United States Court of Appeals for the Fifth Circuit
BIEDENHARN REALTY COMPANY, INC.,
Plaintiff-Appellee,
v.
UNITED STATES of America,
Defendant-Appellant.

Docket No. 73-3690
Date of Decision: January 26, 1976
Judge:  GOLDBERG, Opinion RONEY, Concurring GEE, Dissenting

Tax Analysts Citation: 1995 TNT 38-37
Principal Code Reference: Section 1221

Summary
Provided by Tax Analysts.  Copyright 2000 Tax Analysts.  All rights reserved.
SALE OF SUBDIVIDED PROPERTY RESULTED IN ORDINARY INCOME DESPITE ORIGINAL INVESTMENT INTENT.
Biedenharn Realty Company Inc. (BRC) was organized in 1923 to
hold and manage the Biedenharn family's numerous investments. In 1935, BRC
purchased a 973-acre tract of land, the Hardtimes Plantation, for the
purpose of farming and in the hopes that it would be a good investment. BRC
farmed the land for several years and, thereafter, rented a portion of the
acreage to a farmer.
     In 1939, BRC began dividing approximately 208 acres of the
plantation into three subdivisions, which it improved by adding streets,
drainage, water, sewage, and electricity, at a total cost exceeding
$200,000. BRC sold lots from the Hardtimes subdivisions from 1939 through
1966. The 37 sales at issue in this case occurred between 1964 and 1966.
     BRC was never aggressive about sales of the Hardtimes lots.
BRC's manager handled only 9 of the Hardtimes sales. All sales made by BRC
were unsolicited. BRC did not keep a sales staff and did not engage in
formal advertising. The only notice given to prospective customers by BRC
was the land's prime location and the improvement activities. The majority
of the sales were handled by independent realtors, who took a more
aggressive approach and actively advertised. Although the realtors
possessed a significant amount of responsibility in the sale of the lots,
responsibility for the price and the general credit terms was reserved to
BRC.
     Section 112 defined a capital asset as property held by the
taxpayer, but provided an exclusion for property held by the taxpayer for
sale to his customers in the ordinary course of his trade or business. BRC
claimed the income from the sale of Hardtimes lots as capital gain. It
asserted that under the factors presented in United States v. Winthrop, 417
F.2d 905 (5th Cir. 1969), including the dual purpose for which the land was
held, the exception of section 112 did not apply. The IRS asserted that the
intent at the time the sales were made, as well as the frequency of the
sales, dictated ordinary income treatment. The district court held for BRC.
     The Fifth Circuit reversed. In Winthrop, the Fifth Circuit held
that the determination of capital asset treatment was dependent on the
substantiality and frequency of the sales, solicitation and advertising
efforts, and brokers' activities. Each factor must be weighed separately,
and the weight varies from case to case.
     Here, the appeals court relied primarily on the frequency and
substantiality of the BRC sales. Although only three years were in
question, the court looked at BRC's entire history of improved lot sales.
The facts that the period over which the sales extended was particularly
long and that the sales were numerous weighed heavily in favor of ordinary
income treatment. The history of sales by BRC, both of Hardtimes lots and
other property, indicated the existence of sales in the ordinary course of
a trade or business and negated the contention that the sales were merely
the liquidation of an investment.
     The court also placed significance on BRC's activities, in
particular the construction of improvements. The improvements could be
viewed as mere preparation for the liquidation of an investment, the court
noted, but when viewed in context with the history of BRC's activities,
they lacked sufficient weight to bring the sales within the realm of a mere
liquidation of an investment.
     Analysis of the the other Winthrop factors was insufficient to
shift the determination, the court concluded. The fact that BRC did not
engage in steady advertising or solicitation of customers was not
persuasive because the location of the lots and obviousness of the
improvements was sufficient to act as advertising. The enlistment of
real-estate brokers was also unconvincing; the responsibility and control
retained by BRC sufficiently indicated BRC's determination to manage the
sale of the lots. The fact that Hardtimes sales represented only eleven
percent of income did not negate the substantiality of the sales that in
total resulted in over one million dollars of receipts.
     BRC's intent was also unpersausive. The fact that the property
was originally purchased to be held as both a farm and an investment did
not fix the categorization of the property when sold. The court held that
where the original intent was changed voluntarily by the taxpayer, the
resulting income also changed. A forced liquidation, due to factors beyond
the taxpayer's control would result in the original intent being given
substantial weight in the determination. Judge Goldberg wrote for the court.
     Concurring, Judge Roney emphasized that the statutory test was
still paramount. The Winthrop factors used by the majority served only to
aid in the determination of whether the statutory characteristics of
non-capital assets were present.
     Dissenting, Judge Gee rejected the majority's restatement of the
facts and the law. The majority rejected the findings of the lower court,
but did not hold them clearly erroneous. The district court specifically
found multipurpose use of the land. The majority ignored this finding and
failed to notice factors that distinguished BRC from Winthrop. In ignoring
the facts, the majority revised the old test, placing pre-eminent emphasis
on sales activities and improvements. As to intent, the majority added a
new requirement, restricting capital gains treatment only to the instance
where the taxpayer is forced to liquidate by involuntary circumstances.

