28 T.C. 462">*462 The respondent has determined deficiencies in income tax and additions ¹1957 U.S. Tax Ct. LEXIS 179">*181 thereto, as follows:

In Docket No. 56997, petitioners claim an overpayment of income tax for 1949 of $ 65.82, and an overpayment of income tax for 1951 of $ 93.02.

28 T.C. 462">*463 These proceedings have been consolidated.

The Commissioner has made several adjustments to the petitioners' income but the only question ³ presented herein is whether the gain from the sale of certain real estate held by E. Aldine Lakin and J. Lee Mullendore, as tenants in common, was gain from the sale of capital assets and taxable as long-term capital gain, or gain from the sale of property held primarily for sale to customers in the ordinary course of business and taxable as ordinary income.

1957 U.S. Tax Ct. LEXIS 179">*182 FINDINGS OF FACT.

A stipulation of facts has been filed and is incorporated herein by reference.

Petitioner E. Aldine Lakin (hereinafter sometimes referred to as Lakin) is an individual residing at Fountain Head Heights, Hagerstown, Maryland. He filed individual income tax returns for the years 1949, 1950, and 1951 with the then collector of internal revenue for the district of Maryland at Baltimore. Petitioners J. Lee Mullendore (hereinafter sometimes called Mullendore) and Cecil M. Mullendore, husband and wife, are individuals residing in Hagerstown, Maryland. They filed joint returns for the years 1949, 1950, and 1951 with the then collector of internal revenue for the district of Maryland at Baltimore. Lakin and Mullendore will sometimes hereinafter be referred to as petitioners.

Lakin has lived in Hagerstown all of his life. In 1921, he started in the lumber business in Hagerstown. In the same year that business was incorporated under the name of the Hagerstown Lumber Company (hereinafter sometimes called the lumber company or the company), a Maryland corporation. Lakin is president of the lumber company and owns 61.1 per cent of the company's stock. Lakin was a principalofficer1957 U.S. Tax Ct. LEXIS 179">*183 and majority stockholder of the company during the taxable years 1949, 1950, and 1951.

Mullendore became associated with Lakin in the lumber business in 1921. About 10 years later he acquired 10 per cent of the stock in the lumber company. Mullendore is vice president of the company. During the taxable years 1949, 1950, and 1951, Mullendore was a principal officer and stockholder of the company.

The lumber company was at all times here material engaged in the sale of lumber, millwork, building supplies, and home appliances in and about Hagerstown. It sells practically everything that goes into a house, except furniture. It has available plans and drawings of houses for prospective home builders. The lumber company advertised 28 T.C. 462">*464 in the newspaper that it would plan a customer's home, find a contractor, assist in financing, and do all things necessary to build a home.

On January 12, 1942, Lakin and Mullendore organized Model Homes, Incorporated (hereinafter called Model Homes), a Maryland corporation engaged in the business of buying, improving, developing, and selling real estate, and the speculative building of houses. Petitioners owned the entire stock of ModelHomes1957 U.S. Tax Ct. LEXIS 179">*184 from the time of the latter's incorporation until sometime in 1951, in which year Lakin transferred his stock to his daughter. Lakin is president of Model Homes and Mullendore is vice president. Lakin and Mullendore have at all times been the principal officers and executives of Model Homes. Model Homes was originally conceived and has been extensively used as an outlet for lumber, millwork, building supplies, and appliances handled by the lumber company. Model Homes did not build custom houses but principally engaged in speculative building, i. e., it would purchase land, construct a house thereon, and then place it for sale. It would usually advertise the house for sale in the newspaper. It also, on occasion, sold vacant lots, but none of the lots were sold which it had acquired from the petitioners. Model Homes had no offices set aside for its exclusive use. All business with Model Homes was contracted at the premises of the lumber company. Telephone calls for Model Homes were customarily handled by Mullendore.

Since 1921, Lakin and Mullendore have enjoyed a close association in various business ventures. From time to time, prior to and during the taxable years, petitioners1957 U.S. Tax Ct. LEXIS 179">*185 purchased real property as tenants in common in equal shares. They made their first purchase in about 1928 or 1930.

In 1942, Lakin and Mullendore purchased as tenants in common, in equal shares, 25 undeveloped lots in an existing development known as Fountain Head Heights, in Hagerstown. Lakin was interested in the purchase of the Fountain Head Heights properties because they adjoined the country club in which he was active. He desired that there be a nice residential development in the country club area. The lots, which were 50 feet wide at the time of purchase, were subsequently consolidated into 100-foot lots.

