65 T.C. 197">*198 The respondent determined deficiencies in petitioners' Federal income taxes as follows:

Upon petitioners' oral motion, to which respondent had no objection, these cases were consolidated for trial, briefs, and opinion. The issues in controversy common to these cases 1975 U.S. Tax Ct. LEXIS 43">*45 are whether Thomas K. McManus, John C. Gutleben, and Nelson H. Chick were conducting their activities with respect to a tract of land as individuals or as a partnership, whether the gain realized from the sale of portions of this land, including a condemnation sale, held by the petitioners either as individuals or in a partnership should be characterized as ordinary income or capital gain, and whether the consent agreements (Treasury Form 872-A) executed by the petitioners purporting to extend the statute of limitations for the taxable year 1968 are valid. In connection 65 T.C. 197">*199 with the partnership issue, we must determine whether the election made under section 1033 ² by petitioners Thomas K. McManus and Margaret F. McManus is sufficient to defer the gain that was realized in 1968 on a condemnation sale of a portion of the land or whether this election could only be properly made by the partnership if one existed.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

Petitioners 1975 U.S. Tax Ct. LEXIS 43">*46 Thomas K. McManus (hereinafter petitioner) and Margaret F. McManus are husband and wife who resided in Berkeley, Calif., at the time of the filing of their petitions herein. They filed timely joint Federal individual income tax returns for 1968, 1969, 1970, and 1971 with the Internal Revenue Service Center at Ogden, Utah.

Attached to the 1968 tax return, as introduced into evidence, is a Special Consent Fixing Period of Limitation Upon Assessment of Income Tax (hereinafter Form 872-A) which was cosigned by them on December 30, 1971. Form 872-A provides in relevant part:

That the amount(s) of any Federal income tax due under any return(s) made by or on behalf of the above-named taxpayer(s) for the tax year(s) ended December 31, 1968 under existing or prior revenue acts may be assessed at any time on or before the 90th day after (1) mailing by the Internal Revenue Service of written notification to the taxpayer(s) of termination of Appellate Division consideration, or (2) receipt by the Regional Appellate Division branch office considering the case of written notification from the taxpayer(s) of election to terminate this agreement, except that if in either event a statutory notice 1975 U.S. Tax Ct. LEXIS 43">*47 of deficiency in tax for any such year(s) is sent to the taxpayer(s), the running of the time for making any assessment shall be suspended for the period during which the making of an assessment is prohibited and for 60 days thereafter. If such statutory notice is sent to the taxpayer(s) and neither of the conditions enumerated (1) and (2) in the preceding sentence have occurred, the time for making such assessment will expire 60 days after the period during which the making of an assessment is prohibited. However, this agreement will not reduce the period of time otherwise provided by law for making such assessment.

The statutory notice of deficiency in docket No. 2879-73 is dated March 23, 1973.

65 T.C. 197">*200 John C. Gutleben (hereinafter Gutleben) and Vera B. Gutleben were husband and wife and at the time of the filing of the petitions herein Vera B. Gutleben resided in Castro Valley, Calif. Gutleben died in September 1972 and the petitions herein have been filed by his estate and his surviving spouse. Gutleben and his spouse filed timely joint Federal individual income tax returns for 1968, 1969, and 1970. Attached to the 1968 tax return, again as introduced into evidence, is a Form 872-A, 1975 U.S. Tax Ct. LEXIS 43">*48 cosigned by them on December 31, 1971. This Form 872-A is similar to the one noted above. The statutory notice of deficiency in docket No. 2880-73 is dated March 23, 1973.

During 1968 and 1969 Nelson A. Chick (hereinafter Chick) and Eleanor B. Chick were husband and wife. At the time the petition herein for years 1968 and 1969 was filed, Eleanor B. Chick was deceased and Chick resided in Berkeley, Calif. During 1970 Chick and Dorothy W. Chick were husband and wife who resided in Berkeley, Calif., at the time the petition herein for 1970 was filed. Chick and his spouse filed joint Federal income tax returns for 1968, 1969, and 1970. Attached to the 1968 tax return, as submitted into evidence, is Form 872-A, signed on February 23, 1972, by Chick in his individual capacity and as executor of the Estate of Eleanor B. Chick. This Form 872-A is similar to the ones noted above. The statutory notice of deficiency in docket No. 2881-73 is dated March 23, 1973. Chick died in January 1975.

