Biedenharn Realty Co., Inc. v. United States, 73-3690.

Citation526 F.2d 409
Decision Date26 January 1976
Docket NumberNo. 73-3690.,73-3690.
PartiesBIEDENHARN REALTY COMPANY, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Scott P. Crampton, Asst. Atty. Gen., William A. Friedlander, Atty., Tax Div., Dept. of Justice, Washington, D.C., Donald E. Walter, U.S. Atty., Shreveport, La., Fleming T. de Graffenried, Tax Div., Dept. of Justice, Dallas, Tex., William A. Whitledge, Atty., Meyer Rothwacks, Chief, Appellate Sec., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Paul K. Kirkpatrick, Jr., John C. Blackman, Nauman S. Scott, III, Monroe, La., for plaintiff-appellee.

J. Robertshaw, Greenville, Miss., amicus curiae.

Before WISDOM, GEWIN, BELL, THORNBERRY, COLEMAN, GOLDBERG, AINSWORTH, GODBOLD, DYER, MORGAN, CLARK, RONEY and GEE, Circuit Judges.*

GOLDBERG, Circuit Judge:

The taxpayer-plaintiff, Biedenharn Realty Company, Inc. Biedenharn, filed suit against the United States in May, 1971, claiming a refund for the tax years 1964, 1965, and 1966. In its original tax returns for the three years, Biedenharn listed profits of $254,409.47 from the sale of 38 residential lots. Taxpayer divided this gain, attributing 60% to ordinary income and 40% to capital gains.1 Later, having determined that the profits from these sales were entirely ordinary income, the Internal Revenue Service assessed and collected additional taxes and interest. In its present action, plaintiff asserts that the whole real estate profit represents gain from the sale of capital assets and consequently that the Government is indebted to taxpayer for $32,006.86 in overpaid taxes. Reviewing the facts of this case in the light of our previous holdings and the directions set forth in this opinion, we reject plaintiff's claim and in so doing reverse the opinion of the District Court.

I.

Because of the confusing state of the record in this controversy and the resulting inconsistencies among the facts as stipulated by the parties, as found by the District Court,2 and as stated in the panel opinion,3 we believe it useful to set out in plentiful detail the case's background and circumstances as best they can be ascertained.

A. The Realty Company. Joseph Biedenharn organized the Biedenharn Realty Company in 1923 as a vehicle for holding and managing the Biedenharn family's numerous investments. The original stockholders were all family members.4 The investment company controls, among other interests, valuable commercial properties, a substantial stock portfolio, a motel, warehouses, a shopping center, residential real property, and farm property.

B. Taxpayer's Real Property SalesThe Hardtimes Plantation. Taxpayer's suit most directly involves its ownership and sale of lots from the 973 acre tract located near Monroe, Louisiana, known as the Hardtimes Plantation. The plaintiff purchased the estate in 1935 for $50,000.00. B. W. Biedenharn, the Realty Company's president, testified that taxpayer acquired Hardtimes as a "good buy" for the purpose of farming and as a future investment. The plaintiff farmed the land for several years. Thereafter, Biedenharn rented part of the acreage to a farmer who Mr. Biedenharn suggested may presently be engaged in farming operations.5

1. The Three Basic Subdivisions. Between 1939 and 1966, taxpayer carved three basic subdivisions from Hardtimes — Biedenharn Estates, Bayou DeSiard Country Club Addition, and Oak Park Addition — covering approximately 185 acres.6 During these years, Biedenharn sold 208 subdivided Hardtimes lots in 158 sales, making a profit in excess of $800,000.00. These three basic subdivisions are the source of the contested 37 sales of 38 lots.7 Their development and disposition are more fully discussed below.

a) Biedenharn Estates Unit 1, including 41.9 acres, was platted in 1938. Between 1939 and 1956, taxpayer apparently sold 21 lots in 9 sales.8 Unit 2, containing 8.91 acres, was sold in 9 transactions between 1960 and 1965 and involved 10 lots.

b) Bayou DeSiard Country Club Addition, covering 61 acres, was subdivided in 1951, with remaining lots resubdivided in 1964. Approximately 73 lots were purchased in 64 sales from 1951 to 1966.9

c) Oak Park Units 1 and 2 encompassed 75 acres. After subdivision in 1955 and resubdivision in 1960, plaintiff sold approximately 104 lots in 76 sales.

2. Additional Hardtimes Sales. Plaintiff lists at least 12 additional Hardtimes sales other than lots vended from the three basic subdivisions. The earliest of these dispositions occurred in November, 1935, thirteen days after the Plantation's purchase. Ultimately totaling approximately 275 acres, most, but not all, of these sales involved large parcels of non-subdivided land.

