Before GOODRICH, McLAUGHLIN and STALEY, Circuit Judges.
The sole question presented by these appeals is whether gains realized by the taxpayer on the sale of real estate during the years 1950, 1951, and 1952 are taxable as long-term capital gains or as ordinary income.
The facts, which are set forth in some detail in the opinion of the Tax Court,*fn1 may be summarized as follows:
The Pennroad Corporation is an investment company registered with the Securities and Exchange Commission as a closed-end management company pursuant to the Investment Company Act of 1940, 15 U.S.C.A. § 80a-1 et seq. During the tax years in question, Pennroad, a Delaware corporation, as the common parent corporation of an affiliated group of companies, filed consolidated income tax returns for itself and its affiliates. Among these affiliates was the Canton Company of Baltimore (Canton), of which the taxpayer owned 99.875 per cent of the outstanding capital stock. In turn, Canton owned 100 per cent of the stock of the Canton Railroad Company and 98.6 per cent of the stock of The Cottman Company.
The real estate sales, the taxability of gains from which are at issue, were made by Canton. Canton was incorporated in 1828 by a Special Act of the Maryland Legislature. Its charter provides that it is "capable in law of purchasing, holding, improving and disposing of property, real, personal or mixed * * * for the purposes herein authorized * * and generally may do every other act or thing necessary to carry into effect the provisions of this act, and promote the objects and designs of said company." The purposes for which Canton was incorporated are set out in the margin.*fn2
The Canton Railroad, for which Canton procured a charter in 1906, is presently a Class 1 switching railroad under Part I, Section 20 of the Interstate Commerce Act, 49 U.S.C.A. § 20. It performs switching services between the industries located on its right of way, the Baltimore waterfront, and the three trunk lines servicing the city. The Cottman Company is a stevedoring company, control of which was acquired by Canton on July 19, 1950.It performs stevedoring operations for the Canton Railroad and other companies and leases from Canton and Canton Railroad an ore pier, cranes, a conveyor system, and all of the facilities utilized by it in the loading and unloading of ships.
Shortly following its organization in 1828, Canton acquired over 5,000 acres of waterfront real estate in and near Baltimore, Maryland. It thereafter leased, improved, and sold portions of this real estate. In addition, it constructed waterfront facilities, such as docks, wharves, and piers. The parties agree that some, if not all, of the improvements then made were with a view to the continued holding and use of the property improved. On a portion of Canton's property the United States government constructed three or four warehouses during World War I. These buildings were subsequently acquired by Canton and since that time one of its activities has been the leasing of warehouse space for manufacturing and storage purposes.
Over the years, Canton purchased additional parcels of real estate. Some of these purchases were effected in anticipation of a proposed extension to the Canton Railroad, which plan was later abandoned. A number of parcels so acquired were purchased because they were regarded as having strategic locations along the proposed route, such as at highway intersections. Other acquisitions were made periodically for the avowed purpose of filling out or shaping up irregular parcels already held by Canton, so as to make them more attractive to persons in the market for industrial sites.
In keeping with its purposes as set forth in its charter, Canton has been vitally interested in the development of the Port of Baltimore. Efforts have been directed at improving and developing its waterfront property for continued use in its operations, while at the same time selling or marketing other portions of its real estate. Additionally, the interests of the Canton Railroad have been a strong influence on Canton's activities. Since the railroad's construction, Canton has made it a policy to sell property suitable for industrial use to purchasers who would increase the traffic of the railroad. Land not suitable for such purposes due to inaccessibility has not been so restricted, and a large percentage has been sold for residential purposes.
By 1930 Canton retained approximately 1,700 acres of real estate, the rest having been liquidated. Subsequently, it sold real estate at a reasonably steady rate up to and including the taxable years. Canton did not list its property with brokers nor did it employ agents or brokers to dispose of its property. The prices for property were fixed by one of its officers subject to approval by its board of directors, such prices being comparable to what other sellers of similar property were receiving.
Although no "For Sale" signs were posted by Canton, it did, from time to time, prepare and issue brochures and maps describing its operations and available real estate. It also advertised locally in magazines, newspapers, and telephone directories. Rather consistently Canton described itself as dealing in "Industrial Real Estate." At times it also indicated that it had large or small tracts available to builders for residential purposes.
During the tax years in question, 1950, 1951, and 1952, thirty-three sales were consummated for an income tax profit of $293,949.19.*fn3 A substantial number of the parcels were from the original acquisition of 5,000 acres; others were acquired as part of the plan to extend the Canton Railroad, and still others or portions thereof were acquired for the purpose of "straightening boundary lines." With the exception of two parcels, all of the land was unimproved and only one-third of the parcels had been rented at any time during the preceding ten years, most of them for outdoor advertising or farming operations at nominal rentals.
For federal income tax purposes, Canton always treated gains from the sales of its real estate as capital gains, and this was not questioned by the government until 1949. Taxpayer's consolidated returns for the tax years in question described Canton's business as "Real Estate - Active." During 1940-1950 the taxpayer stated in its annual reports to its stockholders that "Canton Company of Baltimore was chartered in Maryland in 1829 [sic] for the purpose of dealing in real estate, etc. The principal business is the sale and/or rental of real estate." Canton's annual reports for 1951 and 1952 referred to the land that had been ...