Biedenharn Realty Co. v. United States

Biedenharn Realty Company, Inc. (Biedenharn) (plaintiff) was formed to hold and manage family investments, including commercial and residential real estate, farm properties, and a substantial stock portfolio. Biedenharn acquired a 973-acre property as a farming investment. Biedenharn farmed the property and leased some of it to farmers. After being approached by buyers interested in building homes on the property, Biedenharn subdivided the land and sold the resulting lots. Biedenharn improved the property with streets, water, sewer, and electricity, and hired brokers to market the lots. Biedenharn continued to farm a large part of the land while the lots were being sold. Biedenharn listed $254,409.47 in real-estate profits on its federal tax returns for 1964, 1965, and 1966. Biedenharn listed 60 percent of the gain as ordinary income and 40 percent as capital gains. The United States Internal Revenue Service (IRS) (defendant) later determined that Biedenharn’s profits were entirely ordinary income and thus assessed additional taxes and interest. Biedenharn sued the IRS for a refund of $32,006.86, claiming that the entire profit represented capital gains. The district court agreed with Biedenharn’s characterization. The IRS appealed, arguing that Biedenharn has become a business that holds property to sell to customers in the ordinary course of its trade, and Biedenharn must therefore treat any gains as ordinary income.