 US-CT-APP-5, [76-1 USTC ¶9194], Biedenharn Realty Company, Inc., Plaintiff-Appellee v. United States of America, Defendant-Appellant  , Ordinary income v. capital gain: Sales of subdivided lots: Realty company: Primarily for sale: Trade or business.--, (Jan. 26, 1976)
[76-1 USTC ¶9194]Biedenharn Realty Company, Inc., Plaintiff-Appellee v. United States of America, Defendant-Appellant  

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 73-3690, 526 F2d 409, 1/26/76, Reversing District Court, 73-1 ustc ¶9305, 356 FSupp 1331

[Code Sec. 1221]

Ordinary income v. capital gain: Sales of subdivided lots: Realty company: Primarily for sale: Trade or business.--The Court of Appeals for the Fifth Circuit, on a rehearing of its prior decision, found that a realty company derived ordinary income, not capital gain, from the sale of certain subdivided lots.  The property in question, although originally acquired for investment purposes, was transformed into ordinary business property as a result of the substantiality and frequency of the taxpayer’s sales over an extended period of time, the improvements it made, its solicitation and advertising efforts, and brokers’ activities.  Five dissents.  BACK REFERENCES: 76FED ¶4729.64.

Paul K. Kirkpatrick, Jr., John C. Blackman, Nauman S. Scott, III, 1000 Ouachita Nat. Bank Bldg., Monroe, La., for plaintiff-appellee.  Scott P. Crampton, Assistant Attorney General, William A. Friedlander, Meyer Rothwacks, Department of Justice, Washington, D. C. 20530, Donald E. Walter, United States Attorney, Shreveport, La., Fleming T. de Graffenried, Department of Justice, Dallas, Tex., for defendant-appellant.  J. Robershaw, P. O. Drawer 1498, Greenville, MS., for Amicus Curiae.

Before Wisdom, Gewin, Bell, Thornberry, Coleman, Goldberg, Ainsworth, Godbold, Dyer, Morgan, Clark, Roney and Gee, Circuit Judges. *

Golberg, Circuit Judge:

The taxpayer-plaintiff, Biedenharn Realty Company, Inc. [Biedenharn], filed suit against the United States in May, 1971, claiming a refund for the tax years 1964, 1965, and 1966.  In its original tax returns for the three years, Biedenharn listed profits of $254,409.47 from the sale of 38 residential lots.  Taxpayer divided this gain, attributing 60% to ordinary income and 40% to capital gains. 1  Later, having determined that the profits from these sales were entirely ordinary income, the Internal Revenue Service assessed and collected additional taxes and interest.  In its present action, plaintiff asserts that the whole real estate profit represents gain from the sale of capital assets and consequently that the Government is indebted to taxpayer for $32,006.86 in overpaid taxes.  Reviewing the facts of this case in the light of our previous holdings and the directions set forth in this opinion, we reject plaintiff’s claim and in so doing reverse the opinion of the District Court.

I.  Because of the confusing state of the record in this controversy and the resulting inconsistencies among the facts as stipulated by the parties, as found by the District Court, 2 and as stated in the panel opinion, 3 we believe it useful to set out in plentiful detail the case’s background and circumstances as best they can be ascertained.

A.  The Realty Company.  Joseph Biedenharn organized the Biedenharn Realty Company in 1923 as a vehicle for holding and managing the Biedenharn family’s numerous investments.  The original stockholders were all family members. 4  The investment company controls, among other interests, valuable commercial properties, a substantial stock portfolio, a motel, warehouses, a shopping center, residential real property, and farm property.

B.  Taxpayer’s Real Property Sales--The Hardtimes Plantation.  Taxpayer’s suit most directly involves its ownership and sale of lots from the 973 acre tract located near Monroe, Louisiana, known as the Hardtimes Plantation.  The plaintiff purchased the estate in 1935 for $50,000.00 B. W. Biedenharn, the Realty Company’s president, testified that taxpayer acquired Hardtimes as a “good buy” for the purpose of farming and as a future investment.  The plaintiff farmed the land for several years.  Thereafter, Biedenharn rented part of the acreage to a farmer who Mr. Biedenharn suggested may presently be engaged in farming operations. 5

1.  The Three Basic Subdivisions.  Between 1939 and 1966, taxpayer carved three basic subdivisions from Hardtimes--Biedenharn Estates, Bayou DeSiard Country Club Addition, and Oak Park Addition--covering approximately 185 acres. 6  During these years, Biedenharn sold 208 subdivided Hardtimes lots in 158 sales, making a profit in excess of $800,000.00.  These three basic subdivisions are the source of the contested 37 sales of 38 lots. 7  Their development and disposition are more fully duscussed below.

 (a)  Biedenharn Estates Unit 1, including 41.9 acres, was platted in 1938.  Between 1939 and 1956, taxpayer apparently sold 21 lots in 9 sales. 8  Unit 2, containing 8.91 acres, was sold in 9 transactions between 1960 and 1965 and involved 10 lots.

(b)  Bayou DeSiard Country Club Addition, covering 61 acres, was subdivided in 1951, with remaining lots resubdivided in 1964.  Approximately 73 lots were purchased in 64 sales from 1951 to 1966. 9

(c)  Oak Park Units 1 and 2 encompassed 75 acres.  After subdivision in 1955 and resubdivision in 1960, plaintiff sold approximately 104 lots in 76 sales.

2.  Additional Hardtimes Sales.  Plaintiff lists at least 12 additional Hardtimes sales other than lots vended from the three basic subdivisions.  The earliest of these dispositions occurred in November, 1935, thirteen days after the Plantation’s purchase.  Ultimately totaling approximately 275 acres, most, but not all, of these sales involved large parcels of nonsubdivided land.

