*200 Decision will be entered under Rule 50.
Since its organization in 1930 petitioner has been engaged in the business as owner-lessor of real estate in San Antonio, Texas. In the years 1945 and 1946, the sale of unimproved real estate by petitioner was infrequent and unusual. Held, such property was not held by petitioner for sale to customers in the ordinary course of its business within the meaning of section 117, I. R. C., and that the gain from such sales is taxable as capital gain.
*1003 The deficiency notice mailed to petitioner stated:
* * * the determination*201 of your income tax liability for the taxable years ended December 31, 1945 and 1946, discloses an overassessment of $ 731.02, for the taxable year ended December 31, 1945, and a deficiency of $ 2,046.85, for the taxable year ended December 31, 1946; and that the determination of your excess profits tax liability for the taxable year ended December 31, 1945, discloses a deficiency of $ 2,277.69, * * *
*1004 The only taxes in controversy before this Court are the 1945 excess profits tax deficiency and the 1946 income tax deficiency.
By appropriate assignment of error petitioner contests the correctness of the following portion of the Commissioner's determination:
It has been determined that the gains realized in 1945 and 1946, in the amounts of $ 2,384.32 and $ 15,621.70, respectively, from the sale of unimproved real estate represents ordinary income and is taxable as such. No part of the above gains are from the disposition of capital assets, therefore, section 117 of the Internal Revenue Code is not applicable.
FINDINGS OF FACT.
Petitioner's principal place of business is in San Antonio, Texas, and its tax returns for the two calendar years 1945 and 1946 were filed with the*202 collector of internal revenue for the first district of Texas at Austin, Texas. It was stated on petitioner's tax returns that they were prepared on an accrual basis.
The petitioner was incorporated on June 28, 1930, by members of the Dittmar family who, in order to finance another business venture, placed in this corporation, then known as Dittmar Properties Co., a substantial amount of real estate which had been owned by the Dittmar family for many years. They then sold the stock in the corporation and the bonds issued by the corporation to a group of investors in San Antonio, Texas, retaining an option to repurchase the stock and bonds for a limited time. The real estate placed in the corporation included both improved downtown rental property and unimproved acreage on the outskirts of San Antonio. The name of the petitioner was changed from Dittmar Properties Co.
The petitioner never during its entire history purchased any real estate except that it acquired by foreclosure an undivided interest in a piece of real estate in which it already owned an undivided interest. From the date of its incorporation in 1930 through the year 1937 it made no sale of real estate. During *203 the years 1938 through 1950 it made the following sales of real estate:
In 1938 it made one sale of 3.99 acres of land off of the Brooks Field tract to the State Highway Department for the purpose of widening a highway.
In 1939 the petitioner made one sale of a .15-acre tract of land off of the Schmidt tract, again to the State Highway Department for the purpose of widening a highway.
In 1940 the petitioner made one sale of a tract of land containing 171.95 acres. This tract was a farm and had been rented to a tenant for some time. The property adjoined property owned by the tenant's father and when the tenant came to the petitioner with a proposition to buy the land it was accepted.
*1005 In 1941 the petitioner made one sale of a tract of 3.152 acres of land off of the Brooks Field tract to the State Highway Department for the purpose of widening a highway.
In 1942 the petitioner made one sale of 1.406 acres of land off of the Brooks Field tract to the State Highway Department for the purpose of widening a highway.
All of the sales made in 1938, 1939, 1941, and 1942 were of strips off of larger tracts of land to the State Highway Department for the purpose of widening the Military*204 Highway and Highway 66 near San Antonio, Texas.
In 1943 the petitioner made two sales: One was of an improved piece of property, including a building designed and built for a creamery. The petitioner had not been successful in keeping the property rented and when a tenant offered to buy it the petitioner decided to sell. The second tract sold in 1943 consisted of 11.695 acres of unimproved land on the outskirts of San Antonio.
The petitioner made no sales of real estate in 1944.
