## Facts

- Suburban Realty Company, a Texas corporation formed in 1937, acquired an undivided one-fourth interest in approximately 1,742.6 acres in Harris County, Texas, in exchange for its stock.
- Suburban’s corporate charter authorized it, among other purposes, to purchase, sell, and subdivide real property.
- From 1939 through 1971, Suburban sold roughly 244 parcels from the original tract and engaged in ongoing platting and replatting activity.
- The tax dispute concerned five transactions involving six unimproved tracts sold between 1968 and 1971.
- Suburban did not make improvements or perform development work on the tracts sold in the years at issue.
- Suburban initially reported gains from these sales as ordinary income but later sought a refund, claiming the gains were long-term capital gains because the tracts were capital assets.
- The IRS denied the refund; the district court entered judgment for the United States, finding the tracts were held primarily for sale to customers in the ordinary course of Suburban’s business.

## Issues

1. Whether Suburban was engaged in the trade or business of selling real estate during 1968–1971.
2. Whether the six tracts were “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” under 26 U.S.C. § 1221(1), making the gains ordinary income rather than capital gains.
3. Whether long holding periods, appreciation-driven profit, and lack of improvements on the particular tracts require capital-gain treatment despite the taxpayer’s overall sales history.

## Decision

- The Fifth Circuit affirmed the judgment for the United States.
- The court held Suburban was engaged in the business of selling real estate during the years in question.
- The court held the six tracts were held primarily for sale to customers in the ordinary course of that business; the resulting gains were ordinary income.
- The court treated the district court’s findings on Suburban’s sales purpose and business activity as factual determinations not shown to be clearly erroneous in the refund posture.

## Legal Principles

- Under 26 U.S.C. § 1221(1), property is not a capital asset if held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business; gains from such sales are ordinary income.
- No single mechanical factor controls the § 1221(1) analysis; multiple considerations are evaluated in light of the statutory inquiry into the taxpayer’s primary holding purpose.
- A long history of frequent and substantial sales of parcels from a larger tract is strong evidence the taxpayer is in the real-estate sales business and that the land functions as inventory.
- Realization of appreciation over a long period, and the absence of improvements or active development on the particular parcels sold, do not by themselves require capital-gain treatment when the overall pattern shows a primary sales purpose.
- In a tax refund suit, the taxpayer bears the burden to prove the government’s characterization is wrong; appellate review of trial-level factual findings applies a clear-error standard.

## Conclusion

The Fifth Circuit affirmed that Suburban’s long-running, substantial pattern of parcel sales supported treating the disputed tract-sale gains as ordinary income under § 1221(1), notwithstanding long holding periods, appreciation-based profit, and minimal development activity on the specific tracts sold.


Suburban Realty Co. v. United States, 615 F.2d 171 (5th Cir. 1980)