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There is no fixed formula or rule of thumb for determining whether property sold by the taxpayer was held by him primarily for sale to customers in the ordinary course of his trade or business. Each case must, in the last analysis, rest upon its own facts. There are a number of helpful factors, however, to point the way, among which are the purposes for which the property was acquired, whether for sale or investment; and continuity and frequency of sales as opposed to isolated transactions. And, any other facts tending to indicate that the sales or transactions are in furtherance of an occupation of the taxpayer, recognizing however, that one actively engaged in the business of real estate may discontinue such business and simply sell off the remnants of his holdings without further engaging in the business.
C. E. Mauldin, a graduate veterinarian since 1904, who also engaged in some road contracting, moved to Albuquerque, New Mexico in 1916, where he organized a road construction company. While in Clovis, New Mexico in 1920, to bid on a sewer project, he decided to move there and engage in the cattle business. Later in the same year, he contracted to buy 160 acres of land one-half mile from the city limits of Clovis for $ 20,000.00. This land was particularly suitable for cattle feeding, but was not at that time considered suitable for residential development, because the City, with a population of 5000, was not growing in that direction. By the time Mauldin finally received title to the land in June 1921, he decided that it was not the time to go into the cattle business. He tried to sell the entire tract in 1924 for less than he paid for it, but was unable to do so, partly because a highway had been surveyed diagonally across the land, splitting it into two tracts and rendering it less suitable for cattle feeding. A real estate agent with whom he listed the property for sale advised him that they would have better success if he divided it into small tracts and blocks. The land was accordingly platted into 29 tracts and 4 blocks containing 88 lots each, and called the 'Mauldin Addition'. At the time the land was platted in 1924, there was still no demand for residential property in the area. In 1927, he built a home for himself near the center of the Addition. There were no sales of any consequence until the land commenced to be included in the city limits of Clovis in 1931. By 1939, it was wholly within the city limits, and without Mauldin's request, the City began a paving program in the area, for which he was assessed approximately $ 25,000.00. When he was unable to pay this assessment, the City instituted suits on its paving liens, and in order to save his property, he divided some additional tracts into lots and devoted most of his time to the sale of the lots in the Addition. He listed the property with real estate agents and otherwise promoted sales through personal solicitations, signs, newspaper advertisements, and gifts of lots to a school and the builder of the first F. H. A. house in Clovis. During 1939 and 1940, he sold enough lots to liquidate the paving indebtedness. With the indebtedness to the City paid, he decided to hold the remaining portions of the original tract for investment purposes, and after 1940, did nothing to promote sales.
Due primarily to the location of war facilities nearby, the City of Clovis grew in population, and the lots Mauldin Addition were in great demand. By the end of 1945, Mauldin had disposed of all but 20 acres of his original 160 acre tract. For the taxable years in 1939 and 1940, the taxpayers' income tax returns showed income from real estate only; for each of the years 1941 and 1944 (returns for 1942 and 1943 not shown) they showed net income of approximately $ 3,000.00 from sales of real estate and approximately $ 12,000.00 from the lumber business; for the year 1945, $ 20,484.84 from real estate and $ 12,339.80 from lumber; and in 1946, $ 21,942.88 from real estate and $ 25,005.07 from lumber. On his 1940 return, Mauldin stated that the nature of his business was 'real estate'; in 1943 it was shown as 'lumber business'; in 1944 he did not designate the nature of his business; and in 1945 it was shown as 'lumber and real estate'. In their income tax returns for the years 1944 and 1945, the Maudlins showed the lots sold during those years as long-time capital assets, and computed the tax accordingly. The Commissioner determined that the profit realized was ordinary income within the meaning of Section 117(a)(1) of the Internal Revenue Code, and assessed the additional tax. The Tax Court affirmed this determination, holding that certain lots sold by petitioners during the taxable years 1944 and 1945, where 'property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business' within the exclusionary clause of Section 117(a)(1) of the Internal Revenue Code, 26 U.S.C.A. § 117(a)(1). If the gain from the sale of these lots was derived in this manner, it constituted ordinary income taxable under Section 22(a), and not a capital gain taxable under Section 117(a)(1).
Did the Tax Court err in holding that the Maudlin lots were ordinary income taxable?
Admittedly, Mauldin originally purchased the property for purposes other than for sale in the ordinary course of trade or business. When, however, he subdivided and offered it for sale, he was undoubtedly engaged in the vocation of selling lots from this tract of land at least until 1940. As against his contention that he ceased to engage in the business after 1940, the record evidence showed that he sold more lots in 1945 on a sellers market without solicitation than he did in 1940 on a buyers market. It seemed fairly inferable from the record that at all times he had lots for sale, and that the volume sold depended primarily upon the prevailing economic conditions, brought on by wartime activities and their aftermath. It was true that he was in the lumber business, but his returns plainly showed that a substantial part of his income was derived from the sale of the lots.