C.  Taxpayer’s Real Property Activity:  Non-Hardtimes Sales.  The 208 lots marketed from the three Hardtimes subdivisions represent only part of Biedenharn’s total real property sales activities.  Although the record does not in every instance permit exactitude, plaintiff’s own submissions make clear that the Biedenharn Realty Company effectuated numerous non-Hardtimes retail real estate transactions.  From the Company’s formation in 1923 through 1966, the last year for which taxes are contested, taxpayer sold 934 lots.  Of this total, plaintiff disposed of 249 lots before 1935 when it acquired Hardtimes.  Thus, in the years 1935 to 1966, taxpayer sold 477 lots apart from its efforts with respect to the basic Hardtimes subdivisions.  Biedenharn’s year by year sales breakdown is attached as Appendix I of this opinion.  That chart shows real estate sales in all but two years, 1932 and 1970, since the Realty Company’s 1923 inception. 10

Unfortunately, the record does not unambiguously reveal the number of sales as opposed to the number of lots involved in these dispositions.  Although some doubt exists as to the actual sales totals, even the most conservative reading of the figures convinces us of the frequency and abundance of the non-Hardtimes sales. 11  For example, from 1925 to 1958, Biedenharn consummated from its subdivided Owens tract a minimum of 125, but perhaps upwards of 300, sales (338 lots). 12  Eighteen sales accounted for 20 lots sold between 1923 and 1958 from Biedenharn’s Cornwall property.  Taxpayer’s disposition from 1927 to 1960 of its Corey and Cabeen property resulted in at least 50 sales.  Plaintiff made 14 sales from its Thomas Street lots between 1937 and 1955.  Moreover, Biedenharn has sold over 20 other properties, a few of them piecemeal, since 1923.

Each of these parcels has its own history.  Joseph Biedenharn transferred much of the land to the Realty Company in 1923.  The company acquired other property through purchases and various forms of foreclosure.  Before sale, Biedenharn held some tracts for commercial or residential rental.  Taxpayer originally had slated the Owens acreage for transfer in bulk to the Owens-Illinois Company.  Also, the length of time between acquisition and disposition differed significantly among pieces of realty.  However, these variations 13 in the background of each plot and the length of time and original purpose 14 for which each was obtained do not alter the fact that the Biedenharn Realty Company regularly sold substantial amounts of subdivided and improved real property, and further, that these sales were not confined to the basic Hardtimes subdivisions. 15

D.  Real Property Improvements.  Before selling the Hardtimes lots, Biedenharn improved the land, adding in most instances streets, drainage, water, sewerage, and electicity.  The total cost of bettering the Plantation acreage exceeded $200,000 and included $9,519.17 for Biedenharn Estates Unit 2, 16 $56,879.12 for Bayou DeSiard Country Club Addition, and $141,579.25 for the Oak Park Addition.

E.  Sale of the Hardtimes Subdivisions.  Bernard Biedenharn testified that at the time of the Hardtimes purchase, no one foresaw that the land would be sold as residential property in the future.  Accordingly, the District Court found, and we do not disagree, that Biedenharn bought Hardtimes for investment.  Later, as the City of Monroe, expanded northward, the Plantation became valuable residential property.  The Realty Company staked off the Bayou DeSiard subdivision so that prospective purchasers could see what the lots “looked like.”  As demand increased, taxpayer opened the Oak Park and Biedenharn Estates Unit 2 subsidivisions and resubdivided the Bayou DeSiard section.  Taxpayer handled all Biedenharn Estates and Bayou DeSiard sales. 17  Independent realtors disposed of many of the Oak Park lots.  Mr. Herbert Rosenhein, a local broker, sold Oak Park Unit 1 lots.  Gilbert Faulk, a real estate agent, sold from Oak Park Unit 2.  Of the 37 sales consummated between 1964 and 1966, Henry Biedenharn handled at least nine transactions (Biedenharn Estates (2) and Bayou DeSiard (7) while “independent realtors” effected some, if not all, of the other 28 transactions (Oak Park Unit 2.). 18  Taxpayer delegated significant responsibilities to these brokers.  In its dealings with Faulk, Biedenharn set the prices, general credit terms, and signed the deeds.  Details, including specific credit decisions and advertising, devolved to Faulk, who utilized on-site signs and newspapers to publicize the lots.

In contrast to these broker induced dispositions, plaintiff’s non-brokered sales 19 resulted after unsolicited individuals approached Realty Company employees with inquires about prospective purchases.  At no time did the plaintiff hire its own real estate salesmen or engage in formal advertising.  Apparently, the lands’ prime location and plaintiff’s subdivision activities constituted sufficient notice to interested persons of the availability of Hardtimes lots.  Henry Biedenharn testified:

[O]nce we started improving and putting roads and streets in people would call us up and ask you about buying a lot and we would sell a lot if they wanted it.

The Realty Company does not maintain a separate place of business but instead offices at the Biedenharn family’s Ouachita Coca-Cola bottling plant.  A telephone, listed in plaintiff’s name, rings at the Coca-Cola building.  Biedenharn has four employees:  a camp caretaker, a tenant farmer, a bookkeeper and a manager.  The manager, Henry Biedenharn, Jr., devotes approximately 10% of his time to the Realty Company, mostly collecting rents and overseeing the maintenance of various properties.  The bookkeeper also works only part-time for plaintiff.  Having set out these facts, we now discuss the relevant legal standard for resolving this controversy.