Petitioner, Gutleben, and Chick (hereinafter the taxpayers) were all experienced in the construction engineering business. Petitioner met Chick in California in approximately 1936. They organized the 1975 U.S. Tax Ct. LEXIS 43">*49 Underground Construction Co. which specialized in underground utility work. This company was incorporated in 1952.

Petitioner and Chick met Gutleben in approximately 1937. He became an employee of their company serving as a superintendent on one of their projects and later he acquired an interest in the company. These three men along with a fourth man then organized MGC Co. (hereinafter MGC) which specialized in the construction of industrial and commerical buildings. This company was incorporated in 1955.

In September 1961 the taxpayers purchased a tract of land in Alameda County, Calif., consisting of approximately 36 1/2 acres for $ 926,000 (hereinafter tract 2347 or the property). This 65 T.C. 197">*201 property is situated in the northeast interchange of Hegenberger Road and Nimitz Freeway. It is near the Oakland Coliseum Arena and Exhibit Hall complex, the Bay Area Rapid Transit's Coliseum station, and the Oakland International Airport. This property represented prime industrial real estate. Title to the property was placed in all of their names as individuals.

Shortly after the acquisition was made the taxpayers applied to the city planning commission for approval to subdivide the property. 1975 U.S. Tax Ct. LEXIS 43">*50 The appropriate drawings and plans were submitted and their plans were subsequently approved. A subdivision plat map for the property was filed and recorded in May 1962. This map reflects provision for 14 separate plots and a street intersecting the property. ³

Between March and September 1962 approximately $ 240,000 was expended by the taxpayers in improving the property. These improvements included expenditures for road construction and the installation of sewerage, water, gas, and electrical facilities. The construction activities were completed by September 1962.

Also during this time period the taxpayers engaged the services of the Stanford Research Institute, Menlo Park, Calif. (hereinafter SRI), to make a preliminary study of the market for office space for a modern office building at the property's location. SRI prepared a report based on numerous interviews and extensive research.

SRI found that the rental market in Alameda 1975 U.S. Tax Ct. LEXIS 43">*51 County was generally depressed, but it did find a selective demand for a rental building that offered certain advantages and it believed that the building contemplated by the taxpayers could attract a portion of that demand. However, it felt that a structure of only 10,000 square feet of net rentable space was justified due to the generally depressed market and the pioneering aspects of a building at the proposed location, and that it would have to be built on a speculative basis.

During the years 1961 through 1970, financial transactions pertaining to the property were recorded in books and records consisting of a double entry system of accounting. The property itself was reflected as an asset of McManus, Gutleben, and Chick. 65 T.C. 197">*202 Several pages from a ledger account labeled "Capital" reflect various activity in this account.

Among the entries in the account are several labeled "Drawing 3 partners." ⁴ Such drawings were always made in equal amounts to the individual taxpayers and it was their intention to divide equally the profits from their activities. In 1967 the taxpayers opened a checking account at the United California Bank, San Leandro, Calif. The signature card, which is still 1975 U.S. Tax Ct. LEXIS 43">*52 currently on file, indicates that these men were copartners and the card is signed by them in their capacities as partners.

Partnership income tax returns in the name of McManus, Gutleben, and Chick were filed each year during at least the years 1961 through 1970. All of these returns were prepared and signed by Wesley T. Benson, a certified public accountant (hereinafter Benson), and all of the returns were signed by petitioner. After 1970 the filing of partnership returns was discontinued on the advice of legal counsel. The activity with respect to the property was reported directly on petitioner's 1971 individual tax return.

During the course of his audit there was correspondence between the petitioners and respondent. In one such letter prepared by legal counsel and signed by petitioner and Margaret F. McManus, on June 2, 1969, as a protest to proposed adjustments in their 1967 tax return, they state that the petitioner was "a member of two partnerships, known respectively as McManus, Gutleben & Chick and Real Estate Joint 1975 U.S. Tax Ct. LEXIS 43">*53 Holdings. During the year 1967, said partnerships sold three parcels of real property." Further on they refer to two of the parcels as being owned by McManus, Gutleben, and Chick. A second letter dated April 7, 1971, was prepared by Paul E. Anderson, legal counsel in this case and signed by the McManuses, to protest proposed changes to their 1968 and 1969 tax returns. The letter protests the respondent's attempt to change their "allocable share of capital gain from the land holding partnership of McManus, Gutleben and Chick to ordinary income." In the remaining parts of the letter the entity holding tract 2347 is referred to as a partnership and its members as partners.

