Source: https://www.bloomberglaw.com/public/desktop/document/UnitedStatesvWinthrop692USTCPara9686417F2d9055thCir1969CourtOpini?1591035596
Timestamp: 2020-06-01 18:19:58
Document Index: 74963511

Matched Legal Cases: ['§ 1221', '§ 117', '§ 1221', '§ 1221', '§ 1221', '§ 1221', '§ 1221', '§ 1221']

United States v. Winthrop, 69-2 USTC Para. 9686, 417 F.2d 905 (5th Cir. 1969), Court Opinion
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24 AFTR2d 1969-5760
417 F.2d 905
69-2 USTC Para. 9686
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24 AFTR2d 69-5760
Ada Belle Winthrop, Individually and as Executrix under the will of Guy L. Winthrop, Deceased, Appellee.
[*906] GOLDBERG, Circuit Judge:
In selling the lots Winthrop neither advertised nor engaged brokers. The customers primarily came to his home to conduct the sale negotiations since he did not even have an office. He did however, purchase an annual occupational license as a real estate broker from the City of Tallahassee from 1948 through 1963. Despite this low pressure and informal selling technique, the parties stipulated that Winthrop was primarily engaged in selling the Betton Hills property and that though he was a [*907] civil engineer by profession, he did little work of this type during the period in question save that done on the Betton Hills property. Furthermore, Winthrop's technique, although unorthodox, was apparently effective. Commencing with the year 1945 and ending in December, 1963, approximately 456 lots were sold in Betton Hills.2 The profit and other income realized by Winthrop from the sale of these lots from 1951 through 1963 was $483,018.94 or 52.4% of his total income during that period.
The government's first argument in support of its contention that the district court erred in granting capital gains treatment to the taxpayer is founded upon the proposition that capital gains treatment is available only [*908] where the appreciation in value is the result of external market changes occurring over a period of time. In other words, the government argues that where the appreciation is due to the taxpayer's efforts, all profit should be reported as ordinary income. In statutory terms the government argues that the subdivided land ceased to be a "capital asset" when the taxpayer improved the land through his own efforts by platting the lots, paving streets, and installing utilities. Although recognizing that subdivided land is not expressly removed from the "capital asset" category by the exclusionary provisions of I. R.C. § 1221 3 unless such land is held primarily for sale to customers in the ordinary course of business, the government, nevertheless, maintains that its taxpayer efforts rule has, in effect, been read into the statute by the courts. In support of this argument the government relies principally on the following language from Corn Products Refining Co. v. Commissioner of Internal Revenue, 1955, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29:
"Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss. The preferential treatment provided by § 117 applies to transactions in property which are not the normal source of business income. It was intended 'to relieve the taxpayer from * * * excessive tax burdens on gains resulting from a conversion of capital investments, and to remove the deterrent effect of those burdens on such conversions.' Burnet v. Harmel, 287 U.S. at page 106, 53 S.Ct. at page 75." Id. at 52, 76 S.Ct. at 24.
We think the preceding language from Corn Products fails to support the taxpayer efforts rule advanced by the government. The case does support the proposition that an asset may not be a capital asset for tax purposes even though not expressly excluded from that status by I. R.C. § 1221 , but the opinion neither mentions nor deals with assets improved by the taxpayer's effort. Rather, it dealt with daily operational profits in the ordinary course of the taxpayer's business. Further, the other cases discussed in the government's brief in support of this novel interpretation of Corn Products do not adopt the taxpayer efforts rule. In Commissioner of Internal Revenue v. Gillette Motor Transport, Inc., 1960, 364 U.S. 130, 80 S.Ct. 1497, 4 L.Ed.2d 1617, the court held that the fair rental value of facilities taken over temporarily by the government [*909] was ordinary income. In United States v. Midland-Ross Corp., 381 U.S. 54, 85 S.Ct. 1308, 14 L.Ed.2d 214, also relied on by the government, the gain on the sale of non-interest bearing notes purchased at a discount was held to be ordinary income. In neither case did the court have before it property which had been improved by the taxpayer's effort. In both cases what was really sold was the right to receive income, one in the form of rentals, the other in the form of interest. The lump sum payments were, therefore, held to be ordinary income to the recipient. These decisions hardly support the government's argument that Betton Hills was not a capital asset merely because its increase in value was due in part to the taxpayer's efforts.
