*249 Decision will be entered under Rule 50.
1. Petitioner, a corporation, was simultaneously engaged in the businesses of building houses for sale and building and holding houses for rent. At the end of 1945 or beginning of 1946, petitioner decided to liquidate its investment in rental houses and invest in the construction and rental of large regional shopping centers. Petitioner considered having an independent broker handle the sale of its rental housing but decided that its own organization could effect a saving on the selling expenses. Petitioner, in effect, transferred the sale of its rental houses to that part of its business which was engaged in the construction of houses for sale. It paid its salesmen in that department over $ 55,000 in commissions for the sale of its rental housing. It conducted an extensive advertising campaign and, during the 4 taxable years here in issue, it sold 974 of its previously rented units. The average holding period of these units was over 3 years. Held, the manner in which the rental units were sold was such that they must be considered as having been held and sold by petitioner in the ordinary course of its business of holding houses*250 for sale. Gains derived from their sale are to be treated as ordinary income rather than as capital gains.
2. Petitioner acquired a large plot of undeveloped land in 1946 for the construction of a shopping center which it intended to rent to various tenants. It was unable to develop this project because of zoning restrictions and, during its taxable year ended February 28, 1947, it sold 2 parcels from this large plot. During its 3 subsequent taxable years, petitioner sold 18 parcels of undeveloped land at a total price of $ 417,490. The majority of these parcels had been acquired in connection with the building of housing projects for sale or were bargain purchases intended for eventual resale. The only income earned from these properties was a negligible amount received from billboard rentals. Held, with the exception of the 2 sales made during its taxable year ended February 28, 1947, the parcels in issue were held for resale whenever a satisfactory profit could be obtained. Because of the frequency and substantiality of its sales during the following 3 years, petitioner must be considered as a dealer in undeveloped land during such years, and the gains derived from the*251 sales of such land are properly taxable as ordinary income.
*741 These consolidated proceedings involve deficiencies in income tax determined against the Curtis Company (hereinafter referred to as petitioner) as follows:
| Additional | ||||
| Taxable year | Deficiency | deficiency | Total | |
| ended | determined | affirmatively | deficiency | |
| raised | ||||
| Docket No. 35751 | Feb. 28, 1947 | $ 374,342.95 | $ 4,627.31 | $ 378,970.26 |
| Feb. 29, 1948 | 1,329.09 | 9,953.95 | 11,283.04 | |
| Feb. 28, 1949 | 84,771.10 | 1,331.75 | 86,102.85 | |
| Docket No. 38528 | Feb. 28, 1950 | 50,223.95 | 20,571.15 | 70,795.10 |
The issues to be decided are: (1) Whether the*252 gains realized by petitioner on the sale of dwelling houses and apartments constructed for rental purposes are taxable as ordinary income or capital gains; and (2) whether, as alleged by respondent in his amended answer, the gains realized from the sale of various parcels of undeveloped real estate are taxable as ordinary income rather than as capital gains.
Petitioner has conceded that the gains from certain other sales of undeveloped real estate, originally placed in issue by the pleadings, are properly taxable as ordinary income.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner was incorporated under the laws of the State of Pennsylvania on November 8, 1939, as Curtis Construction Company. On December 14, 1942, its name was changed to Curtis Engineering Company, and on March 26, 1949, the name was changed to Curtis Company. Its returns for the years here involved were filed with the collector of internal revenue for the first district of Pennsylvania. Petitioner's taxable year ends February 28, and it maintains its books and files its returns on the basis of an accrual method of accounting.
*253 Myers L. Girsh is the sole stockholder of petitioner and has been its president since its organization.
During the taxable years here in issue, namely, those ended February 28, 1947 to 1950, inclusive, petitioner was engaged in the businesses *742 of (1) building new houses for sale; (2) renting and managing rental properties, including commercial properties, homes and apartments; and (3) manufacturing micrometers and precision tools. This last activity was conducted as a separate enterprise in Providence, Rhode Island. Petitioner also acquired and held various parcels of undeveloped real estate for sale whenever an advantageous price could be obtained.
Sales of Rental Units.
Petitioner built and sold new houses each year from the time it was organized with the exception of the taxable years ended February 28, 1944, 1945, and 1946. It was the largest builder of houses for sale in the Philadelphia area. During the taxable years here involved, petitioner sold new houses which it had built for sale and reported the proceeds as ordinary income, as follows:
| Number of | ||
| Taxable year ended | houses sold | Gross profit |
| Feb. 28, 1947 | 125 | $ 380,021.98 |
| Feb. 29, 1948 | 1,251 | 1,922,911.08 |
| Feb. 28, 1949 | 1,186 | 2,177,299.55 |
| Feb. 28, 1950 | 1,613 | 3,016,860.67 |
*254 Prior to 1942, petitioner desired to construct houses and apartments for rental purposes but was unable to obtain financing which it considered satisfactory. It applied to various banks and other lending institutions for permanent loans on the proposed rental projects, but none would grant a loan of more than 60 per cent of the value of the project and all required such loans to be amortized over a 10-year period. Petitioner requested the local director of the Federal Housing Administration to authorize the use of section 203 of Title II of the National Housing Act 1 for the purpose of financing the building of rental projects. This request was denied on the basis that Title II was designed to provide permanent financing for the home buyer and was not available to the builder of rental housing. Petitioner consequently deferred its construction of rental houses since the financing terms offered to it would have required that it invest its available funds in a much more limited construction program.