The partnership returns indicate that the taxpayers started their business activity on January 1, 1954. These men along with 65 T.C. 197">*203 their wives acquired a tract of land situated southwest of the intersection of Hegenberger Road and the Nimitz Freeway. Upon application to the city planning commission this tract was subdivided into several plots. Two streets and utilities were also installed. The appropriate documents were sent to the commission with a covering letter signed by petitioner as a partner on behalf of the 1975 U.S. Tax Ct. LEXIS 43">*54 taxpayers. These parcels were all sold with the last sale occurring in 1960.

The partnership income tax return for 1962 reported four sales from tract 2347. Gain was realized on all of these transactions and it was reported as ordinary income. One of these transactions was a sale by the taxpayers to a partnership known as Three Companies, which in turn sold the parcel to a third party who constructed the Holiday Inn. This partnership consisted of three corporations controlled by petitioner, Gutleben, and Chick, or their families, in their individual capacities. Other sales from tract 2347 were made with one occurring in 1964 and two occurring in 1967. The gains realized from these transactions were reported as long-term capital gain. ⁵

In 1965 a parcel in tract 2347 was transferred by the taxpayers to a partnership known as Real Estate Joint Holdings (hereinafter REJH). The taxpayers were equal partners. Subsequently, a building was erected on the parcel by MGC. Upon completion the building was leased to the Blue Chip Stamp 1975 U.S. Tax Ct. LEXIS 43">*55 Co. In 1967 REJH sold this building to a third party and realized a profit on the sale. This building was the only one constructed for rental purposes by the taxpayers, although MGC did construct buildings for others on tract 2347.

During this time the taxpayers attempted to lease portions of tract 2347 to several groups. There were negotiations with representatives of banks, a food store, a manufacturing company, the Government with respect to a post office, and several other parties. Portions of tract 2347 were leased for an amusement ride, parking space, an outdoor sign, a model home display, and pipe storage. The total rental income from these sources during this period was nominal.

During this period it was generally known among real estate brokers that tract 2347 was available for industrial or commercial development and was available for sale or lease. Real 65 T.C. 197">*204 estate commissions were paid by the taxpayers on eight of the sales from tract 2347 to various real estate agents or firms. On one occasion Gutleben gave one real estate firm the exclusive right for a period of approximately 45 days to sell a portion of the property. The taxpayers did not place a "For Sale" sign on 1975 U.S. Tax Ct. LEXIS 43">*56 the property.

The property was the subject of advertisements in magazines that listed such property. One such publication was prepared by the California State Chamber of Commerce and the following notice appeared in five of its publications between 1964 and 1970:

Empire City Industrial Park -- Oakland 1962; 36 acres; Light Industrial & Commerical. McManus, Chick & Gutleben, 2600 Williams St., San Leandro

The purpose of this publication is to generate industrial growth in the State and it is sent to those firms involved in industrial development. Its circulation is approximately 8,000. The listing is free and the information is gathered from various sources throughout the State. Once a property is listed the publication is sent to the property owners and a card is sent prior to the issuance of the next publication so that any new developments can be included. At the owners' request the notice is removed.

Other notices of this type also appeared in the April 1969 Western Real Estate News, a publication mainly for realtors, contractors, architects, and engineers, and the California Site Selection Handbook. The latter publication was prepared by the editors of Industrial Development 1975 U.S. Tax Ct. LEXIS 43">*57 Magazine, Conway Research, Inc., Atlanta, Ga. Approximately 15,000 issues were circulated primarily to subscribers of the magazine and to persons in the real estate industry. The listings were compiled from questionnaires completed by the owners of the properties without cost to them. There is no evidence that any of the taxpayers ever completed such a questionnaire nor authorized in any other manner the description that appears in the handbook.

The partnership income tax returns for 1968, 1969, and 1970 reported the following sales from tract 2347:

65 T.C. 197">*205 All of these gains were reported as long-term capital gains on the respective partnership returns and the total long-term capital gains for each year, along with the ordinary income or loss, was divided evenly between the taxpayers and reported by them as income received from a partnership on the respective individual tax returns.

