Before GOODRICH, McLAUGHLIN and KALODNER, Circuit Judges.
These appeals present the question whether the taxpayer is entitled to the benefit of capital gains provisions of the income tax statute in the business transactions described herein. The Tax Court has held that the taxpayer is liable for ordinary income tax*fn1 and the two appeals represent the taxpayer's litigation contesting the conclusion reached for different years of its business.
The sole question is one which comes under section 117 of the Internal Revenue Code of 1939, specifically (a) (1) and (j) (1) of that section. 26 U.S.C.A. § 117(a) (1), (j) (1). What was decided by the Tax Court and what we must review here is whether specified property owned by the taxpayer was held "primarily for sale to customers in the ordinary course of his trade or business." This sounds like a fact conclusion.*fn2 But it is subject to reversal if the conclusion is clearly erroneous*fn3 or if the findings of fact are induced by an erroneous view of the law.*fn4 The point was recently stated by this Court as follows: "In disturbing a district court's findings of basic facts, this court is guided by the 'clearly erroneous' provision of Rule 52 (a). But Rule 52(a) is not applicable where, as here, the dispute is not as to the basic facts, but as to what inference (i. e., ultimate fact) should reasonably be derived from the basic facts. * * *" Sears, Roebuck & Co. v. Johnson, 3 Cir., 1955, 219 F.2d 590, 591. Again, to the same effect: "The District Court found as a fact that expatriation had taken place. With respect to that finding it must immediately be noted that it was in the nature of an ultimate finding of fact and on that score it is well settled that such a finding is but a legal inference from other facts and as such is subject to review free of the restraining impact of the so-called 'clearly erroneous' rule applicable to ordinary findings of fact by the trial court. * * *" Lehmann v. Acheson, 3 Cir., 1953, 206 F.2d 592, 594; see also, Goldberg v. Commissioner, 5 Cir., 1955, 223 F.2d 709, 711.
There are two chapters to the taxpayer's story. One has to do with the sale of houses; the other has to do with the sale of unimproved land.
The house question will be considered first. The taxpayer during the years 1942 through 1944 built 1,098 units of housing for rental purposes. 858 units of these were single family homes; 240 were duplex apartments. Petitioner, prior to this, had bought land, divided it, built houses thereon and sold them. This was an established division of its business and through the years ordinary income tax was paid on the profits resulting. Likewise, ordinary income tax was paid on profits derived from the rental of the houses just described.
In 1946 the restrictions on the prices at which these houses could be sold were removed.*fn5 Restrictions were still retained upon the price at which the property could be rented, however. The taxpayer decided to sell the houses and put its capital into the development of shopping centers, for rental purposes. It doubted whether the market value of the houses would continue to appreciate. The taxpayer thereupon made efforts to sell the houses. 851 units were sold in its tax year ending in 1947; 2 in 1948; 76 in 1949 and 45 in 1950. A gross profit of $2,829,742.81 was realized in 1947; $8,560.08 in 1948; $638,043.98 in 1949 and $377,626.31 in 1950.
The method adopted by the taxpayer was as follows: Sales were made by taxpayer's own staff. This saved the taxpayer money; its commissions were much less than if it had employed real estate brokers at the established 5 per cent commission price. Some advertising was used, more in the case of the single residences than in the case of the duplex apartments. The sales were for cash. No inspection of the properties was permitted. They were all sold in the condition in which they then were; no effort was made to improve their appearance or to make them more saleable. No additional properties of similar nature were bought by the taxpayer nor were any properties not owned by it sold in this fashion. When the rental properties were all sold the rental part of the taxpayer's business was wound up.Upon these facts, is a conclusion justified to the effect that these rental properties which were to be sold were held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business?
We find helpful language used by Judge Tuttle for the court in Goldberg v. Commissioner, 5 Cir., 1955, 223 F.2d 709, 712. The court says:
"(2) In the typical case it is clear that the property owner did not intend to engage in the business of buying and selling real estate when he acquired or developed it, but on the contrary intended only to rent it. At the time he may have been restrained from selling by wartime legislation or the terms of a government loan. But years later, his intention changes or the government restrictions are removed, and he proceeds to sell the property. The test as to whether the capital gain provisions apply in such event is, at bottom, whether the purpose of the sales is primarily making money by carrying on a substantial part of the activities of a person engaged in the business of selling houses, or to dispose of or liquidate the rental business. If the latter is the case, the owner obtains capital gain benefits."
There is no doubt in this particular case that prior to the decision to sell these houses the properties were being held for investment purposes. The Tax Court so states and explicitly says that "up until the decisions to sell its rental houses and apartments, petitioner had [not] done anything which would disqualify these rental units for capital gains treatment under section 117(j) upon their sale."
The court, however, did conclude that because of the manner in which the sales were made they were conducted in the ordinary course of business of selling real property.It was expressly pointed out, however, that the court did not rely merely on the large number of sales involved but upon the various actions by the taxpayer.
It was conceded by counsel for the Commissioner at the argument that if the taxpayer had sold all these properties to one buyer at one time there would be no basis for holding that they were sold in the ordinary course of the taxpayer's business.*fn6 It was also conceded that had taxpayer employed a firm of brokers to sell the properties ...