On April 3, 1946, petitioners acquired as tenants in common, in equal shares, from Hiram Shupp a 55-acre tract of farmland, together with existing buildings consisting of farmhouse, barn, and outbuildings. This tract was located about 1 1/2 miles north of Hagerstown, on the Middleburg Road (U. S. Route 11), and was near the country club and Fountain Head Heights. The purchase price of this tract was $ 15,000. On April 6, 1946, petitioners purchased 28 T.C. 462">*465 for $ 1,000 an adjoining 1.9-acre tract of unimproved land. These two parcels of land became knownas, and1957 U.S. Tax Ct. LEXIS 179">*186 are referred to hereinafter as, Fairgreen Acres.

On February 28, 1949, petitioners acquired as tenants in common, in equal shares, from G. Tyson Kenly and others a 16.6-acre tract of land on Wilson Boulevard, in the southeast section of Hagerstown. There was an old house on the property. The purchase price of this tract was $ 28,000. Included in the purchase were 2 lots on Frederick Street (U. S. Route 40A). This tract of land became known as, and is referred to hereinafter as, Homeland. This property, which was about 2 blocks from the lumber company premises, had been offered for sale for a number of years and was purchased at a reduced price. Petitioners understood that a contractor was interested in buying the tract and would use it for storage of heavy equipment which might be unsightly, so they decided to purchase it themselves.

From time to time petitioners acquired as tenants in common, in equal shares, odd lots in various existing developments in and about Hagerstown. In 1945, they acquired 57 lots in 5 separate transactions. In 1946, they acquired 15 lots in 3 separate transactions. In 1947, they acquired 2 lots in 1 transaction. In 1948, they acquired 8lots in1957 U.S. Tax Ct. LEXIS 179">*187 2 transactions. In 1949, they acquired 2 lots in 1 transaction. No lots were acquired as tenants in common in 1950 or 1951, although lots were so acquired by petitioners in subsequent years.

In addition to acreage and lots acquired as tenants in common by Lakin and Mullendore, Lakin acquired individually 2 lots in 1943, 7 lots in 1944, 1 lot in 1946, and 2 lots in 1947, and Mullendore acquired individually 1 lot in 1947 and 1 lot in 1950. The proper tax treatment of the sales proceeds of these lots is not an issue in this proceeding.

Mullendore first considered acquiring Fairgreen Acres as a home, but abandoned that idea after a month or two, and then talked with Lakin about acquiring the property as a farm. Mullendore believed that a property which was located like Fairgreen Acres would be valuable and would enhance in value, and that if it was not used as a farm, it might be used for a motel or shopping center or somebody might want to buy it for development. Fairgreen Acres was operated as a farm, on halves, for a period of time. Lakin and Mullendore joined the Farm Bureau and attended farm meetings but neither of them resided on the premises.

After approximately 2 years, 1957 U.S. Tax Ct. LEXIS 179">*188 petitioners considered the possibility of developing Fairgreen Acres for apartments, but were unable to do so because of sewerage problems. At sometime prior to April 1, 1948, petitioners decided to sell the property known as Fairgreen 28 T.C. 462">*466 Acres in small parcels to persons deciding to build homes, including speculative builders. On or about April 1, 1948, a plat showing proposed streets and a subdivision of approximately one-half of the proposed property into lots of an average area of one-third acre each was prepared and filed for record. The plat indicated that it was prepared for Model Homes. This plat showed 73 lots and a portion of the land as being reserved for stores and apartments. Some sales of homesites were made from the area marked as reserved for stores and apartments. The first grading of Fairgreen Acres was done on or about November 10, 1947. Additional grading and waterlines were laid in 1950, and additional grading was done in 1952. There were further grading of roads and installation of waterlines in 1953. There were no curbs, and the county paved the streets. The water company laid the waterlines.

The first sales of lots in Fairgreen Acreswere made1957 U.S. Tax Ct. LEXIS 179">*189 in or about November 1948. In 1949, 8 lots were sold in 3 transactions; in 1950, 12 lots were sold in 10 transactions; and in 1951, 6 lots were sold in 6 transactions. Additional sales were made in subsequent years.

