United States v. Winthrop

• Decision Date: 22 October 1969
• Docket Number: No. 26176.,26176.
• Parties: UNITED STATES of America, Appellant, v. Ada Belle WINTHROP, Individually and as Executrix under the will of Guy L. Winthrop, Deceased, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

417 F.2d 905 (1969)

UNITED STATES of America, Appellant, v. Ada Belle WINTHROP, Individually and as Executrix under the will of Guy L. Winthrop, Deceased, Appellee.

No. 26176.

United States Court of Appeals Fifth Circuit.

October 22, 1969.

Clinton N. Ashmore, U. S. Atty., Tallahassee, Fla., Mitchell Rogovin, Asst. Atty. Gen., Meyer Rothwacks, William A. Friedlander, David E. Carmack, Stanley L. Ruby, Lee A. Jackson, Attys., Tax Division, Dept. of Justice, Washington, D. C., for appellant; Stewart J. Carrouth, Asst. U. S. Atty., of counsel.

W. J. Oven, Jr., Tallahassee, Fla., for appellee.

Before JOHN R. BROWN, Chief Judge, and GEWIN and GOLDBERG, Circuit Judges.

GOLDBERG, Circuit Judge:

We must emerge with a solution to the "old, familiar, recurring, vexing and ofttimes elusive" problem described by Judge Brown in Thompson v. Commissioner of Internal Revenue, 5 Cir.1963, 322 F.2d 122, concerning capital gains versus ordinary income arising out of the sale of subdivided real estate. Finding ourselves engulfed in a fog of decisions with gossamer like distinctions, and a quagmire of unworkable, unreliable, and often irrelevant tests, we take the route of ad hoc exploration to find ordinary income.

I.

The taxpayer, Guy L. Winthrop¹ was the owner of certain property in the environs of Tallahassee, Florida, known as Betton Hills. The property had been in his family since 1836. Winthrop first received a share of the property in 1932 upon the death of his mother. Additional portions of the property were received by him in 1946, 1948, and 1960 through inheritance and partition. As the city of Tallahassee expanded, its city limits were extended to incorporate most of the Winthrop property and the taxpayer began to sell lots for homesites. The first subdivision was undertaken in 1936, and the first sales were made in that year. Thereafter, eight other subdivisions were platted and developed by the taxpayer. Each subdivision was platted separately and the taxpayer endeavored to sell most of the lots in one subdivision before another was developed. The process was one of gradual orderly development of the property through the various subdivisions. Each was surveyed and platted. The streets were graded and paved at Winthrop's expense. Electricity and water facilities were installed; and in some subdivisions sewer lines were built, again at Winthrop's expense, although this was eventually repaid out of the utility bills incurred by homeowners who moved into the subdivisions. Moreover, the taxpayer participated in building five houses for sale in the addition in order to assist other purchasers in obtaining F.H.A. loans to finance their homes.

In selling the lots Winthrop neither advertised nor engaged brokers. The customers primarily came to his home to conduct the sale negotiations since he did not even have an office. He did however, purchase an annual occupational license as a real estate broker from the City of Tallahassee from 1948 through 1963. Despite this low pressure and informal selling technique, the parties stipulated that Winthrop was primarily engaged in selling the Betton Hills property and that though he was a civil engineer by profession, he did little work of this type during the period in question save that done on the Betton Hills property. Furthermore, Winthrop's technique, although unorthodox, was apparently effective. Commencing with the year 1945 and ending in December, 1963, approximately 456 lots were sold in Betton Hills.² The profit and other income realized by Winthrop from the sale of these lots from 1951 through 1963 was $483,018.94 or 52.4% of his total income during that period.

The taxpayer reported the profits from these sales as capital gains up until 1953. In that year the Commissioner determined that Winthrop was liable for self employment taxes with respect to his real estate sales. His accountant thereafter listed the sales of Betton Hills property, and expenses connected with those sales, as profits from a business or profession and for the years 1953 through 1963 the taxpayer and his wife paid taxes on these profits at ordinary income rates. In addition, the taxpayer paid self employment taxes for these years on the income derived from the sale of Betton Hills real estate, and such a tax was paid for him in 1963 by his executrix. On his income tax returns for the years 1953 through 1962 the taxpayer listed his occupation as "real estate and engineer." He also listed his occupation in a similar manner on motel registration cards during his extensive travels within the period in question.

