*2283 1. The petitioner is sustained in his contention that the gains here in question are capital net gains.
2. Held, that in accordance with his election, the tax thereon shall be levied at 12 1/2 per centum thereof under the provisions of section 206(b) of the Revenue Act of 1921.
*560 The Commissioner determined a deficiency for the year 1923, notice of which was mailed to the petitioner on November 16, 1926. The deficiency determined is $18,317.22, of which amount approximately $10,000 is in dispute. The petitioner alleges that the Commissioner erred (a) in finding that the sale of certain real estate in 1923 constituted a sale of the petitioner's "stock in trade," and not a sale of "capital assets," and (b) in taxing the profit realized from such sale at normal and surtax rates instead of at the rate of 12 1/2 per cent as provided for capital net gains by the Revenue Act of 1921.
FINDINGS OF FACT.
The parties agree by stipulation that the sum of $86,249.99 was realized as a gain by the petitioner in 1923*2284 from the sale of real property; that of this amount $74,886.83 was realized from ordinary sales and $11,363.16 from installment sales; that the question is whether the sale of real property by petitioner in 1923 was the sale of a "capital asset" or of "stock in trade," within the meaning of *561 section 206 of the Revenue Act of 1921; and that the amount of profit from the sale held to be "capital assets" by the Board shall be taken to be the amount of "capital net gain" within the meaning of section 206 of the Revenue Act of 1921.
In addition to the facts stipulated as above, we find the following: The petitioner is an individual with principal office at 5600 West North Avenue, Chicago, Ill. Petitioner in his income-tax return for 1923 reported profit from the sale of real estate owned by him for more than two years. The sales from which this profit was derived were consummated after December 31, 1921. The petitioner elected to treat such profit as a capital net gain subject to the 12 1/2 per cent tax on such gains, as provided for in the Revenue Act of 1921, and he still claims that election. The petitioner had lived for 32 years in one block about 2 miles from the*2285 properties from the sales of which he derived the profits involved in this appeal. He had been for 18 years in public office connected with the administration of the City of Chicago. For a part of that time he was a member of the Board of Local Improvements and as such he became familiar with the growth and development of the city and realized the opportunities that were offered for profitable investment in outlying or suburban real estate, buying where he believed that the expansion of the city would eventually include his holdings and enhance their value.
Except for a few individual lots, the real estate from which the petitioner realized his profits in 1923 consisted of four irregular pieces acquired in 1912, 1913, and 1914. It was all farm land devoted to the production of hay and for gardens and his purchases were made upon an acreage basis at $900 or $1,000 per acre.
These parcels are now as -
| Purchased | Acres | |
| Keeney's North Avenue subdivision | 1912 | 15 |
| Keeney's Third North Avenue subdivision | 1912-13 | 10 |
| Keeney's Fourth North Avenue subdivision | 1913 | 16(?) |
| Belmont Home Gardens subdivision | 1914 | 10 |
All of this land was on the northwest side*2286 of the City of Chicago. It was later subdivided at various times and with the exception of 12 lots in the Third North Avenue Subdivision, it was all sold in 1923. These 12 lots the petitioner still holds. In 1916 he was offered $15,000 for 10 of them, and $325,000 in 1927. He expects to get $500,000 for this property and is "not so sure" that he would sell even at that figure. At the time the land was purchased there was no transportation or pavement in that locality. The petitioner bought these parcels of land with the intention of holding them. *562 He had been a resident of Chicago for 42 years, and as a young man he had the idea that it would be a great city. He had faith in its future and with his limited amount of money he made these purchases at what he thought was a reasonable figure. He regarded it as a good investment and felt certain that he would make a good profit. When he purchased the property he had no plans or thought of immediately subdividing it, and intended to hold it as acreage until he could dispose of it at an advantageous price.
When in 1911 the petitioner, then president of the Board of Local Improvements, was retired from active political*2287 life by a changing city administration, he entered the office of a friend, a real estate man on Dearborn Street, where he had a little space. He was "waiting for some other kind of a job" because, having been in politics so long, he thought that he could not do any other kind of work. He was there for two years trying to sell real estate on the brokerage basis. He was not doing very well at that, so when another friend said that he was going to organize the Pioneer State Savings Bank in the West End and suggested that the petitioner go in with him, the invitation was accepted. The bank was organized in 1913 and the petitioner was its active vice president until September, 1915. At that time he determined that from his standpoint he could not make money in the banking business and he "concluded to go across the street and start a real estate office." He rented a second-floor room at 4005 West North Avenue, opened his office there "and employed a girl"; that was the first employee he had had in any business. He maintained that office for two years and in September, 1917, moved to a one-story brick building at North and Central Avenues, which is the office he still occupies.