At the request of Model Homes, a plat was prepared for the 16.6-acre tract known as Homeland on or about May 25, 1949. However, this plat was not used, and a revised plat from which sales were actually made was adopted on February 8, 1950. The plat was not filed or recorded. Although the plat covered only 13 lots on a part of the tract known as block 3, petitioners treated the tract as being further divided into the following blocks and lots:

Petitioners rough-graded the streets in the Homeland tract and installed curbs. The city of Hagerstown paved the streets and installed waterlines and sewers.

In 1950, petitioners sold the house located on the 16.6-acre tract known as Homeland, together with three-fourths acre of land. In the same year they sold 3 other lots from this tract, each lot having an area of about three-fourths acre. In 1951, 6 lots having a total area of 2 acres were1957 U.S. Tax Ct. LEXIS 179">*190 sold from the tract. The 1951 sales included the lots fronting on Frederick Street. In addition, 2 small buildings were sold in 1951 for $ 128.45. Additional lots were sold subsequent to 1951, but by the end of 1953 all of the lots had not been sold.

No improvements were made by petitioners to any of the lots which were acquired in Fountain Head Heights and other existing developments.

28 T.C. 462">*467 The total number of lots acquired by petitioners between 1942 and 1951, after subdivision of the tracts of land, was about 240. In addition, they held undivided acreage in Fairgreen Acres and Homeland which was capable of subdivision. Some lots were later combined and sales out of Fairgreen Acres and Homeland did not always follow lot lines.

Properties were sold only to purchasers who would agree to purchase their materials for building on the lot from the lumber company.

In 1949, petitioners sold 11 1/2 lots; in 1950, they sold 26 lots; and in 1951, they sold 17 1/4 lots. Petitioners made sales of lots in years prior and subsequent to the taxable years 1949 to 1951, inclusive. There were 27 individual purchasers of lots sold in 1949, 1950, and 1951, in addition to Model Homes. Four1957 U.S. Tax Ct. LEXIS 179">*191 of theindividual purchasers bought more than 1 lot, three of whom made lot purchases in more than 1 year.

The following schedule shows the source of lots purchased by Model Homes for the period 1942 through December 31, 1953:

The following schedule shows the gains of the petitioners that are in question and their other income:

All of the property which was sold in 1949, 1950, and 1951 was held for over 6 months.

Neither Lakin nor Mullendore had ever had or applied for a license to sell real estate, or been a member of a real estate board, or had an 28 T.C. 462">*468 office from which he conducted a real estate business, or had his name listed in the telephone directory as being in the real estate business, or otherwise publicized himself as being in the real estate business. Petitioners did not employ any salesmen, or advertise the properties for sale, or have any sales office, or list the properties with brokers, or pay commissions to brokers. Inquiries about the properties were unsolicited. Neither Lakin nor Mullendore spent any significant amount of time on real estate transactions. However, Lakin and Mullendore are and were, during the years in question, prominent businessmen in Hagerstown, Maryland, and were known to own lots.

Hagerstown has increased in population1957 U.S. Tax Ct. LEXIS 179">*193 from about 35,000 in 1938 or 1940, to about 45,000 at the present time, and there has been an increase in building activity since World War II.

With the exception of the time when Fairgreen Acres was operated as a farm and a farm bank accountwas maintained, Lakin and Mullendore never had a joint bank account. Each issued his own check for his share of the cost of properties purchased and each received a check from the purchaser for his share of the sales proceeds which was put in his own bank account. No specific fund was established for the purchase of properties. No separate books were maintained for the real estate transactions, and the transactions in the real estate, which real estate was owned as tenants in common, were recorded on Lakin's and Mullendore's separate personal books in the same manner as transactions in real estate which they owned individually. Each maintained a set of books for his personal affairs in which personal income and expenses were recorded.

Lakin and Mullendore, during the years in question, were engaged in the business of buying and selling real estate to promote their interests in the lumber company. The lots owned by them as tenants in common1957 U.S. Tax Ct. LEXIS 179">*194 and sold by them during the years in question were properties held primarily for sale to customers in the ordinary course of that business.

OPINION.

The petitioners during the years 1949, 1950, and 1951 sold approximately 55 lots, which theyheld for over 6 months as tenants in common. They reported their gain on these sales as long-term capital gain. The respondent determined that the gain, the amount of which is not in dispute, was ordinary income.

Whether the gain was ordinary income or capital gain depends upon whether the lots which were sold were held primarily for sale to customers in the ordinary course of trade or business. Sec. 117 (a).

