Mauldin v. Commissioner

Brief Fact Summary. Petitioner bought a large tract of land for the cattle business. After deciding against the cattle business, he divided the land into tracts and aggressively sold the tracts. At one point he stopped aggressively selling and went full-time into the lumber industry.

Synopsis of Rule of Law. Profits received from the ordinary course of one’s trade or business should be treated and ordinary income and is not entitled to capital gains treatment.

Facts. Petitioner, C.E. Mauldin, bought a piece of property outside Clovis, New Mexico for the cattle business. He decided against the cattle business and ended up selling the property by dividing it into tracts. Very few lots sold for many years until the city decided to pave the area. Petitioner was charged for the paving and he began aggressively selling the tracts to pay for the paving indebtedness. After paying off the city, he held on to the rest of the lots. From 1940 to 1949 he devoted all of his time to his lumber business. He sold some of the more valuable lots that remained in 1944 and 1945. He reported the gains from these lots as long-term capital assets. The Commissioner determined that the gains were ordinary income. The Tax Court sustained the Commissioner’s ruling. Petitioner argues that after 1940 he was no longer engaged in the business of selling the tracts, but he was in the lumber business only.

Issue. Was the property sold by Petitioner in the ordinary court of his trade or business?

Held. Circuit Judge Murrah issued the opinion for the United States Tenth Circuit Court of Appeals in affirming the lower courts and holding that the property was sold in the ordinary course of his trade or business and should be treated as ordinary income.

Discussion. The Court of Appeals notes that at all times Petitioner had lots for sale. Further, he continued to sell lots and his success depended upon the economic conditions. He also received a substantial amount of income from the sales even though he was also in the lumber business.