In 1945, one of the years involved here, the petitioner made only one sale of real estate, consisting of a tract of land of 4 acres out of a larger tract owned by the petitioner. The purchaser, a Mr. York, came to the petitioner unsolicited and asked to buy these 4 acres out of a larger tract because he owned a plane which he kept at the nearby San Antonio Municipal Airport and wanted to build a house near the Airport, and also because he contemplated having gardens and wanted to get the water supply available on this 4-acre piece of property. The officers of the petitioner did not want to sell, but finally quoted what they considered a high price, and Mr. York accepted it. The property had not been advertised*205 and the petitioner did not solicit the sale.
In 1946 the petitioner sold six parcels of real estate. The first sale was of an isolated tract of land containing 31.13 acres on the outskirts of San Antonio. It was not desirable property because access to it was across Almos Basin, a low, flat area subject to flooding. The property was not advertised nor was the sale solicited. The property has now passed into the hands of a real estate developer, but at the time of trial had not yet been improved.
The next four parcels of land sold consisted of adjoining tracts containing the following acreages: 2.02 acres; 2.44 acres; 1.81 acres; 2.60 acres. Several men who were friends and who wanted to be neighbors came to the petitioner to acquire these tracts, and at their request the petitioner carved these tracts out of a larger tract of land and made these sales. The sales were made simultaneously. At the time of trial the tracts were still vacant.
*1006 The last sale in 1946 was of a lunchstand on St. Mary's and Marne Streets in San Antonio. This was improved property but the improvements were in very bad condition and had to be replaced or demolished. The Commissioner has not*206 denied capital gains treatment to the gains from this sale of depreciable property used in petitioner's business, section 117 (j) of the Code.
In 1947 the petitioner sold four parcels of real estate. The first was a sale of property improved with warehouses, adjoining the creamery property sold in 1943. The circumstances of the sale of the warehouses were the same as in the case of the sale of the creamery property. The improvements were very old, needed a good deal of money expended on them to keep them in good condition, and the petitioner preferred to accept an offer that was made for the property rather than keep it.
The next sale was of a tract of 1.80 acres adjoining the four tracts sold in 1946 to a group of friends who wished to be neighbors. The tract sold in 1947 was purchased by another member of the same group of friends.
The next sale consisted of two tracts: One, of 4.28 acres, and another of 50.7 acres, which were sold to a man named Shearer who subdivided them into a residential development called Shearer Hills.
The next sale consisted of a tract of 18.63 acres which was sold to a Mr. Duran who had a restaurant in San Antonio and bought it with the intention of*207 putting a restaurant or a night club on the property, but who later resold it.
In 1948 the petitioner made two sales of real estate: One was a sale of 140 acres of land known as the Goliad Road tract; and the other was the sale of a tract of land containing approximately 13 acres to one of the Catholic Sisters organizations at a price of approximately $ 1,000 per acre.
In 1949 the petitioner made one sale of a tract of land containing 127 or 128 acres at a price of approximately $ 550 per acre.
In 1950 the petitioner made one sale of a tract of land containing approximately 113 or 115 acres at approximately $ 400 per acre.
The petitioner maintained no office and no regular employees. The work incident to the collection of rents and the maintenance of the properties was performed by one of the employees of the president of the corporation. The bookkeeping was also done by an employee of the president of the corporation in his office, and the petitioner paid a general overhead expense which took care of rent and other expenses, including repayment to the president for the parttime use of his employees. The amounts expended by the petitioner for such services were $ 2,454.03 in 1945*208 and $ 2,909.21 in 1946. The employee of the president of the petitioner who attended to these matters for the petitioner in 1945 and 1946 was Mr. Dufour. He *1007 was not a salesman and devoted none of his time to the selling of real estate. If a sale was made, Dufour attended to the details of getting a survey, and the attorneys for the petitioner would draw the deed and close the sale. The officers of the corporation each had his own business, and they devoted a very minor portion of their time to the business of the corporation. There was not much for them to do. None of the officers or directors received any salary.
