ALABAMA MINERAL LAND COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, 250 F.2d 870

JONES, Circuit Judge. Six individuals owned the bonds of a $5,000,000 issue of Selma, Rome and Dalton Railroad Company secured by its deed of trust. Through foreclosure the bondholders acquired approximately 361,-000 acres of land situate in fifteen or more counties of Alabama. In 1883 the six former bondholders transferred the lands to the petitioner, Alabama Mineral Land Company, in exchange for its stock. The stock was issued in the same proportion as the bonds had been held. Prior to March 1, 1913, the petitioner had sold about 163,000 acres of land so that on that date it had about 198,000 acres remaining.

During 1943 and 1944 the petitioner, as it had done before and as it has done since, made sales of land and made dispositions of timber, coal and mineral rights. These transactions were reported by the petitioner in its Federal income tax returns as sales of capital assets and the tax on the profits was computed as long-term capital gains. The Commissioner of Revenue determined that these profits were ordinary income and proposed tax deficiencies. The Tax Court reached the same conclusion in a memorandum opinion. The correctness of this determination, among other issues, is presented to us for review.

In the Tax Court’s opinion it is stated that the petitioner acquired the property from the bondholders, who became the petitioner’s stockholders, for the purpose of selling it, and that it never deviated from that purpose. Therefore, the Tax Court concluded, it was regularly engaged in the business of selling its properties and the properties were held for sale in the ordinary course of trade or business. 26 U.S.C.A. (I.R.C.1939) § 117. The evidence shows that the property was not acquired through a voluntary purchase for the purpose of reselling in smaller parcels.

It was taken over in foreclosure and replaced bond holdings which had been acquired as investments. Realization upon the investment required that the property be sold. There was no substantial sales promotion or activity. It sold timber, coal and mineral rights but did no logging, mining or exploring. In Alabama Mineral Land Co. v. Commissioner, 28 B.T.A. 586, decided in 1933, the Board of Tax Appeals said that the petitioner was engaged in the business of buying and selling timber, timber lands and cut-over lands.

However, there is nothing in the record before us to show land purchases after the 1883 acquisition except one small tract acquired for blocking out its holdings, nor were any timber purchases shown since the Board’s decision. The acquisition by the bondholders was for the purpose of liquidation. The transfer to the corporation did not endow it with a different purpose. Proceeds of sales have been distributed in liquidation.

The Commissioner calls to our attention the charter powers of the petitioner to improve, develop and sell the lands acquired in the foreclosure and to acquire other property for use, improvement, development and sales. Our concern, though, must be with what it did rather than with what it might have done. The exercise of a power and not the possession of it is the material factor to be weighed in testing whether a corporation is in a particular business. See South Texas Properties Co. v. Commissioner, 16 T.C. 1003.

Frequency and continuity of sales are matters for consideration in ascertaining whether sales are of assets held for sale in the ordinary course of trade or business but are not necessarily controlling. Goldberg v. Commissioner, 5 Cir., 1955, 223 F.2d 709. On other occasions this Court has reviewed the tests which have been applied in determining whether property has been held for sale in the ordinary course of trade or business. See Smith v. Dunn, 5 Cir., 1955, 224 F.2d 353, and Gamble v. Commissioner, 5 Cir., 1957, 242 F.2d 586, and the cases there cited.

From all of the decisions it is apparent that there is not any fixed formula that can be used, and that each case must rest upon its own facts. This is the rule in cases involving liquidation of properties as in other cases. Taxpayers have been denied capital gain or loss treatment of liquidations by decisions of this Court in Snell v. Commissioner, 5 Cir., 1938, 97 F.2d 891; Brown v. Commissioner, 5 Cir., 1944, 143 F.2d 468; and in White v. Commissioner, 5 Cir., 1949, 172 F.2d 629. In other Fifth Circuit cases the right to treat liquidations on a capital gain basis has been sustained. See United States v.

Robinson, 5 Cir., 1942, 129 F.2d 297; Goldberg v. Commissioner, 5 Cir., 1955, 223 F.2d 709; Consolidated Naval Stores Company v. Fahs, 5 Cir., 1955, 227 F.2d 923. In the case of Snell v. Commissioner, supra, the taxpayer had platted the property and improved it in order to make it the more saleable. The reason for denying the use of the capital gain tax rate was thus stated by the Court: “The fact that he bought no additional lands during this period does not prevent his activities being a business. He merely had enough land to do a large business without buying any more.

He was not reselling land in the condition in which he bought it, but was subdividing and platting it and sometimes improving it, so as to make wild lands into town lots, thus adding the business element of development. All was done with such purpose, system and continuity as well to constitute it a business.” Snell v. Commissioner, 5 Cir., 97 F.2d 891, 893. Upon similar facts the Court reached a like conclusion in Brown v. Commissioner, supra, where the opinion adopts the language we have quoted.

