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Tax Lien Certificate | |
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Paul K. Ashby and Gretchen G. Ashby v. Commissioner Thomas
B. Roberts, Esq., for the petitioners. Donald W. Wolf, Esq., for
the respondent. BRUCE,
Judge: This
proceeding involves deficiencies in Federal income tax for the
years 1955 and 1956 in the amounts of $125.59 and $133.65,
respectively. After certain concessions by petitioners the sole
issue remaining is whether the amounts of $382.17 and $653.85,
which represent a 4 percent statutory penalty received by
petitioner in 1955 and 1956, respectively, upon redemption of
certain parcels of real estate purchased by petitioner at
delinquent tax sales and held for more than 6 months, constitute
capital gain or ordinary income. Findings of Fact The
stipulated facts are so found and are incorporated herein by this
reference. Paul
K. and Gretchen G. Ashby, husband and wife, are residents of Paul
K. Ashby, hereinafter referred to as the petitioner, has been in
the real estate business for approximately 30 years and is a
licensed real estate broker regularly employed by Paul C. Shay
Realty Co., Number of Total
Year Parcels Bid For Amounts Bid
1951 .... 1 $ 40.47
1952 .... 8 548.12
1953 .... 39 2,680.65
1954 .... 115 7,811.13
1955 .... 77 6,768.66
Such
delinquent tax sales were conducted by In
bidding for properties at delinquent tax sales petitioner's idea
was not that he would own them, but that delinquent taxpayers
would redeem them. Petitioner's sole objective in purchasing such
properties was to obtain profit from the 4 percent penalty and the
6 percent interest. Shortly
after the tax sales petitioner contacted the delinquent owners to
have them redeem their property. Approximately 60 percent of the
delinquent owners redeemed their property within 6 months after
the tax sales held in December of 1952, 1953, 1954, 1955, and
1956. Virtually all of the parcels of real property were redeemed,
but occasionally, when certain parcels were not redeemed,
petitioner surrendered the certificate of purchase to the During
the years 1955 and 1956, 111 and 129 parcels of real estate,
respectively, were redeemed by the delinquent owners thereof by
making payment to the auditor of Polk County, Iowa, of the amounts
for which such parcels were sold plus 4 percent of such amount as
a penalty, with 6 percent interest per annum on the whole amount
from the date of sale, plus the amount of all general taxes paid
by petitioner on any of said parcels for any subsequent year or
years, with a similar penalty added to the amounts of the payments
for each subsequent year and 6 percent interest per annum on the
total amount from the time of payment. All of these redemptions
occurred more than 6 months after the dates on which petitioner
purchased the redeemed parcels at tax sales and more than 6 months
after the date on which he paid the general taxes assessed against
such parcels for the year or years subsequent to the year for
which the general taxes involved in the tax sales were assessed.
The aforementioned amounts originally bid by petitioner and
subsequent taxes paid by him as well as penalties and interest
thereon for the years 1955 and 1956 were as follows: Taxes for
Year Amount Bid Subsequent Years Interest Penalty
1955 .... $ 7,847.52 $1,843.47 $ 612.47 $382.17
1956 .... 10,001.51 6,485.36 1,374.54 653.85
During
the years 1955 and 1956 petitioner received payments from the Polk
County auditor in the respective amounts of $22,140.57 and
$23,753.34, plus interest of 6 percent, as a result of the
redemption of real property successfully bid for at tax sales in
the respective amounts of $21,289 and $22,839.75. The
profits resulting from the aforementioned redemptions were
reported by petitioners on their joint tax returns for the years
1955 and 1956 as follows: Interest Income Long-Term Capital
Year (6% Interest) Gain (4% Penalty)
1955 .... $1,122.61 $851.57
1956 .... 2,683.78 913.59
The
amounts of $382.17 and $653.85, representing a 4 percent statutory
penalty received by petitioner upon redemption of certain parcels
of real property by the owners thereof during the years 1955 and
1956, said parcels having been bid for by petitioner at delinquent
tax sales more than 6 months earlier, constitute ordinary income. Opinion The
sole issue presented concerns the taxability of the 4 percent
penalty received by petitioner upon redemption of properties
purchased by him at delinquent tax sales and held by him for more
than 6 months. Petitioner contends that the property interest
represented by the certificate of purchase constitutes a capital
asset under section
1221 , Internal Revenue Code of 1954, and that the 4 percent
penalty paid to petitioner upon the redemption thereof constitutes
capital gain under section
1222 . Respondent contends that the certificates of purchase
were not "capital assets" as defined by section
1221 , and that even assuming they were capital assets, there
was no "sale or exchange" within the meaning of section
1222 , and, therefore, the amounts received by petitioner
constituted ordinary income. These statutes, so far as relevant,
are set forth in the margin. 1 We
agree with respondent, under the facts and circumstances presented
herein, that the certificates of purchase or the interests
evidenced by them, which are involved herein, were not
"capital assets," as defined by section
1221 , and consequently there was no "sale or exchange of
a capital asset" within the meaning of section
1222 , such as would entitle petitioner to capital gain
treatment of the gain realized by him upon redemption by the
owners of the real estate involved. Section
1221(1) provides that "the term 'capital assets' means
property held by the taxpayer (whether or not connected with his
trade or business), but does not include--(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." [Italics supplied.] We need not determine
whether the certificates of purchase, or the interests represented
by them, were "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," as suggested in the alternative by
respondent, for, in our opinion, petitioner was clearly in the
business of buying tax liens, with the expectation of realizing
gain from the redemption or other disposition thereof (cf.