If the universality and sweep which the government reads into the Corn Products message is in fact the gospel word in capital gains cases, it has not yet come through nor been heard by the Fifth Circuit. Indeed, the cases are many where taxpayer efforts have contributed to value and have been accorded capital gains treatment. United States v. Temple, 5 Cir.1966, 355 F.2d 67; Commissioner of Internal Revenue v. Ponchartrain Park Homes, Inc., 5 Cir.1965, 349 F.2d 416; Cole v. Usry, 5 Cir.1961, 294 F.2d 426; Barrios' Estate v. Commissioner of Internal Revenue, 5 Cir.1959, 265 F.2d 517; Smith v. Dunn, 5 Cir.1955, 224 F.2d 353; Goldberg v. Commissioner of Internal Revenue, 5 Cir.1955, 223 F.2d 709. As this court said in Barrios' Estate, supra:
While we are in disagreement with the government's first argument concerning taxpayer efforts, we find its second argument, that the land in question was primarily held for sale in the ordinary course of business and, therefore, was not a capital asset under § 1221 , persuasive. In holding against the government on this point the court below appears to have placed particular emphasis upon the following facts: (1) The proceeds from the sales of the property were not reinvested in real estate; (2) the taxpayer had other investments, none of which involved the sale of real estate; (3) the subdivided property was acquired by inheritance, not by purchase for the purpose of resale; (4) the taxpayer's holding period was twenty-five years; (5) the taxpayer maintained no office, made most of the sales from his home, spent no time whatever promoting sales and did not advertise; and (6) the purchasers came to him and he was selective in making the sales.
In relying on these factors the court below was obviously following earlier suggestions by this court that such facts are relevant in determining the ultimate question of whether or not the land in question was held primarly for sale to customers in the ordinary course of business. Cole v. Usry, 5 Cir.1961, 294 F.2d 426; Barrios' Estate v. Commissioner of Internal Revenue, 5 Cir.1959, 265 F.2d 517; Consolidated Naval Stores Co. v. Fahs, 5 Cir.1955, 227 F.2d 923; Smith v. Dunn, 5 Cir.1955, 224 F.2d 353; Ross v. Commissioner of Internal Revenue, 5 Cir.1955, 227 F.2d 265; Goldberg v. Commissioner of Internal Revenue, 5 Cir.1955, 223 F.2d 709. In condensed form the tests mentioned [*910] most often are: (1) the nature and purpose of the acquisition of the property and the duration of the ownership; (2) the extent and nature of the taxpayer's efforts to sell the property; (3) the number, extent, continuity and substantiality of the sales; (4) the extent of subdividing, developing, and advertising to increase sales; (5) the use of a business office for the sale of the property; (6) the character and degree of supervision or control exercised by the taxpayer over any representative selling the property; and (7) the time and effort the taxpayer habitually devoted to the sales. Smith v. Dunn, supra , 224 F.2d at 356.
Despite their frequent use, this court has often declared that these seven pillars of capital gains treatment "in and of themselves * * * have no independent significance, but only form part of a situation which in the individual case must be considered in its entirety to determine whether or not the property involved was held primarily for sale in the ordinary course of business (source cited)." Cole v. Usry, supra , 294 F.2d at 427. Accord: Thompson v. Commissioner of Internal Revenue, 5 Cir.1963, 322 F.2d 122; Wood v. Commissioner of Internal Revenue, 5 Cir.1960, 276 F.2d 586; Thomas v. Commissioner of Internal Revenue, 5 Cir.1958, 254 F.2d 233; Smith v. Commissioner of Internal Revenue, 5 Cir.1956, 232 F.2d 142; Consolidated Naval Stores Co. v. Fahs, 5 Cir.1955, 227 F.2d 923. Moreover, in Thompson v. Commissioner, supra, this court remarked concerning these "tests":
"Essential as they are in the adjudication of cases, we must take guard lest we be so carried away by the proliferation of tests that we forget that the statute excludes from capital assets 'property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.' 26 U.S.C.A. § 1221. * * *" 322 F.2d 127.
We think, therefore, that even though we accept as true the fact findings of the court below, it is nevertheless incumbent upon this court to inquire into the ultimate conclusion of law reached by that court. In so doing, our analysis of the undisputed facts leads us to the contrary conclusion, that the taxpayer did hold the land in question primarily for sale to customers in the ordinary [*911] course of business, and thus, under I. R.C. § 1221 is not eligible for capital gains treatment on the profits made from the sale of this land.
In analyzing a case of this sort no rubrics of decision or rubbings from the philosopher's stone separate the sellers garlanded with capital gains from those beflowered in the garden of ordinary income. Each case and its facts must be compared with the mandate of the statute. In so doing we note that the enunciations of the Supreme Court are clarion as they enjoin us to construe narrowly the definition of a capital asset and as a corollary interpret its definitional exclusions broadly. Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199; Hort v. Commissioner of Internal Revenue, 313 U.S. 28, 61 S.Ct. 757, 85 L.Ed. 1168; Kieselbach v. Commissioner of Internal Revenue, 317 U.S. 399, 63 S.Ct. 303, 87 L.Ed. 358; Commissioner of Internal Revenue v. P. G. Lake, 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743. We therefore approach first the issue of whether or not Winthrop held the property "primarily for sale" as that phrase is used in § 1221 .