*255 On May 26, 1942, Title VI of the National Housing Act 2 was amended to increase the amount of a loan which could be obtained on rental housing. This amendment also extended the permissible amortization period to a maximum of 25 years. Petitioner thereupon embarked an extensive program of rental housing construction under the provisions of Title VI.
During the years 1942 to 1946, inclusive, there was a serious housing shortage in the Philadelphia area. In order to construct housing, it was necessary to obtain priorities for materials from the War Production *743 Board. Petitioner filed applications and received priorities to construct the following projects here involved:
| Name of project | Units built | |
| Walnut Hill #3 | 71 | houses |
| Drexel Park Gardens #4 | 1 102 | duplex apartments |
| Drexel Park Gardens #5 | 190 | houses |
| Drexel Park Gardens #3 | 134 | houses |
| Lansdowne Park Gardens #1, #2, and #3 | 644 | houses |
| 1,141 |
*256 The applications for priorities covering Walnut Hill Park #3, Drexel Park Gardens #3, and Drexel Park Gardens #5, as originally submitted and approved, provided that these units were to be built for sale. After satisfactory financing under Title VI became available, petitioner applied to the War Production Board, National Housing Agency, and the Federal Housing Administration for authority to build these three projects for rent instead of for sale. Such permission was granted. Petitioner thereupon returned to prospective purchasers all tentative deposits which it had received, and advised such prospective purchasers that the properties were not for sale but were for rent. Petitioner's action in changing these projects to rental projects, after priorities had been obtained to build them for sale, was entirely voluntary on its part. No Government agency required petitioner to make such changes, and its priorities for materials were the same at that time whether it was building for sale or for rent.
Petitioner filed applications with the Federal Housing Administration for mortgage insurance under Title VI of the National Housing Act on each of the properties here involved. In each*257 of the applications, petitioner stated that it intended to rent the property and that it was "not for sale."
Petitioner had received no rental income prior to the taxable year ended February 28, 1943. Petitioner established a rental department and the above-listed projects were rented to tenants. Weekly and monthly reports were prepared and submitted to petitioner's president on the status of the rental program, setting forth the number of applications on hand, the applications approved, and the number of leases signed. In order to facilitate the servicing of its tenants and the collection of rents, petitioner purchased a building near its rental projects and moved its office to that location. The rental department instituted a complete system of routines and procedures for the renting and maintenance of the rental projects. Prospective tenants were carefully selected. No properties were rented without a written lease for an initial term of at least 1 year. In default of a *744 notice to terminate at the end of the year or longer term of such lease, the lease continued on a month-to-month basis.
Petitioner used more durable types of materials and more permanent methods*258 of construction in the houses which it built for rent than in those built for sale. It thus sought to avoid extensive costs for maintenance and repairs. A complete maintenance organization was established, maintenance equipment purchased, and a separate building was erected for the storage of such equipment. This maintenance equipment included machinery and tools to take care of concrete, electrical, and carpentry repairs, painting equipment, plumbing equipment, tractors and snow plows to clean out the driveways, and other necessary equipment to maintain the properties. The construction department changed the locks in those houses which had been converted from sale to rental purposes so that a master key would provide access to all the houses and garages.
Petitioner's accounting department established separate books and records for the rental program. The rental projects were set up in the capital asset section of its balance sheet as real estate investments. Petitioner claimed and was allowed deductions on its income tax returns for the depreciation of such properties.
As of February 28, 1946, petitioner owned and was renting 1,098 rental units. These consisted of 858 houses*259 and 240 apartments. The cost of the 1,098 rental units was over 4 million dollars. In the opinion of the district director of the Federal Housing Administration for the Philadelphia area during the years here involved, petitioner was the largest builder of housing and apartments for rent in that area.
