a couple of defunct oil wells on it. It was unoccupied, was not improved in any way, and was miles from a street car line. The petitioner purchased this property because he thought it was a good investment, lying between Wilshire and Vermont, an area which included Hollywood, at that time only a small village. The property had no rental value and could not have been cultivated or farmed successfully. The petitioner did not at any time do any farming upon the property or rent it for farming purposes.
In 1911 the city of Los Angeles had been extended so as to include the land, and the property was entitled to city water. Petitioner began to grade it and had gas and electricity installed and sidewalks constructed. On September 12, 1911, a copy of a plat of the above mentioned*2039 property, known as Tract No. 499, was recorded in the office of the County Recorder of Los Angeles County in Book 48, page 105. In the same year the petitioner began the erection of his own residence on a part of this property and moved into it on May 7, 1912. He thought that by so doing he would enhance the value of the property. He improved about five acres of land around the house and fenced it off from the rest of the property. Later he sold some of this, retaining only about one and one-half acres for himself.
From 1911 until 1923, between 50 and 60 lots were sold from the whole property, principally through brokers to whom the petitioner paid a commission. About 12 or 15 of the sales were made through the Wright-Callender-Andrews Company. In 1923 the petitioner sold 12 lots, three of these were out of the five acres which he had originally kept for his own property. The profit from the sale of these lots in that year amounted to $51,868.38. Of the 12 lots sold in 1923, the petitioner paid the regular commission on ten of them. These lots were unimproved. The petitioner did not do any extensive advertising, but when his agents came to him and told him they had some*2040 one interested he would see the prospective customers and take them over the lots in person. Some time between 1911 and 1921, *1048 he had some maps of the tracts printed to give to persons who approached him about the lots, headed as follows:
RIDGEWOOD PARK
[TRACT 499]
IN THE FASHIONABLE WILSHIRE DISTRICT
High Elevation without being inaccessible, Broad Streets, Building Restrictions, First Class Improvements
PURE MOUNTAIN WATER MAGNIFICENT VIEWS
Reasonable Prices, which Insure Future Profits
Remember you pass through the finest business and residence section of the city to reach this property
All adjoining properties subject to building restrictions
GILBERT S. WRIGHT, 403 SOUTH HILL ST.
Telephone 10745
Aside from the four parcels of land mentioned the petitioner owned, in 1905, a piece of land on Wilshire Boulevard, where his home was located, a lot in Clearwater, inherited from his father, and a piece on Hill Street between Third and Fourth. From 1905 to 1911 the petitioner did not acquire any other real estate. At the time of purchasing the four parcels of property the petitioner did not have any definite plan as to when or in what manner he would*2041 resell it. The cost of such property was approximately $35,000.
In his income tax return for 1923 the petitioner elected to have his income computed under the provisions of section 206 of the Revenue Act of 1921. The respondent refused to allow the petitioner to compute his income under said section, on the ground that the real estate which was sold in 1923 constituted stock in trade of petitioner, and, therefore, computed the tax liability under the provisions of sections 210 and 211 of the Revenue Act of 1921.
On his return the petitioner claimed and was allowed the following deductions:
| Stenographer | $250.00 |
| Business phone, stationery, etc | 100.00 |
| Salary paid to son (6 mos. at $100) | 600.00 |
| Depreciation and chauffeur hire for car used in business | 1,318.75 |
OPINION.
MCMAHON: The only question to be decided in the instant case is whether the tax liability of the petitioner is to be computed under section 206, Act of 1921, which provides as follows:
*1049 SEC. 206. (a) That for the purpose of this title:
(1) The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921;
* * *
*2042 (6) The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.
The petitioner himself was the only witness produced by either party. He testified that after the dissolution of the corporation in 1921 and the winding up of its affairs he did not thereafter engage in business in any way, and that during the year 1923 he did not have a business office; that neither he nor the corporation was ever a dealer in real estate, except that the corporation occasionally received syndicate interests in real estate in lieu of commissions. The respondent apparently attempted to prove by cross-examination that the petitioner was engaged in business during 1923 as a dealer in real estate. In his brief he argues that both the petitioner and the corporation were real estate dealers, *2043 not merely brokers, that though the lots in question may have been purchased originally as an investment, when the petitioner subdivided and sold them he was acting as a dealer. He also urges that since the petitioner testified that he was not engaged in business after 1921, but claimed on his return certain deductions for stenographers, business phone, depreciation and chauffeur's hire on business cars, his testimony is not entitled to much weight. He is careful, however, to state that there is no suggestion of bad faith on the part of the petitioner. In our view the testimony of the petitioner is entitled to full weight.
The property sold in 1923 was originally purchased by the petitioner as an investment, it had been held for more than two years, and it had not been devoted to the personal use of petitioner or his family. We must therefore determine whether it was "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."
We have held in former cases that real estate may not be included in an inventory. *2044 ; and . In the case of , involving the years 1922, 1923, and 1924, the petitioners were real estate dealers. We held in that case that as to the years 1922 and 1923, in which the 1921 Act was applicable, *1050 the petitioners were entitled to the benefits of section 206 of the Revenue Act of 1921, saying:
* * * Whether or not real estate, under any circumstances, could properly be classed as "stock in trade," the syntax of the phrase in which that term is used in the statute now under consideration, is such that it is modified by the clause "which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year."
* * *
The property was purchased in 1916, and hence the lots sold in 1922 and 1923 had been held for more than two years, and by reason of the fact that real estate, however held, is not excluded by the excluding clause of the statute, it must be deemed to be included within the provisions of section 206(b) of the Revenue Act of 1921. *2045
It is, therefore, immaterial whether or not the petitioner was a real estate dealer. In either event he is entitled to have his tax upon the profit from the sale of these lots in 1923 computed under section 206, Act of 1921. The petitioner has conceded that the respondent's computation of the amount of the profit derived is correct.
Judgment will be entered under Rule 50.