The sale in 1968 to the State of California was pursuant to a condemnation action. In connection with this transaction, Gutleben wrote a letter on behalf of McManus, Gutleben, and Chick in March 1966, to the State of California in which he stated:

The postponement of this acquisition and the actual construction while the property meanwhile remains earmarked for condemnation is seriously and adversely effecting [sic] our use of the property as well as its present saleability.

In November 1968 petitioner purchased property in Freemont, Calif., which he believed constituted replacement property under section 1033. Petitioner did not report his ratable share of the gain from the condemnation sale on his 1968 individual tax return. MGC constructed a building on this property which is currently being used by a third party. Petitioner did not notify the 1975 U.S. Tax Ct. LEXIS 43">*59 respondent or the Secretary of the Treasury or his delegate that he had purchased replacement property until after April 1, 1970.

In 1973 two additional sales of tract 2347 were made by the taxpayers. One was a large sale to Continental Development Co. that resulted in a gain of $ 960,749. These sales represented the final portions of tract 2347 originally owned by the taxpayers, although they did own a portion through REJH. By 1973 Gutleben had passed away and Chick was in ill health and was contributing very little to the management of these affairs.

65 T.C. 197">*206 The respondent in his deficiency notices to the petitioners for the years in issue determined that the long-term capital gains as reported on the partnership returns and subsequently carried forward to the individual tax returns should properly be characterized as ordinary income. He explained his determination as follows:

It is determined that such real property was held for sale to customers in the ordinary course of your trade or business. Accordingly, such profits are includable in ordinary income.

Respondent made the necessary changes in petitioners' tax returns to reflect this determination.

Respondent, with respect to petitioner's 1975 U.S. Tax Ct. LEXIS 43">*60 1968 tax return, determined that the gain realized on the condemnation sale to the State of California as reported on the 1968 partnership tax return was taxable to the petitioner in 1968 and that it represented ordinary income. He explained this determination as follows:

It is further held that the sale to the State of California does not qualify for nonrecognition of gain pursuant to section 1033 because the partnership made no election under section 1033(a)(3)(A) nor was replacement of the property made by the partnership in accordance with section 703(b).

It is further held that the alleged replacement real property acquired individually by you does not qualify as replacement property within the meaning of section 1033 because it was not of a like kind or similar or related in service or use to the property acquired by the State of California.

Petitioners in an amendment to their petitions in docket Nos. 2879-73, 2880-73, and 2881-73 allege that the notice of deficiency issued by the respondent is erroneous because it is barred by the statute of limitations. In his answer respondent denies this allegation.

OPINION

The case at bar requires us to consider procedural and substantive matters 1975 U.S. Tax Ct. LEXIS 43">*61 involving the years in issue before this Court. In order to dispose orderly of these issues we believe that the procedural issue should be discussed and determined at the outset.

Petitioners in amendments to their petitions filed in docket Nos. 2879-73, 2880-73, and 2881-73 assert that the deficiency notices issued by the respondent with respect to 1968 are 65 T.C. 197">*207 erroneous because that year is barred by the statute of limitations. The facts with respect to this issue are mainly uncontested.

The petitioners all timely filed their respective individual tax returns for 1968 and hence the standard 3-year statute of limitation would have expired on April 15, 1972, absent the prior execution of valid extensions. Sec. 6501(a), (b), and (c). Attached to these tax returns, as introduced into evidence, are Forms 872-A, the relevant portion of which has been set out in our findings of fact. This form purports to extend the statute of limitations until 90 days after either party appropriately notifies the other that they wish to terminate the agreement. These agreements were executed in docket Nos. 2879-73, 2880-73, and 2881-73 on December 30, 1971, December 31, 1971, and February 23, 1972, respectively. 1975 U.S. Tax Ct. LEXIS 43">*62 The respondent's notices of deficiency for these docket numbers are dated March 23, 1973.

Petitioners attack the validity of the open-ended nature of these agreements arguing that the use of the term "period" in section 6501(c)(4) ⁶ requires that the term for which the statute of limitations is extended must be fixed and may not be indefinite. Petitioners do not cite any authority for this proposition, but rely mainly on dictionary definitions of the word "period."

Upon examination of the statute we see no requirement that the statute of limitations can only be extended for a definite period of time. The statute, in fact, does allow for 1975 U.S. Tax Ct. LEXIS 43">*63 additional extensions of the statute of limitations beyond the period of the original agreement. ⁷ As noted previously Form 872-A does permit the taxpayer to terminate the agreement upon proper notification to the respondent.