II.  The determination of gain as capital or ordinary is controlled by the language of the Internal Revenue Code.  The Code defines capital asset, the profitable sale or exchange of which generally results in capital gains, as “property held by the taxpayer.”  26 U. S. C. §1221.  Many exceptions limit the enormous breadth of this congressional description and consequently remove large numbers of transactions from the privileged realm of capital gains.  In this case, we confront the question whether or not Biedenharn’s real estate sales should be taxed at ordinary rates because they fall within the exception covering “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”  26 U. S. C. §1221(1). 20

The problem we struggle with here is not novel.  We have become accustomed to the frequency with which taxpayers litigate this troublesome question.  Chief Judge Brown appropriately described the real estate capital gains-ordinary income issue as “old, familiar, recurring, vexing and of times elusive.”  Thompson v. Commissioner of Internal Revenue, 5 Cir. 1963, [63-2 ustc ¶9676] 322 F. 2d 122, 123.  The difficulty in large part stems from ad-hoc application of the numerous permissible criteria set forth in our multitudinous prior opinions. 21  Over the past 40 years, this case by case approach with its concentration on the facts of each suit has resulted in a collection of decisions not always reconcilable.  Recognizing the situation, we have warned that efforts to distinguish and thereby make consistent the Court’s previous holdings must necessarily be “foreboding and unrewarding.”  Thompson, supra at 127.  See Williams v. United States, 5 Cir. 1964 [64-1 ustc ¶9329] 329 F. 2d 430, 431.  Litigants are cautioned that “each case must be decided on its own peculiar facts.  * * * Specific factors, or combinations of them are not necessarily controlling.”  Thompson, supra at 127; Wood v. Commissioner of Internal Revenue, 5 Cir. 1960, [60-1 ustc ¶9390] 276 F. 2d 586, 590; Smith v. Commissioner of Internal Revenue, 5 Cir. 1956, [56-1 ustc ¶9436] 232 F. 2d 142, 144.  Nor are these factors the equivalent of the philosopher’s stone, separating “sellers garlanded with capital gains from those beflowered in the garden of ordinary income.”  United States v. Winthrop, 5 Cir. 1969, [69-2 ustc ¶9686] 417 F. 2d 905, 911.

Assuredly, we would much prefer one or two clearly defined, easily employed tests which lead to predictable, perhaps automatic, conclusions.  However, the nature of the congressional “capital asset” definition and the myriad situations to which we must apply that standard make impossible any easy escape from the task before us.  No one set of criteria is applicable to all economic structures.  Moreover, within a collection of tests, individual factors have varying weights and magnitudes, depending on the facts of the case.  The relationship among the factors and their mutual interaction is altered as each criteria increases or diminishes in strength, sometimes changing the controversy’s outcome.  As such, there can be no mathematical formula capable of finding the X of capital gains or ordinary income in this complicated field.

Yet our inability to proffer a panaceatic guide to the perplexed with respect to this subject does not preclude our setting forth some general, albeit inexact, guidelines for the resolution of many of the §1221(1) cases we confront.  This opinion does not purport to reconcile all past precedents or assure conflict-free future decisions.  Nor do we hereby obviate the need for ad hoc adjustments when confronted with close cases and changing factual circumstances.  Instead, with the hope of clarifying a few of the area’s mysteries, we more precisely define and suggest points of emphasis for the major Winthrop delineated factors 22 as they appear in the instant controversy.  In so doing, we devote particular attention to the Court’s recent opinion in order that our analysis will reflect, insofar as possible, the Circuit’s present trends.

III.  We begin our task by evaluating in the light of Biedenharn’s facts the main Winthrop 23 factors--substantiality and frequency of sales, improvements, solicitation and advertising efforts, and brokers’ activities--as well as a few miscellaneous contentions.  A separate section follows discussing the keenly contested role of prior investment intent.  Finally we consider the significance of the Supreme Court’s decision in Malat v. Riddell. 24

A.  Frequency and Substantiality of Sales

Scrutinizing closely the record and briefs, we find that plaintiff’s real property sales activities compel an ordinary income conclusion. 25  In arriving at this result, we examine first the most important of Winthrop’s factors--the frequency and substantiality of taxpayer’s sales.  Although frequency and substantiality of sales are not usually conclusive, they occupy the preeminent ground in our analysis.  The recent trend of Fifth Circuit decisions indicates that when dispositions of subdivided property extend over a long period of time and are especially numerous, the likelihood of capital gains is very slight indeed.  See United States v. Winthrop, 5 Cir. 1969, [69-2 ustc ¶9686] 417 F. 2d 905; Thompson v. Commissioner of Internal Revenue, 5 Cir. 1963, [63-2 ustc ¶9676] 322 F. 2d 122.  Conversely, when sales are few and isolated, the taxpayer’s claim to capital gain is accorded greater deference.  Cf. Gamble v. Commissioner of Internal Revenue, 5 Cir. 1957, [57-1 ustc ¶9516] 242 F. 2d 586, 591; Brown v. Commissioner of Internal Revenue, 5 Cir. 1944 [44-2 ustc ¶9376], 143 F. 2d 468, 470.

On the present facts, taxpayer could not claim “isolated” sales or a passive and gradual liquidation.  See Gamble supra; Dunlap v. Oldham Lumber Company, 5 Cir. 1950, [50-1 ustc ¶9134] 178 F. 2d 781, 784; Brown supra.  Although only three years and 37 sales (38 lots) are in controversy here, taxpayer’s pre-1964 sales from the Hardtimes acreage as well as similar dispositions from other properties are probative of the existence of sales “in the ordinary course of his trade or business.”  See Levin, Capital Gains Or Income Tax on Real Estate Sales, 37 B. U. L. Rev. 165, 170 & n. 29 (1957).  Cf. Snell v. Commissioner of Internal Revenue, 5 Cir. 1938, [38-2 ustc ¶9417] 97 F. 2d 891.  As Appendix I indicates, Biedenharn sold property, usually a substantial number of lots, in every year, save one, from 1923 to 1966.  Biedenharn’s long and steady history of improved lot sales at least equals that encountered in Thompson v. Commissioner of Internal Revenue, 5 Cir. 1963, [63-2 ustc ¶9676] 322 F. 2d 122, where also we noted the full history of real estate activity. 26  Supra at 124-25.  There taxpayer lost on a finding that he had sold 3761/2 lots over a 15 year span--this notwithstanding that overall the other sales indicia were more in taxpayer’s favor than in the present case.  Moreover, the contested tax years in that suit involved only ten sales (28 lots); yet we labeled that activity “substantial.”  Supra at 125.

