54 T.C. 1278">*1278 Respondent determined a deficiency in petitioner's income tax for the taxable year 1964 in the amount of $ 22,829.63.

Due to concessions by petitioner, the only issue presented for our decision is whether a tract of real1970 U.S. Tax Ct. LEXIS 115">*116 estate sold by petitioner in 1964 was held "primarily for sale to customers in the ordinary course of his [petitioner's] trade or business" so as to be excluded under section 1221, I.R.C. 1954, from capital gains treatment.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioner is a Tennessee corporation with its place of business being located on Gallatin Road, Nashville, Tenn., at the time it filed its petition herein. It filed its Federal income tax return for the taxable year 1964 with the district director, Nashville, Tenn., employing the completed-contract method of accounting.

Petitioner was incorporated under the laws of the State of Tennessee on March 30, 1959, by Drew R. Maddux, his father Ford L. Maddux, and his mother Lena W. Maddux. Since its incorporation, petitioner has had 40 shares of common capital stock outstanding, of which 20 shares were owned by Drew Maddux, 18 shares by Ford Maddux, and 2 shares by Lena Maddux.

Drew Maddux has been in the real estate business since 1954. He first started as a salesman, but in 1955 formed a sole proprietorship, Maddux Real Estate Co., to engage in the general business of selling real estate. 1970 U.S. Tax Ct. LEXIS 115">*117 In 1959, at the same time he caused petitioner to be organized, Drew Maddux incorporated Maddux Real Estate Co. under the name of Maddux Realty Co., Inc. (hereinafter refered to as Realty Co.). Realty Co. continued to operate a general real estate business, selling property belonging to others.

Petitioner has been engaged in the business of residential development and the construction of homes. The residential development aspect of the business was primarily for its own use in the construction of homes. Realty Co. acts as broker for all real property of the 54 T.C. 1278">*1279 petitioner. In serving as agent for the petitioner, Realty Co. did not have a written agreement. Drew Maddux has been president of Realty Co. and secretary-treasurer of petitioner. He devoted most of his time to Realty Co. Ford Maddux devoted most of his time to constructing houses for petitioner.

During the years 1959 through 1964, petitioner's usual sources of income were from (1) the construction and sale of speculative houses, built for sale on a subdivision lot owned by petitioner with the expectation that the house would be sold either during construction or upon completion, (2) the sale of houses which it1970 U.S. Tax Ct. LEXIS 115">*118 built on company-owned land and other land in accordance with a contract executed with the purchaser, (3) the occasional sale of improved residential lots, and (4) the sale of houses received as trade-ins. All of these sales were reported by petitioner as ordinary income. The following schedule reflects the income from each of these sources for each of the years 1959 through 1964:

The only sale of real estate by petitioner during the years 1959 through 1964 other than that set forth above was the sale of a portion of a 28-acre tract of land in September 1964, which gave rise to the issue here involved. Petitioner had purchased this 1970 U.S. Tax Ct. LEXIS 115">*119 tract in February 1962, and upon sale in September 1964 realized a gain of $ 114,619.13. Petitioner reported this gain as long-term capital gain on its 1964 income tax return. This was the only sale of real estate which was reported as long-term capital gain during the years 1959 through 1964.

The land had been purchased from Ervin Entrekin, trustee for a group of investors headed by Franklin G. Clark. The land was located on Walton Lane just west of Gallatin Road in Nashville, Tenn. Gallatin Road is a major thoroughfare for Nashville and Davidson County and is designated as U.S. Highway 31-E. The 28-acre tract was bordered by Walton Lane to the north, railroad tracks to the west, and a proposed Briley Parkway to the south. The property adjoining the tract to the east and lying between the tract and Gallatin Road, with a depth of approximately 200 feet from Gallatin Road, was owned by J. W. Hunt, dba J. W. Hunt Monument Co., and a Mr. and Mrs. Kennaston. To the north of the tract across Walton Lane was a Federal 54 T.C. 1278">*1280 cemetery. The land across Gallatin Road to the east from the Hunt and Kennaston property was occupied by a public cemetery.

When the group of investors headed1970 U.S. Tax Ct. LEXIS 115">*120 by Franklin Clark purchased the 28-acre tract, it was zoned residential C. Since they considered the highest and best use to be made of the property was commercial, they had the northern portion of the tract rezoned commercial B. Both the Hunt property and the Kennaston property were zoned commercial A.

