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.