Mauldin v. Commissioner
195 F.2d 714 (10th Cir. 1952)

  • Maudlin bought 160 acres of land in New Mexico with the intention of using it for cattle grazing. But then he decided a cattle ranch was a bad investment, so he did nothing with the land.
    • The land was way outside the city limits, and wasn't very valuable for building houses.
  • Years later, the town had grown and the land was now inside the city limits. The city built some roads on the land, and charged Maudlin for the service. To pay the bill, Maudlin split up the land into lots and started selling them off to people who wanted to build houses.
    • As soon as Maudlin sold enough lots to cover the cost of the roads, he stopped actively marketing the lots. But over the next 10 years, unsolicited offers came in and he eventually sold off most of the lots, making a good profit.
  • When Maudlin filed his taxes, he claimed that the lots he sold were a long-time capital asset (26 U.S.C. 1221) and paid taxes on the profits at that rate. The IRS denied Maudlin's claim and found that the profit was ordinary income (now 26 U.S.C. 61(a)), which is taxed at a higher rate. Maudlin appealed.
    • Maudlin argued that his profits shouldn't be considered ordinary income unless he was in the trade or business of selling real estate, but he wasn't, he was only trying to get rid of this land he didn't want anymore.
  • The Tax Court found for the IRS. Maudlin appealed.
    • The Tax Court found that Maudlin was in the "trade or business" of selling real estate, therefore the profits were ordinary income.
  • The Appellate Court affirmed.
    • The Appellate Court found that there is no rule of thumb for when property sales amount to a trade or business. Evidence the courts should consider includes:
      • The purposes for which the property was acquired
      • Whether acquisition was for resale or for investment
      • The continuity and frequency of sales.
    • In this case, the Court found that the evidence weighed in favor of Maudlin being engaged in a trade or business.