Before BIGGS, Chief Judge, KALODNER, Circuit Judge, and WRIGHT, District Judge., Circuit Judge.
Was real estate sold by taxpayers in 1951 and 1952 held by them primarily for sale to customers in the ordinary course of business within the meaning of Section 117(a) and (j) of the Internal Revenue Code of 1939, as amended?*fn1
That is the primary question presented by these petitions for review of the decision of the Tax Court*fn2 which answered it affirmatively, thereby making gains on the sale of the real estate taxable as ordinary income rather than "capital gains".
A second issue presented is whether the Tax Court erred in sustaining the Commissioner's determination that taxpayers were subject to penalties for failure, under Section 294(d) (1) (A) of the Internal Revenue Code of 1939, as amended,*fn3 to file a declaration of estimated tax for 1952, and for substantial underestimation of tax due for 1952, under Section 294(d) (2) of the Internal Revenue Code of 1939, as amended.*fn4
Taxpayers contended in the Tax Court that they had relied solely on their accountant to file the required declaration of estimated tax; that he failed to do so and that therefore their failure to file was due to reasonable cause and not willful neglect. In rejecting the contention the Tax Court held that proof had not been presented that taxpayers' accountant was qualified to advise them concerning tax matters; that there was no evidence that their reliance on the accountant was "well placed" and accordingly the failure to file the declaration was not due to reasonable cause.
The facts may be summarized as follows:*fn5
In 1936, Walter H. and Irene C. Kaltreider ("taxpayers"), husband and wife, purchased twenty-seven acres of farmland located on the outskirts of York, Pennsylvania, for $9,500.00. In 1938 they built their residence on a part of that land and continued to use the property exclusively for farming for a number of years.
On October 21, 1947, taxpayers, together with their son, Walter H. Kaltreider, Jr., a graduate engineer, organized Kaltreider Construction Inc. ("Corporation") under the laws of Pennsylvania to carry on a building and construction business.
The capital of Corporation was initially contributed by taxpayers and their son and, with the exception of twenty-five shares issued to each of taxpayers' two grandchildren on December 25, 1952, all outstanding stock has been held by them since the incorporation.
During 1951 and 1952, the taxable years in issue, taxpayers' son served as president of Corporation. The taxpayers, husband and wife, acted as treasurer and secretary respectively. Throughout this period Corporation was engaged in the construction of homes, garages, schoolhouses, and freight truck terminals.
During 1948 taxpayers developed a seven-acre tract of their twenty-seven acre farm and subdivided it into fifteen lots; Corporation constructed homes on eleven of them. In 1952 the taxpayers developed a second seven-acre tract of their farm and subdivided it into thirteen lots; Corporation constructed homes on seven of them.
Two of the homes were sold in 1949, and four in 1950, at a profit. In their joint income tax returns for the years 1949 and 1950, taxpayers treated the profits as ordinary income. On the first page of their tax returns the taxpayers listed their occupation as "Contractor" while in Schedule "C"*fn6 of the tax returns, in which they specifically reported the profits, they listed the "nature of [their] business" as "Real Estate".
Five of the homes and the four remaining vacant lots*fn7 in the 1948 development were sold at a profit by taxpayers in 1951, the first of the two taxable years in issue. In their 1951 tax return taxpayers made allocation of sales price, costs, and gross profits between houses and lots. The profit allocated to sales of houses ($350.00) was reported as ordinary income in Schedule "C" and one hald ($10,478.90) of the profit allocated to sale of the lots*fn8 was reported as long-term capital gain in Schedule "D".*fn9
The allocation procedure established by taxpayers in their 1951 tax return was pursued in their 1952 tax return with respect to the seven homes which were built and sold that year. Profit allocated to sale of houses ($5,150) was reported as ordinary income in Schedule "C" and one-half ($6,744.50) of the profit allocated to sale of the lots ...