Under the local zoning regulations in effect during the years involved, one-family dwellings on a lot having 5,000 square feet and two-family dwellings on lots having 7,500 square feet were permitted on property zoned residential C. All types of retail stores were permitted on property zoned commercial A. On commercial B property, in addition to retail businesses, certain warehousing operations were permitted.

During the time the Clark group owned the land they attempted unsuccessfully to lease it to several business firms, primarily discount houses. They felt their failure to lease it was due to the fact they were unable to join the land with that of the Hunts and Kennastons which would provide frontage on Gallatin Road. Because the tract was sandwiched between the railroad and two cemeteries, Clark did not think there was too much profit in the property if developed residentially, 1970 U.S. Tax Ct. LEXIS 115">*121 based on the price for which his group sold the tract to petitioner. In the negotiations leading up to the purchase of the tract by petitioner, Clark conveyed his view that a substantial profit could be derived from developing the property commercially if it was joined with the Hunt and Kennaston property.

At a special meeting on December 15, 1961, the board of directors of petitioner unanimously voted to acquire the 28-acre tract of land. The pertinent parts of the minutes of that meeting are set forth below:

Ford L. Maddux announced that the purpose of this meeting was to discuss the propriety of entering into a contract to purchase a certain tract or parcel of land * * * containing 28 acres * * * for the purpose of subdividing same into approximately 46 lots. He was of the opinion that this subdivision would be particularly adaptable to houses within the $ 13,000.00 to $ 15,000.00 price range.

On December 27, 1961, petitioner executed an agreement to purchase the 28-acre tract for $ 98,350. Under the terms of the agreement, the seller, in addition to other things, was obligated to take appropriate steps to secure final Federal Housing Administration approval for the subdivision. 1970 U.S. Tax Ct. LEXIS 115">*122 On the other hand, petitioner was obligated to install roads, waterlines and other utilities, and take such other steps necessary to record an approved plat of the property.

Petitioner made arrangements with the First American National Bank in Nashville for a loan of $ 56,000 to partially finance the purchase. 54 T.C. 1278">*1281 The loan was made to petitioner on an open basis, but a guaranty had to be signed by Drew and Ford Maddux and their wives.

Petitioner purchased the 28-acre tract in February 1962. In March 1962 petitioner was approached by Leon Beard, a real estate salesman for Guaranty Mortgage Co. and Guaranty Realty Co. in Nashville, to see if petitioner would be interested in selling the 28-acre tract to Sears, Roebuck & Co. Petitioner informed Beard that it would sell for the right price. Beard also approached the Hunts and Kennastons regarding their property, and both advised Beard they would be willing to sell.

On May 15, 1962, a special meeting of petitioner's board of directors was held. The pertinent parts of the minutes of that meeting are as follows:

Ford L. Maddux announced to the Board that the purpose of this called meeting was to discuss the propriety of continuing1970 U.S. Tax Ct. LEXIS 115">*123 with their plan to develop the property purchased from Ervin Entrekin, Trustee, into a residential subdivision.

Drew R. Maddux explained that the company had already spent a considerable amount of time and money toward having the property subdivided for residential purposes. That the subdivision of this land for residential purposes had been approved by the Davidson County Planning Commission and that the company had received F.H.A.'s appraisal of the subdivision. * * *

After the subject of this meeting was thoroughly discussed * * *, the Board of Directors unanimously voted to hold the subject real estate for investment purposes and abandon the idea of subdividing this tract of land for residential construction * * *

On June 18, 1962, Drew Maddux wrote a letter to Finis Nelson, vice president of First American National Bank, regarding the 28-acre tract and the loan made in respect to that property. The pertinent parts of the letter are as follows:

During the past three weeks, there have been four meetings which Sears have had their local and Atlanta office Real Estate department heads attend.

It all boils down to this, Sears is extremely interested. The delay is that there exists1970 U.S. Tax Ct. LEXIS 115">*124 a complex engineering problem in tying the Briley Parkway, the Ellington Parkway and Gallatin Road together. * * *

Sears will not do anything until they have seen the final design of the accesses. * * *

We also have some interest in leasing the northern 800 feet of the property. An Atlanta Realtor who has been to see me twice recently is bringing his client to inspect the property this Saturday, June 23. With the positive interest and the announcement of the Briley Parkway through the property, it should definitely be developed commercially and not residentially.

I would like to know the possibility, if necessary, to make a substantial payment on our $ 56,000.00 note and renew the balance for twelve months. * * * The commercial development takes a little more time, but it is definitely the best and highest use for the property.

