*147 Decisions will be entered under Rule 50.
Petitioners, husband and wife, acquired in 1923 and 1925 real estate in New Orleans as community property. The property was acquired and used in connection with petitioners' nursery business. The property had been platted some years before purchase by petitioners. In 1937 the city of New Orleans built streets through the property at its own expense in accordance with the original plats. This was not desired or requested by petitioners, whose property was thus increased in value for residential purposes but decreased in value for use as a nursery. During the taxable year petitioners sold 25 1/2 lots to various purchasers, realizing a profit thereon of $ 14,816.37. Petitioners made no active efforts to sell, but accepted such satisfactory offers as were made. Petitioners did not advertise the property for sale, hired no agents, erected no signs, did not list the property, or construct any improvements to facilitate its sale for residential purposes. Held, the property was not held by petitioners primarily for sale to customers in the ordinary course of their trade or business within the meaning of section 117 (a) (1) of the Internal*148 Revenue Code; held, further, that the profit derived from the sales in question is taxable as long term capital gain and not as ordinary income.
*199 Respondent determined deficiencies in petitioners' income tax liabilities for the fiscal year ended July 31, 1941, of $ 845.56 in Docket No. 8961 and $ 845.56 in Docket No. 8962.
The question is whether the profit from the sale of certain real estate, owned by the petitioners as community property, is taxable as ordinary income or as capital gain. The two cases have been consolidated. The record consists of oral testimony and exhibits. Petitioners filed separate returns with the collector*149 for the district of Louisiana.
FINDINGS OF FACT.
Petitioners are husband and wife residing in the city of New Orleans, Louisiana. Since Elmer A. Farley, the husband, is the active head of the business and manages the community property here involved, he will be referred to hereinafter as the petitioner for the sake of convenience.
Since 1908 petitioner has been in the nursery, florist, and landscaping business, using for this purpose various tracts of land in and adjacent to a section of New Orleans known as Gentilly Terrace. Titles to the various tracts of land so used were acquired by petitioner at various times, as follows:
| Year acquired | Designation | Number of lots |
| 1909 | Square 3081 | 18. |
| 1923 | 1 | 20. |
| 1923 | 4 | 77. |
| 1925 | 2 | 18. |
| 1925 | 3 | 42. |
| 1927 | 3080 | Not disclosed. |
| 1943 or 1944 | 3037 | "" |
These tracts constitute together one irregularly shaped but contiguous area and were acquired for use in petitioner's nursery business. Squares 1 to 4, inclusive, are within and part of the Gentilly Terrace section and hereinafter will be referred to sometimes as the Gentilly Squares. The Gentilly Squares had been platted and each had been divided*150 into numbered lots by the city engineer of New Orleans in 1909. The platted squares were bordered by platted streets *200 which had been similarly designated by the city engineer. The Gentilly Squares, as platted, and their bordering streets had been officially delineated on a map which was of record in the city engineer's office in New Orleans. When the Gentilly Squares were acquired by petitioner and until 1937, however, these streets existed only on paper. Until 1937 these streets had no physical existence on the ground, but were merely in the nature of proposed development plans. The Gentilly Squares when acquired by petitioner constituted unimproved pastureland. It is not unusual in New Orleans for a suburban area to be platted although many years may intervene between the original platting and the physical execution of the plans.
Petitioner used the entire area described above in connection with his nursery business. Petitioner built permanent structures, such as hothouses and sheds, on squares 3080 and 3081. The Gentilly Squares were used for growing nursery stock. Due to restrictions on the use of the Gentilly Squares contained in the conveyances, no permanent*151 business structures or fences could be built on these squares. Petitioner's nursery business was on a large scale and he devoted his full time and attention to its management. His wife and four of his five children assisted him in the business.
In 1937 the city of New Orleans caused the platted streets to be built through Gentilly Squares. The construction of these streets was not requested or desired by petitioner, but was done at the behest of various individuals who were interested in real estate in the vicinity. New Orleans employed W. P. A. labor in the construction of these streets, which was not financed in any way by petitioner. Petitioner did furnish the materials required in constructing curbings and sidewalks at a cost to him of $ 1,773.01. The furnishing of curbing and sidewalk material to the city by owners whose property flanked public streets was customary in New Orleans.
The construction of streets through the Gentilly Squares increased the value of such land for residential purposes, but substantially decreased its usefulness for nursery purposes. Due to the restrictions on the use of the Gentilly Squares, petitioner could not construct fences to protect his*152 nursery stock on such land. The construction of the streets and the encroaching residential development in the area exposed petitioner's nursery stock to increasing dangers. In addition to the changing character of the area, petitioner was having difficulty in obtaining sufficient labor in 1940.