Intercounty Operating Corp. [Dec.
14,138 ], 4 T. C. 55), and assuming, for the purposes of this
case but without determining, that the certificates of purchase or
the interests evidenced by them were "property" and that
the redemptions by the owners of the real estate involved were
"sales," as contended by petitioner, it is clear that
such certificates of purchase or interests were "held"
by petitioner "primarily for sale to customers in the
ordinary course of his trade or business" and accordingly
were not "capital assets" within the meaning of section
1221(1) . In
determining whether or not property was held primarily for sale to
customers in the regular course of a taxpayer's trade or business,
the courts have evolved a number of criteria among which are the
intent of the seller with respect to the particular asset or
assets in question; the purpose for which the property was
acquired, held, and sold; the volume, frequency, continuity, and
substantiality of the sales; the proximity of sale to purchase;
and the extent of sales activity on the part of the seller or his
agents. These factors are to be viewed in the light of all the
facts and no single factor is controlling. Eline Realty Co.
[Dec. 24,388 ],
35 T. C. 1; W. T. Thrift, Sr. [Dec.
17,863 ], 15 T. C. 366; Boomhower v. United States [48-1
USTC ¶9133 ], 74 F. Supp. 997 (N. D. Iowa). Equally material
to a proper consideration of the question is a recognition of the
fundamental objective of the capital gain provisions of the Code,
that is, to grant preferential treatment to gains realized upon
those transactions which are not normally the source of business
income. Referring to these objectives, the Supreme Court, in Corn
Products Refining Co. v. Commissioner [55-2
USTC ¶9746 ], 350 Since
this section [section
117 , I. R. C., 1939] is an exception from the normal tax
requirements of the Internal Revenue Code, the definition of a
capital asset must be narrowly applied and its exclusions
interpreted broadly. Petitioner
is a licensed real estate broker and has been in the real estate
business for approximately 30 years. He began attending delinquent
tax sales in 1949 or 1950. During the years 1951, 1952, 1953,
1954, and 1955, he was the successful bidder and received
certificates of purchase on 1, 8, 39, 115, and 77 parcels of real
property, respectively. During the years 1955 and 1956, 11 and 129
parcels, respectively, on which petitioner had held certificates
of purchase for more than 6 months, were redeemed by the
delinquent owners of the read estate. The 4 percent penalty
receipts in issue were derived from these redemptions. It
is quite clear from the record presented that petitioner acquired
the certificates of purchase at delinquent tax sales with the
intent of having them redeemed by the delinquent taxpayers as soon
as possible. His primary objective was to make the profit
represented by the 4 percent penalty, with the 6 percent interest
as an ancillary objective. With this in mind he contacted the
delinquent taxpayers shortly after the tax sales and suggested
early redemption. He was not interested in waiting passively for
the expiration of the substantial period of time (approximately 5
years) necessary to secure a tax deed and clear title. He took
active steps to produre an early redemption. Approximately 60
percent of all the delinquent owners whose properties were sold in
1952 to 1956, inclusive, and for which petitioner received
certificates of purchase, redeemed their properties within 6
months of the tax sales. The redemption involved (111 in 1955 and
129 in 1956) were made more than 6 months after the tax sales but
apparently before the expiration of the 3-year period when
petitioner would have been entitled to a tax deed. The redemptions
were frequent and continuous. They were not casual transactions,
but very much a part of petitioner's trade or business of
purchasing and disposing of interests in delinquent tax
properties. While the tax sales occurred only once annually, the
redemptions were more frequent, as was petitioner's contacting of
the delinquent owners. Petitioner also testified he contacted
owners prior to the tax sales, apparently for the purpose of
ascertaining the probabilities of early redemption. The total
effect of all his activities compels the conclusion that he was in
the trade or business of buying and disposing of tax liens and
that the property interests acquired by him at the tax sales were
held by him primarily for sale to customers in the ordinary course
of his trade or business. Whether or not such activity was a part
of his regular employment as a real estate broker is immaterial;
it is well established that a person may be engaged in more than
one business at the same time. Joseph M. Philbin [Dec.
