Before GOODRICH, McLAUGHLIN and STALEY, Circuit Judges.
This taxpayer's petition for review of a decision of the Tax Court primarily poses the question whether the profit realized on the disposition of certain property was properly treated by the Tax Court as ordinary income rather than capital gain. Two subsidiary issues were also raised in the Tax Court, one relating to an expense deduction and the other to a constructive dividend. The former issue was withdrawn on appeal and the latter need be considered only if it is determined that the Tax Court erred in holding that the profit realized was ordinary income.
The facts may be summarized as follows: George K. Heebner, Jr. and Ruth S. Heebner*fn1 filed a joint individual income tax return on a cash basis for the calendar year 1953, upon which the Commissioner of Internal Revenue determined a deficiency of $114,372.68. The taxpayer, an architect, was individually engaged in the building and construction business during the years 1951 through 1953. In addition, during the tax year in question, 1953, he was employed as president of George K. Heebner, Incorporated, ("Corporation") organized under Pennsylvania law in 1934 to engage in design and construction of industrial and commercial buildings. Taxpayer owned 89.54 per cent of the Corporation's outstanding stock and the remainder was owned by his two brothers.
Taxpayer was one of a group of builders who early engaged in "package" building. This term has been applied to a builder who not only constructs a building pursuant to the specifications of a customer but also undertakes other facets of the building project, such as design, location of a suitable site, financial arrangements, and delivery of a completed project to the prospective purchaser. Not all projects undertaken by the taxpayer, either individually or through the Corporation were of the package variety, but those that were, were undertaken with the purpose of getting his "foot in the door as a builder." Taxpayer derived substantial taxable income from his individual building operations during the years 1949 to 1953.
In May or June, 1951, two Philadelphia real estate brokers informed taxpayer that Nash-Kelvinator Sales Corporation was desirous of locating offices and a warehouse in the Philadelphia suburban area. Acting upon this information, taxpayer undertook a complicated series of negotiations. Initially he approached the Baltimore and Ohio Railroad in order to acquire a building site adjacent to the railroad's right-of-way in the Sharon Hill, Pennsylvania, section. The title to the property, which the taxpayer subsequently acquired, was held of record by the Schuylkill Improvement Land Company of Philadelphia, a wholly-owned subsidiary of the Baltimore and Ohio Railroad. Contact was also made with Nash-Kelvinator in an attempt to ascertain the desired specifications for the warehouse. More than a month prior to August 30, 1951, taxpayer approached the Frankford Trust Company concerning a construction loan and as early as July 13, 1951, contacted Prudential Insurance Company representatives in regard to a proposed sale of the completed premises.
The existence in 1951 of Regulation X promulgated by the Board of Governors of the Federal Reserve System initially presented some difficulties. This regulation limited the amount of any mortgage loan on non-residential real estate to a maximum of 50 per cent of the value of the property. However, this regulation did not apply to short-term construction loans made to a person "other than the owner" of non-residential real estate, provided there was a take-out commitment from a financially responsible institution within the twenty-four month period permitted for construction loans. Since the taxpayer required a mortgage substantially in excess of 50 per cent, he took title to the Sharon Hill site in his individual name and had the construction contract performed by the Corporation. Thereafter, the Corporation, not the taxpayer, could apply for the construction loan in its name and Regulation X would be no hindrance. In considering the application for the loan, however, Frankford Trust Company appeared equally interested in taxpayer's financial stability and required his personal financial statements as well as those of the Corporation.
In short order, taxpayer negotiated the following transactions: In July, 1951, he obtained an option on the building site and on September 5, 1951, the Schuylkill Improvement Land Company agreed to convey the Sharon Hill site to him for $45,000. On September 4, 1951, Frankford Trust Company agreed to make the construction loan in the amount of $600,000 to the Corporation. A preliminary lease was obtained from Nash-Kelvinator in July of 1951 and on August 14, 1951, Nash-Kelvinator committed itself to lease the completed warehouse. Prudential obligated itself in August to purchase the land and building upon completion and confirmed the arrangement on September 11, 1951. Finally, on September 28, 1951, taxpayer entered into an agreement with the Corporation whereby the latter agreed to construct the building, commencing within thirty days of September 28, 1951, the building in no event to cost more than $550,000, including the profit. The commitment of each of the participants with whom taxpayer negotiated was dependent and conditioned upon a commitment of one or more of the other participants; e. g., Frankford Trust Company agreed to make the construction loan to the Corporation only upon condition that Nash-Kelvinator would agree to lease and Prudential would agree to purchase the site and building upon completion.
Taxpayer reported to and obtained the approval of Prudential as regards each significant detail of the supervision and construction of the Sharon Hill project from its inception in May or June, 1951, until final transfer February 15, 1953. The form of agreement to lease, the cost estimate, the specifications, and the settlement sheet were each submitted to Prudential. In addition, following enactment by the Commonwealth of Pennsylvania on December 27, 1951, of legislation, effective February 1, 1952, taxing all real estate transfers at a rate of one per cent, taxpayer entered into negotiations with Prudential concerning it. Initially he proposed that there be "a conveyance immediately by George K. Heebner, Jr., of the ground, with the building in the process of erection." However, following discussion and further correspondence it was agreed that the $6,500 transfer tax would be paid one-half by taxpayer and one-half by Prudential.
On August 1, 1952, Nash-Kelvinator took possession of the warehouse pursuant to its lease with taxpayer and thereafter paid rent to him until February 15, 1953. Subsequently, on January 19, 1953, taxpayer informed Prudential that on or about February 15, 1953, he would tender a deed to Prudential. Prudential inspected the premises and on February 16, 1953, taxpayer conveyed the property to Prudential for the sum of $650,000. The selling price of the ground and building was $650,730.06, less settlement expenses of $10,741.40, for a net figure of $639,988.66 paid to taxpayer.*fn2
Taxpayer paid the real estate brokers who first brought the lease possibility to his attention a commission of $21,000. In his 1953 return he deducted $20,650 of this amount as an ordinary expense deduction, but the Commissioner disallowed the deduction and determined that the amount represented an additional cost of the Sharon Hill project. On appeal taxpayer has conceded that the Commissioner is correct as regards this item.
Finally, taxpayer treated the gain from the sale of the property as capital gain. The Commissioner, as previously indicated, took issue with this contention.The Tax Court concluded that "The work performed by [taxpayer] in connection with the development and final disposition of the Sharon Hill project, to-wit, site selection, assistance in design and lease negotiation, financing arrangements, and building construction was in keeping with his regular business operations and the resulting profit in the amount of $193,544.49 was derived from property held by him primarily for sale to customers in the ordinary course of his trade or business." Accordingly, the gain from the transaction was held not to represent proceeds of a capital asset transaction within Section 117(a) (1) (A) of the Internal Revenue Code of 1939.*fn3
Taxpayer in his brief makes an elaborate attack on the finding of the Tax Court.However, we need not consider individually each of the five separate arguments, for they are merely varying ways of analyzing the thorny problem posed by the capital gain provisions in light of the specific facts of this appeal.
Initially, we note that the parties appear to disagree as to what the proper scope of our review is in matters of this nature.This is especially significant as regards the Tax Court's finding that the profit "was derived from property held * * * primarily for sale to customers in the ordinary course of his trade or business." As we recently stated in Pennroad Corporation v. Commissioner of Internal Revenue, 3 Cir., 1958, 261 F.2d 325, 328, certiorari denied ...