## Facts

- Biedenharn Realty Company, Inc., a closely held family investment corporation, held diverse investments including significant real estate.
- In 1935, the company bought Hardtimes Plantation, a 973-acre tract near Monroe, Louisiana, for $50,000 and used it as a farming investment, farming and leasing portions.
- As Monroe expanded, the company subdivided parts of the tract into residential lots and sold lots over many years while continuing to farm substantial acreage.
- In connection with the subdivision sales, the company made substantial improvements (including streets and utilities) and used brokers to sell lots.
- For tax years 1964–1966, the company sold 38 lots, realizing $254,409.47 in profit, and reported the profit partly as capital gain.
- The IRS determined the entire profit was ordinary income and assessed additional tax; the company sued for a refund.
- The district court ruled for the taxpayer (capital gain treatment); an initial appellate panel affirmed, but the Fifth Circuit reheard the case en banc.

## Issues

1. Whether profits from selling subdivided residential lots were gains from the sale of capital assets under 26 U.S.C. § 1221.
2. Whether the lots were instead “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,” excluded from capital-asset treatment under § 1221.

## Decision

- The en banc Fifth Circuit reversed the district court.
- The court held the lots were held primarily for sale to customers in the ordinary course of the taxpayer’s real estate business.
- The profits from the 1964–1966 lot sales were ordinary income, not capital gain, and the taxpayer was not entitled to a refund.

## Legal Principles

- Under 26 U.S.C. § 1221, property held primarily for sale to customers in the ordinary course of a taxpayer’s trade or business is not a “capital asset,” and gains from its sale are ordinary income.
- Classification of subdivided-land sales turns on a fact-intensive inquiry that emphasizes the taxpayer’s course of conduct, including frequency, continuity, and substantiality of sales; the extent of development and improvements; and marketing or sales activity.
- Original investment intent is relevant but not controlling; subsequent conduct can show a change in purpose from investment holding to dealer-type sales.
- Continued use of remaining property for farming or other purposes does not prevent a finding that subdivided lots are held primarily for sale when sales activity and development efforts indicate an ongoing sales business.

## Conclusion

The Fifth Circuit concluded that repeated, substantial lot sales combined with significant subdivision improvements and active selling efforts showed the taxpayer held the lots primarily for sale to customers in the ordinary course of business, requiring ordinary-income treatment under § 1221.


Biedenharn Realty Co. v. United States, 526 F.2d 409 (5th Cir. 1976) (en banc)