The petitioner maintained no price list of its real estate, never listed any of its real estate with real estate agents, did not hold a license as a dealer in real estate, and was not a member of the real estate board. It did not advertise its property for sale. If it received an inquiry from someone who wanted to buy a piece of its property, one of its officers would suggest a price which he would be willing to recommend to the board of directors of the company, and if the purchaser accepted the price the matter was referred to the board for its acceptance*209 or rejection. An actual board meeting was held to consider each sale made. There were at times pronounced disagreements amongst the members of the board as to whether specific sales should be made. If the board of directors approved the sale it had to be referred to the bondholders to get their consent before the sale could be made.
The petitioner never subdivided or platted any of its real estate. Some of the property sold consisted of entire tracts and some sales were made of smaller tracts carved out of larger tracts. When smaller tracts were carved out of larger tracts it was done at the request of a purchaser who was interested in a particular piece of property, as in the case of the sale to York in 1945 and to the group of friends in 1946. In such cases surveys were made and the properties described by metes and bounds. The petitioner paved no streets, laid no sewers, nor did it install any improvements of any sort on the land sold.
The income from sale of real estate (other than depreciable properties sold) and rental receipts of petitioner from date of incorporation to December 31, 1946, were as follows:
| Year | Rental receipts | Total sales | Gain from |
| price | sales | ||
| 1930 (6 months) | $ 24,995.77 | ||
| 1931 | 42,061.37 | ||
| 1932 | 35,296.00 | ||
| 1933 | 28,626.24 | ||
| 1934 | 43,669.94 | ||
| 1935 | 24,100.50 | ||
| 1936 | 27,280.97 | ||
| 1937 | 31,574.43 | ||
| 1938 | 31,102.42 | $ 698.25 | ($ 71.80) |
| 1939 | 29,239.91 | 56.25 | 30.23 |
| 1940 | 32,167.51 | 4,500.00 | 2,163.75 |
| 1941 | 39,498.73 | 551.60 | (57.21) |
| 1942 | 50,665.81 | 246.05 | (25.51) |
| 1943 | 60,196.94 | 5,000.00 | 1,045.83 |
| 1944 | 59,764.87 | ||
| 1945 | 65,834.94 | 4,002.93 | 2,065.92 |
| 1946 | 57,685.64 | 22,824.15 | 13,812.76 |
*210 *1008 Substantially all the rental receipts of petitioner were received from its improved real estate.
The sales of real estate in question are the sales of unimproved real estate made by petitioner during the years 1945 and 1946. The descriptions of the properties sold, and the circumstances of sale, have already been mentioned, and a summary follows for each such sale made during the taxable years:
| Selling | Basis unadjusted | Selling | Gain or | ||
| Date of sale | Property sold | price | expense | (loss) | |
| 1945 | 4 acres | $ 4,002.93 | $ 1,618.61 | $ 318.40 | $ 2,065.92 |
| 1946 | 31.13 acres | 10,821.20 | 3,330.52 | 818.64 | 6,672.04 |
| 1946 | 2.02 acres | 2,800.87 | 903.45 | 230.30 | 1,667.12 |
| 1946 | 2.44 acres | 3,051.05 | 984.12 | 253.35 | 1,813.58 |
| 1946 | 1.81 acres | 2,250.78 | 725.98 | 189.75 | 1,335.05 |
| 1946 | 2.60 acres | 3,900.25 | 1,258.38 | 316.90 | 2,324.97 |
In petitioner's corporate charter, it was provided:
The purpose for which this corporation is formed is to erect or repair any building or improvement, and to accumulate and lend money for said purposes, and to purchase, sell and subdivide real property in towns, cities and villages and their suburbs, not extending more than two miles beyond their*211 limits and to accumulate and lend money for that purpose.
The italicized portion of petitioner's corporate charter was extracted from the Texas Code, Vernon's Texas Statutes 1948, Article 1302, paragraph 47, by the incorporators of petitioner.