The frequency and substantiality of Biedenharn’s sales go not only to its holding purpose and the existence of trade or business but also support our finding of the ordinariness with which the Realty Company disposed of its lots.  These sales easily meet the criteria of normalcy set forth in Winthrop, supra at 912.

Furthermore, in contrast with Goldberg v. Commissioner of Internal Revenue, 5 Cir. 1955, [55-1 ustc ¶9519] 223 F. 2d 709, 713, where taxpayer did not reinvest his sales proceeds, one could fairly infer that the income accruing to the Biedenharn Realty Company from its pre-1935 sales helped support the purchase of the Hardtimes Plantation.  Even if taxpayer made no significant acquisitions after Hardtimes, 27 the “purpose, system, and continuity” of Biedenharn’s efforts easily constitute a business.  See Snell, supra at 893; Brown, supra at 470.  As we said in Snell, supra:

The fact that he bought no additional lands during this period does not prevent his activities being a business.  He merely had enough land to do a large business without buying any more.

Citing previous Fifth Circuit decisions including Goldberg v. Commissioner of Internal Revenue, 5 Cir. 1955, [55-1 ustc ¶9519] 223 F. 2d 709, 713, and Ross v. Commissioner of Internal Revenue, 5 Cir. 1955, [55-2 ustc ¶9773], 227 F. 2d 265, 268, the District Court sought to overcome this evidence of dealer-like real estate activities and property “primarily held for sale” by clinging to the notion that the taxpayer was merely liquidating a prior investment.  We discuss later the role of former investment status and the possibility of taxpayer relief under that concept.  Otherwise, the question of liquidation of an investment is simply the opposite side of the inquiry as to whether or not one is holding property primarily for sale in the ordinary course of his business.  In other words, a taxpayer’s claim that he is liquidating a prior investment does not really present a separate theory but rather restates the main question currently under scrutiny.  To the extent the opinions cited by the District Court might create a specially protected “liquidation” niche, 28 we believe that the present case, with taxpayer’s energetic subdivision activities and consummation of numerous retail property dispositions, is governed by our more recent decision in Thompson v. Commissioner of Internal Revenue, supra at 127-28.  There, the Court observed:

The liquidation, if it really is that, may therefore be carried out with business efficiency.  Smith v. Commissioner of Internal Revenue, 5 Cir. 1956, [56-1 ustc ¶9436] 232 F. 2d 142, 145.  But what was once an investment, or what may start out as a liquidation of an investment, may become something else.  The Tax Court was eminently justified in concluding that this took place here.  It was a regular part of the trade or business of Taxpayer to sell these lots to any and all comers who would meet his price.  From 1944 on when the sales commenced, there is no evidence that he thereafter held the lots for any purpose other than the sale to prospective purchasers.  It is true that he testified in conclusory terms that he was trying to “liquidate” but on objective standards the Tax Court could equate held solely with “held primarily.”  And, of course, there can be no question at all that purchasers of these lots were “customers” and that whether we call Taxpayer a “dealer” or a “trader”, a real estate man or otherwise, the continuous sales of these lots down to the point of exhaustion was a regular and ordinary (and profitable) part of his business activity.

See Ackerman v. United States, 5 Cir. 1964, [64-2 ustc ¶9670] 335 F. 2d 524-25; Brown, supra at 470.

B.  Improvements

Although we place greatest emphasis on the frequency and substantiality of sales over an extended time period, our decision in this instance is aided by the presence of taxpayer activity--particularly improvements--in the other Winthrop areas.  Biedenharn vigorously improved its subdivision, generally adding streets, drainage, sewerage, and utilities.  These alterations are comparable to those in Winthrop, supra at 906, except that in the latter case taxpayer built five houses.  We do not think that the construction of five houses in the context of Winthrop’s 456 lot sales significantly distinguishes that taxpayer from Biedenharn.  In Barrios Estate v. Commissioner of Internal Revenue, 5 Cir. 1959, [59-1 ustc ¶9377] 265 F. 2d 517, 520, heavily relied on by plaintiff, the Court reasoned that improvements constituted an integral part of the sale of subdivided realty and were therefore permissible in the context of a liquidating sale.  As discussed above, Biedenharn’s activities have removed it from any harbor of investment liquidation.  Moreover, the additional sales flexibility permitted the Barrios Estate taxpayer might be predicated on the forced change of purpose examined in section IV.  Finally, in Thompson, supra, the plaintiff’s only activities were subdivision and improvement.  Yet, not availing ourselves of the opportunity to rely on a Barrios Estate type “liquidation plus integrally related improvements theory,” we found no escape from ordinary income.

