## Facts

- Guy L. Winthrop owned a large tract near Tallahassee, Florida (Betton Hills), acquired over time largely through inheritance and partition.
- Beginning in 1936 and continuing until his death in 1963, he subdivided the tract for residential development and sold hundreds of lots.
- He platted nine subdivisions, generally developing and selling one subdivision before moving to the next.
- For each subdivision, he undertook significant development work at his expense, including surveying and platting, grading and paving streets, and arranging for water, electricity, and in some areas sewer lines (initially paid by him and later recouped through utility charges).
- He participated in building five houses for sale to facilitate purchasers’ ability to obtain FHA financing.
- He did not advertise, employed no brokers, and had no real estate office; purchasers typically negotiated at his home.
- From 1948 through 1963, he obtained an annual occupational license as a real estate broker from the City of Tallahassee.
- Between 1951 and 1963, profits from lot sales constituted more than half of his total income.
- The Commissioner treated the lot-sale profits as ordinary income (and subject to self-employment tax); after Winthrop’s death, his executrix sought refunds for 1959–1963, asserting capital-gain treatment under I.R.C. § 1221.
- The district court ruled for the taxpayer, treating the land as a capital asset; the United States appealed.

## Issues

1. Whether profits from Winthrop’s subdivided-lot sales were capital gains or ordinary income under I.R.C. § 1221(1).
2. Whether, on undisputed historical facts, the lots were “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”

## Decision

- The Fifth Circuit reversed the district court and held the profits were ordinary income.
- The court concluded the lots were held primarily for sale to customers in the ordinary course of Winthrop’s real estate business within § 1221(1).
- The case was remanded for proceedings consistent with ordinary-income treatment.

## Legal Principles

- Under I.R.C. § 1221(1), property is not a capital asset if it is held primarily for sale to customers in the ordinary course of the taxpayer’s trade or business; gains from such sales are ordinary income.
- The characterization turns on the taxpayer’s purpose and activities at the time of sale, assessed from the totality of circumstances, including extent of development, continuity and volume of sales, and the role of the activity in the taxpayer’s livelihood.
- Substantial, long-term subdivision and development activity with repeated sales to customers supports a finding of a real estate sales business even without advertising, a separate office, or broker involvement.
- The source of title (including inheritance) does not control; property can change character based on later development and sales activity.
- Reinvestment of proceeds into additional real estate is not required to find dealer/business status.
- Occupational licensing and prior self-employment tax treatment may corroborate business status but are not dispositive.

## Conclusion

Because Winthrop systematically developed Betton Hills into multiple subdivisions and sold hundreds of lots over decades as a primary income-producing activity, the Fifth Circuit held the lots were held primarily for sale to customers in the ordinary course of business, making the gains ordinary income rather than capital gains.


United States v. Winthrop, 417 F.2d 905 (5th Cir. 1969)