After Mr. Winthrop's death in 1963, Mrs. Winthrop, individually and as executrix of Mr. Winthrop's estate, filed claims for a refund for the years 1959 through 1963 in the amount of $57,630.96, asserting that the gains from the sale of the subdivided properties should have been treated as capital gains rather than ordinary income, as originally reported on the tax returns for those years. The Commissioner disallowed these claims and this suit followed. The court below agreed with Mrs. Winthrop's contention and ordered the refund. From this adverse judgment the government appeals. Agreeing with the government, we reverse the decision of the district court and hold that the profits received by the taxpayer from the sales of the property in question were ordinary income.

II.

The government's first argument in support of its contention that the district court erred in granting capital gains treatment to the taxpayer is founded upon the proposition that capital gains treatment is available only where the appreciation in value is the result of external market changes occurring over a period of time. In other words, the government argues that where the appreciation is due to the taxpayer's efforts, all profit should be reported as ordinary income. In statutory terms the government argues that the subdivided land ceased to be a "capital asset" when the taxpayer improved the land through his own efforts by platting the lots, paving streets, and installing utilities. Although recognizing that subdivided land is not expressly removed from the "capital asset" category by the exclusionary provisions of I.R.C. § 1221³ unless such land is held primarily for sale to customers in the ordinary course of business, the government, nevertheless, maintains that its taxpayer efforts rule has, in effect, been read into the statute by the courts. In support of this argument the government relies principally on the following language from Corn Products Refining Co. v. Commissioner of Internal Revenue, 1955, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29:

"Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss. The preferential treatment provided by § 117 applies to transactions in property which are not the normal source of business income. It was intended `to relieve the taxpayer from * * * excessive tax burdens on gains resulting from a conversion of capital investments, and to remove the deterrent effect of those burdens on such conversions.\' Burnet v. Harmel, 287 U.S. at page 106, 53 S.Ct. at page 75." Id. at 52, 76 S.Ct. at 24.

We think the preceding language from Corn Products fails to support the taxpayer efforts rule advanced by the government. The case does support the proposition that an asset may not be a capital asset for tax purposes even though not expressly excluded from that status by I.R.C. § 1221, but the opinion neither mentions nor deals with assets improved by the taxpayer's effort. Rather, it dealt with daily operational profits in the ordinary course of the taxpayer's business. Further, the other cases discussed in the government's brief in support of this novel interpretation of Corn Products do not adopt the taxpayer efforts rule. In Commissioner of Internal Revenue v. Gillette Motor Transport, Inc., 1960, 364 U.S. 130, 80 S.Ct. 1497, 4 L.Ed.2d 1617, the court held that the fair rental value of facilities taken over temporarily by the government was ordinary income. In United States v. Midland-Ross Corp., 381 U. S. 54, 85 S.Ct. 1308, 14 L.Ed.2d 214, also relied on by the government, the gain on the sale of non-interest bearing notes purchased at a discount was held to be ordinary income. In neither case did the court have before it property which had been improved by the taxpayer's effort. In both cases what was really sold was the right to receive income, one in the form of rentals, the other in the form of interest. The lump sum payments were, therefore, held to be ordinary income to the recipient. These decisions hardly support the government's argument that Betton Hills was not a capital asset merely because its increase in value was due in part to the taxpayer's efforts.

If the universality and sweep which the government reads into the Corn Products message is in fact the gospel word in capital gains cases, it has not yet come through nor been heard by the Fifth Circuit. Indeed, the cases are many where taxpayer efforts have contributed to value and have been accorded capital gains treatment. United States v. Temple, 5 Cir.1966, 355 F.2d 67; Commissioner of Internal Revenue v. Ponchartrain Park Homes, Inc., 5 Cir. 1965, 349 F.2d 416; Cole v. Usry, 5 Cir. 1961, 294 F.2d 426; Barrios' Estate v. Commissioner of Internal Revenue, 5 Cir.1959, 265 F.2d 517; Smith v. Dunn, 5 Cir.1955, 224 F.2d 353; Goldberg v. Commissioner of Internal Revenue, 5 Cir.1955, 223 F.2d 709. As this court said in Barrios' Estate, supra:

"The idea of selling a large tract of land in lots embraces necessarily the construction of streets for access to them, the provision of drainage and the furnishing of access to such a necessity as water. It is hardly conceivable that taxpayer could have sold a lot without doing these things. To contend that reasonable expenditures and efforts, in such necessary

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