During the taxable years ended February 28, 1943, to February 28, 1950, petitioner derived the following gross rental income and net income after direct operating expenses (not taking into account any provisions for proration of general and administrative expenses) from the housing units here involved:
| Net operating | ||
| income (not | ||
| taking into | ||
| account indirect | ||
| Taxable year ended | Gross rentals | costs) |
| Feb. 28, 1943 | $ 53,981.60 | $ 607.78 |
| Feb. 29, 1944 | 454,875.28 | 136,537.84 |
| Feb. 28, 1945 | 671,487.71 | 205,983.68 |
| Feb. 28, 1946 | 718,330.30 | 182,985.20 |
| Feb. 28, 1947 | 283,741.92 | 60,998.67 |
| Feb. 29, 1948 | 186,740.44 | 33,518.44 |
| Feb. 28, 1949 | 150,421.52 | 33,107.31 |
| Feb. 28, 1950 | 19,222.00 | 2,061.99 |
Petitioner had many requests from tenants, their friends, and real estate brokers who wished to purchase the rental houses here in issue. All such requests were denied*260 prior to petitioner's decision, at the end *745 of 1945 or beginning of 1946, to sell these properties. Many tenants requested that an option to purchase be inserted in their leases but no such options were granted.
In 1944, petitioner prepaid mortgages totaling $ 620,000 on 126 units of its rental housing, thus reducing its interest costs. This prepayment was from its own funds and did not involve a refinancing.
Property constructed for rental purposes pursuant to priorities granted prior to February 10, 1943, could have been sold by the builder, subject however to a maximum sales price which was set by the National Housing Agency at the time the priorities were granted.
On October 15, 1945, all restrictions on the occupancy or disposition of priority-constructed housing were removed by National Housing Agency Regulation 60-17. 3 However, this regulation expressly provided that it did not affect any rents or tenant charges controlled by the Office of Price Administration. Accordingly, although the rents remained frozen and controlled, all limitations on sales price were removed.
*261 In January 1946, petitioner commenced advertising some of its rental housing for sale. Petitioner had decided to discontinue the rental housing phase of its business. It intended to construct, for rental purposes, large regional shopping centers. Substantial amounts of capital would be required for this undertaking. Petitioner decided to obtain such capital by liquidating its investment in rental houses since it felt that the market value of these rental houses had appreciated to a point where it was questionable whether it would increase any further.
At that time, petitioner's intention was to continue holding its apartments as an investment. Thus, petitioner refinanced its Drexel Park apartments in January or February of 1946, although the mortgages thereon still had 21 years to run, because it was able to obtain a lower interest rate. There was a substantial amount of immediate expense involved in this refinancing, including a 1 per cent prepayment charge under the F. H. A. mortgages. However, petitioner felt that this immediate expense would be justified by the savings in interest over the 15-year period of the new mortgage.
Petitioner notified the tenants in its houses*262 that the properties involved were for sale and gave them preference on the purchase of such properties. During the fiscal year ended February 28, 1947, 102 of the houses were sold to petitioner's tenants.
Petitioner considered having real estate brokers handle the sale of the houses. However, it felt that the demand was so great that it could easily handle the liquidation of these rental properties with its own staff and thus reduce the selling expenses. Petitioner's salesmen *746 were paid a lower fee on the sale of these previously rented houses than that which they received on the sale of new houses constructed by petitioner. During the taxable years involved, petitioner paid the following total amounts to its salesmen as commissions for the sale of previously rented houses:
| Feb. 28, 1947 | $ 41,561.50 |
| Feb. 29, 1948 | 113.00 |
| Feb. 28, 1949 | 7,260.00 |
| Feb. 28, 1950 | 6,475.00 |
Petitioner advertised the sale of its rental houses in two Philadelphia newspapers. A total of 361 classified advertisements were run in 1946.
The rental housing units were sold subject to the right of the existing tenants under their leases. When a house was sold, petitioner would assign the *263 lease of the existing tenant to the purchaser. The duration of such leases varied from the 1- or 2-year term of a new tenant to the month-to-month basis on which old tenants occupied their houses. Petitioner made no repairs on the rental units in order to ready them for sale and required the purchaser to execute a release wherein it was stated: "The premises are conveyed and are hereby accepted by the purchaser as is. Any and all repairs that may be necessary in or about said premises, for any reason whatsoever, are the sole responsibility of the purchaser."
No "For Sale" signs were placed on any of the rental properties. The purchaser of such rental properties had no right to make an inspection of the property unless he happened to be the tenant or was able to gain access to the property.
In the early part of 1948, petitioner purchased a 50-acre tract of land on which it intended to build a large shopping center. The estimated cost of the project was between 4 and 5 million dollars, and petitioner needed all of the funds it could obtain. Accordingly, it decided to sell its rental apartments during the taxable year ended February 28, 1949. Prior to that time petitioner had intended*264 to continue to hold them for rental income. Petitioner had never built any apartments for sale in its construction business.
Each apartment was actually one-half of a two-family house. Petitioner found that they were not as readily salable as the previously rented houses, since a purchaser would have to become a landlord as well as a homeowner. Petitioner advertised these apartments for sale in two Philadelphia newspapers, inserting 43 display advertisements and 63 classified advertisements during the period May-December of 1948. In the first 6 months of 1949, petitioner inserted 29 display advertisements and 61 classified advertisements regarding the sale of its apartments. Certain of these advertisements promoted the sale of both the apartments and new houses being constructed by petitioner.