Where, as here, a liquidating landowner has engaged in disposing of its property without having platted, subdivided or made improvements upon it, and without having advertised it for sale, listed it with brokers or employed sales agents, it was not in the trade or business of selling real estate. Rather it was in the course of gradual and passive liquidation, and sales made in following such a course are sales of capital assets. This is so even though sales have been frequent and continuous. Such is the holding of the Tax Court in Farley v.

Commissioner, 7 T.C. 198, which this Court has cited with approval in White v. Commissioner, supra. The Tax Court, in its Farley opinion, cited the opinion of this Court in United States v. Robinson, supra, where timber sold in liquidation was held to be a capital asset rather than stock in trade. Of the reported cases bearing upon the capital gains question the one nearest in point on its facts is Chandler v. United States, 7 Cir., 1955, 226 F.2d 403. The facts were that the State of Texas had conveyed some 3,000,000 acres of land to a British corporation as payment for constructing the State capital building.

The titles came to Chandler and others as trustees under a declaration of trust which contemplated liquidation. There as here it was contended that the capital of the trust had been embarked upon a full scale real estate business. Following its earlier decision in Three States Lumber Co. v. Commissioner, 7 Cir., 1946, 158 F.2d 61, it was held that the property sold was not held for sale to customers in the ordinary course of trade or business. The quantity of the land owned by the petitioner and the fact that it was cheekerboarded rather than in large tracts required time within which to dispose of it.

The length of time required for liquidation and the number of transactions necessary are not determinative of the issue of selling in the course of business. Consolidated Naval Stores Co. v. Fahs, supra; Three States Lumber Co. v. Commissioner, supra; Chandler v. United States, supra. The material facts were not in dispute on the issue of whether the sales were in the course of business. Although the issue is one of fact, it is of the ultimate fact which we may with propriety review under the rule stated in Galena Oaks Corporation v. Scofield, 5 Cir., 1954, 218 F.2d 217. And see Consolidated Naval Stores Co. v.

Fahs, supra. We conclude that the sales of land, timber and mineral rights made by the petitioner during the years in question were not of property held primarily for sale to customers in the ordinary course of trade or business. In the second of the two questions presented by this appeal, the petitioner challenges the Tax Court’s findings as to the unrecovered March 1, 1913, value of the timber owned on December 31, 1941. The amount was claimed by the petitioner in its Tax Court petition to be not less than $908,844. It here claims such unrecovered value was $1,831,188.

The Commissioner, in determining the petitioner’s tax liability, assigned $33,256, as the unrecovered 1913 value of timber owned on December 31, 1941. The amount found by the Tax Court is $118,188. There was no dispute as to the amount of the recovery from March 1, 1913, to December 31, 1941. The difference in amount unrecovered is the result of disagreements as to the 1913 value of the timber owned in 1941. The disagreements are both as to the quantity of timber and as to the value per M board feet to be placed upon it'.

The Board of Tax Appeals, in the 1933 case involving 1928 and 1929 tax deficiencies, found that the timber there involved had a March 1, 1913, value of $5 per M board feet. Alabama Mineral Land Co. v. Commissioner, supra. In that case the $5 figure was established' by petitioner’s witnesses and the Tax Court pointed out that the Commissioner “offered no rebuttal evidence and failed to weaken the testimony of petitioner’s witnesses by cross-examination or otherwise”.

In the trial of this case before the Tax Court the Commissioner produced testimony of several witnesses, some who knew the land and its history firsthand and some who qualified as experts in the field of timber appraising. There was a conflict of the testimony and the evidence fully justified the Tax Court in the finding which it made. The requirements of the Treasury Regulation for the determination of the value of timber were followed. Treas.Reg. Ill, § 29.23 (m)-25.

The petitioner asserts that it was entitled to> have its timber aggregated in a “block” for determining the unrecovered March 1, 1913, value of the timber held on December 31, 1941, and contends that its. right to such method of valuation is given to it by Treasury Regulation 111, § 29.23 (m)-27. This regulation provides: “With a view to logical and reasonable valuation of timber, the taxpayer shall include his timber in one or more accounts.

In general, each such account shall include all of the taxpayer’s timber which is located in one ‘block’, a block being an operation unit which includes all of the taxpayer’s timber which would logically go to a single given point of manufacture.

In those cases in which the point of manufacture is at a considerable distance, or in which the logs or other products will probably be sold in a log or other market, the block may be a logging unit which includes all of the taxpayer’s timber which would logically be removed by a single logging development. * * ” We do not outline the evidence upon which the petitioner relies in putting forward this claim. It is enough for us to say that the evidence furnishes no basis for a blockage method of valuation. See 4 Mertens, Law of Federal Income Taxation, p. 135, § 24.43.

The decision of the Tax Court is reversed and the case is remanded for a redetermination of the tax deficiency in conformity with this opinion. Reversed and remanded.