After initially contacting the Hunts and the Kennastons, Beard obtained a written agreement from both of them to act as their exclusive 54 T.C. 1278">*1282 agent in the sale of their property. He also tried unsuccessfully to obtain an agency agreement from Drew Maddux.

Beard attempted to sell the property to Sears over a period of time without success. Sears1970 U.S. Tax Ct. LEXIS 115">*125 would not agree to purchase the property until the route of the proposed Briley Parkway had been fixed by the proper State and Federal officials, which had not been done by the time the sale here involved took place. The negotiations between Beard and Sears ended sometime in 1964, although there was little activity with respect to petitioner's property after 1962.

On November 7, 1962, Drew Maddux wrote a letter to J. W. Hunt wherein he made the following statement: "We would sell this property as a whole or in substantial size tracts to a financially sound and qualified purchaser." He further stated that the purpose of the letter was for cooperation and agreement between adjacent owners in order that the properties be put to their highest and best use. The agreement was limited to a 6-month period. Subsequently, on February 15, 1963, J. W. Hunt executed an exclusive sales agency contract with Realty Co. for his frontage on Gallatin Road. The contract was limited to a 6-month period.

Prior to the end of negotiations with Sears, in response to Beard's request for information on the tract, Realty Co. prepared a flyer setting forth certain information regarding the tract. The heading1970 U.S. Tax Ct. LEXIS 115">*126 of the flyer was: "Prime Shopping Center Location."

After the negotiations with Sears ended, Beard prepared a flyer under his letterhead containing the information supplied by Realty Co. plus certain other information and distributed the flyer to commercial prospects.

On February 17, 1964, petitioner resubmitted the preliminary residential subdivision plat for the tract to the planning commission for reapproval under the rules of the commission. The tract had been designated the Carousel Subdivision by petitioner. On February 29, 1964, the director of the planning services division of the planning commission advised Realty Co. by letter that his committee would recommend that the plan be reapproved as resubmitted. However, on March 11, 1964, the planning commission deferred action on the preliminary plat filed for the Carousel Subdivision pending completion of the negotiations relative to right-of-way for the Briley Parkway. On March 30, 1964, Drew Maddux wrote a letter to the director of the planning services division, withdrawing petitioner's request for reapproval until the report on the right-of-way for Briley Parkway was rendered.

Sometime in April 1964 W. B. Wiggins, Sr., 1970 U.S. Tax Ct. LEXIS 115">*127 contacted petitioner, the Hunts, and the Kennastons in order to negotiate a purchase of the properties. On June 26, 1964, petitioner granted Wiggins & Co. a 60-day option to purchase the 15.76 acres of the tract zoned commercial 54 T.C. 1278">*1283 B for the amount of $ 205,953.73. On the same day petitioner also granted Wiggins & Co. an option to purchase the remainder of the tract zoned residential C. The Hunts also granted Wiggins & Co. a 60-day option to purchase 400 feet of their frontage on Gallatin Road. Likewise, the Kennastons granted Wiggins & Co. an option to purchase their property.

On August 7, 1964, petitioner executed a document wherein it stated its intention to abandon, void, and vacate the Carousel Subdivision, its streets, alleys, and all easements of record. The planning commission and the department of public works consented to the abandonment.

On September 2, 1964, Wiggins exercised the option obtained from petitioner on the 15.76 acres zoned commercial B and petitioner sold the 15.76 acres to Wiggins for $ 207,390.31. The option on the remaining portion of the 28-acre tract was never exercised. At or about the same date Wiggins also exercised the options obtained1970 U.S. Tax Ct. LEXIS 115">*128 on the Hunt and Kennaston property.

Petitioner paid Realty Co. a commission of $ 20,735 in connection with the sale of its property to Wiggins. Realty Co. then paid half of this amount to Leon Beard and designated the payment as a sales commission on its books and records. In Nashville, the majority of the real estate salesmen follow a practice of splitting sales commissions with other salesmen who assist them in a sale.

In the statutory notice of deficiency mailed to petitioner on December 26, 1967, respondent determined that the 15.76 acres sold by petitioner in 1964 was property held for sale to customers in the ordinary course of petitioner's trade or business, and, therefore, the gain of $ 114,619.13 realized from the sale was taxable as ordinary income rather than as long-term capital gain as reported.

ULTIMATE FINDINGS OF FACT

Petitioner acquired the 28-acre tract with the intention of subdividing it and constructing houses thereon in the ordinary course of its business. On or before May 15, 1962, petitioner abandoned its intention to subdivide the property for residential purposes and decided to hold the property for investment purposes, either as rental property or for1970 U.S. Tax Ct. LEXIS 115">*129 eventual sale at a profit. At the time petitioners sold the 15.76 acres of the tract to Wiggins in September 1964 petitioner was holding the property for investment purposes.