*747 Petitioner held and rented the units here involved from a minimum period of 19 months to a maximum period of 6 years 10 months. The average holding period was over 3 years. Petitioner sold the previously rented units as follows:
| Taxable year ended | ||||||
| Tota | On hand 1 | |||||
| units | Mar. 1, | |||||
| built | Feb. 28, | Feb. 29, | Feb. 28, | Feb. 28, | 1950 | |
| 1947 | 1948 | 1949 | 1950 | |||
| Drexel Park Gardens #1 | 91 | 2 | ||||
| Drexel Park Gardens #2 | 95 | 20 | 1 | |||
| Drexel Park Gardens #3 | 134 | 98 | 9 | 10 | ||
| Drexel Park Gardens #4 | 102 | 67 | 35 | |||
| Drexel Park Gardens #5 | 190 | 147 | 1 | |||
| Walnut Hill Park #2 | 63 | 4 | ||||
| Walnut Hill Park #3 | 71 | 51 | ||||
| Lansdowne Park Gardens #1 | 158 | 126 | 1 | |||
| Lansdowne Park Gardens #2 | ||||||
| and #3 | 486 | 403 | 2 | 1 | ||
| Total | 1,390 | 851 | 2 | 2 76 | 2 45 | 4 |
Of the 851 units sold in the taxable year ended February 28, 1947, 773 units were sold during the first 4 months of that year.
The sales price received by petitioner for the previously rented houses and apartments ranged from $ 5,690 to $ 9,950 during the taxable years ended February 28, 1947, and February 29, 1948; and between $ 10,250 and $ 16,200 during the taxable years ended February 28, 1949, and February 28, 1950.
For the taxable years involved, the gross sales price, adjusted cost, and gross profit derived from the sale of the previously rented units involved were as follows:
| Taxable year | Sales price | Original | Adjusted | Gross profit |
| ended | cost | cost | ||
| Feb. 28, 1947 | $ 5,832,370.00 | $ 3,327,951.12 | $ 3,002,627.19 | $ 2,829,742.81 |
| Feb. 29, 1948 | 15,180.00 | 7,260.99 | 6,619.92 | 8,560.08 |
| Feb. 28, 1949 | 1,054,950.00 | 489,216.88 | 416,906.02 | 638,043.98 |
| Feb. 28, 1950 | 634,955.52 | 305,532.14 | 257,329.21 | 377,626.31 |
| Totals | $ 7,537,455.52 | $ 4,039,961.13 | $ 3,683,482.34 | $ 3,853,973.18 |
*266 Petitioner reported the gain from the sale of the rental units here in issue as capital gains from the sale of property used in trade or business. Respondent determined that petitioner's gains from the sale of its rental properties were taxable as ordinary income rather than as capital gains.
Sales of Undeveloped Land.
During the taxable years here involved, petitioner sold the following parcels of undeveloped land, the gain from which is here in issue: *748
| Location | Date acquired | Cost | Selling price | Gain |
| Taxable year ended | ||||
| Feb. 28, 1947 | ||||
| West Chester Pike | Jan. 2, 1946 | $ 78,929.32 | $ 113,875.00 | $ 34,945.68 |
| Taxable year ended | ||||
| Feb. 29, 1948 | ||||
| Baltimore Pike | Apr. 3, 1946 | 18,670.40 | 57,000.00 | 38,329.60 |
| Colonial Park | Oct. 15, 1945 | 42,498.01 | 68,500.00 | 26,001.99 |
| Sherwood Road | Mar. 5, 1946 | 20,733.50 | 30,000.00 | 9,266.50 |
| 21st Street and Edgemont | ||||
| Avenue | May 17, 1946 | 3,013.45 | 4,250.00 | 1,236.55 |
| Taxable year ended | ||||
| Feb. 28, 1949 | ||||
| Oakmont Estates | Jan. 3, 1946 | 5,201.68 | 8,950.00 | 3,748.32 |
| Madison and Springfield | ||||
| Road | Apr. 27, 1946 | 506.85 | 6,000.00 | 5,493.15 |
| Taxable year ended | ||||
| Feb. 28, 1950 | ||||
| Lubin Ground #4 | Oct. 17, 1947 | 1,248.40 | 4,600.00 | 3,351.60 |
| Lubin Ground #1 | Oct. 17, 1947 | 4,954.00 | 46,500.00 | 41,546.00 |
| Lubin Ground #3 | Oct. 17, 1947 | 14,265.48 | 65,000.00 | 50,734.52 |
| Malvern Avenue | Feb. 13, 1945 | 508.00 | 5,000.00 | 4,492.00 |
| West Chester Pike | Jan. 2, 1946 | 13,105.95 | 50,000.00 | 36,894.05 |
| Paddock Farms | Jan. 7, 1946 | 30,240.81 | 50,000.00 | 19,759.19 |
*267 During these years, petitioner also sold the following parcels of undeveloped land, the gain from which it reported as capital gain, but which it now concedes to be taxable as ordinary income:
| Location | Date | Cost | Selling | Gain |
| acquired | price | |||
| Taxable year ended | ||||
| Feb. 29, 1948 | ||||
| 5 lots Upland Township | May 17, 1946 | $ 3,003.90 | $ 4,000.00 | $ 996.10 |
| Lot adjoining 437 West | ||||
| 21st Street | May 17, 1946 | 751.10 | 800.00 | 48.90 |
| Taxable year ended | ||||
| Feb. 28, 1949 | ||||
| Lot adjoining 145 West | ||||
| 21st Street | May 17, 1946 | 751.10 | 840.00 | 88.90 |
| 911 Upland Avenue | June 30, 1947 | 13,823.93 | 14,350.00 | 526.07 |
| Berkley Avenue lots | Apr. 3, 1946 | 401.10 | 700.00 | 298.90 |