65 T.C. 197">*208 An agreement of the type in issue may very well not toll the statute of limitations indefinitely. This Court has held in several early cases that "an unlimited waiver extends the statutory period for a reasonable time, or until termination by either party upon reasonable notice." Ethel D. Co., 27 B.T.A. 25">27 B.T.A. 25, 27 B.T.A. 25">27-28 (1932), affd. 70 F.2d 761 (D.C. Cir. 1934). See also William S. Doig, Inc., 13 B.T.A. 256">13 B.T.A. 256, 13 B.T.A. 256">260 (1928); F. L. Bateman, 34 B.T.A. 351">34 B.T.A. 351, 34 B.T.A. 351">358 (1936). 1975 U.S. Tax Ct. LEXIS 43">*64 In Greylock Mills v. Commissioner, 31 F.2d 655, 658 (2d Cir. 1929), affg. 9 B.T.A. 1281">9 B.T.A. 1281 (1928), cert. denied 280 U.S. 566">280 U.S. 566 (1929), the court said:

But there is also another ground equally fatal to appellant's contention. If waivers which are in terms unlimited are to be limited at all, we think they should expire only after the taxpayer gives notice to the Commissioner that he will regard the waiver as at an end after a reasonable time, say three or four months, from the date of such notice. In such a rule there is no harshness to either party; on the contrary, it seems to us the most reasonable one. * * *

In this case the agreements were executed between December 1971 and February 1972, the normal statute of limitations expired in April 1972, and the deficiency notices which involved items common to 1968 and 1969 were issued in March 1973. There is no indication in the record that the petitioners ever notified the respondent of a desire to terminate the agreement or complained of unreasonable delay. We believe that the agreements have clearly been reasonably used in the case at issue and should be upheld. Consequently we believe that we should move on to a consideration of the 1975 U.S. Tax Ct. LEXIS 43">*65 substantive issues as they affect 1968 and the other years in issue.

The remaining issues common to the petitioners relate to their activities with respect to tract 2347. We must decide whether the taxpayers conducted these activities as individuals or as a partnership and whether the gain realized from the sale of portions of tract 2347, including a condemnation sale, by the taxpayers either as individuals or as a partnership should be characterized as ordinary income or capital gain.

As provided by section 761(a) "the term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on." The regulations expand and explain this definition and include other groups not commonly called partnerships. ^{81975 U.S. Tax Ct. LEXIS 43">*66}

65 T.C. 197">*209 As noted by the regulations mere coownership of property does not cause the creation of a partnership. However, coowners may be partners if the determination is made that they intended actively to carry on the business or venture as a partnership. Mihran Demirjian, 54 T.C. 1691">54 T.C. 1691 (1970), affd. 457 F.2d 1 (3d Cir. 1972); George Rothenberg, 48 T.C. 369">48 T.C. 369 (1967). The burden of proof is upon the petitioners. 48 T.C. 369">George Rothenberg, supra.In the present case we believe the evidence shows that the taxpayers did intend to carry on actively their business affairs as a partnership, that they so held themselves out, and that the latter part of section 1.761-1(a), Income Tax Regs., 1975 U.S. Tax Ct. LEXIS 43">*67 applies to the situation at hand.

The entity known as McManus, Gutleben, and Chick was organized by the taxpayers in 1954. After purchasing a tract of land, plans were submitted to the planning commission to subdivide certain property on two separate occasions. One set of plans was accompanied by a cover letter signed by petitioner as partner on behalf of the taxpayers. Improvements were made to the tract and the individual plots were sold by 1960.

After completing their activity with respect to this tract, the taxpayers then acquired tract 2347. Subdivision plans were again submitted on their behalf and improvements were made to the property. The taxpayers were involved in numerous business negotiations with respect to the property. Some of these negotiations resulted in rental and sale agreements. These negotiations were handled primarily by either petitioner or Gutleben, each with at least the apparent authority to make a commitment for the others.

From 1961 through 1970 partnership tax returns were filed in the name of McManus, Gutleben, and Chick. These returns reflect the various sources of income and expenses and the equal division of the net gain or loss. The accountant 1975 U.S. Tax Ct. LEXIS 43">*68 who prepared these returns testified that it was always the taxpayers' intention 65 T.C. 197">*210 to share equally in this venture. Books and records were also kept in the partnership name and the capital account reflects entries for partners' drawing in equal amounts.

