purchase of such magnitude would have required more elements of business activity than did petitioner's acceptance of individual offers as they occurred from time to time. Under these circumstances, it appears to us that the frequent and continuous character of the sales resulted notwithstanding petitioner's passivity rather than from any business activity on his part. As already suggested, petitioner could have eliminated the frequent and continuous character of sales by selling the property in one tract. However, such procedure would have undoubtedly involved many practical disadvantages. The property was covered with nursery stock. Had the property been sold in one tract, with reasonably prompt occupancy expected, petitioner would have been faced with the problem of removing large quantities of nursery stock to enable such occupancy. The large scale removal of such nursery stock would have posed petitioner the problem of obtaining labor, which was in short supply, and of finding a way to dispose of such stock. In view of the absence of the elements of development and sales activity and the impracticability of disposing of the property in one tract, we are not inclined to think that the frequency and continuity test as applied to these circumstances would constitute in and of itself a satisfactory criterion of business activity.

We are impressed on the other hand by what we consider the almost complete absence of any development or sales activity in the instant case. The only improvements on the property which had any relation to the desirability of the property for residential purposes were the streets that were constructed and paid for by the city of New Orleans. Petitioner did not desire these improvements and was not instrumental in any way in obtaining their construction. Petitioner did contribute certain materials required to build sidewalks and curbing. However, the expense to petitioner was relatively insignificant in amount and such practice of furnishing such material was customary in the city of New Orleans. With this exception petitioner was not responsible directly or indirectly for any improvements on the property which might be considered as facilitating its sale for residential purposes. Nor did petitioner engage in any activities whatsoever to promote sales. He did no advertising, hired no agents, did not list the property, and erected no signs. Petitioner, in our opinion, merely accepted satisfactory offers from unsolicited purchasers. It would seem that petitioner could have maintained a more passive role only by refusing to sell at all.

We are further impressed by the fact that the sales in question appear to have been essentially in the nature of a gradual and passive liquidation of an asset. We appreciate that the so-called liquidation test has been rejected in certain cases wherein the manner of conducting the alleged liquidation was such as to constitute a trade or business. See

Richards v. Commissioner, supra; Commissioner v. Boeing, 106 Fed. (2d) 305; Ehrman v. Commissioner, supra. It is undoubtedly true that where the liquidation of an asset is accompanied by extensive development and sales activity, the mere fact of liquidation will not be considered as precluding the existence of a trade or business. Where, however, the active elements of development and sales activities are absent, the fact of liquidation is not, in our opinion, to be disregarded. The liquidation factor has been given consideration and weight in such cases as United States v. Robinson, 129 Fed. (2d) 297; Fuld v. Commissioner, 139 Fed. (2d) 465; Harriss v. Commissioner, 143 Fed. (2d) 279.

In considering whether or not the circumstances of the instant case involve a trade or business, we have borne in mind the dominant purpose of the capital gain provisions of the Internal Revenue Code. The purpose of these provisions has been stated by the Supreme Court in Burnet v. Harmel, 287 U. S. 103, as follows:

Before the act of 1921, gains realized from the sale of property were taxed at the same rates as other income, with the result that capital gains, often accruing over long periods of time, were taxed in the year of realization at the high rates resulting from their inclusion in the higher surtax brackets. The provisions of the 1921 Revenue Act for taxing capital gains at a lower rate, reenacted in 1924 without material change, were adopted to relieve the taxpayer from these excessive tax burdens on gains resulting from a conversion of capital investments, and to remove the deterrent effect of those burdens on such conversions. House Report No. 350, Ways and Means Committee, 67th Cong., 1st Sess. on the Revenue Bill of 1921, p. 10; see Alexander v. King, (CCA) 46 F. (2d) 235.

We think the instant situation is one which the capital gain provisions are intended to cover. The profit realized from the sales of the Gentilly lots represented, in our opinion, an appreciation in the value of such property which had gradually accrued during the years of petitioner's ownership. This appreciation in value was the result of changing conditions over which petitioner had no control. The same conditions, while increasing the property's value for residential purposes, diminished its value as an asset in petitioner's nursery business. Restrictive covenants running with the land prevented petitioner from erecting fences to protect his nursery from the encroachment of the city's growth. Under these circumstances petitioner sold when satisfactory offers were made. It is difficult for us to imagine how petitioner could have converted this nursery business asset with any less elements of business activity than he did. To hold that petitioner, under the circumstances of this case, became engaged in the trade or business of selling real estate, it seems to us, would be unnecessary distortion of the facts and an avoidance of the purposes of the capital gain provisions of the statute. Our conclusion in the instant case is supported by the reasoning of such cases as Phipps v. Commissioner, 54 Fed. (2d) 469; Croker v. Helvering, 91 Fed. (2d) 299; Burk

hard Investment Co. v. United States, 100 Fed. (2d) 642; United States v. Robinson, supra; Fuld v. Commissioner, supra; Harriss v. Commissioner, supra; Sparks v. United States, 55 Fed. Supp. 941; and Collin v. United States, 57 Fed. Supp. 217. We hold that the amount of the profits from the sales in question, to wit, $14,816.37, is taxable on a community basis as capital gain rather than as ordinary income. Decisions will be entered under Rule 50.

MARY D. WALSH (MRS. F. HOWARD WALSH), PETITIONER, v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
WM. FLEMING, PETITIONER, V. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.

WM. FLEMING, Trustee, PETITIONER, V. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT.

Docket Nos. 701, 703, 704. Promulgated June 24, 1946.