| Taxable year ended | ||||
| Feb. 28, 1950 | ||||
| Lot #49 Anna Street | July 15, 1948 | 545.48 | 1,000.00 | 454.52 |
The above-listed tract at West Chester Pike, purchased by petitioner on January 2, 1946, was acquired for the purpose of building a large regional shopping center thereon. Financing of the shopping center was arranged, but the project had to be abandoned when zoning of the complete tract for commercial purposes was denied. Only the frontage was zoned for commercial usage and this was not adequate to build a shopping center of*268 the regional type which petitioner contemplated. Petitioner sold the commercial frontage, during the taxable year ended February 28, 1947, to two buyers at a total gain of $ 34,945.68. The remainder of the tract was retained until the taxable year ended February 28, 1950, when it was sold at a gain of $ 36,894.05. Petitioner had anticipated that the building program of the first two purchasers would result in the appreciation of the remaining part of the tract.
*749 In the course of acquiring large tracts of land on which it built new homes for sale, petitioner acquired and set aside various parts of such tracts as unsuitable for use in home construction. In some instances, these parcels were set aside because they were adjacent to main traffic arteries and of high commercial value, although unsuitable for homes. Other parcels were placed in this group because they were in a poor physical location or did not have sufficient depth. Title to all parcels set aside in this manner was transferred to a subsidiary corporation of petitioner. Petitioner was aware that the undeveloped leftover land from each project would greatly appreciate in value as a result of its construction*269 of new houses on the remainder of such tracts and, in some cases, that other building in the area would further enhance such appreciation. Eight of these parcels which had been set aside were sold by petitioner during the years here in issue. They are denominated in the foregoing list of sales, Baltimore Pike, Sherwood Road, 21st Street and Edgemont Avenue, Madison and Springfield Road, Lubin Ground #4, Lubin Ground #1, Lubin Ground #3, and Malvern Avenue. A total gain of $ 154,449.92 was realized on the sale of these eight parcels.
Petitioner also purchased certain partially improved parcels of property listed above as Colonial Park, Oakmont Estates, and Paddock Farms. Petitioner considered the purchase price of these properties as low and anticipated reselling them sometime in the future at a profit. These three properties were resold by petitioner during the years here in issue at a total gain of $ 49,509.50.
Petitioner did not place "For Sale" signs on any of the land here involved and did not list any of the parcels for sale with real estate brokers. None of the land was subdivided by petitioner nor were improvements made thereon prior to sale.
None of these parcels of *270 undeveloped land were acquired for the purpose of producing rental income; and, except for a very negligible amount received from billboard rentals, no income was derived therefrom. Except for the West Chester Pike parcel, each of the parcels of unimproved land here in issue was acquired with the anticipation that it would appreciate in value and could be resold at a profit.
Petitioner maintained a separate account to record its undeveloped land, together with subsidiary accounts reflecting each transaction. The following table sets forth the number of parcels and the total cost of the undeveloped land held by petitioner at the end of each of the taxable years, February 28, 1946, through February 28, 1950:
| Number of | ||
| Taxable year ended | parcels | Cost |
| Feb. 28, 1946 | 7 | $ 185,388.50 |
| Feb. 28, 1947 | 11 | 155,301.13 |
| Feb. 29, 1948 | 9 | 96,707.48 |
| Feb. 28, 1949 | 10 | 181,946.57 |
| Feb. 28, 1950 | 9 | 386,742.49 |
*750 The rental housing sold by petitioner during the taxable years here in issue was held by it primarily for sale to customers in the ordinary course of its business during such years.
The various parcels of undeveloped land here in issue, except for that part of the*271 West Chester Pike tract sold in the fiscal year ended February 28, 1947, were held by petitioner primarily for sale to customers in the ordinary course of its business.
