Welch v. Solomon

¶5STEPHENS, Circuit Judge.

¶6This is an appeal from a judgment of the District Court in the amount of $1,803.67. The judgment was entered in appellee’s favor in an action brought by him pursuant to § 3226 of the Revised Statutes, Í7 Stat. 257, 26 U.S.C.A. §§ 1672-1673, and § 24(5) of the Judicial Code, 28 U.S.C.A. § 41(5), for the recovery of Federal income taxes and interest for the calendar years of 1924 and 1925, which taxes and interest were paid to appellant in his capacity as Collector of Internal Revenue for the Sixth District of California. On March 13, 1931, claims for refund of said income taxes and interest were filed by appellee with the Commissioner and thereafter, on May 27, 1931, said claims were rejected, whereupon this action was commenced December 9, 1931. The case was tried by the court without a jury, trial by jury having been expressly waived.

¶7The evidence consists of a stipulation of facts and of testimony given by the appellant. The pertinent facts thus established are as follows:

¶8In 1920 a trust known as Wilshire Crest Syndicate (hereinafter referred to as “Syndicate”) was created by a declaratiori of trust, of which the Title Insurance and Trust Company was the trustee. This trust was organized for the purpose of subdividing a tract of land in the City of Los Angeles. The Syndicate was in existence at all times subsequent to the year 1920, to and including the year 1927.

¶9On September 1, 1920, the Syndicate acquired, for the purpose of subdivision and resale at a profit, a tract of land known as Wilshire Crest Tract. Thereafter the tract was subdivided and sale of the lots therein, the taxability of the profit from the sale of which is here in controversy, was accomplished in the years 1922 and 1923. More than 25 per centum and less *42than the total sale price of »ach of the lots was paid in the year of their sale, purchase contracts being taken for the balance. Each of these contracts had a readily realizable market value equal to 30 per centum of the face amount thereof.

¶10At the time of the organization of the trust, appellee acquired an 18/300ths beneficial interest therein, and held the same continuously from that time through and including the years 1924 and 1925 here involved. Appellee acquired and held this interest for profit. Appellee at no time personally gave his attention to the business of selling real estate.

¶11Subsequent to the enactment of the Revenue Act of 1928 the Title Insurance and Trust Company, as trustee of said Syndicate, elected under the provisions of § 704(b)1 of the. Revenue Act of 1928, 45 Stat. 880, to have the Syndicate taxed as a trust and not as an association.

¶12Appellee filed Federal income tax returns for the years 1922, 1923, 1924 and 1925 and reported therein as income taxable at capital gain rates the amounts distributed to him from the Syndicate. Taxes were paid on these amounts. Subsequently, deficiencies were assessed and collected from appellee by reason of the denial of the advantage to him of such capital gain rate. These deficiencies together with interest thereon were paid to appellant.

¶13The sole question presented on this appeal is whether appellee is entitled to have the income which he received from the Syndicate in 1924 and 1925 .taxed at the rate for capital gains rather than at the rate for ordinary net gains.

¶14Section 2082 of the Revenue Act of *431924, 43 Stat. 262, 263, which contains the provisions applicable here, allows a taxpayer to have the tax computed on his capital net gain at the rate of 12% per centum. The same section provides the method for computation of the tax. Subsection (a) (5) of § 208 defines “capital net gain” as the excess of the total amount of capital gains over the sum of certain specified deductible items. By § 208(a) (1) the term “capital gain” means “taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.” In § 208(a) (8) the term “capital assets” is defined as “property held by the taxpayer for more than two years … but does not include … property held by the taxpayer primarily for sale in the course of his trade or business.”

¶15Appellant urges two principal arguments in support of his position that the income derived by taxpayer from the sale of the property in question was not a “capital gain” and that consequently, contrary to the holding of the District Court, taxpayer was not entitled to the advantage of the capital gain tax rate. Both attacks are directed at the conclusion of the District Court that the property involved was a “capital asset” within the meaning of § 208(a) (8). It is first asserted that there is a failure of proof that appellee held the land for more than two years before the sale thereof. It is argued that because legal title to the land sold was in the Syndicate the land was not held by appellee. Appellant’s second contention is, that even if it be assumed that the land was “held” by appellee, it still cannot be treated as a “capital asset” since it has not been shown that it was not held by him “primarily for sale in the course of his trade or business.” The argument is that since the Syndicate was in the business of selling the tract of land as to which it held title its activities in this regard should be imputed to the taxpayer.

¶16We need not decide whether the taxpayer was the “holder” of the property since we are in agreement with appellant that even if it be so assumed the judgment must nevertheless be reversed. This court has previously held in Richards v. Commissioner, 9 Cir. 1936, 81 F.2d 369, 106 A. L.R. 249, a case involving a factual situation similar to that here present, that the beneficiary of a trust was engaged in the business of selling real estate within the broad definition of “business” approved by the Supreme Court in Von Baumbach v. Sargent Land Co., 242 U.S. 503, 515, 37 S. Ct. 201, 204, 61 L.Ed. 460,3 although, as was stipulated, “the petitioner, himself, [had] never taken part in the subdivision or the sale of the lots in the subdivisions … [page 371.] We think that the decision in the Richards Case was correct and see no reason for departing from its authority. The personal attention which a taxpayer gives to a business is certainly not decisive as to whether a resulting profit is ordinary income or capital gain. One may conduct a business through others, his agents, representatives, or employers. The business is nonetheless his because he chooses to let others hear all of the burdens of management. Appellee takes an illogical position when he argues, as he must, that the property was “held” by him rather than by the trust, while in the same breath rejecting the notion that the subdivision, improvement and sale of his property, at his expense, constituted any business of his. If we are to disregard the trust entity in order to consider the beneficiary as the “holder” of the property, it is likewise to be disregarded in determining to whom the activities of subdivision, improvement and sale of the property should be attributed.

¶17However, even if the business of subdivision and sale of the property is to be considered as that of the trust rather than that of the beneficiaries, nonetheless the profit here involved cannot be considered a capital gain in the hands of appellee.

¶18 Section 208(e)4 of the Revenue Act of 1924, 43 Stat. 263, and Regulation 65, Art. 1653,5 promulgated under authority *44of this section, extend to the beneficiary of a trust the benefit of the capital gains rate where the income distributed is capital gain to the trust. It has been’ held in construing this section that though under the terms of the trust and the law of the state, income is distributable to a beneficiary only as a dividend on the trust corpus, it nevertheless is a capital gain to the beneficiary if in fact it results from the conversion of a capital asset. Letts v. Commissioner, 30 B.T.A. 800, affirmed, 9 Cir. 1936, 84 F.2d 760; McNaghten v. United States, Ct.Cl. 1937, 17 F.Supp. 509. Conversely, we think that where income is “ordinary income” to a trust it retains the same character on distribution to the beneficiary, at least in a case such as this, where, under the provisions of § 704(b)6 of the Revenue Act of 1928, the income is taxable to the beneficiary whether distributed to him or not.

¶19The case of Phipps v. Commissioner, 2 Cir. 1931, 54 F.2d 469, is not in conflict with the present holding, the decision in that case being based on the conclusion that in the years in which the sales were made there had been no activity sufficient to amount to a “business” within the meaning of the statute. In the case of Pope v. Commissioner, 6 Cir. 1935, 77 F.2d 599, it does not appear that the precise point here involved was presented'to the court, but insofar as that decision may be in conflict with our own we refuse to follow it.

¶20The judgment of the District Court is reversed.