C.  Solicitation and Advertising Efforts

Substantial, frequent sales and improvements such as we have encountered in this case will usually conclude the capital gains issue against taxpayer.  See, e.g., Thompson, supra.  Thus, on the basis of our analysis to this point, we would have little hesitation in finding that taxpayer held “primarily for sale” in the “ordinary course of [his] trade or business.”  “[T]he flexing of commercial muscles with frequency and continuity, design and effect” of which Winthrop spoke, supra at 911, is here a reality.  This reality is further buttressed by Biedenharn’s sales efforts, including those carried on through brokers. 29  Minimizing the importance of its own sales activities, taxpayer points repeatedly to its steady avoidance of advertising or other solicitation of customers.  Plaintiff directs our attention to stipulations detailing the population growth of Monroe and testimony outlining the economic forces which made Hardtimes Plantation attractive residential property and presumably eliminated the need for sales exertions.  We have no quarrel with plaintiff’s description of this familiar process of suburban expansion, but we cannot accept the legal inferences which taxpayer would have us draw.

The Circuit’s recent decisions in Thompson, supra at 124-26, and Winthrop, supra at 912, implicitly recognize that even one inarguably in the real estate business need not engage in promotional exertions in the face of a favorable market.  As such, we do not always require a showing of active solicitation where “business . . . [is] good, indeed brisk.”  Thompson, supra at 124, and where other Winthrop factors make obvious taxpayer’s ordinary trade or business status.  See also Levin, supra at 190.  Plainly, this represents a sensible approach.  In cases such as Biedenharn, the sale of a few lots and the construction of the first homes, albeit not, as in Winthrop, by the taxpayer, as well as the building of roads, addition of utilities, and staking off of the other subdivided parcels constitute a highly visible form of advertising.  Prospective home buyers drive by the advantageously located property, see the development activities, and are as surely put on notice of the availability of lots as if the owner had erected large signs announcing “residential property for sale.” 30  We do not by this evaluation automatically neutralize advertising or solicitation as a factor in our analysis.  This form of inherent notice is not present in all land sales, especially where the property is not so valuably located, is not subdivided into small lots, and is not improved.  Moreover, inherent notice represents only one band of the solicitation spectrum.  Media utilization and personal initiatives remain material components of this criterion.  When present, they call for greater Government oriented emphasis on Winthrop’s solicitation factor.

D.  Brokerage Activities

In evaluating Biedenharn’s solicitation activities, we need not confine ourselves to the Thompson-Winthrop theory of brisk sales without organizational efforts.  Unlike in Thompson and Winthrop where no one undertook overt solicitation efforts, the Realty Company hired brokers who, using media and on site advertising, worked vigorously on taxpayer’s behalf.  We do not believe that the employment of brokers should shield plaintiff from ordinary income treatment.  See Gamble v. Commissioner of Internal Revenue, 5 Cir. 1957, [57-1 ustc ¶9516] 242 F. 2d 586, 592; Brown, supra at 470; Snell v. Commissioner of Internal Revenue, 5 Cir. 1938 [38-2 ustc ¶9417] 97 F. 2d 891, 892-93; Cf. McFaddin v. Commissioner of Internal Revenue, 5 Cir. 1945, [45-1 ustc ¶9262] 148 F. 2d 570, 571.  See also Levin, supra at 193-94.  Their activities should at least in discounted form be attributed to Biedenharn.  To the contrary, taxpayer argues that “one who is not already in the trade or business of selling real estate does not enter such business when he employs a broker who acts as an independent contractor.  Fahs v. Crawford, [47-1 ustc ¶9233] 161 F. 2d 315 (5 Cir. 1947); Smith v. Dunn, [55-2 ustc ¶9543] 224 F. 2d 353 (5 Cir. 1955).”  Without presently entangling ourselves in a dispute as to the differences between an agent and an independent contractor, see generally Levin, supra, we find the cases cited distinguishable from the instant circumstances.  In both Fahs and Smith, the taxpayer turned the entire property over to brokers, who, having been granted total responsibility, made all decisions including the setting of sales prices. 31  In comparison, Biedenharn determined original 32 prices and general credit policy.  Moreover, the Realty Company did not make all the sales in question through brokers as did taxpayers in Fahs and Smith. 33  Biedenharn sold the Bayou DeSiard and Biedenharn Estates lots and may well have sold some of the Oak Park land. 34  In other words, unlike Fahs and Smith, Biedenharn’s brokers did not so completely take charge of the whole of the Hardtimes sales as to permit the Realty Company to wall itself off legally from their activities.

E.  Additional Taxpayer Contentions

Plaintiff presents a number of other contentions and supporting facts for our consideration.  Although we set out these arguments and briefly discuss them, their impact, in the face of those factors examined above, must be minimal.  Taxpayer emphasizes that its profits from real estate sales averaged only 11.1% in each of the years in controversy, compared to 52.4% in Winthrop.  Whatever the percentage, plaintiff would be hard pressed to deny the substantiality of its Hardtimes sales in absolute terms (the subdivided lots alone brought in over one million dollars) or, most importantly, to assert that its real estate business was too insignificant to constitute a separate trade or business. 35

The relatively modest income share represented by Biedenharn’s real property dispositions stems not from a failure to engage in real estate sales activities but rather from the comparatively large profit attributable to the Company’s 1965 ($649,231.34) and 1966 ($688,840.82) stock sales.  The fact of Biedenharn’s holding, managing, and selling stock is not inconsistent with the existence of a separate realty business.  If in the face of taxpayer’s numerous real estate dealings this Court held otherwise, we would be sanctioning special treatment for those individuals and companies arranging their business activities so that the income accruing to real estate sales represents only a small fraction of the taxpaying entity’s total gains.