*2288 During this period of years and in 1923 it was his practice to purchase occasional lots for a quick turnover or resale as he found good bargains. He had a small office and a small force - "people talk very confidentially in those places, and when they had something to sell at a bargain, I would buy one or two lots, principally one at a time and sold at a small profit" - but such lots were not the item in which he now claims capital net gain. Until 1917 he made no effort to sell that property. In September, 1917, he moved out on the property. He then employed the young woman in the office and one salesman. After 1920 he had two more salesmen. In 1923 he had three salesmen, a stenographer, and a bookkeeper and cashier in the office.
The petitioner issued plats of the North Avenue property, with the advertisements on the plats. He did not do any advertising in the newspapers and conducted no intensive campaign, "as in the *563 regular subdivisions." His method was to approach those people who came along the street and sell to them - that was his only means of contact. He did not advertise generally and did not distribute "literature" except from his office. In the*2289 Belmont Home Gardens, a surveyor who was also connected with the car company sold the larger part of that property and was paid a commission for selling it as the petitioner's broker. The petitioner himself sold hardly anything in the Belmont Gardens property, which was about two and one-half miles from his office. He gave only a small portion of his time to it. Most of his time was given over to making loans and investigating the tracts which he purchased and to his alleged brokerage business, the commissions from which in 1923 yielded him more than $20,000.
The petitioner introduced exhibits showing that for the year 1923 he was duly licensed by the City of Chicago and by the State of Illinois as a real estate broker. For three years prior to July, 1923, and continuously since that date he has had the following advertisement regularly inserted in the St. Paul Congregational Herald, a monthly church publication: "Loans $100.00 and up on vacant and improved real estate in this vicinity. Albert F. Keeney, 5600 W. North Avenue."
The taxpayer maintained a complete set of books, upon which the four properties in question were carried. State, county and city taxes upon them were*2290 charged to expenses. Sundry special assessments were charged to the properties as part of their cost. These properties had never been included in the petitioner's inventory.
OPINION.
LOVE: The issue here arises in the contention of the respondent that the petitioner was a real estate "dealer"; that these four properties were a part of his "stock in trade" 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 contends, to the contrary, that he was and is a real estate "broker" and that as such he has no inventory; and that even though he were a real estate "dealer," these properties would not constitute a stock in trade of a kind which would properly be included in his inventory if on hand at the close of the taxable year. If the petitioner is correct, these properties which at the time of their sale in 1923 had been held for a much longer period than the two years provided in the Revenue Act of 1921, were capital assets and any gain derived *564 from their exchange or sale is taxable as a capital gain at 12 1/2 per cent, if the taxpayer so elects.
That Act provides:
SEC. 206. (a) *2291 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;
(2) The term "capital loss" means deductible loss resulting from the sale or exchange of capital assets consummated after December 31, 1921;
(3) The term "capital deductions" means such deductions as are allowed under this title for the purpose of computing net income and are properly allocable to or chargeable against items of capital gain as defined in this section;
(4) The term "capital net gain" means the excess of the total amount of capital gain over the sum of the capital deductions and capital losses;
(5) The term "ordinary net income" means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions, and
(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, *2292 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.
(b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:
A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12 1/2 per centum of the capital net gain; but if the taxpayer elects to be taxed under this section the total tax shall in no such case be less than 12 1/2 per centum of the total net income. The total tax thus determined shall be computed, collected and paid in the same manner, at the same time and subject to the same provisions of law, including penalties, as other taxes under this title.