21,942 ], 26 T. C. 1159; Friend v. Commissioner [52-2
USTC ¶9428 ], 198 F. 2d 285 (C. A. 10, 1952), affirming a
Memorandum Opinion of this Court [Dec.
18,688(M) ]. Nor is it material that the business or
occupation in question does not take all his time or is seasonal
and not active the year round. Snell v. Commissioner [38-2
USTC ¶9417 ], 97 F. 2d 891, affirming a Memorandum Opinion [Dec.
9509-C ] of the Board of Tax Appeals. He devoted whatever time
was necessary to carry on the business. Solly K. Finally,
there is no merit in petitioner's argument that the delinquent
owners who redeemed their properties were not
"customers" within the meaning of section
1221(1) . While it is true the "redemption" was
limited to the owners of the real estate or one having a
redeemable interest therein, for the purposes of this case, they
were nevertheless "purchasers" of the outstanding tax
liens and therefore "customers." The fact that the owner
of the real estate was the most likely purchaser and that in him
petitioner had a ready made market did not prevent such a
purchaser from being a customer. Moreover, petitioner could have
assigned the certificates of purchase to others prior to
redemption. Section 446.31, Reviewed
by the Court. Decision will be entered for the respondent. 1 SEC. 1221
. CAPITAL ASSET DEFINED. For
purposes of this subtitle, the term "capital asset"
means property held by the taxpayer (whether or not connected with
his trade or business), but does not include-- (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; * * * SEC.
1222 . OTHER TERMS RELATING TO CAPITAL GAINS AND LOSSES. For
purposes of this subtitle-- * * * (3)
Long-term capital gain.--The term "long-term capital
gain" means gain from the sale or exchange of a capital asset
held for more than 6 months, if and to the extent such gain is
taken into account in computing gross income. * * * TIETJENS,
Judge, concurring: In
my opinion, the redemption of the certificates of purchase by the
property owners was not a sale or exchange of such certificates
and the gains realized by petitioner on his transactions
constituted ordinary income. See Kanawha Valley Bank [Dec.
14,199 ], 4 T. C. 252. WITHEY,
FISHER, MULRONEY, and DRENNEN, Judges, agree with this concurring
opinion.
Intercounty Operating Corporation v. Commissioner H.
B. McCawley, Esq., for the petitioner. F. S. Gettle, Esq., for the
respondent. Respondent
determined that petitioner was a personal holding company and
liable as such for surtax on its income under section 500 of the
Internal Revenue Code, in the amount of $670.68 for the fiscal
year ended Findings of Fact The
petitioner is a corporation organized in 1937 under the laws of All
of petitioner's capital stock has always been owned by five
individuals. Petitioner
was engaged in the real estate business and the purchase of tax
liens, but its principal business was the purchase of tax liens on
real properties located in The
procedure which was followed by the respective three counties in
making its sales of tax liens to petitioner, and the procedure
which was followed by petitioner in making its purchases of such
liens, and in receiving amounts in redemption thereof are as
hereinafter set out. In
In
In
In
all three counties the tax sale was for state, county and school
taxes. In all three counties the holder of the tax sale
certificate would, upon surrender of the certificate, obtain a
deed from the proper official after the expiration of the period
of redemption had expired and the property had not been redeemed. The
excess of the amounts received by the petitioner in the taxable
years from the redemption of tax liens held by it above the
amounts paid by it in the purchase of such liens did not
constitute interest. In
the spring of 1940 petitioner acquired title through foreclosure
of tax liens, to certain unimproved real estate in the City of
Yonkers, New York. Petitioner retained this title throughout the
taxable year. The tax liens were purchased by it in the spring of
1938 and the particular real estate covered by such tax liens,
with the cost of the liens to petitioner, are as follows: 12 lots
in "Lawrence Park",--cost $8,113.53; a four acre tract
known as "Valley Farms",--cost $4,739.92; and two lots
identified in the record as Items 5358 and 5365 at a cost
respectively of $311.14 and $212.57. As
of January 1941 the fair market values of the properties were as
follows: " As
of January 1941 taxes for three years had accrued on certain of
the properties as follows: On " Petitioner
after acquiring the titles to these properties in the spring of
1940 made continuous efforts, during the remainder of 1940, to
sell the "Lawrence Park" properties through the medium
of newspaper advertisements, real estate brokers, and the use of
the exclusive services of a person employed for that purpose; and
petitioner also during the same period made efforts to sell the
"Valley Farms" tract through the medium of advertising
and the mailing of several thousands of descriptive circulars.
