226 F.

2d 403
55-2 USTC P 9691

Kent CHANDLER, Farwell Winston and Albert D. Farwell, as

Trustees of The Capitol Freehold Land Trust,
Plaintiffs-Appellants,
v.
The UNITED STATES of America, Defendant-Appellee.
Kent CHANDLER et al.
v.
John T. JARECKI, as Collector of Internal Revenue Of The
United States of America For The First District of
the State of Illinois, Defendant-Appellee.
Nos. 11295-11297.

United States Court of Appeals Seventh Circuit.

Oct. 14, 1955.

J. F. Dammann, Clay Judson, Sheldon Lee, Kent Chandler, Jr., Chicago,

Ill., Wilson & McIlvaine, Chicago, Ill., of counsel, for plaintiffsappellants.
H. Brian Holland, Asst. Atty. Gen., Marvin W. Weinstein, U.S. Dept. of
Justice, Robert Tieken, U.S. Atty., Donald S. Lowitz, Asst. U.S. Atty.,
Ellis N. Slack, Hilbert P. Zarky, Grant W. Wiprud, Special Assts. to the
Atty. Gen., for appellees.
Before MAJOR, FINNEGAN and LINDLEY, Circuit Judges.
FINNEGAN, Circuit Judge.

A clear-cut question is before us, arising from lengthy facts, requiring

interpretation and application of former 117, Internal Revenue Code of 1939.1
We must decide if, during the calendar years 1942 to 1950, taxpayers2 sold
statutory capital assets. To reach our ultimate disposition of these appeals3 we
consider if taxpayer engaged in the real estate business during that period and

whether the lands involved constituted property held by taxpayer primarily for
sale to customers in the ordinary course of trade or business within the ambit of
117.
2

Only a distilled version of the facts need by reported since Chandler v. United
States, D.C.N.D.Ill. 1954, 121 F.Supp. 722, reflects considerable detailing of
the record made below, on a stipulation of certain facts, some documentary
evidence and testimony-- largely uncontradicted. Capitol Freehold Land Trust
succeeded to the title of approximately one million acres of Texas land. In the
beginning, 1882 to 1888, the State of Texas conveyed some 3,000,000 acres of
land to a British corporation, Capitol's earliest predecessor in title. These
transfers were consideration for constructing the Texas State Capitol building at
Austin. Another trust, created June 4, 1915, held title to all the remaining
portions of the principal tract until December 23, 1933, when Capitol took over
its titles.

Activities of these trusts, according to the District Judge's memorandum, 121

F.Supp. 723, were shown as, and by:

'An agreed tabulation from the books and records, or annual reports, of the
trustees reflects that from 1915 through 1932 over 700,000 acres of land were
sold for approximately $10,747,000; that from 1933 through 1941 over 187,000
acres were sold at approximately $1,291,000; and that from 1942 through 1950
over 290,000 acres were sold for approximately $5,000,000. During the period
from 1942 through 1950 there were at least 536 separate sales transactions, or
an average of 59 per year.'

The declarations of trust contained these pertinent provisions:

The 1915 Trust:

'As soon as practicable without in the opinion of the Trustees sacrificing values
the Trustees shall convert the entire trust estate into money notes or bonds or
partly one or partly the other or others and distribute the same among certificate
holders. It is the expectation and desire of the parties hereto that all of the lands
belonging to the trust estate situated in Texas shall be converted into money
within 10 years from this date unless this will in the judgment of the Trustees
involve an unreasonable sacrifice but in any event it shall be the duty of the
Trustees to have the trust hereby created completely settled and determined
within 15 years from and after the date of this deed.' (Stipulation of facts, T.R.
34.)

The 1933 Trust:

7

'The object of this trust is to administer the trust estate in such manner as to
produce as large dividends to the Shareholders as is consistent with sound
business practices without in the judgment of the Trustees endangering the
safety of the trust estate and to convert the trust estate into personal property
including moneys, notes, bonds, stocks, mortgages, certificates of beneficial
interest in trusts or partly one and partly others and to distribute the same as
ordinary or liquidating dividends among the Shareholders before the trust
expires by its terms.' (Exhibit 1.)

The Commissioner of Internal Revenue taxed as ordinary income, gains

realized by taxpayer, on land sales, from 1942 to 1950, inclusive. Having paid
the assessed taxes, taxpayer sued for a refund on the theory that these gains
should have been taxed as long-term capital gains. The District Judge rejected
taxpayer's contentions and entered judgment for defendants in the three cases
consolidated for trial. D.C., 121 F.Supp. 722.

Though the District Judge made findings of fact, conclusions of law and filed a
memorandum, Rule 52, Fed.Rules Civil Proc., 28 U.S.C.A. we are empowered
to overturn his decision since the ultimate finding on which the judgment
appealed rests is a conclusion of law, or a mixed one. Fritz v. Jarecki, 7 Cir.,
1951, 189 F.2d 445.

