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Courts consider the Winthrop delineated factors: (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 the taxpayer exercises over any representative selling the property; and (7) the time and effort the taxpayer habitually devotes to the sales.
Plaintiff taxpayer, Biedenharn Realty Company, Inc., purchased a 973 acre plantation in 1935 for farming and as a future investment. Plaintiff farmed the land for several years, and thereafter rented part of the acreage to another farmer. Plaintiff later carved the property into subdivisions and sold residential lots. Plaintiff listed the profits in his original tax returns, attributing 60 percent to ordinary income and 40 percent to capital gains. Defendant Internal Revenue Service determined that the profits were entirely ordinary income, and assessed and collected additional taxes and interest. Plaintiff taxpayer filed suit against defendant claiming a refund for three tax years. Defendant appealed the district court's ruling that the profits were taxable as capital gains, entitling plaintiff to a tax refund.
Were the plaintiff’s profits taxable as capital gains, thereby entitling the plaintiff to a tax refund?
The appeals court reversed the judgment. The Court reviewed the plantation’s terrain, and considered factors such as the frequency and substantiality of sales over an extended time, the significant improvement of the basic subdivisions, the acquisition of additional properties, the use of brokers, and other less important factors. According to the Court, such factors persuasively combined to doom taxpayer's cause. Applying Winthrop's criteria, the case clearly fell within the ordinary income category.