OPINION.
The deficiencies herein result from respondent's determination that the gains realized by petitioner on sales of its previously rented housing and various parcels of undeveloped real estate are taxable as ordinary income rather than as capital gains. To overcome respondent's determination that it is not entitled to capital gains treatment of the income derived from the sales of its rental housing, petitioner must prove that these rental units were not held by it "primarily for sale to customers in the ordinary course of his trade or business * * *," within the meaning of section 117 (j) of the Internal Revenue Code of 1939. 4Greene v. Commissioner, 141 F. 2d 645 (C. A. 5, 1944), certiorari denied 323 U.S. 717">323 U.S. 717 (1944). Insofar as the various parcels of undeveloped real estate are concerned, the burden of proof is on respondent since this issue was affirmatively raised by him in an amended answer.
*272 Numerous cases involving the application of the above-quoted portion of section 117 (j) have been decided; and, although helpful, none are decisive since, in each instance, the ultimate issue is essentially a factual one and thus dependent upon the precise facts of the instant case. Rubino v. Commissioner, 186 F. 2d 304 (C. A. 9, 1951), certiorari denied 342 U.S. 814">342 U.S. 814 (1951). These cases have adopted many criteria which are of aid in determining the intent of the taxpayer with regard to the houses in question. However, no single test is decisive, Victory Housing No. 2 v. Commissioner, 205 F. 2d 371 (C. A. 10, 1953); King v. Commissioner, 189 F. 2d 122 (C. A. 5, 1951), certiorari denied 342 U.S. 829">342 U.S. 829 (1951), and the relative significance to be *751 accorded each of such criteria varies with the specific factual situation presented.
Turning first to petitioner's sales of its previously rented housing units, we think it clear that such units were constructed as an investment in the rental field and continued to be held for*273 that purpose until the decision to sell them was made. Admittedly petitioner's prior activity was almost exclusively in the field of building houses for immediate sale. However, it had demonstrated its intention to enter the rental housing field if it could obtain more liberal financing arrangements than those which were currently available to it. Upon the enactment of Title VI of the National Housing Act, petitioner commenced the construction of rental housing units under the liberal financing provisions of that title. Petitioner constructed the rental houses here in question during the years 1942 through 1944, becoming the largest builder of rental housing in the Philadelphia area during that period. On February 28, 1946, petitioner owned 1,098 rental units built at a cost of over 4 million dollars.
Petitioner's course of conduct prior to its decision to sell its rental properties indicates that it was, at that time, holding these properties for investment purposes. Thus, petitioner had voluntarily requested that certain priorities, which it already possessed for the construction of houses for sale, be changed to priorities for rental housing. Further, all offers of tenants*274 and brokers to purchase various houses were refused. In 1944, mortgages totaling $ 620,000 were prepaid on 126 of the houses and, in January or February of 1946, petitioner refinanced one of the apartment projects. Although the refinancing resulted in an immediate additional expense, it would have resulted in the lowering of interest costs in the future. We are, therefore, convinced that petitioner was simultaneously engaged in the businesses of building houses for sale and building and holding houses for rent. Cf. Walter R. Crabtree, 20 T. C. 841 (1953); Nelson A. Farry, 13 T. C. 8 (1949).
On October 15, 1945, all restrictions on the sale of priority constructed housing were removed, although the rentals charged for such housing continued under control. Petitioner decided to liquidate its investment in its rental houses and invest in the construction and rental of regional shopping centers. Underlying this decision was the feeling that the rental houses had appreciated as much as they ever would and that this was an opportune time to sell them. Petitioner intended to maintain its investment in its rental apartments*275 at this time. Thus it refinanced the mortgages on one of its apartment projects in 1946 although this involved an additional charge for the prepayment of the existing mortgages. However, in 1948, petitioner decided to sell the apartments as well.
*752 We do not believe that, up until the decisions to sell its rental houses and apartments, petitioner had done anything which would disqualify these rental units for capital gains treatment under section 117 (j) upon their sale. The rental units were held for a minimum period of 19 months and a maximum period of 6 years 10 months, prior to their disposition. The average holding period was over 3 years and, until the decisions to sell, petitioner's conduct with regard to these units was entirely consistent with that of a real estate investor.
It has frequently been stated that, in determining whether the gain derived from the sale of real property is entitled to capital gains treatment under section 117 (j), the test which deserves greatest weight is the purpose for which the property was held during the period in question. Walter R. Crabtree, supra. This holding period does not terminate upon the*276 decision to sell but extends until the project is actually sold. Naturally, once a decision has been made to sell investment property, such property is thereafter held for sale. However, this does not preclude the application of section 117 (j) since the critical issue is whether it is held for sale by the seller "in the ordinary course of his trade or business." To obtain capital gains treatment under section 117 (j), a taxpayer may choose the most advantageous method of liquidating his investment in properties originally acquired and held for investment purposes, so long as such method of disposal does not constitute his entrance into the trade or business of selling such properties. It may be more expeditious to enter such business in order to dispose of investment properties; but once this is done, the benefits of section 117 (j) are lost.