There were, therefore, no multiple, dual, or changes of purpose during the relevant years of Winthrop's Betton Hills sales. The taxpayer, long before the tax years in question, had as his sole motivation the sale of Betton Hills, lot by lot, year by year, transaction by transaction. The evidence is clear and uncontradicted that the lots were at all times held by Winthrop "primarily for sale" as that phrase was interpreted by the Supreme Court in Malat v. Riddell, 1966, 383 U.S. 569, 86 S.Ct. 1030, 16 L.Ed.2d 102.
[*912] The taxpayer has made much over the fact that no office was used, no brokers were employed, no time was spent promoting sales, and no advertising was used. While advertising, solicitation and staff are the usual components of a business, they are not a necessary element in either the concept or the pragmatics of selling. Here it is evident that the taxpayer was quite successful in selling the lots without the assistance of these usual props. It is not necessary that customers be actively and fervently and frenetically sought. Winthrop had lots to sell and not mousetraps, so they beat a way to his door to buy his lots. As the court remarked in Thompson v. Commissioner, supra, which involved a similar lack of promotional activity, "merely because business was good, indeed brisk, does not make it any less in the ordinary course of such a good business." 322 F.2d at 124. Winthrop was in the business of selling lots in Betton Hills, even though his salesmanship was unorthodox and low pressure. The sales were out of his lots, and were made to customers, though these customers sought him out rather than having been pursued.
fn1. Ada Belle Winthrop, individually, and as executrix under the will of Guy L. Winthrop, deceased, is the appellee in the instant case. The activities under review, however, concern Guy L. Winthrop and he will, therefore, be referred to as the taxpayer.
fn2. Transactions from 1945 through 1963:
YearTransactionsTotal Lots Sold
1945                                                      25
1946                           64                         84
1947                            7                          8½
1948                            9                         15
1949                           14                         21
1950                           42                         50
1951                           25                         26½
1952                           17                         19
1953                           16                         19½
1954                           23                         30
1955                           25                         26
1956                           14                         15
1957                           17                         24¼
1958                            2                          5
1959                            5                          7
1960                           25                         35
1961                            9                         10
1962                           20                         28
1963                            7                          7
fn3. 26 U.S.C.A. Internal Revenue Code § 1221
For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include--
(3) a copyright, a literary, musical, or artistic composition, or similar property, held by--
, 5 Cir.1963, 322 F.2d 122
, 1955, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29
Commissioner of Internal Revenue v. Gillette Motor Transport, Inc., 1960, 364 U.S. 130, 80 S.Ct. 1497, 4 L.Ed.2d 1617
United States v. Midland-Ross Corp., 381 U.S. 54, 85 S.Ct. 1308, 14 L.Ed.2d 214
United States v. Temple, 5 Cir.1966, 355 F.2d 67
Commissioner of Internal Revenue v. Ponchartrain Park Homes, Inc., 5 Cir.1965, 349 F.2d 416
Cole v. Usry, 5 Cir.1961, 294 F.2d 426
Barrios' Estate v. Commissioner of Internal Revenue, 5 Cir.1959, 265 F.2d 517
Smith v. Dunn, 5 Cir.1955, 224 F.2d 353
Goldberg v. Commissioner of Internal Revenue, 5 Cir.1955, 223 F.2d 709
Consolidated Naval Stores Co. v. Fahs, 5 Cir.1955, 227 F.2d 923
Ross v. Commissioner of Internal Revenue, 5 Cir.1955, 227 F.2d 265
Thompson v. Commissioner of Internal Revenue, 5 Cir.1963, 322 F.2d 122
Wood v. Commissioner of Internal Revenue, 5 Cir.1960, 276 F.2d 586
Thomas v. Commissioner of Internal Revenue, 5 Cir.1958, 254 F.2d 233
Smith v. Commissioner of Internal Revenue, 5 Cir.1956, 232 F.2d 142
Galena Oaks Corp. v. Scofield, 5 Cir., 1954, 218 F.2d 217
Goldberg v. Commissioner, 5 Cir., 1955, 223 F.2d 709
Fahs v. Taylor, 5 Cir., 1956, 239 F.2d 224
Gamble v. Commissioner, 5 Cir., 242 F.2d 586
Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199
Hort v. Commissioner of Internal Revenue, 313 U.S. 28, 61 S.Ct. 757, 85 L.Ed. 1168
Kieselbach v. Commissioner of Internal Revenue, 317 U.S. 399, 63 S.Ct. 303, 87 L.Ed. 358
Commissioner of Internal Revenue v. P. G. Lake, 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743
Malat v. Riddell, 1966, 383 U.S. 569, 86 S.Ct. 1030, 16 L.Ed.2d 102
Thompson v. Commissioner, 5 Cir.1963, 322 F.2d 122
Galena Oaks Corp. v. Scofield, 5 Cir.1954, 218 F.2d 217