OPINION

The sole issue before us is whether the 15.76 acres of land sold by petitioner in 1964 constituted property held primarily for sale to customers 54 T.C. 1278">*1284 in the ordinary course of petitioner's trade or business so that the profit therefrom was taxable as ordinary income rather than as capital gain.

Subchapter P, secs. 1201 et seq., I.R.C. 1954, provides for special treatment of gains received on the sale of capital assets. Section 1221 (1) excludes from the definition of a capital asset "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." In Malat v. Riddell, 383 U.S. 569">383 U.S. 569, 383 U.S. 569">572 (1966), the Supreme Court concluded with respect to this statutory provision:

The purpose of the statutory provision with which we deal is to differentiate between the "profits and losses arising from the everyday operation of a business" on the one hand * * * [citation omitted] and "the realization of appreciation in value accrued1970 U.S. Tax Ct. LEXIS 115">*130 over a substantial period of time" on the other. * * * [citation omitted.] A literal reading of the statute is consistent with this legislative purpose. We hold that, as used in § 1221(1), "primarily" means "of first importance" or "principally."

Our task here is to determine whether petitioners held the property involved "primarily" for sale to customers in the ordinary course of its business as that phrase is interpreted by the Supreme Court in the above quotation.

This question is purely a factual question, the burden of proof being upon petitioner. Several factors have been enumerated by the courts for the determination of the question, some of which are: (1) The purpose for which the property was initially acquired; (2) the purpose for which the property was subsequently held; (3) the extent to which improvements, if any, were made to the property by the taxpayer; (4) the frequency, number, and continuity of sales; (5) the extent and nature of the transactions involved; (6) the ordinary business of the taxpayer; (7) the extent of advertising, promotion, or other active efforts used in soliciting buyers for the sale of the property; (8) the listing of property with brokers; 1970 U.S. Tax Ct. LEXIS 115">*131 and (9) the purpose for which the property was held at the time of sale. See James G. Hoover, 32 T.C. 618">32 T.C. 618 (1959); Ralph J. Oace, 39 T.C. 743">39 T.C. 743 (1963). None of the above factors are conclusive standing alone, but rather all of the factors taken as a whole govern. W. T. Thrift, Sr., 15 T.C. 366">15 T.C. 366 (1950).

In this case we are dealing with the sale of unimproved real estate. There is really little dispute about the underlying facts; only in the implications that can be drawn therefrom. Concededly, petitioner is in the real estate business, namely, the development of real estate for the construction of homes thereon. While this is one facet of the real estate business, it is more restricted than the general real estate business. Thus, we are not concerned here with the situation where the taxpayer is in the general real estate business and is attempting to get capital gains treatment on sales of real estate. See Municipal Bond54 T.C. 1278">*1285 Corp., 46 T.C. 219">46 T.C. 219 (1966), affirmed in part and reversed in part 382 F.2d 184 (C.A. 8, 1967).

At the1970 U.S. Tax Ct. LEXIS 115">*132 time petitioner acquired the property in early 1962 the indications are that it intended to subdivide the property and construct residential homes thereon for sale in the usual course of its business, although it may have had some idea at that time of leasing or selling a part of the property for commercial use. Despite the fact that petitioner's charter permitted it to engage in the general real estate business, it had never done so and had never dealt with commercial property. It soon became apparent, however, that because of its location this property could not be most profitably used as residential property, and that a better and more profitable use of the property would be for commercial purposes, particularly if the property could be combined with the property owned by the Hunts and Kennastons lying between petitioner's property and Gallatin Road. Petitioner thereupon decided to abandon its plans for subdividing the property for residential use and to hold it as an investment for eventual use as commercial property. ¹

1970 U.S. Tax Ct. LEXIS 115">*133 Not long after petitioner acquired the property in February 1962 petitioner was approached by Leon Beard, a real estate broker, who was looking for commercial property for Sears, Roebuck. Petitioner indicated a willingness to sell the property if the price was right. However, Sears would not buy the property until the location of the highway interchange was fixed, and consequently never seriously negotiated for the property. So far as we can determine from the record, petitioner made no overt efforts to sell the property at any time after it was acquired. While Beard may subsequently have made some efforts to interest prospective purchasers in the property, he was acting more in his own interests as a real estate broker than in behalf of petitioner. Wiggins, the eventual purchaser of the 15.76 acres, contacted petitioner in the summer of 1964 with an offer to buy the property; petitioner did not contact Wiggins. The uncontradicted evidence is that petitioner was financially able to hold on to the property as an investment and was prepared to do so.