C. Taxpayer's Real Property Activity: Non-Hardtimes Sales. The 208 lots marketed from the three Hardtimes subdivisions represent only part of Biedenharn's total real property sales activities. Although the record does not in every instance permit exactitude, plaintiff's own submissions make clear that the Biedenharn Realty Company effectuated numerous non-Hardtimes retail real estate transactions. From the Company's formation in 1923 through 1966, the last year for which taxes are contested, taxpayer sold 934 lots. Of this total, plaintiff disposed of 249 lots before 1935 when it acquired Hardtimes. Thus, in the years 1935 to 1966, taxpayer sold 477 lots apart from its efforts with respect to the basic Hardtimes subdivisions. Biedenharn's year by year sales breakdown is attached as Appendix I of this opinion. That chart shows real estate sales in all but two years, 1932 and 1970, since the Realty Company's 1923 inception.10

Unfortunately, the record does not unambiguously reveal the number of sales as opposed to the number of lots involved in these dispositions. Although some doubt exists as to the actual sales totals, even the most conservative reading of the figures convinces us of the frequency and abundance of the non-Hardtimes sales.11 For example, from 1925 to 1958, Biedenharn consummated from its subdivided Owens tract a minimum of 125, but perhaps upwards of 300, sales (338 lots).12 Eighteen sales accounted for 20 lots sold between 1923 and 1958 from Biedenharn's Cornwall property. Taxpayer's disposition from 1927 to 1960 of its Corey and Cabeen property resulted in at least 50 sales. Plaintiff made 14 sales from its Thomas Street lots between 1937 and 1955. Moreover, Biedenharn has sold over 20 other properties, a few of them piecemeal, since 1923.

Each of these parcels has its own history. Joseph Biedenharn transferred much of the land to the Realty Company in 1923. The company acquired other property through purchases and various forms of foreclosure. Before sale, Biedenharn held some tracts for commercial or residential rental. Taxpayer originally had slated the Owens acreage for transfer in bulk to the Owens-Illinois Company. Also, the length of time between acquisition and disposition differed significantly among pieces of realty. However, these variations13 in the background of each plot and the length of time and original purpose14 for which each was obtained do not alter the fact that the Biedenharn Realty Company regularly sold substantial amounts of subdivided and improved real property, and further, that these sales were not confined to the basic Hardtimes subdivisions.15

D. Real Property Improvements. Before selling the Hardtimes lots, Biedenharn improved the land, adding in most instances streets, drainage, water, sewerage, and electricity. The total cost of bettering the Plantation acreage exceeded $200,000 and included $9,519.17 for Biedenharn Estates Unit 2,16 $56,879.12 for Bayou DeSiard County Club Addition, and $141,579.25 for the Oak Park Addition.

E. Sale of the Hardtimes Subdivisions. Bernard Biedenharn testified that at the time of the Hardtimes purchase, no one foresaw that the land would be sold as residential property in the future. Accordingly, the District Court found, and we do not disagree, that Biedenharn bought Hardtimes for investment. Later, as the City of Monroe expanded northward, the Plantation became valuable residential property. The Realty Company staked off the Bayou DeSiard subdivision so that prospective purchasers could see what the lots "looked like." As demand increased, taxpayer opened the Oak Park and Biedenharn Estates Unit 2 subdivisions and resubdivided the Bayou DeSiard section. Taxpayer handled all Biedenharn Estates and Bayou DeSiard sales.17 Independent realtors disposed of many of the Oak Park lots. Mr. Herbert Rosenhein, a local broker, sold Oak Park Unit 1 lots. Gilbert Faulk, a real estate agent, sold from Oak Park Unit 2. Of the 37 sales consummated between 1964 and 1966, Henry Biedenharn handled at least nine transactions (Biedenharn Estates (2) and Bayou DeSiard (7)) while "independent realtors" effected some, if not all, of the other 28 transactions (Oak Park Unit 2.).18 Taxpayer delegated significant responsibilities to these brokers. In its dealings with Faulk, Biedenharn set the prices, general credit terms, and signed the deeds. Details, including specific credit decisions and advertising, devolved to Faulk, who utilized on-site signs and newspapers to publicize the lots.

In contrast to these broker induced dispositions, plaintiff's non-brokered sales19 resulted after unsolicited individuals approached Realty Company employees with inquiries about prospective purchases. At no time did the plaintiff hire its own real state salesmen or engage in formal advertising. Apparently, the lands' prime location and plaintiff's subdivision activities constituted sufficient notice to interested persons of the availability of Hardtimes lots. Henry Biedenharn testified:

Once we started improving and putting roads and streets in people would call us up and ask you about buying a lot and we would sell a lot if they wanted it.

The Realty Company does not maintain a...

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