In July 1967 the taxpayers opened a checking account with each individual signing the signature card as a partner in McManus, Chick & Gutleben, et al. ⁹ The signature card authorizes the bank to conduct business with any of these individuals. Petitioner, on two separate occasions in correspondence with the respondent protesting changes to his individual income tax return, stated that he was a member of a partnership known as McManus, Gutleben & Chick and that tract 2347 was its asset.

Petitioners argue that the taxpayers never intended to enter into a partnership, that there is no existing written or oral partnership agreement, and that the partnership tax returns were filed merely as a matter of convenience. The support for their first contention rests mainly on the testimony of petitioner, 1975 U.S. Tax Ct. LEXIS 43">*69 the sole surviving member of the group. While we have no reason to doubt his statements, we believe the substantive evidence, as discussed above, provides us with a better standard with which to judge the relationship of the taxpayers.

It does appear that there is no existing written partnership agreement. However, we have found that the taxpayers have been engaged in this and other activities over a substantial period of time. We have also found that large amounts of money and a substantial degree of personal effort were needed to further this activity. We can only believe that over the years the taxpayers discussed their rights and obligations among themselves and came to some understandings.

Petitioners maintain that the partnership returns were filed only as a matter of convenience and that they do not truly reflect their actual relationship. However, we have found that on several occasions the taxpayers have held themselves out as partners to third parties, and have acted individually on behalf of the others. We have also found the taxpayers have conducted substantial activities with respect to tract 2347.

Petitioners argue that our earlier decision in 54 T.C. 1691">Mihran Demirjian, supra, 1975 U.S. Tax Ct. LEXIS 43">*70 is distinguishable since in that case the office building was held by the taxpayers as partners and in the instant 65 T.C. 197">*211 case tract 2347 was held by the taxpayers as their separate property. However, as noted in Demirjian there are several elements to be measured in this determination and we believe that upon consideration of the evidence in this case the entity created by the taxpayers can be properly classified as a partnership.

Having made the above determination we can now move on to consider the oft-litigated issue of whether the real property owned by the partnership was held "primarily for sale to customers in the ordinary course of [its] trade or business" within the meaning of section 1221(1) or section 1231(b)(1) ^{101975 U.S. Tax Ct. LEXIS 43">*71} with the result that gain upon its sale is to be treated as ordinary income rather than capital gain. This issue is purely factual, its resolution depending on the unique combination of its particular facts.

To help place this issue in perspective several factors have been established as particularly relevant. Those considered most often are:

(1) the nature and purpose of the acquisition of the property and the duration of the ownership; (2) the extent and nature of the taxpayer's efforts to sell the property; (3) the number, extent, continuity and substantiality of the sales; (4) the extent of subdividing, developing, and advertising to increase sales; (5) the use of a business office for the sale of the property; (6) the character and degree of supervision or control exercised by the taxpayer over any representative selling the property; and (7) the time and effort the taxpayer habitually devoted to the sales.

United States v. Winthrop, 417 F.2d 905, 910 (5th Cir. 1969). 1975 U.S. Tax Ct. LEXIS 43">*72 However these factors have no independent significance and only form part of the entire situation presented. United States v. Winthrop, supra at 910.

Section 1221 defines the term "capital asset" as being property (with five statutory exceptions) held by the taxpayer. The first statutory exception, as found in section 1221(1), excludes from the definition of property: ¹¹

65 T.C. 197">*212 (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business * * *

The purpose of this exception, as stated by the Supreme Court's opinion in Malat v. Riddell, 383 U.S. 569">383 U.S. 569, 383 U.S. 569">572 (1966), is to differentiate between gain derived from the everyday operations of a business and gain derived from assets that have appreciated in value over a substantial period of time. The Court went on to hold that, as used in section 1221(1), "primarily" means "of first importance" or "principally," 383 U.S. 569">Malat v. Riddell, supra at 572. This statutory exception 1975 U.S. Tax Ct. LEXIS 43">*73 had previously been clarified in Dunlap v. Oldham Lumber Co., 178 F.2d 781, 785 (5th Cir. 1950), when the court noted that the property must not only have been "held primarily for sale," but also for sale in the "ordinary course of business." See also United States v. Winthrop, supra at 911; William B. Howell, 57 T.C. 546">57 T.C. 546, 57 T.C. 546">555 (1972).