Petitioner completed its income tax returns, Form 1120, for each of the taxable years in the following manner:
| Business group serial number | ||
| Year | Kind of business | (from Instruction N) |
| 1945 | REAL ESTATE | 182 |
| 1946 | REAL ESTATE RENTAL | 182 |
During each of the taxable years Instruction N provided serial numbers relating to corporations engaged in real estate business as follows:
REAL ESTATE
182. Owner-operators of improved property and lessors of buildings.
183. Owners for improvement.
184. Trading for own account.
185. Agents, brokers, managers, etc.
186. Title abstract companies.
187. Lessee operators of improved property.
The petitioner, during 1945 and 1946, was engaged in the business of owning and leasing real estate. During the taxable years petitioner was not engaged in the business of selling real estate: (1) in the ordinary course of trade or business, (2) as a trader or dealer, (3) as a broker or agent or, (4) as developer*212 or subdivider of realty.
The unimproved real estate of petitioner was held as a capital asset during the taxable years, and the profit arising out of sales thereof is *1009 gain from disposition of capital assets, to which section 117 of the Internal Revenue Code is applicable.
OPINION.
The question in this proceeding is whether the gain from the sales of unimproved real estate by the petitioner, a corporation, is taxable as ordinary income or as capital gain. The respondent has determined that such real estate was held by petitioner during 1945 and 1946 for sale to customers in its ordinary course of trade or business within the meaning of sections 117 (a) (1) and 117 (j) (1) of the Internal Revenue Code and that, consequently, the gain from the sales is taxable as ordinary income. The petitioner contends that the unimproved real estate was not held primarily for sale to customers in the ordinary course of business and that the gains, therefore, are taxable as capital gains.
The issue which we have in the instant case has arisen in one form or another in many cases. Inasmuch as each case is to be decided upon its own facts no useful purpose would be served by discussing the*213 various fact situations presented by the cases. See particularly Boomhower v. United States (1947), 74 F. Supp. 997">74 F. Supp. 997. See also Dunlap v. Oldham Lumber Co. (C. A. 5), 178 F. 2d 781; White v. Commissioner (C. A. 5), 172 F. 2d 629; Thomas E. Wood, 16 T. C. 213; W. T. Thrift, Sr., 15 T.C. 366">15 T. C. 366; Nelson A. Farry, 13 T. C. 8; and Frieda E. J. Farley, 7 T.C. 198">7 T. C. 198.
One fact upon which respondent comments in his brief, is presented by the general purpose clause of petitioner's charter of incorporation which empowers petitioner to subdivide real estate. Respondent contends that due to this clause the sales of real estate made by petitioner become, or should be considered as, sales to its customers in the ordinary course of trade or business. We do not believe that mere possession of a power to subdivide real estate is controlling in determining whether petitioner was actually engaged in the trade or business of selling real estate to its customers.
The issue here must*214 be decided by considering the actions of the petitioner, and whether the acts of selling unimproved real estate support a finding that petitioner intended to hold the property in question for sale to its customers in the ordinary course of its trade or business. We think that the facts show that it did not so intend.
Petitioner maintained no price list, employed no salesman to conduct its sales, and had no established office procedure but instead each purchaser's offer was considered by petitioner's board of directors. Only a few sales of unimproved real estate were made by petitioner during the taxable years. Such facts strongly indicate that the real estate was not held by petitioner for sale to its customers in the ordinary *1010 course of its trade or business. We have weighed all the facts relative to the holding of unimproved real estate by petitioner, and the sales thereof, and we are convinced that the petitioner did not hold the property in question for sale to customers in the ordinary course of its trade or business. The basis for our conclusion is fully stated in our findings of fact.
In its tax returns for the years 1945 and 1946, petitioner deducted its selling*215 expense as an ordinary and necessary business expense, section 23 (a) (1) (A) of the Code. Since we have determined that petitioner was not engaged in the business of selling real estate, the selling expenses may be deducted only from the selling price of the real estate in the computation of petitioner's capital gain, section 111 of the Code. Accordingly, petitioner's tax liability must be recomputed for the years 1945 and 1946.
Decision will be entered under Rule 50.