Petitioner also made efforts during this same period to sell Items
5358 and 5365. All of these efforts were unavailing and none of
the properties was sold. After acquiring the " Petitioner's
president submitted to its board of directors a report dated "RESOLVED that the said report of the President dated "FURTHER RESOLVED that in accordance with the
recommendations contained in the President's said report and for
the reasons therein stated, this Corporation abandon as of (Here is set out description of the above mentioned
properties and their book cost of $13,377.16.) Respondent
disallowed $11,001.77 of the $13,337.16 loss claimed by petitioner
on its original return for the fiscal year ended The
petitioner's interest in the " Opinion TYSON,
Judge: There
is no controversy between the parties as to the excess of the
amounts received by petitioner in the taxable years from the
redemption of tax liens by it above the amounts paid by it in the
purchase of such liens; and petitioner does not deny that such
excess was gain, but denies that it was interest as is contended
by respondent. It is also undisputed that all of petitioner's
outstanding stock was then owned by not more than five individuals
and that over 94 per cent of its gross income for the fiscal year
ended January 31, 1940 and over 99 per cent of its gross income
for the fiscal year ended January 31, 1941 consisted of such
excess, thus bringing petitioner, with regard to such stock
ownership and percentages of gross income, within the provisions
of section
501(a)(1) and (2) 1
of the Interal Revenue Code relating to the definition of a
personal holding company and its income within section
502 of that code if such excess constituted interest. The
first issue therefore is whether such excess constituted interest
within the meaning of section
502(a) of the Internal Revenue Code. 2 On
the first issue respondent contends that the New York statutes
designate as "interest" the amount of the gain realized
by petitioner through the redemption of its tax sale certificates,
represented by certain percentages upon the amount paid for such
certificates, and that for that reason alone such gain should be
held to be interest within the meaning of section
502(a) , supra, and in the amount of at least 80 per
cent of petitioner's gross income under section
502(a)(1) , supra. He also contends that the gain
constitutes such interest within the broad meaning of section
502 independently of the provisions of the We
will first consider the effect of the New York statutes on the
question of whether the gains, represented by the percentages on
the amounts paid by petitioner for the tax lien certificates, and
received by it from redemption of its tax liens constitute
interest includable in petitioner's personal holding company
income under section
502(a) , supra. Chapter
477 of the Laws of New York of 1932 operative during the years of
the purchase of the tax lien certificates and the redemptions of
the lands involved, dealing with the sale of lands for taxes and
the redemption of same in Nassau County, New York, amending section
85 of chapter 541 of the Laws of 1916, as added by chapter 154
of the Laws of 1919, provides, in part, as follows: Section
85 . * * * Such lands shall be sold for an amount sufficient
to pay all the taxes and assessments due thereon for the years for
the taxes of which said sales shall be made with interest thereon
to the time of sale, and all costs, expenses and charges accrued
thereon and * * * said amount paid for such property shall carry
and bear the maximum interest and penalties as follows: Ten per
centum on the purchase price, if redeemed within 6 months of date
of sale. An additional 10 per centum on the purchase price if
redeemed after the expiration of six months and within twelve
months of the date of sale * * * (followed by similar language
with regard to additional percentages covering each six months
until four years have expired) * * * The rate of interest at which
any person or persons shall offer to take the lot or parcel of
land to be sold shall be established by his bid. The rate thus
established shall be the rate of interest up to the time of the
redemption of the property purchased and until the expiration of
four years. Section
89 . The owner of, or any person interested in, * * * any real
estate sold for taxes * * * as aforesaid, may redeem the same at
any time within forty-eight months after the date of such sale
upon the following terms: If redeemed within Forty-five months by
paying to the county treasurer the sum for which such property was
purchased with the interest or penalties thereon, * * * calculated
and added to such purchase price as provided in section eight-five
hereof. * * * The
provisions of chapter 175 of the Laws of New York, 1937, section
45 , and chapter 152 of the Laws of New York of 1929, section
49 , with reference to the sale of lands for unpaid taxes and
their redemption in Suffolk County, New York, are, in effect,
identical with sections
85 and 89 of
the Laws of New York, 1932, chapter 477, above quoted, except that
the maximum rate of interest and penalties is six per cent instead
of 10 per cent and the period of redemption is 36 instead of 48
months. The
provisions of chapter 175, supra, above referred to, were
in effect, as agreed by the parties on brief, during the years of
the purchases of the tax lien certificates and the redemption of
the lands involved. Chapter
441 of the Laws of New York of 1938, as amended with regard to Section 20. Payments and fees--The purchasers at such sale shall pay the amounts of their respective bids to the said treasurer immediately after the sale, and after such payments shall have been made the said treasurer shall and a penalty of ten per centum thereto for the benefit of the said purchasers, and shall give the purchaser of any such real estate a certificate describing the lands purchased, the sum paid and the penalty attached thereto, * |