During the taxable year ended July 31, 1941, petitioner sold a total of 25 1/2 lots to private purchasers out of the Gentilly Squares. Petitioner realized a gain of $ 14,816.37 on these sales. Petitioner did not advertise these lots for sale in any way, nor did he hire a real estate agent or list the property with any agents. On one occasion petitioner permitted an agent to erect a "Sold by" sign on the property. *201 Except for furnishing sidewalk and curbing material, petitioner did not improve these lots in any way for purposes of sale.
The initial purchasers of these lots were friends of petitioner. They went to him, unsolicited, and requested him to sell lots to them. These initial purchasers persuaded and attracted their friends and relatives to make similar purchases on adjacent and nearby lots. In this fashion, word going from friend to friend, were the sales made. Houses*153 were built on all but four of these 25 1/2 lots by the purchasers or their successors.
At the time these lots were sold during the taxable year they were covered with nursery stock. Petitioner consequently required time to remove such stock before the purchasers could take possession. Due to labor shortages, petitioner gave such stock to local Army installations and state parkways, which in turn furnished the labor required to move it.
Under the customary real estate practice prevailing in New Orleans, petitioner was required to pay commissions to agents representing purchasers. Similarly petitioner was required to have prepared the necessary documents for accomplishing the formal transfer of title.
The 25 1/2 lots sold during the taxable year were the community property of petitioners, who filed separate returns. Each reported as income his or her community interest in the profit realized from the sales as long term capital gain. Respondent, in the explanation accompanying the notice of deficiency to Elmer, which is identical in this respect to the explanation given to Mrs. Farley, stated:
It is held that the lots which you sold during the fiscal year ended July 31, 1941, were*154 held primarily for sale to customers in the ordinary course of a trade or business, and that they were accordingly not capital assets as defined in section 117 (a) of the Internal Revenue Code. It follows that the profit from the sales constitutes ordinary gain to the marital community, and not long-term capital gain as contended by you.
The taxable gain from the sale of these lots is computed as follows:
| Sales price | $ 25,400.00 |
| Less: Commissions and selling expense | 408.06 |
| Net sales price | $ 24,991.94 |
| Cost of lots | 10,175.57 |
| Taxable gain | $ 14,816.37 |
| Amount reported on return | 6,827.35 |
| Additional taxable gain | $ 7,989.02 |
OPINION.
The question presented is whether the profit realized on the sales of the Gentilly lots is taxable as capital or ordinary gain. *202 Respondent argues that the property involved is excepted from the general definition of capital assets because "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business," within the meaning of section 117 (a) (1) of the Internal Revenue Code. 1 Petitioner argues that the property was not so held, because he was not engaged in the trade or business of selling real*155 estate.
Respondent contends primarily that the sales involved were so frequent and continuous as to constitute such activity a trade or business. It is unquestionably true that the frequency and continuity with which a particular activity is carried on is a primary consideration in determining whether such activity constitutes*156 a trade or business. It is significant to note, however, that the cases which have applied this test to real estate transactions involved elements of development and substantial sales activity which are essentially lacking in the instant case. See Richards v. Commissioner, 81 Fed. (2d) 369; Snell v. Commissioner, 97 Fed. (2d) 891; Welch v. Solomon, 99 Fed. (2d) 41; Ehrman v. Commissioner, 120 Fed. (2d) 607; Oliver v. Commissioner, 138 Fed. (2d) 910; Gruver v. Commissioner, 142 Fed. (2d) 363; Brown v. Commissioner, 143 Fed. (2d) 468; James Lewis Caldwell McFadden, 2 T. C. 395. In none of these cases did the taxpayer maintain the passive posture held by petitioner in the instant case.
Not only are there absent here the elements of development and sales activities which distinguish the instant case from those cited above, but there are also other circumstances which, in our opinion, explain the frequency and continuity*157 of sales here involved in terms other than those connotating business activity. In the first place, it should be borne in mind that the Gentilly Squares were subdivided and platted prior to the time petitioner acquired them. In the second place, the method of selling the property in lots, we think, was determined by the purchasers rather than by petitioner. Although taking no active steps to sell the property, petitioner was approached by individual purchasers seeking small residential lots. These unsolicited approaches were what lent the element of frequency and continuity to the sales. Petitioner might have eliminated the frequency and continuity of the sales by selling the entire tract in one piece. It is not improbable, however, that to interest an individual or group of individuals in a *203 purchase of such magnitude would have required more elements of business activity than did petitioner's acceptance of individual offers as they occurred from time to time. Under these circumstances, it appears to us that the frequent and continuous character of the sales resulted notwithstanding petitioner's passivity rather than from any business activity on his part. As already*158 suggested, petitioner could have eliminated the frequent and continuous character of sales by selling the property in one tract. However, such procedure would have undoubtedly involved many practical disadvantages. The property was covered with nursery stock. Had the property been sold in one tract, with reasonably prompt occupancy expected, petitioner would have been faced with the problem of removing large quantities of nursery stock to enable such occupancy. The large scale removal of such nursery stock would have posed petitioner the problem of obtaining labor, which was in short supply, and of finding a way to dispose of such stock. In view of the absence of the elements of development and sales activity and the impracticability of disposing of the property in one tract, we are not inclined to think that the frequency and continuity test as applied to these circumstances would constitute in and of itself a satisfactory criterion of business activity.
