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 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.