The petitioner and the respondent each lays stress on the difference between a "broker" and "dealer" in real estate, the respondent especially contending*2293 that upon that difference depends the answer to the question whether or not the method of accounting regularly employed in keeping the books of the taxpayer was such as clearly to reflect the income of the taxpayer. Both seem to agree that if in 1923 the petitioner was a real estate broker, the use of an inventory of the real estate that he was handling for others was neither necessary nor permissible, and in that obvious mutual agreement the Board concurs. The petitioner goes further and contends that even though he was a dealer in that year, the particular parcels of real estate in controversy were a capital asset, and that in any case, the use of an inventory of that or any other real estate that he owned *565 was neither necessary nor permissible in order clearly to reflect his net income either in accordance with the method of accounting regularly employed in keeping his books, or as conforming as nearly as may be to the best accounting practice in his trade or business. The respondent contends that the petitioner was a real estate dealer in 1923; that in the opinion of the Commissioner the use of an inventory of his "stock in trade" was necessary in order clearly to*2294 determine his income; that all the real estate owned by him was his "stock in trade" and that that part of it on hand at the close of each of his taxable years should therefore be inventoried and taken into his accounts in determining his taxable income, thereby debarring him from the election provided in the case of capital net gains by section 206(b) of the Revenue Act of 1921.
We do not believe that any fine distinction need by drawn here as between "dealer" and "broker," for it is our opinion that the petitioner by his own showing was in 1923 clearly both. His amended tax return for that year holds him out to be engaged in the "real estate" business, which course would be equally true whether he were a dealer or broker. But on that return his gross income is shown to have been derived from -
| Amount | Per cent | |
| Commission, line 1 | $20,052.53 | 30 |
| Interest on deposits, etc., line 3 | 26,815.91 | 40 |
| Rents, line 5 | 3,563.63 | 5 |
| Profits from sale of real estate, line 6 | 13,760.55 | 20 |
| Miscellaneous sources, lines 7 and 8 | 3,339.04 | 5 |
| Total | 67,531.66 | 100 |
The percentages shown above are sufficiently exact to support our opinion that a taxpayer, an approximate*2295 quarter of whose gross income is derived from rents and profits from sale of real estate, can hardly seriously maintain that he was not a dealer as well as a broker in real estate.
As a broker, the petitioner and the respondent are in agreement that it would not be proper for the purpose of determining net income to include in the accounts of the petitioner an inventory of property in which he holds no title, and we have above declared our concurrence in that agreement. As a dealer, we have heretofore decided, in Atlantic Coast Realty Co.,11 B.T.A. 416">11 B.T.A. 416, that in the business of buying and selling lands, a taxpayer's income is not to be determined by the use of inventories where the Commissioner has by regulation ruled generally that such inventories are not required and the proof does not indicate that such use is in conformity with the best accounting practice, but tends rather to show *566 such use to be impractical. In our discussion of the circumstances of that case, we quoted the Bureau's Office Decision 848, published in 1921 in Cumulative Bulletin No. 4, page 47, to the effect that "a taxpayer engaged in the real estate business is not permitted*2296 [our italics] to inventory real estate which is held for sale for the purpose of calculating net income subject to Federal income tax." That case was distinguished from this under consideration here by the facts that the Revenue Act of 1918 controlled and that the petitioner (a corporation) was endeavoring to establish its right to use inventories, which right the Commissioner contested; but the provision concerning the use of inventories in section 203 of the Revenue Act of 1921 repeats verbatim the provision of the same section of the 1918 Act. There is no difference in regard to this provision as between an individual and a corporation; and the fact that in Atlantic Coast Realty Co., supra, we sustained the Commissioner in the very contention that this petitioner is now advancing gives our decision there even stronger force, if possible, in its present application. "Inventory" is a word that in its broadest sense is of wide application. Even a balance sheet including all the assets and liabilities of an individual or corporation might be held to be an inventory; but as we believed when we decided the above case, so we believe now, that under the provisions*2297 of the Revenue Act of 1918 (and of 1921) "the use of inventories must be reasonably necessary to the determination of income. The language (of the Act) indicates no intention to recognize in any trade a new method of determining income or a new limitation upon income, but only a recognition of the use of inventories in such trades or businesses, like 'manufacturing and merchandise concerns,' as had been found to require such accounting practice. Nowhere have we been able to find a reference to such an accounting practice in the business of buying and selling lands." Counsel for the respondent quotes Kester to the contrary; but the unsupported opinion of one man, even though he were an admitted authority, does not establish an "accounting practice."
In referring in his opening statement to Office Decision 848, quoted supra, counsel for the respondent said: "It is true that the office at that time apparently had that slant on it (i.e., that such property could not properly be included in the taxpayer's inventory), but later it reversed its views, as I presume it had the right to do, and has since maintained the position we hope to maintain in this case." In other words, that*2298 the Commissioner had changed his mind, as undoubtedly he had the right to do. But the conclusion of the Board was reached independently through its own interpretation of the provisions and intent of the law, and it is not affected in any degree by a change of mind on the part of the Commissioner, for, notwithstanding, the law remains the same.
