Appeal from the United States District Court for the District of New Jersey (D.C. Civil Action No. 261-70).
Seitz, Chief Judge, Rosenn and Garth, Circuit Judges.
The defendant, United States, appeals from an adverse judgment of the district court which held that the plaintiff taxpayer was entitled to treat its gain on the sale of certain industrial real estate as capital gains.
The essential facts as found by the district court are as follows: William J. Bigley, president and sole shareholder of the plaintiff, Jersey Land and Development Corporation ("Jersey Land"), also headed Bigley Brothers, Inc. ("Bigley Brothers"), a large New Jersey trucking concern engaged in the business of hauling heavy construction materials. By the mid-1950's, Bigley Brothers' main terminal in Hoboken, N.J. could no longer accommodate the company's growing number of vehicles and other equipment. In addition, it determined that it would be advantageous to store construction materials for its clients on its own site. Consequently, it began seeking a new and larger facility for its expanding operations.
Bigley Brothers' need for a larger terminal led to the formation of the plaintiff, Jersey Land, by Bigley in 1957. Shortly after its incorporation, Jersey Land entered into a lease-option agreement with the Township of North Bergen, N.J. covering approximately 97 acres of marshland owned by the township. Under the terms of the agreement, Jersey Land leased the North Bergen tract for seven years at an annual rental of $5,000 and acquired an option to purchase the same at a price of $700 per acre. However, its option to purchase the property was contingent upon its filling and grading of the tract in order to make it suitable for commercial and industrial uses. Jersey Land agreed to fill and grade at least twenty-five acres during the first year of the lease and at least ten acres in each subsequent year. Upon completion of the filling and grading of any five acre segment, it could exercise its option to purchase that segment. In addition, the agreement provided that Jersey Land could sell, assign or sublet its rights under the lease although it would remain fully liable for the terms and conditions thereof.
Following execution of the agreement with North Bergen, Jersey Land leased a fourteen acre segment of the tract to Bigley Brothers at a rental of $5,000 per annum and the trucking company moved its operations to the new site. Jersey Land also commenced its filling and grading of the property in accordance with its agreement with the township.
By early 1961, Bigley Brothers had encountered serious financial difficulties and, as a result, Bigley decided to sell his trucking business. In January, 1961, he negotiated a sale of Bigley Brothers to Youngstown Cartage Corporation ("Youngstown"). Although the sale did not receive the requisite Interstate Commerce Commission approval until 1964, Youngstown took immediate control of Bigley Brothers' trucking operations under a lease arrangement with the company. This included operation of the facilities of Bigley Brothers located on the North Bergen tract for which Youngstown began paying rent to Jersey Land.
Prior to the sale of the trucking company to Youngstown, Jersey Land had incurred approximately $50,000 in filling and grading costs on the North Bergen tract and had acquired, through the exercise of its option, a single five acre segment. However, even after the sale of Bigley Brothers, it continued its filling and grading operations expending an additional $600,000 in the process. By the time its lease with North Bergen ended in 1964, Jersey Land had exercised its options over approximately seventy-five acres of the tract.
Shortly after the sale of Bigley Brothers in 1961, Jersey Land began selling portions of the North Bergen tract over which it had exercised its options. By 1968, it had sold approximately forty of its seventy-five acres at a considerable profit in six separate transactions. None of these sales were solicited by Jersey Land. Instead, Jersey Land was sought out by the purchasers. Moreover, Jersey Land never established a sales office, advertised the property or otherwise operated as a typical real estate business. It is noteworthy, however, that during this same general time period, several of Bigley's other corporations had also acquired marshland properties, improved them through filling and grading, and thereafter sold them at a profit.
Jersey Land's treatment of the gain on sales occurring in 1963 is at issue on this appeal. During that year, Jersey Land made sales of approximately twenty acres of the tract on which it realized a net gain of $294,256.15. This gain was reported as capital gains on its tax return for the year in question. Thereafter, the Commissioner of the Internal Revenue Service determined that this gain was not entitled to capital gains treatment under 26 U.S.C. § 1201 because it was derived from the sale of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business". Hence, he concluded that the gain should have been reported as ordinary income and assessed a tax deficiency against Jersey Land.
Jersey Land paid the deficiency and then brought this action for a refund in district court. After trial, the district court entered judgment in favor of Jersey Land finding that the gain on the sales qualified for capital gains treatment because plaintiff had not held the property sold primarily for sale to customers in the ordinary course of its business. Rather, the court determined that it had acquired and held the property to facilitate Bigley's trucking business. However, in reaching this conclusion, the district court erroneously found that Jersey Land had incurred more than $600,000 in filling and grading costs prior to the sale of Bigley Brothers to Youngstown.
The government immediately called this error to the district court's attention on a motion under Rule 52(b), Fed. R. Civ. Proc., requesting the court to amend its findings and judgment. After reconsideration, the district court revised its initial opinion to correct this mistake of fact. However, it determined that this error had no effect on its determination that the property had not been held by Jersey Land for sale in the ordinary course of its business. In affirming its initial conclusion in this regard, the district court emphasized: (1) that Jersey Land's original purpose in entering into the lease-option arrangement was to further Bigley's trucking business; (2) that Jersey Land, rather than promoting sales of the property, had been sought out by the purchasers; (3) that it had never set up a sales office, or otherwise operated as a typical real estate business; (4) that sales had been infrequent; and (5) that the plaintiff still retained much of the North Bergen tract. This appeal followed.
The sole issue for our consideration is whether the district court erred in concluding that the North Bergen property was a capital asset which generated capital gains, rather than ordinary income, upon its disposition by the plaintiff. In this Court, the government reiterates its contention that the North Bergen tract was held by Jersey Land "primarily for sale to customers in the ordinary course of its business". Property held for such a purpose by a taxpayer is specifically excluded from the definition of capital assets found in 26 U.S.C.§ 1221. Hence, the government ...