## Facts

- Four individuals (including Richard H. Bramblett) formed Mesquite East Joint Venture (a partnership) to acquire vacant land for investment; ownership interests were 50%, 22%, 18%, and 10%.
- The same individuals formed Town East Development Company (a corporation) with identical ownership percentages to develop and sell real estate.
- Mesquite East acquired roughly 264.56 acres in Mesquite, Texas; at acquisition the property lacked zoning, sewerage, and access for immediate development.
- Over several years Mesquite East sold a small number of parcels, including sales to Town East and one direct sale to an unrelated third party.
- In multiple sales to Town East, Town East had binding resale contracts with third-party buyers before purchasing the land from Mesquite East.
- The transaction producing income in 1983 and 1984 involved Mesquite East selling its remaining tract to Town East, which then sold to third parties; Mesquite East reported the gain as capital gain.
- Mesquite East did not maintain an office, employ staff, advertise, or develop the land; the partners devoted minimal time to partnership affairs.
- Town East, in contrast, engaged in development and resale activities (improving, subdividing, and selling lots).

## Issues

1. Whether Mesquite East’s gain from its land sales was capital gain or ordinary income as property held primarily for sale to customers in the ordinary course of business.
2. Whether Town East acted as Mesquite East’s agent so that Town East’s development and sales activities could be attributed to Mesquite East.
3. Whether the relationship and transactions between the commonly owned partnership and corporation justified treating Mesquite East as a real-estate dealer.

## Decision

- The Fifth Circuit reversed the Tax Court.
- Mesquite East was not directly in the business of selling land, and the land was held as a capital asset.
- Town East was not Mesquite East’s agent, and Town East’s activities could not be attributed to Mesquite East.
- The gain was entitled to capital-gain treatment rather than ordinary-income treatment.

## Legal Principles

- Whether land is a capital asset or dealer property turns on a fact-intensive inquiry, including the purpose of acquisition and holding, frequency and substantiality of sales, development/improvement efforts, marketing activity, and the taxpayer’s ordinary business.
- A separately incorporated, commonly owned development company’s activities are not imputed to a related landholding partnership absent proof of agency, sham transactions, or non-arm’s-length dealings.
- Common ownership and parallel interests, without more, do not justify disregarding separate entity status for capital-gain versus ordinary-income characterization.
- Investor status is supported where the landholder bears economic risk of appreciation and engages in limited, non-dealer-like disposition activity.

## Conclusion

The Fifth Circuit held that Mesquite East’s limited, investor-like landholding and sales activity warranted capital-gain treatment and that the IRS could not convert the partnership into a dealer by attributing development and resale conduct of a separately existing, commonly owned corporation absent agency or sham.


Bramblett v. Comm’r, 960 F.2d 526 (5th Cir. 1992)