United States v. Winthrop

Guy L. Winthrop owned property in Tallahassee, Florida. The property had been in Winthrop’s family for generations, and Winthrop slowly acquired portions of the property through inheritance and partition. In 1936 Winthrop began dividing and developing the land into subdivisions. Winthrop paid for streets to be paved and for electricity, water facilities, and sewage systems to be installed. Winthrop also built five houses for sale to assist property buyers in obtaining Federal Housing Administration loans. Between 1945 and 1963, Winthrop sold hundreds of lots. Winthrop had no real estate office, did not advertise, and employed no brokers; instead, his customers dealt with him directly. The profit Winthrop received from the sales accounted for over half his income between 1951 and 1963. Winthrop initially reported the profits from his sales as capital gains. In 1953 the Commissioner of Internal Revenue (the Commissioner) (defendant) determined that Winthrop, who had obtained an occupational license to be a real estate broker, owed self-employment taxes related to his sales. From 1953 to 1963, the earnings from Winthrop’s sales were treated as business profits, and Winthrop paid self-employment taxes. Winthrop died in 1963, and Mrs. Winthrop (plaintiff) filed claims for tax refunds from 1959 through 1963, arguing that the profit from the sales should have been treated as capital gains, not ordinary income. The Commissioner disallowed the claims, finding that Winthrop’s land was not a capital asset under § 1221 of the Internal Revenue Code because it was primarily held for sale in the ordinary course of business. The district court reversed the Commissioner, holding that the land was a capital asset. The court pointed to several factors to show that the land was not held for sale in the ordinary course of business, including that Winthrop had not reinvested the profits from the sale in real estate, that Winthrop had inherited the land and not purchased it for resale, and that Winthrop did not have a real estate office. The Commissioner appealed.