Robert A. Riddell v. Leon W. Scales

The taxpayers in these six consolidated actions obtained summary judgment in the District Court upholding their contentions that (1) gain derived from payment of two promissory notes held in trust for their benefit was taxable as capital gain, not ordinary income, and (2) gain derived from their profit interest in joint venture real estate was likewise taxable as capital gain, not ordinary income. The Government appeals.

The pertinent facts are not in dispute. On April 9, 1953, Kearney Park Development Corp. (“Kearney Park”) contracted to buy certain unimproved realty located near Miramar Naval Air Station in San Diego, California. As part of the purchase price Kearney Park gave one note for $80,000 and a second note for $553,750, each of which was secured by a deed of trust. At the time of the purchase, the land was subject to a prior improvement lien. By 1955 thé notes were in default, and the improvement bond payments and the taxes were delinquent. During the same year news was released that the Navy might acquire the land to expand the Miramar flight pattern. In 1956 a real estate dealer, B. B. Margolis, and the taxpayers in this case bought the $80,000 note for $30,000 and…