Similarly, taxpayer observes that Biedenharn’s manager devoted only 10% of his time to real estate dealings and then mostly to the company’s rental properties.  This fact does not negate the existence of sales activities.  Taxpayer had a telephone listing, a shared business office, and a few part-time employees.  Because, as discussed before, a strong seller’s market existed, 36 Biedenharn’s sales required less than the usual solicitation efforts and therefore less than the usual time.  Moreover, plaintiff, unlike taxpayers in Winthrop, supra and Thompson, supra, hired brokers to handle many aspects of the Hardtimes transactions--thus further reducing the activity and time required of Biedenharn’s employees.

Finally, taxpayer argues that it is entitled to capital gains since its enormous profits (74% to 97%) demonstrate a return based principally on capital appreciation and not on taxpayer’s “merchandising” efforts.  We decline the opportunity to allocate plaintiff’s gain between long-term market appreciation and improvement related activities.  See generally S. Surrey, W. Warren, P. McDaniel, H. Ault, 1 Federal Income Taxation 1012 (1972).  Even if we undertook such an analysis and found the former element predominant, we would on the authority of Winthrop, supra at 907-908, reject plaintiff’s contention which, in effect, is merely taxpayer’s version of the Government’s unsuccessful argument in that case. 37

 IV.  The District Court found that “[t]axpayer is merely liquidating over a long period of time a substantial investment in the most advantageous method possible.”  356 F. Supp. at 1336.  In this view, the original investment intent is crucial, for it preserves the capital gains character of the transaction even in the face of normal real estate sales activities.

The Government asserts that Biedenharn Realty Company did not merely “liquidate” an investment but instead entered the real estate business in an effort to dispose of what was formerly investment property.  Claiming that Biedenharn’s activities would result in ordinary income if the Hardtimes Plantation had been purchased with the intent to divide and resell the property, and finding no reason why a different prior intent should influence this outcome, 38 the Government concludes that original investment purpose is irrelevant.  Instead, the Government would have us focus exclusively on taxpayer’s intent and the level of sales activity during the period commencing with subdivision and improvement and lasting through final sales.  Under this theory, every individual who improves and frequently sells substantial numbers of land parcels would receive ordinary income. 39

While the facts of this case dictate our agreement with the Internal Revenue Service’s ultimate conclusion of taxpayer liability, they do not require our acquiescence in the Government’s entreated total elimination of Winthrop’s first criterion, “the nature and purpose of the acquisition.”  Undoubtedly, in most subdivided-improvement situations, an investment purpose of antecedent origin will not survive into a present era of intense retail selling.  The antiquated purpose, when overborne by later, but substantial and frequent selling activity, will not prevent ordinary income from being visited upon the taxpayer.  See, e.g., Ackerman v. United States, 5 Cir. 1964, [64-2 ustc ¶9670] 335 F. 2d 521; Thompson v. Commissioner of Internal Revenue, 5 Cir. 1963, [63-2 ustc ¶9676] 322 F. 2d 122; Galena Oaks Corp. v. Scofield, 5 Cir. 1954, [55-1 ustc ¶9127] 218 F. 2d 217; Brown v. Commissioner of Internal Revenue, 5 Cir. 1944, [44-2 ustc ¶9376] 143 F. 2d 468.  Generally, investment purpose has no built-in perpetuity nor a guarantee of capital gains forever more.  Precedents, however, in certain circumstances have permitted landowners with earlier investment intent to sell subdivided property and remain subject to capital gains treatment.  See, e.g., Cole v. Usry, 5 Cir. 1961, [61-2 ustc ¶9651] 294 F. 2d 426; Barrios Estate v. Commissioner of Internal Revenue, 5 Cir. 1959, [59-1 ustc ¶9377] 265 F. 2d 517; Smith v. Dunn, 5 Cir. 1955, [55-2 ustc ¶9543] 224 F. 2d 353.

The Government, attacking these precedents, argues that the line of cases decided principally in the 1950’s represented by Barrios Estate, supra; Goldberg v. Commissioner of Internal Revenue, 5 Cir. 1955, [55-1 ustc ¶9519] 223 F. 2d 709; Ross v. Commissioner of Internal Revenue, 5 Cir. 1955, [55-2 ustc ¶9773] 227 F. 2d 265 and including United States v. Temple, 5 Cir. 1966, [66-1 ustc ¶9165] 355 F. 2d 67, are inconsistent with our earlier holdings in Galena Oaks Corp., supra; White v. Commissioner of Internal Revenue, 5 Cir. 1949, [49-1 ustc ¶9183] 172 F. 2d 629; Brown, supra, and the trend of our most recent decisions in Ackerman, supra, Thompson, supra and including Judge Wisdom’s dissent in Temple, supra.  Because of the ad-hoc nature of these previous decisions and the difficulty of determining in each instance the exact combination of factors which placed a case on one side or the other of the capital gains-ordinary income boundary, we are loath to overrule any of these past decisions.  In a sense, we adhere to our own admonitions against efforts at reconciling and making consistent all that has gone before in the subdivided realty area.  But in so avoiding a troublesome and probably unrewarding task, we are not foreclosed from the more important responsibility of giving future direction with respect to the much controverted role of prior investment intent, nor are we precluded from analyzing that factor’s impact in the context of the present controversy.

