Curtis Company v. Commissioner
232 F.2d 167 (1956)

  • Curtis owned about 1000 houses that they rented out on a regular basis.
    • They were in the trade or business of renting real property.
  • During WWII, the government imposed price controls on rents as well as the price for selling real estate. After the war, rent controls continued, but the price on selling real estate were relaxed. Curtis decided that they could make more money selling off the houses than they could by renting them.
  • Curtis sold their houses. When they filed their taxes, they claimed the profits from the sales as capital gain. The IRS disagreed.
    • Curtis argued that under the tax code (now 26 U.S.C. 1221), they were allows to claim the sale of assets as capital gains.
    • The IRS argued that under what is now 1221(a)(1), the definition of a capital asset does not include "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."
      • The IRS argued that from the moment that Curtis decided to liquidate their houses, they were in the trade or business of selling houses. Therefore the sales should count as ordinary income.
    • Curtis argued that all companies sell property eventually, so if you agreed with the IRS's argument, then no sale could ever count as a capital gain.
  • The Tax Court found for the IRS. Curtis appealed.
  • Appellate Court reversed and allowed the house sales to be counted as long-term capital gains.
    • The Appellate Court found that the act of liquidating property held for investment purposes does not put someone in the trade or business of selling the property.
  • Basically, since Curtis' houses had been producing rental income for a while, the sale of those houses was the last step in a relationship with investment property, and the liquidation was not part of Curtis' trade or business.
    • For example, if you own gas station, you are in the business of selling gasoline. When you decide to retire and sell the gas station, you don't all of a sudden find yourself in the trade or business of selling gas stations.