We are impressed on the other hand by what we consider the almost complete absence of any development or sales activity in the instant case. The only improvements on the property which had any relation to the desirability of*159 the property for residential purposes were the streets that were constructed and paid for by the city of New Orleans. Petitioner did not desire these improvements and was not instrumental in any way in obtaining their construction. Petitioner did contribute certain materials required to build sidewalks and curbing. However, the expense to petitioner was relatively insignificant in amount and such practice of furnishing such material was customary in the city of New Orleans. With this exception petitioner was not responsible directly or indirectly for any improvements on the property which might be considered as facilitating its sale for residential purposes. Nor did petitioner engage in any activities whatsoever to promote sales. He did no advertising, hired no agents, did not list the property, and erected no signs. Petitioner, in our opinion, merely accepted satisfactory offers from unsolicited purchasers. It would seem that petitioner could have maintained a more passive role only by refusing to sell at all.
We are further impressed by the fact that the sales in question appear to have been essentially in the nature of a gradual and passive liquidation of an asset. We *160 appreciate that the so-called liquidation test has been rejected in certain cases wherein the manner of conducting the alleged liquidation was such as to constitute a trade or business. See *204 Richards v. Commissioner, supra;Commissioner v. Boeing, 106 Fed. (2d) 305; Ehrman v. Commissioner, supra.It is undoubtedly true that where the 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. The liquidation factor has been given consideration and weight in such cases as United States v. Robinson, 129 Fed. (2d) 297; Fuld v. Commissioner, 139 Fed. (2d) 465; Harriss v. Commissioner, 143 Fed. (2d) 279.
In considering whether or not the circumstances of the instant case involve a trade or business, *161 we have borne in mind the dominant purpose of the capital gain provisions of the Internal Revenue Code. The purpose of these provisions has been stated by the Supreme Court in Burnet v. Harmel, 287 U.S. 103">287 U.S. 103, as follows:
Before the act of 1921, gains realized from the sale of property were taxed at the same rates as other income, with the result that capital gains, often accruing over long periods of time, were taxed in the year of realization at the high rates resulting from their inclusion in the higher surtax brackets. The provisions of the 1921 Revenue Act for taxing capital gains at a lower rate, reenacted in 1924 without material change, were adopted to relieve the taxpayer from these excessive tax burdens on gains resulting from a conversion of capital investments, and to remove the deterrent effect of those burdens on such conversions. House Report No. 350, Ways and Means Committee, 67th Cong., 1st Sess. on the Revenue Bill of 1921, p. 10; see Alexander v. King, (CCA) 46 F. (2d) 235.
We think the instant situation is one which the capital gain provisions are intended to cover. The profit realized from*162 the sales of the Gentilly lots represented, in our opinion, an appreciation in the value of such property which had gradually accrued during the years of petitioner's ownership. This appreciation in value was the result of changing conditions over which petitioner had no control. The same conditions, while increasing the property's value for residential purposes, diminished its value as an asset in petitioner's nursery business. Restrictive covenants running with the land prevented petitioner from erecting fences to protect his nursery from the encroachment of the city's growth. Under these circumstances petitioner sold when satisfactory offers were made. It is difficult for us to imagine how petitioner could have converted this nursery business asset with any less elements of business activity than he did. To hold that petitioner, under the circumstances of this case, became engaged in the trade or business of selling real estate, it seems to us, would be unnecessary distortion of the facts and an avoidance of the purposes of the capital gain provisions of the statute. Our conclusion in the instant case is supported by the reasoning of such cases as Phipps v. Commissioner, 54 Fed. (2d) 469;*163 Croker v. Helvering, 91 Fed. (2d) 299; Burkhard *205 v. United States, 100 Fed. (2d) 642; United States v. Robinson, supra;Fuld v. Commissioner, supra;Harriss v. Commissioner, supra;Sparks v. United States, 55 Fed. Supp. 941; and Collin v. United States, 57 Fed. Supp. 217. We hold that the amount of the profits from the sales in question, to wit, $ 14,816.37, is taxable on a community basis as capital gain rather than as ordinary income.
Decisions will be entered under Rule 50.
Footnotes
1. 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)↩ * * *. [Emphasis supplied.]