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Bramblett v. Commissioner - 960 F.2d 526 (5th Cir. 1992)


Seven factors which should be considered when considering whether sales of land are sales of a capital assets or sales of property held primarily for sale to customers in the ordinary course of business 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. The frequency and substantiality of sales is the most important factor. 


This tax appeal arose out of a series of transactions entered into by a partnership and a related corporation. The partnership, Mesquite East, and the corporation, Town East, were owned by the same four people, and each person had the same ownership interest in the corporation as he did in the partnership. Mesquite East bought several parcels of land for the stated purpose of investment. It then sold almost all of this land to Town East, which developed it and sold it to various third parties. Mesquite East reported the income from the sale of land at issue as capital gain, arguing that it held the land as a capital asset. The commissioner asserted a deficiency against one of the partners for his distributive share of the profit, arguing that the profit should be taxed as ordinary income, because in the light of the activities of Town East and their relationship to Mesquite East, Mesquite East was really in the business of selling land. The tax court affirmed the deficiency, holding that the totality of circumstances supported the conclusion that Mesquite East was in the business of selling land.


Was Mesquite East in the business of selling land?




The court held that Mesquite East was not directly in the business of selling land, that Town East was not the agent of Mesquite East, and that the activities of Town East cannot be attributed to Mesquite East. Thus, Mesquite did hold the land as a capital asset and is entitled to capital gains treatment. The court found that a partnership established to hold land for investment purposes which sold land three times in five years should have received capital gains treatment on the sale at issue. The court reversed the decision of the tax court.

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