In the recent case of Louis Greenspon, 23 T. C. 138, we stated:
Although property is sold to liquidate an investment, the manner in which it is sold or disposed of can constitute a trade or business. R. J. Richards, 30 B. T. A. 1131, affd. (C. A. 9) 81 F. 2d 369;*277 Florence H. Ehrman, 41 B. T. A. 652, affd. (C. A. 9) 120 F.2d 607">120 F. 2d 607, certiorari denied 314 U.S. 668">314 U.S. 668. The foregoing cases indicate that, if a liquidating operation is conducted with the usual attributes of a business and is accompanied by frequent sales and a continuity of transactions, then the operation is a business and the proceeds of the sale are taxable as ordinary income. Or, as we have said, "It is undoubtedly true that where liquidation of an asset is accompanied by extensive development and sales activity, the mere fact of liquidation will not be considered as precluding the existence of a trade or business. Where, however, the active elements of development and sales activities are absent, the fact of liquidation is not, in our opinion, to be disregarded." Frieda E. J. Farley, 7 T.C. 198">7 T. C. 198, 204.
In the instant case, petitioner went beyond the steps permitted of an investor who merely wishes to liquidate his rental properties and thereby achieve capital gains treatment. The manner in which petitioner sold its rental properties put it into the business of holding*278 them *753 for sale to customers in the ordinary course of its business. As pointed out in Home Co. v. Commissioner, 212 F. 2d 637, 641 (C. A. 10, 1954):
One may, of course, liquidate a capital asset. To do so it is necessary to sell. The sale may be conducted in the most advantageous manner to the seller and he will not lose the benefits of the capital gain provision of the statute, unless he enters the real estate business and carries on the sale in the manner in which such a business is ordinarily conducted. In that event, the liquidation constitutes a business and a sale in the ordinary course of such a business and the preferred tax status is lost.
Petitioner's president testified that he considered having independent real estate brokers handle the sale of the rental housing, but decided that petitioner could effect a saving by doing the job itself. Accordingly, petitioner engaged in an aggressive sales effort and, in effect, transferred the rental housing to that part of its business which had previously been exclusively devoted to the sale of new houses. Salesmen regularly employed by petitioner in the sale of its new houses were*279 used to sell the previously rented units. Commissions totaling $ 55,409.50 were paid to these salesmen for the sale of the units here involved. An extensive advertising campaign was entered into and, at times, the sale of the previously rented units was promoted in the same advertisement with new houses being offered for sale by petitioner. Measured by such criteria as the frequency and continuity of sales, Mauldin v. Commissioner, 195 F. 2d 714 (C. A. 10, 1952), the substantiality of sales, Rollingwood Corp. v. Commissioner, 190 F. 2d 263 (C. A. 9, 1951), advertising and sales promotion, King v. Commissioner, supra; cf. Delsing v. United States, 186 F. 2d 59 (C. A. 5, 1951), it is readily apparent that the rental houses were held for sale and sold by petitioner in the ordinary course of its trade or business.
Petitioner refers us to Victory Housing No. 2, supra, and the court's statement therein that a considerable number of sales in a relatively short period of time does not, of itself, put one in the business*280 of selling real property. The result in that case is readily distinguishable since it was held that the taxpayer therein "did none of the things which we ordinarily associate and find with one actively engaged in the real estate business." In Walter R. Crabtree, supra, we held that the taxpayer, who was simultaneously engaged in the businesses of holding houses for rent and building houses for sale, was entitled to capital gains treatment on the sale of the rental houses in his investment portfolio because such sales were unsolicited and consummated without any selling effort or advertising. In the instant case, we do not rely on merely the large number of sales involved but are compelled to conclude from all the various actions of petitioner that such sales were conducted in the ordinary course of its business of selling real property.
*754 Petitioner stresses the facts that the houses and apartments were sold "as is" and that no effort was made to renovate them for sale; also, that the purchasers took possession subject to the rights of the existing tenants under their leases. However, these are merely variations in the terms and conditions*281 of sale from those applicable to the sale of its new houses. Any concern engaged in the sale of real estate could impose such conditions during the postwar market favorable to real estate sellers. They do not serve to alter petitioner's position as one who was engaged in the business of selling previously rented housing.
The second and last issue here involved is whether the gains derived from the sale of various parcels of undeveloped real estate shall be treated as capital gains. Respondent contends that these parcels were, in effect, petitioner's stock in trade, held primarily for sale to customers in the ordinary course of its trade or business. He maintains, therefore, that they are neither capital assets under section 117 (a)5 nor is the gain derived from their sale taxable as capital gain under the provisions of section 117 (j). The burden of proving these contentions is on respondent since this issue was affirmatively raised by him in an amended answer.