*567 The provision in section 208(a)(8) barring from inclusion among capital assets "property held by the taxpayer primarily for sale in the course of his trade or business" is not asserted by the respondent as declarative of the purpose of section 206(a)(6) of the Revenue Act of 1921. On the authority of the former General Counsel for the Bureau of Internal Revenue he admits that it constitutes a "change" in the provisions of the law; but he argues that the addition of that provision in the 1924 Act "to make it clear that real property held primarily for sale" in the course of the taxpayer's trade or business should thereafter be considered "stock in trade" and not "capital assets," does not warrant the inference or conclusion that property similarly held while the 1921 Revenue Act was in effect, was not "stock in trade" subject*2299 to inventory. Without expressing any opinion in regard to that conclusion of the respondent's counsel, it is only necessary to say here that we are not now concerned with the provisions of the Act of 1924 except as they may be held to be declaratory of the purposes and intent of the earlier Act, which it is not asserted is the case here and which we do not believe to be the fact. Following our reasoning in Atlantic Coast Realty Co., supra, we held that none of the real property owned by the petitioner in his business as a dealer in real estate and on hand at the close of his taxable year 1923, or at any earlier date, could properly have been included in his inventory.
In considering whether the four parcels primarily at issue were capital assets or stock in trade, we recall that all these purchases were made in 1912, 1913, and 1914, and held for a much longer period than two years; all that have been disposed of having been sold in 1923.
In 1911 the petitioner retired from active politics which, so far as it appears, had previously been his only vocation, and entered the real estate office of a friend where, while he was "waiting for some other kind of a job, *2300 " he tried, not very successfully, to sell real estate on commission. He was so occupied until 1913, when he became active vice president of a savings bank, which position he held until September, 1915. It was in this period during which it is certain that he was not a "dealer" in real estate, that he acquired all of these four parcels, the greater part of which was later disposed of so advantageously. He made his purchases without any well defined idea of what he was going to do with the property. He bought farm acreage and, if he had any plan at all, it was with the expectation of disposing of it as acreage when its value had increased through the normal growth of the city. It was not purchased in connection with "his business" for he had no business of that kind at that time, being occupied in a small way in selling *568 real estate for others, and, after he had abandoned that, as vice president of the savings bank. Naturally, his purchase was made "for profit," which he hoped to achieve in some way not at all clear to him at the time that the purchases were made; but it was not his purpose to, nor did he, sell the property for any price that he could get above its*2301 cost to him. He intended to hold it, and did hold it, until, in 1923, he was able to dispose of it at a price that justified his faith in the growth of Chicago at the time the purchase was made, and the soundness of his judgment in regard to the direction in which the city would expand. Such a transaction was not a "speculation" except as every business venture where the outcome is uncertain is a speculation. In our opinion, it was a transaction in property not connected with his trade or business, "acquired and held by the taxpayer for profit or investment" long before the provisions of the Revenue Act of 1921 were enacted into law, of the exact kind in the contemplation of section 206 of that Act that recognized "capital gain" as distinguished from "ordinary net income"; and provided for the taxation of such gains upon a different basis at the election of the taxpayer.
Reviewing the foregoing facts and discussion, we conclude:
That the petitioner in 1912, 1913, and 1914, when these purchases here in question were made, was not a dealer in real estate and that the purchases were not made in connection with his trade or business;
That the purchases were made for profit or*2302 investment and that the petitioner held said property for more than two years from the date of purchase until its sale after December 31, 1921;
That the said property was not held by the petitioner for his personal use or consumption or that of his family;
That such property formed no part of the petitioner's stock in trade or other property of a kind which would properly be included in the inventory of the petitioner if on hand at the close of the taxable year;
That the property constituted a capital asset from which a capital net gain was derived in the sale consummated after December 31, 1921; and that
Pursuant to the privilege granted to him by law, this petitioner has elected that the tax upon such capital net gain shall be levied at 12 1/2 per centum thereof under the provisions of section 206(b) of the Revenue Act of 1921, and so collected and paid; and the petitioner still maintains and asserts that election.
And we held accordingly. The tax will be recomputed in accordance with the stipulation and this decision.
Judgment will be entered for the petitioner under Rule 50.