Petitioner Mary D. Walsh reported on a calendar year basis. Her husband was a member of a partnership which reported on the basis of a fiscal year ending May 31. Petitioner and her husband returned their income in accordance with the community property law of Texas. One Elliott was also a member of this partnership until his death on July 7, 1939. Held, the respondent erred in including in petitioner's income for the calendar year 1939 and in excluding from petitioner's income for the calendar year 1940, any part of the income of the partnership for the period beginning June 1, 1939, and ending July 7, 1939; held, further, the "taxable year of the partnership" as that phrase is used in section 188, I. R. C., as far as the surviving partners are concerned, was not affected by Elliott's death, and, therefore, such "taxable year" began June 1, 1939, and ended May 31, 1940.

Harry C. Weeks, Esq., for the petitioners.

J. Marvin Kelley, Esq., and John W. Alexander, Esq., for the respondent.

These consolidated proceedings involve deficiencies in income tax in amounts and for taxable years as follows:

In a joint motion "The parties have effected a settlement of all issues involved in Docket Nos. 701, 703 and 704, with the exception of one issue, common to all cases." That one issue is whether the

respondent erred in determining petitioners' (except Wm. Fleming) share of the income of two partnerships known respectively as Hardesty-Elliott Oil Co. and Elliott-Walsh Oil Co. R. A. Elliott was a member of these partnerships until his death on July 7, 1939, and the issue turns on what effect, if any, his death had on the determination of petitioners' (except Wm. Fleming) share of the income of the two partnerships. The parties have also agreed that for 1939 Wm. Fleming should report one-half of the income of Wm. Fleming, Trustee, for the fiscal year ended August 31, 1939. Wm. Fleming was not a partner in either partnership. Effect will be given under Rule 50 to the issues agreed upon.

FINDINGS OF FACT.

Petitioners Mary D. Walsh and Wm. Fleming are individuals who reside in Forth Worth, Texas. Mary D. Walsh is the wife of F. Howard Walsh and the daughter of Fleming. Petitioner Wm. Fleming, Trustee, is a trust of which Fleming is the sole trustee. The trust was created in 1933 for the benefit of Mary D. Fleming, now Mrs. F. Howard Walsh. The trust has its principal office in Fort Worth, Texas. The returns of all three petitioners for the taxable years here involved were all filed with the collector for the second collection district of Texas at Dallas, Texas. Petitioners Mary D. Walsh and Fleming filed on the calendar year basis. Petitioner Wm. Fleming, Trustee, filed on the basis of a fiscal year ending August 31. All three petitioners kept their books and made their returns on the cash receipts and disbursements basis.

The partnership of Hardesty-Elliott Oil Co. was composed of Wm. Fleming, Trustee, Wm. Fleming Trustee No. 2, and R. A. Elliott, and it reported its income on a calendar year basis. The beneficiaries of Wm. Fleming Trustee No. 2 were Mary D. Walsh and Elliott.

The partnership of Elliott-Walsh Oil Co. was composed of Wm. Fleming, Trustee, Elliott, and F. Howard Walsh, and reported its income on the basis of a fiscal year ending May 31.

Both partnerships were formed by verbal agreement. The business of both partnerships was drilling oil wells and producing and selling oil and gas. Fleming in his individual capacity was not a partner in either partnership. Both partnerships kept their books and made their tax returns upon the basis of cash receipts and disbursements.

Elliott died on July 7, 1939. He was survived by his wife and three minor children. The executors of his estate were his wife and his wife's brother, Cecil Tolvert.

The verbal partnership agreements contained no provisions as to what was to happen in the case of the death of a partner.

Fleming operated both partnerships before the death of Elliott and thereafter continued to operate the businesses previously conductd by the partnerships, without consulting the heirs or executors of Elliott. After Elliott's death, Fleming, as manager, did not buy any new property or drill any new wells for others, but continued to operate what the partnerships owned at the time Elliott died. Debts of both firms existing at the date of Elliott's death were paid off after his death out of subsequent operations. The assets of the two partnerships were not distributed between the date of Elliott's death and the close of 1939. In determining the deficiency for the fiscal year ended August 31, 1939, of Wm. Fleming, Trustee, the respondent included its distributive share of the income of Hardesty-Elliott Oil Co. for the period from January 1 to July 7, 1939, and also its distributive share of the income of Elliott-Walsh Oil Co. from June 1 to July 7, 1939, in addition to its share of each partnership's income for the preceding partnership taxable year.

In determining the deficiency of Mary D. Walsh for the calendar year 1939, the respondent included in the community income of her husband and herself their distributive share of the income of ElliottWalsh Oil Co. from June 1 to July 7, 1939, in addition to their share of partnership income for the preceding partnership taxable year. In determining the deficiency of Mary D. Walsh for the calendar year 1940, the respondent excluded from the community income of her .husband and herself their distributive share of the income of ElliottWalsh Oil Co. from June 1 to July 7, 1939.

OPINION.

BLACK, Judge: There is one issue remaining to be decided in these proceedings: Does the death of a partner in a partnership cut short the "taxable year of the partnership" as that phrase is used in section 188 of the Internal Revenue Code, as far as the surviving partners are concerned? As indicative and controlling for all, we may consider specifically only petitioner Mary D. Walsh, hereinafter sometimes referred to as "petitioner," and the partnership of which her husband was a member, the Elliott-Walsh Oil Co., hereinafter sometimes referred to as the partnership. Petitioner and her husband returned their income in accordance with the community property law of Texas. Petitioner filed her return on the calendar year basis and the partnership filed its return on the basis of a fiscal year ending May 31. In

1SEC. 188. DIFFERENT TAXABLE YEARS OF PARTNER AND PARTNERSHIP.

If the taxable year of a partner is different from that of the partnership, the inclusions with respect to the net income of the partnership, in computing the net income of the partner for his taxable year, shall be based upon the net income of the partnership for any taxable year of the partnership (whether beginning on, before, or after January 1, 1939) ending within or with the taxable year of the partner.