*282 Petitioner argues that these parcels were, in each instance, acquired and held for capital appreciation; that the sales of these properties were completely unsolicited; and that gains from these sales should therefore be taxable as capital gains under section 117 (a). Petitioner points to the lack of any evidence of sales promotional activities such as listing of the parcels with real estate brokers, the posting of "For Sale" signs, and the insertion of advertisements. We must decide whether, despite the absence of the customary indicia of a selling effort, petitioner was nevertheless engaged in the business of buying and selling undeveloped real estate.
These various parcels of undeveloped land fall into three categories, namely, (1) land acquired for the construction of a shopping center; (2) land acquired in connection with the building of projects for sale; and (3) land acquired at a bargain price for eventual resale. As to the two sales made during the taxable year ended February 28, 1947, *755 from land acquired in the first category, we think that they are entitled to capital gains treatment. The property involved in these two sales had been acquired for investment*283 purposes. It was to be used in the development of a shopping center which would be held for rental. When the construction of this shopping center was blocked because of zoning restrictions on the property, petitioner promptly disposed of the major portion of the property through these two sales. Respondent has not introduced any evidence to substantiate his contention that, during this year, petitioner was engaged in the business of holding undeveloped land primarily for sale to customers in the ordinary course of its business. The record does not disclose that any other sales of undeveloped property were made by petitioner during this year, or that it engaged in promotional activities incident to these sales. Respondent is, therefore, in error in his determination that these two isolated sales, during the taxable year ended February 28, 1947, of property acquired for investment purposes are not entitled to capital gains treatment. Cf. Carter-Colton Cigar Co., 9 T. C. 219 (1947).
However, we think that respondent's determination must be sustained with respect to the remaining sales of undeveloped land here in issue. These sales were made during*284 the petitioner's 3 subsequent taxable years and were substantial both in amount and frequency. Including the parcels which petitioner concedes to have resulted in ordinary income, there were six sales in the taxable year ended February 29, 1948, five sales the following taxable year, and seven sales during the last year in issue. The total sales prices of such properties were $ 164,550, $ 30,840, and $ 222,100, respectively.
Petitioner's president testified that both the property in category two (that acquired in connection with the building of projects for sale) and the property acquired in the third category (property acquired as a bargain purchase) were acquired and held for purposes of appreciation. These properties returned a negligible amount of income from billboard rentals, and there was no intention to use them in the development of future projects. Petitioner's president testified that no efforts were made to sell any of these properties during the years in issue and that each of these sales was unsolicited. Petitioner argues that these properties were capital assets held solely for capital appreciation and sale during future years. It attempts to explain the sales*285 during the years in issue as unexpected, too profitable to refuse, and made for reasons of friendship, goodwill, or by condemnation. However, the essential fact seems to be that these properties were acquired for the purpose of resale whenever a satisfactory profit could be made. Petitioner may not have aggressively promoted the sale of these properties; but, nevertheless, the frequency and volume of its sales of undeveloped real estate and its substantial holdings of such *756 properties convince us that these properties were held, not only for sale at some time in the future, but primarily for sale to its customers in the ordinary course of its business during each of the years here in issue. Petitioner was a dealer in undeveloped land, and gains derived from the sale of such property are taxable as ordinary income.
Since we have found that petitioner was a dealer in undeveloped land during the years ended February 29, 1948, through February 28, 1950, it is obvious that the remainder of the West Chester Pike property, originally acquired for the development of a shopping center, was during these latter years held for sale and eventually sold to its customers during the ordinary*286 course of its business.
Decision will be entered under Rule 50.
Footnotes
1. 48 Stat. 1246.↩
2. 56 Stat. 301.↩
1. The record indicates that either 18 or 36 additional apartments may have been built in this project.↩
3. 10 Fed. Reg. 12762↩ (1945).
1. Balance of units listed as built were disposed of prior to taxable years here involved.↩
2. Included among the above units were 75 apartments sold in the year ended February 28, 1949, and 45 apartments sold in the year ended February 28, 1950↩
4. SEC. 117. CAPITAL GAINS AND LOSSES.
(j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. --
(1) Definition of property used in the trade or business. -- For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l)↩, held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taypayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Such term also includes timber with respect to which subsection (k) (1) or (2) is applicable. Such term also includes livestock, regardless of age, held by the taxpayer for draft, breeding, or dairy purposes, and held by him for 12 months or more from the date of acquisition.
5. SEC. 117. CAPITAL GAINS AND LOSSES.
(a) Definitions. -- As used in this chapter --
(1) Capital assets. -- The term "capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include 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, or property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), or an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, or real property used in the trade or business of the taxpayer;
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