Mauldin v. Commissioner of Internal Revenue

• Decision Date: 19 March 1952
• Docket Number: No. 4366,4367.,4366
• Citation: 195 F.2d 714
• Parties: MAULDIN v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: U.S. Court of Appeals — Tenth Circuit

195 F.2d 714 (1952)

MAULDIN v. COMMISSIONER OF INTERNAL REVENUE (two cases).

Nos. 4366, 4367.

United States Court of Appeals Tenth Circuit.

March 19, 1952.

Dorothy Ann Kinney, Amarillo, Tex., for petitioners.

Irving Axelrad, Washington, D. C. (Ellis N. Slack and Fred E. Youngman, Washington, D. C., on the brief), for respondent.

Before HUXMAN, MURRAH and PICKETT, Circuit Judges.

MURRAH, Circuit Judge.

This is an appeal from a decision of the Tax Court, 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). Petitioners, residents of the State of New Mexico, are husband and wife, and all income involved is community income. The two cases were therefore consolidated for trial and disposition. A summary of Mauldin's business activities is necessary to a determination of the issue presented.

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 because of drought, crop and bank failures, and a decline in the cattle business which continued through 1924. 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. He stated that at times he would "chase" a prospective purchaser "around the block". During 1939 and 1940, he sold enough lots to liquidate the paving indebtedness.

Mauldin testified that 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. He stated, "I cut it up and tried my best to sell it to clear it, and when I cleared it, I quit". From 1940 until 1949, when his health failed, Mauldin devoted full time to the lumber business he organized in 1939. During this period, he had no real estate office, no license to sell real estate, did not advertise the properties by newspapers or signs, had no fixed price for lots, and at times refused to sell certain lots, either because the prospective purchaser would not pay the asked price, or Mauldin did not wish to sell the particular property at that time. The only real estate purchased by Mauldin after acquiring the 160 acres in 1920 was one "unsightly" block of lots near his residence, and some commercial properties to be used in connection with his lumber business.

Due primarily to the location of war facilities nearby, the City of Clovis grew in population to 14,000 in 1940 and to 20,000 to 25,000 in 1945, 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. This 20 acres was considered by him and real estate dealers to be his most valuable property. Mauldin's records show that he sold 2 lots in 2 transactions in 1941; 11 in 1942 in 2 transactions (6 lots were given to his daughter as a wedding present); 5½ in 1943 in 3 transactions; 5½ in 1944 in 3 transactions; 44½ in 1945 in 15 transactions; 39 in 1946, 1 in 1947 and 2 in 1948. 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...