This is a factual determination, , and although certain tests such as the purpose or reason for the taxpayer's acquisition of the property and the disposal of it, the 28 T.C. 462">*469 continuity of sales or sales related activity over a period of time, the number, frequency, and substantiality of sales, and the extent to which the owner or his agents engaged in sales activities by developing or improving the property, soliciting customers, and advertising, have been considered relevant, 1957 U.S. Tax Ct. LEXIS 179">*195 the circumstances of each individual case are controlling.

The principal contention of the petitioners is that they were not engaged in a real estate business; therefore, regardless of whether the properties were held primarilyfor sale, they would not be so held in the ordinary course of trade or business. They base their contention on the absence of circumstances which usually indicate that a business is being carried on, i. e., the lack of an active sales effort, no customer solicitations, the small amount of time spent in dealing with the properties, and their general passivity regarding the properties.

Although we agree that petitioners were not engaged in the real estate business as it is sometimes conducted, we still think the record shows that they were engaged in that business and that the properties in question were held primarily for sale in the ordinary course of the business. See

The petitioners are the principal stockholders and officers of the lumber company, which supplied all the materials for home construction and for equipping a home, except furniture. They were also the principal stockholders and officers of Model Homes, 1957 U.S. Tax Ct. LEXIS 179">*196 a speculative building company, which was used as an outlet for the products of the lumber company. The petitioners, although the lots which they purchased and sold in prior years might have been purchased solelyfor investment, appear to have embarked upon a different course of action when they formed Model Homes in 1942. Cf. . The record, we think, shows they entered into business activities having in mind the promotion of their interests in their principal business, the lumber company. From 1942 to 1951, petitioners acquired land which, after subdivision, totaled about 240 lots. The petitioners were Model Homes's principal source of supply. Of the 155 lots purchased by Model Homes from 1942 to 1953, 89 were purchased from petitioners. Of the 132 purchased by Model Homes from 1945 to 1953, 89 were purchased from petitioners. During the years in question about 55 lots were sold by petitioners, 21 of them being sold to Model Homes.

The lots sold to third parties were sold on the condition that the purchasers would purchase their building material from the lumber company. Also, as stated previously, Model Homes purchased1957 U.S. Tax Ct. LEXIS 179">*197 the material for the construction of its homes from the lumber company. These facts, we think, clearly show that the petitioners were selling the 28 T.C. 462">*470 lots for the purpose, at least in part, of promoting their interests in the lumber company. Under these circumstances the sales cannot be said to be the passive liquidation of investment property. On the contrary, their purchase of lots in existing developments and of tracts of land, the subdivision of the tracts, and the sale of lots, when considered in relation to their other activities, constituted a business.

Although Fairgreen Acres was used as a farm for a short while and although Homeland was purportedly purchased to prevent a contractor from using it for storage space for unsightly heavy equipment that might detract from the lumber company's premises, their subsequent subdivision at the instance of Model Homes shows that the purpose for which those properties were held had changed. Cf. They were being held primarily for sale to customers, including Model Homes, in the ordinary course of their business of promoting their interests in the lumber company.

1957 U.S. Tax Ct. LEXIS 179">*198 The lack of a real estate license, the lack of solicitations, and the lack of sales activities are not of great significance since, under the circumstances, the sales were substantial. Cf. ,affirmed as to this part (C. A. 3, 1956) . The gain from the sales for the 3-year period constituted 19 per cent of the gross income of Lakin and 25 per cent of the gross income of Mullendore. Also Model Homes, their largest customer, advertised the houses it built; the petitioners were well known in the community and were known to own lots; and their position with the lumber company undoubtedly gave them valuable contacts with builders and contractors who were in the market for undeveloped lots. In short, there was no need to conduct an active selling campaign to dispose of the lots. Cf. .

The petitioners cite cases in which the number of sales was greater than is involved herein but where we held that the taxpayer was not engaged in a business. However, in none of the cases are the facts substantially similar to those involved herein.

1957 U.S. Tax Ct. LEXIS 179">*199 After reviewing the entire record, we can come only to the conclusion that the lots held by the petitioners as tenants in common and sold by them during the years involved were held by them primarily for sale to customers in the ordinary courseof their trade or business. Cf. ; The gains resulting from these sales, therefore, are ordinary income rather than long-term capital gain. The determination of the respondent is, accordingly, upheld.

Decisions will be entered for the respondent for the amounts of the deficiencies in income tax. ⁴