Petitioners argue that the property was not acquired primarily for sale citing other reasons for the acquisition of the property. Petitioner testified that the property was acquired for use in leasing and rentals, to generate additional work for the construction companies controlled by the taxpayers, and for investment purposes. However, we do not believe that the evidence in the record supports a finding that the acquisition was made primarily for either of the first two reasons.

When the property was acquired the taxpayers requested SRI to make a preliminary study of the market for office space at the property's location. Their report, which was generally pessimistic, only recommended the construction of a relatively small office building. The taxpayers then were aware at the outset that the rental or leasing prospects were not encouraging.

Petitioner 1975 U.S. Tax Ct. LEXIS 43">*74 did testify to several serious but ill-fated negotiations, which included the development of drawings, with prospective tenants. We can only believe that the depressed rental market, as found by SRI, contributed to these breakdowns. The taxpayers did manage to secure several leases but they do not appear to be the type that they had originally intended.

The petitioners also argue that they expected the acquisition of the property to generate additional construction work for the 65 T.C. 197">*213 companies that they controlled. However these expectations should also have been affected by the findings reported by SRI. We do not believe that this was the motivating reason for the acquisition. In fact, the taxpayers were only involved in the construction of two buildings on the property, with most of the ultimate purchasers assuming the responsibility for their own projects.

It seems clear from the record that the partnership acquired a prime tract of property in the industrial section of Oakland. We believe that this property was acquired and managed primarily for the purpose of eventual resale, hopefully at a profit. This leaves for determination whether the property was held for sale in the ordinary 1975 U.S. Tax Ct. LEXIS 43">*75 course of the partnership's business.

We note at the outset that the partnership has engaged in this activity for a long period of time. In 1954, it acquired property in Oakland, subdivided and improved it, and sold the individual plots by approximately 1960. Shortly thereafter the property in issue was acquired. We view the second acquisition as a replenishment of the partnership's supply of land.

With the acquisition of the property the partnership developed plans to subdivide it. The necessary documents were submitted and approved and the property was subdivided and improvements (including road construction and installation of sewerage, water, gas, and electrical facilities) were made.

We are aware that property does not lose its capital asset status merely because the taxpayer has improved his property through his own efforts. Such activity does not always produce profit derived from the everyday operation of a business. United States v. Winthrop, supra at 908-909. However, the record indicates that the improvements greatly increased the value of the property and this, coupled with the partnership's prior history, provides us with tangible evidence of the partnership's intentions.

The 1975 U.S. Tax Ct. LEXIS 43">*76 parties are in direct conflict with respect to the effect of the sales activity regarding the property. Respondent points to the magazine advertisements, the real estate brokerage listing, and the activity of the real estate brokers in the area. Most of this activity does not appear to have been generated by the taxpayers although the evidence in this regard is sparse. If the taxpayers did not encourage this activity they certainly could have put the 65 T.C. 197">*214 clamps on it. It seems clear to us that the taxpayers, the partners, held themselves out to the community as purveyors of raw land.

Petitioners point to the small number of sales, the particular reasons for some of them, and the length of time they held the property. We do note that holding an asset for several years indicates an intention to hold for investment, rather than for sale. Austin v. Commissioner, 263 F.2d 460 (9th Cir. 1959). However, we believe that factors have been established that negate these elements.

This property was acquired in 1961 at a time when the area was still developing. The neighboring sports stadium complex and the rapid transit system were still in their early development stages. We believe the taxpayers 1975 U.S. Tax Ct. LEXIS 43">*77 were waiting for this area to develop fully before they would sell.

The problems associated with the condemnation sale, which occurred in 1968, also contributed to the holding period of the property and deterred prospective purchasers who would be unsure of the desirability of this location. Gutleben's letter to the State in 1966 complains of delays and their effect on the partnership's use of the property.

Petitioner points out that, of the five sales during the years in issue, two were attributable to condemnation or threatened condemnation action and two were connected with prior sales. As will be discussed later, we believe the former sales represent transactions made in the normal course of the petitioner's business.

Finally we note that the partnership return filed in 1962 reported the real estate profits for sales as ordinary income, thereby conceding the nature of their business for that year at least. We are also impressed with the large profits the partnership reaped through the years from its real estate activity.