10

Tax law is littered with cases manifesting the constant struggle to capture the
preferred treatment accorded capital gains and losses in contrast to ordinary
income and loss transactions. Ascertainment of the definitive characteristics of
a capital asset in a given factual situation, is one of the more substantial zones
of difficulty. See e.g., Surrey and Warren, Federal Income Taxation, 519
(1955); Miller, The 'Capital Asset' Concept: A Critique of Capital Gains
Taxation, 59 Yale L.J. 837, 1057 (1950). In deceptively simple words 117(a)
(1) defined capital [ ] assets4 as property held by the taxpayer, whether or not
used in his trade or business, with the exception of several enumerated statutory
exclusions of which this is a pertinent one:5 '* * * property held by the
taxpayer primarily for sale to customers in the ordinary course of his trade or
business * * *'* From its completion of the capitol building, at Austin, until
sometime in 1912, taxpayer engaged in the cattle-ranching business6 on a large
scale. D.C., 121 F.Supp. 722, stipulation of facts, T.R. 22. That business
activity was abandoned upon becoming financially unsuccessful; the live stock
was sold-- (stipulation, T.R. 23), and it was then decided that the land holdings
should be liquidated. Indeed government counsel stated7 during the trial below:

'Maybe I can save time. We can concede the taxpayer here was liquidating, that
it was under a duty to liquidate in accordance with the trust instrument.' We
would assume from the continuity of testimony appearing in the record just
prior to that concession, that counsel referred to the trust created December 23,
1933. The short of it is under defendants' theory, taxpayer liquidated by
embarking its capital on a full-scale real estate business, and we add,-- using
the residue from the vast tract first acquired as compensation for services
rendered Texas. Implementing that argument, defendants point to the piecemeal conversion and diminution of land holdings, for profit, as manifesting
taxpayer's operation of a realty business. Of course, it is abundantly clear that
this taxpayer started with a capital asset. Resort to dictionary definitions of such
words as 'ordinary,' 'trade' and 'business,' as expected, are little aid here. Nor
can any workable formula be developed which will show what quantum of
commercial activity equals 'business.' Moreover, 'liquidation' is, also, devoid of
any magical meaning. Here the taxpayer desired to replace acreage with cash.
The lands were not purchased in one market for the purpose of selling holdings
in another. There is a consistent history, traced in the record, of an aim to
realize on the lands held, compelling adherence to our earlier decision reported
as Three States Lumber Co. v. Commissioner, 7 Cir., 1946, 158 F.2d 61. There,
the Commissioner sponsored a theory8 remarkably similar to his present
position, and we rejected it. Disposition of these lands was consistent with the
provisions already quoted from the several successive trust instruments.
11

Had the lands been sold in a single unit there probably would have been slight
debate concerning their capital asset status. But the market place is hardly
glutted with prospective buyers clamoring for million acre tracts. It seems odd
to penalize this taxpayer because it actively sought to dispose of these holdings.
Defendant would insist that Capitol sit idle, wishing for a buyer or buyers,
under the threat that any selling effort would result in deprivation of capital
asset treatment. Despite the blurring, in relevant precedent, between capital
gain and ordinary income we think the specific facts established in this case
warrant capital gain treatment for taxpayer's transactions. That taxpayer
indicated in a 1942 protest to an Internal Revenue Agent, it was a dealer in real
property is hardly determinative of the total appeal. Self-description, such as
that, in the setting of this case is well wide of the mark and but a speck on the
periphery.

12

The District Court's judgment, appealed, is reversed.

26 U.S.C.A. 117

Plaintiffs in all three appeals are Kent Chandler, Farwell Winston and Albert D.
Farwell, Trustees of The Capitol Freehold Land Trust. The United States is
defendant in cases numbered 11295-6, and John T. Jarecki as Collector of
Internal Revenue is defendant in appeal numbered 11297. For convenience we
shall refer to these plaintiffs-trustees-taxpayers as the 'taxpayer.' For years prior
to and including those involved in these appeals The Capitol Freehold Land
Trust was classified and taxed as a corporation. T.R., 23

These are three actions, consolidated for hearing in the District Court and on
appeal here

Section 1221 of the Internal Revenue Code of 1954, 26 U.S.C.A., is based upon
this section. But section 1237, I.R.C. 1954, concerning real property subdivided
for sale is a new provision. See S.R.No. 1622, 83d Cong., 2d Sess. 441 (1954),
where the Committee on Finance stated: 'It is a new section which permits an
individual who is not otherwise a real-estate dealer (as the result of his
engaging in the business of selling other real property to customers) to dispose
of a tract of real property, held for investment purposes, by subdividing it
without necessarily being treated as a real-estate dealer with respect to all of his
long term gain.'
5 U.S.Treas.Reg. 111, 29.117-1.

Italics supplied

'The State of Texas * * * issued to The Capitol Freehold Land and Investment
Company, Limited, the original predecessor in interest and title of the lands in
question, a Permission to do Business in the State of Texas, to the extent and
for the purposes as follows, towit: 'the raising, buying and selling of live stock'.
* * *' Stipulation, T.R. 24

T.R. 184. See also defendants' brief, pp. 6 ff, pp. 24 ff

Summarizing his argument and position taken in Three States Lumber Co. v.
Commissioner of Internal Revenue, 7 Cir., 1946, 158 F.2d 61, the
Commissioner stated on page 5 in the brief he there filed:
'After terminating its lumber business the taxpayer for many years engaged in
the business of dividing and selling its 17,000 acres of land. It is quite
immaterial that its motive in doing so was the desire to liquidate. The statute
which provides that 'property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business,' shall not constitute
capital assets, does not require that the property must have been acquired
originally for resale to customers, or that a taxpayer must also indulge in buying

property during the period in which it holds already acquired property for sale.'
(Italicization appears in originial.)