We reject the Government’s sweeping contention that prior investment intent is always irrelevant.  There will be instances where an initial investment purpose endures in controlling fashion notwithstanding continuing sales activity.  We doubt that this aperture, where an active subdivider and improver receives capital gains, is very wide; yet we believe it exists.  We would most generally find such an opening where the change from investment holding to sales activity results from unanticipated, externally induced factors which make impossible the continued pre-existing use of the realty.  Barrios Estate, supra, is such a case.  There the taxpayer farmed the land until drainage problems created by the newly completed intercoastal canal rendered the property agriculturally unfit.  The Court found that taxpayer was “dispossessed of the farming operation through no act of her own.”  Supra at 518.  Similar, Acts of God, condemnation of part of one’s property, new and unfavorable zoning regulations, or other events forcing alteration of taxpayer’s plans create situations making possible subdivision and improvement as a part of a capital gains disposition. 40

However, cases of the ilk of Ackerman, supra, Thompson supra, and Winthrop, supra, remain unaffected in their ordinary income conclusion.  There, the transformations in purpose were not coerced.  Rather, the changes ensued from taxpayers’ purely voluntary responses to increased economic opportunity--albeit at times externally created 41--in order to enhance their gain through the subdivision, improvement, and sale of lots.  Thus reinforced by the trend of these recent decisions, we gravitate toward the Government’s view in instances of willful taxpayer change of purpose and grant the taxpayer little, if any, benefit from Winthrop’s first criterion in such cases.

The distinction drawn above reflects our belief that Congress did not intend to automatically disqualify from capital gains bona fide investors forced to abandon prior purposes for reasons beyond their control.  At times, the Code may be severe, and this Court may construe it strictly, but neither Code nor Court is so tryannical as to mandate the absolute rule urged by the Government.  However, we caution that although permitting a land owner substantial sales flexibility where there is a forced change from original investment purpose, we do not absolutely shield the constrained taxpayer from ordinary income.  That taxpayer is not granted carte blanche to undertake intensely all aspects of a full blown real estate business.  Instead, in cases of forced change of purpose, we will continue to utilize the Winthrop analysis discussed earlier but will place unusually strong taxpayer-favored emphasis on Winthrop’s first factor.

Clearly, under the facts in this case, the distinction just elaborated undermines Biedenharn’s reliance on original investment purpose.  Taxpayer’s change of purpose was entirely voluntary and therefore does not fall within the protected area.  Moreover, taxpayer’s original investment intent, even if considered a factor sharply supporting capital gains treatment, is so overwhelmed by the other Winthrop factors discussed supra, that that element can have no decisive effect.  However wide the capital gains passageway through which a subdivider with former investment intent could squeeze, the Biedenharn Realty Company will never fit.

V.  The District Court, citing Malat v. Riddell, 1966, [66-1 ustc ¶9317] 383 U. S. 569, 86 S. Ct. 1030, 16 L. Ed. 2d 102, stated that “the lots were not held . . . primarily for sale as that phrase was interpreted . . . in Malat . . ..”  356 F. Supp. at 1335. 42  Finding that Biedenharn’s primary purpose became holding for sale and consequently that Malat in no way alters our analysis here, we disagree with the District Court’s conclusion.  Malat was a brief per curiam in which the Supreme Court decided only that as used in Internal Revenue Code §1221(1) the word “primarily” means “principally,” “of first importance.”  The Supreme Court, remanding the case, did not analyze the facts or resolve the controversy which involved a real estate dealer who had purchased land and held it at the time of sale with the dual intention of developing it as rental property or selling it, depending on whichever proved to be the more profitable.  Malat v. Riddell, 9 Cir. 1965, [65-2 ustc ¶9452] 347 F. 2d 23, 26.  In contrast, having substantially abandoned its investment and farming 43 intent, Biedenharn was cloaked primarily in the garb of sales purpose when it disposed of the 38 lots here in controversy.  With this change, the Realty Company lost the opportunity of coming within any dual purpose analysis. 44

We do not hereby condemn to ordinary income a taxpayer merely because, as is usually true, his principal intent at the exact moment of disposition is sales.  Rather, we refuse capital gains treatment in those instances where over time there has been such a thoroughgoing change of purpose, see, e.g., Thompson, supra, as to make untenable a claim either of twin intent or continued primacy of investment purpose. 45

VI.  Having surveyed the Hardtimes terrain, we find no escape from ordinary income.  The frequency and substantiality of sales over an extended time, the significant improvement of the basic subdivisions, the acquisition of additional properties, the use of brokers, and other less important factors persuasively combine to doom taxpayer’s cause.  Applying Winthrop’s criteria, this case clearly falls within the ordinary income category delineated in that decision. 46  In so concluding, we note that Winthrop does not represent the most extreme appliation of the overriding principle that “the definition of a capital asset must be narrowly applied and its exclusions interpreted broadly.”  Corn Products Refining Co. v. Commissioner of Internal Revenue, 1955 [55-2 ustc ¶9746], 350 U. S. 46, 52, 76 S. Ct. 20, 24, 100 L. Ed. 29, 35.  See also Commissioner of Internal Revenue v. Lake, 1958, [58-1 ustc ¶9428] 356 U. S. 260, 265, 78 S. Ct. 691, 694, 2 L. Ed. 2d 743, 748.  Accord, Winthrop, supra at 911.

We cannot write black letter law for all realty subdividers and for all times, but we do caution in words of red that once an investment does not mean always an investment.  A simon-pure investor forty years ago could by his subsequent activities become a seller in the ordinary course four decades later.  The period of Biedenharn’s passivity is in the distant past; and the taxpayer has since undertaken the role of real estate protagonist.  The Hardtimes Plantation in its day may have been one thing, but as the plantation was developed and sold, Hardtimes became by the very fact of change and activity a different holding than it had been at its inception.  No longer could resort to initial purpose preserve taxpayer’s once upon a time opportunity for favored treatment.  The opinion of the District Court is reversed.