Upon review of the evidence we have found factors to which both sides can point to support their position. Our determination is based upon an evaluation of those 1975 U.S. Tax Ct. LEXIS 43">*78 factors that have occurred over a period of years. See Starke v. Commissioner, 312 F.2d 608 (9th Cir. 1963), revg. 35 T.C. 18">35 T.C. 18 (1960). After careful consideration of the total factual pattern in this rather closely contested issue, we find as an ultimate fact that the partnership was engaged in the real estate business. Consequently, we hold that the property was primarily held for sale to customers in the ordinary course of its trade or business. In view of this finding, 65 T.C. 197">*215 the gain produced by the disputed sales is held to have resulted in the realization of ordinary income.

Petitioners argue even if we were to make the above finding, that the gain produced by the sales to the State of California in 1968 and 1970 under an actual condemnation action and the threat of condemnation, respectively, are entitled to be treated differently and should receive long-term capital gain treatment. They argue that, once the prospect of condemnation materialized, the plots involved were no longer held for sale to customers in the ordinary course of the partnership's business.

In support of their position they have cited several recent decisions. However, upon careful review, we find them to be 1975 U.S. Tax Ct. LEXIS 43">*79 distinguishable from the situation at hand. In Casalina Corp., 60 T.C. 694">60 T.C. 694, 60 T.C. 694">703 (1973), affd. per curiam 511 F.2d 1162 (4th Cir. 1975), and Maurice F. Fabiani, T.C. Memo. 1973-203, this Court found that the property involved was held for investment purposes making a discussion of the condemnation factor immaterial.

In Ridgewood Land Co., Inc., T.C. Memo. 1972-16, Juleo, Inc., T.C. Memo. 1971-68, and Tri-S Corp., 48 T.C. 316">48 T.C. 316 (1967), there is a finding that the respective taxpayers were in the business of developing real estate for residential or commercial purposes and that the condemnation action frustrated their original intentions. Since the original purpose for which the land was held had changed this Court held that they were entitled to report the gain realized on the condemnation sale as a long-term capital gain. This holding was affirmed in Ridgewood Land Co. v. Commissioner, 477 F.2d 135 (5th Cir. 1973), affd. per curiam, and Commissioner v. Tri-S Corp., 400 F.2d 862 (10th Cir. 1968); and was reversed in Juleo, Inc. v. Commissioner, 483 F.2d 47, 49 (3d Cir. 1973), cert. denied 414 U.S. 1103">414 U.S. 1103 (1973), where the court held that "A condemnation notice does not change land held 1975 U.S. Tax Ct. LEXIS 43">*80 primarily for sale to customers in the ordinary course of business into a capital asset."

In the case at hand we do not believe that the condemnation factor changed the partnership's intention in the manner found by this Court previously. From the evidence in the record we believe that the partnership was in the business ab initio of purchasing raw land, improving it, and holding it for sale in that condition to prospective customers. Various governmental authorities could use the property in that condition and as such 65 T.C. 197">*216 they represented potential customers for the partnership's property.

The record indicates that the partnership recognized the various governmental authorities as potential customers. Besides the two transactions in issue, there was a sale to the City of Oakland in 1962, and there were negotiations with respect to the construction of a post office. Furthermore, it appears that the amount paid by the State represented the amount that would have been paid by any other potential customers.

In our view, the condemnation element did not bring any unexpected customers to the partnership's door, but rather served as the means by which the sale was conducted. We see no reason 1975 U.S. Tax Ct. LEXIS 43">*81 then why the gain produced by the sales to its governmental customers should be treated any differently than the gain realized by sales to its other customers. Petitioners' argument must be denied.

Finally, having found that the entity created by the taxpayers constituted a partnership, we must now determine whether the election made individually by petitioners purportedly under section 1033, following their individual reinvestment of the proceeds, is sufficient to defer the gain realized on the condemnation sale.

Petitioners argue that a partnership is not a taxable entity and that Thomas McManus, in his separate capacity, is liable for income taxes. Since the tax liability is determined at his level, they contend it follows that he individually, and therefore also his spouse, is entitled to the benefits of section 1033.

This question and these arguments were presented to this Court and decided adversely to the taxpayer in 54 T.C. 1691">Mihran Demirjian, supra at 1698-1701. We see no need to repeat here what we said in that case. Suffice it to say that we find our previous opinion controlling and we intend to apply it to the issue at hand. ¹² Respondent's determination with respect to this issue 1975 U.S. Tax Ct. LEXIS 43">*82 must be upheld.

Decisions will be entered under Rule 155.