Respondent's contention is that petitioner acquired the property with the intention of either developing it and selling it as residential1970 U.S. Tax Ct. LEXIS 115">*134 property or of selling it as commercial property, either of which, he contends, would be holding it primarily for sale to customers in the ordinary course of its business. Had petitioner been in the general real estate business, the facts would come closer to supporting respondent's 54 T.C. 1278">*1286 contention. As we said in 46 T.C. 219">Municipal Bond Corp., supra at 229, where the taxpayer was in the general real estate business:

While we recognize that a corporation may be an investor in real estate and entitled to capital gain on the profits realized on the sale of such investment property, * * * we find it difficult to understand how the profits realized on the sales of property by a corporation engaged solely in the above business [buying, holding, renting, and selling real estate] can be considered other than the "profits * * * arising from the everyday operation" of that business, unless the corporation can show by convincing evidence that its primary purpose for acquiring all of its properties, or its primary purpose in acquiring a specific parcel of real estate, was to derive income from the holding of such property rather than the sale thereof, and that 1970 U.S. Tax Ct. LEXIS 115">*135 the sale of such properties was not inconsistent with that primary purpose. * * * ²

However, that reasoning does not apply here because petitioner was not in the general real estate business. Petitioner's business was the construction of houses for residential purposes either on property owned and developed by petitioner or on property owned by others. This is the only transaction in which petitioner purchased a large tract of undeveloped real estate, held it for a period of time, and then sold it in bulk for commercial use. Petitioner had no customers for commercial property in the ordinary course of its business. At the time of the trial petitioner still owned, undeveloped, the remainder of the 28-acre tract.

It is well established that a taxpayer in the real estate business may hold real estate as an investment, Randolph D. Rouse, 39 T.C. 70">39 T.C. 70 (1962); Eline Realty Co., 35 T.C. 1">35 T.C. 1 (1960);1970 U.S. Tax Ct. LEXIS 115">*136 Charles E. Mieg, 32 T.C. 1314">32 T.C. 1314 (1959). The characterization of a particular property as one held for sale or investment must be determined from the facts in each case, aided by the use of the various factors mentioned above.

Of the various factors mentioned above which the courts have considered in determining issues similar to the one before us, the facts support only one that would be favorable to respondent. We agree that petitioner originally acquired the property for sale to customers in the ordinary course of its business. However, while the purpose of acquisition is one factor to be considered, it is not conclusive, for as we stated in 35 T.C. 1">Eline Realty Co., supra at 5:

while the purpose for the acquisition must be given consideration, intent is subject to change, and the determining factor is the purpose for which the property is held at the time of sale. * * * [Citations omitted.]

But the other factors mentioned, viewed in the light of all the evidence in this case, convince us that petitioner abandoned this purpose soon after it acquired the property and thereafter held the property as an investment. The only 1970 U.S. Tax Ct. LEXIS 115">*137 improvements made by petitioner were to 54 T.C. 1278">*1287 extend waterlines out to the property and were made before petitioner decided to hold the property for investment -- more than 2 years before it was sold. Petitioner has made only this one sale of this type property and this transaction was much larger than any other participated in by petitioner. Petitioner did not advertise the property itself, ³ nor did it list the property with brokers; and we have found as a fact that the property was being held as an investment at the time it was sold.

We cannot conclude from the record before us that the profit realized by petitioner on this one isolated transaction represents "profits * * * arising from the everyday operation of a [petitioner's] business." Instead we believe the profit resulted from a change in the character of the property because of the approaching highways and represented1970 U.S. Tax Ct. LEXIS 115">*138 "the realization of appreciation in value accrued over a substantial period of time" while petitioner held the property, 383 U.S. 569">Malat v. Riddell, supra. We think our conclusion is in accord with what we stated in Raymond Bauschard, 31 T.C. 910">31 T.C. 910 (1959), to be the fundamental objective of the capital gains provisions; i.e., to grant preferential treatment to the gains realized from those transactions which are not the normal source of (petitioner's) business income.

We hold that petitioner has carried its burden of proving that it was not holding this property primarily for sale to customers in the ordinary course of its business and, therefore, properly reported the gain realized on the sale of the 15.76 acres to Wiggins in 1964 as long-term capital gain.

Decision will be entered under Rule 50.