actually done. See to the same effect George I. Stone, 32 T.C. 1021. We decide the present issue in favor of the petitioner.

Decision will be entered for the petitioner.

WILLIAM E. STARKE AND CECILIA G. STARKE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 70249. Filed October 7, 1960.

Held, that amounts received in the years in question representing gain from real estate lots sold in those years and prior years constituted ordinary income as gain from the sale of property held for sale to customers in the ordinary course of trade or business. Sec. 117(a) (1), I.R.C. 1939, and sec. 1221 (1), I.R.C. 1954.

Robert E. Austin, Esq., and Wendell H. Davis, Esq., for the petitioners.

Eugene F. Reardon, Esq., for the respondent.

ATKINS, Judge: The respondent determined deficiencies in income tax and additions to tax for substantial underestimation or underpayment of estimated tax for the taxable years 1953, 1954, and 1955 as follows:

The petitioners concede they are liable for additions to tax under the above sections of the Internal Revenue Codes of 1939 and 1954. The sole issue remaining for decision is whether gain from the sale of real estate lots by petitioners in the years 1953, 1954, and 1955 is taxable as ordinary income as determined by the respondent or as long-term capital gain as contended by the petitioners.

FINDINGS OF FACT.

Some of the facts are stipulated and are incorporated herein by this reference.

The petitioners are husband and wife residing in San Diego, California. They filed joint income tax returns for the years 1953, 1954,

and 1955 with the district director of internal revenue at Los Angeles, California. Since Cecilia G. Starke is involved herein solely because the income in question is community income under the laws of California and because she and her husband filed joint returns for the years 1953, 1954, and 1955, William E. Starke will hereinafter be referred to as petitioner.

Petitioner is an attorney and has been actively and continuously engaged in the private practice of law in San Diego, California, since 1936. From 1937 to 1951 he practiced law in partnership with Solon S. Kipp. For approximately 10 years prior to 1937 petitioner was the chief redemption clerk in the office of the county auditor in San Diego. During that employment he became familiar with tax deeds, street improvement bonds, quitclaim deeds, and other aspects of acquiring title interests in real estate and is considered an expert in this field. He is familiar with property in San Diego and it was not necessary for him to actually view particular property to know its location and character.

In 1930 or 1931 the petitioner commenced acquiring title to real estate lots in San Diego County through the acquisition of street improvement bonds. Title to the underlying lots was obtained either by quitclaim deeds from the property owners, by foreclosure pursuant to the provisions of the bonds, or by payment of delinquent taxes and the receipt of tax deeds. In some instances he purchased tax deeds outstanding against lots in which he had acquired an interest through ownership of street bonds, thus perfecting his title. Street improvement bonds were issued under the circumstances described hereinafter. San Diego property owners desirous of having streets adjacent to their properties paved and otherwise improved would file petitions with the San Diego City Council. If a petition was supported by more than 50 per cent of those whose property was adjacent to the streets to be improved, the city council would approve the project and direct the city engineers to furnish plans and specifications for the improvements. The city council would then award a contract to the contractor making the lowest bid. After the contractor had finished his work, the city council would apportion the cost of the improvements to the various properties benefited and the amount apportioned was assessed against each property. The contractor would then send bills to the various property owners. If payment was not made within 30 days, the contractor would report the delinquency to the city council and request and receive a street improvement bond in the amount of the assessment in each such case. The bond was issued and payable to the bearer, the amount thereof was payable in installments over a 10year period, it bore interest at the rate of 6 per cent per annum, it

constituted a lien on the property, and was salable on the open market. The interest was exempt from income tax.

If a property owner failed to meet any installment of principal or interest when due, the owner of the bond had the right to force a judicial sale of the property for the amount of the bond and the interest due thereon.

Contractors usually obtained three legal opinions in connection with a particular contract, one when the original contract was awarded, one when the paving work was completed, and one when delinquency occurred and the contractor requested the issuance of street improvement bonds. The petitioner wrote approximately 90 per cent of these legal opinions in San Diego County, and in this connection traveled to all the cities in the county.

Contractors sometimes sold the bonds issued to them. The petitioner knew of the availability of bonds for sale through his connection with the contractors and through his legal representation of several bond buyers and investment houses. Such contractors and investment houses would advise him of such availability. He purchased many such bonds from contractors and received many in payment of legal fees due from contractors. Upon acquisition of such bonds the petitioner made no title search with respect to the properties since the amount of the bond constituted a first lien on the property on a parity with the lien for local taxes.

The petitioner also obtained part interests in street bonds through the purchase thereof with others, each furnishing his proportionate share of the money. He purchased such bonds in ventures with Kipp, in which he received a 50 per cent interest, in ventures with Kipp and Kenneth Mark, in which he received a 3313 per cent interest, and in ventures with Kipp and Joseph Schreve, in which he received a 25 per cent interest.

Kenneth Mark represented the Griffith Company, a Los Angeles paving contractor doing street-paving work in San Diego, and in that connection made surveys of street improvements on which the Griffith Company proposed to submit bids. The petitioner also represented the Griffith Company in hundreds of street bond foreclosures. Mark has had a real estate license in California for many years.

Schreve was the sole owner of the Michigan Mortgage Company and the Eagle Investment Company. The business of these two companies included the making of various investments, including investments in real estate, issuance of insurance, and the purchasing and selling of street bonds and interests in real estate. Schreve acted as an adviser

on investments in real property and in the stock market. The two companies had held real estate licenses in California for many years. The petitioner never sold any of the street improvement bonds which he acquired, although sometimes he would exchange some for other improvement bonds on properties in which he already had some interest.

The petitioner individually, and he and the other joint venturers, generally acquired the fee interest in the properties against which they held street bond liens through foreclosure and judicial sale by bidding the amount of the judgment plus the cost of the judicial sale and taking the property in satisfaction of the judgment. However, they sometimes acquired title to properties on which they held street bonds through the payment of delinquent taxes owed on the properties and the receipt of tax deeds. In this latter manner they were able to obtain a fee interest immediately rather than wait for a delinquency in payment under the bonds; this would also preclude anyone else from obtaining a part interest in the property through payment of delinquent taxes. Also in the case of many of the bonds which were delinquent, they found it more advantageous to obtain title by payment of the delinquent taxes. With respect to many of such properties, the petitioner and his coventurers were able to reach an agreement with the taxing officials to pay a flat sum per lot, in lieu of the greater amount of taxes due, and thus were able to obtain title to the underlying properties at a lower cost.

All of the real estate lots acquired by the petitioner, as above described, were unimproved lots and petitioner did not thereafter improve them in any way. The petitioner continued to acquire street bonds through the years up to the time of the hearing. However, after 1953 his acquisitions of titles to lots through the payment of delinquent taxes ceased because taxes were too high.

The petitioner did not commence to sell any of the real estate lots which he had acquired, as described above, until about 1941. At that time due to World War II, large aircraft factories were located in the area, which, together with the fine climate, attracted a large population. As a consequence the demand for property increased and the petitioner continued to sell lots from then on, including the years in question. Although his sales of lots were relatively few in the years 1948, 1949, 1950, and 1951, the average number of lots which he sold annually over the period from 1941 through 1952 was as great as the number sold in each of the years in question. The greatest increase in prices and demand for lots occurred in the middle of 1952.

Sales in which petitioner had an interest were made during the years 1953 to 1956, inclusive, as follows: