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10.5 Tax Refund Suits Real Estate Held Primarily For Sale In this case the Plaintiff claims to be entitled to treat the gains or profits realized from the sale of the properties in question as capital gain, subject to the lower capital gain tax rate. The Government contends that the gain should be taxed at the higher tax rates applicable to ordinary income. You need not concern yourselves, however, with the amount of gain realized by the Plaintiff on the sale of these properties, or with the dollar amount of the taxes to be paid as a result of these gains. What you must decide is whether or not the Plaintiff is entitled to treat any gain from the sale of the properties in question as capital gain. Basically, the purpose of the capital gains provisions of the Internal Revenue Code is to attract the investment of capital in the economy thereby stimulating commercial activity and creating new jobs. This is accomplished by granting preferential tax treatment in situations where the gain or profit involved in a sale of property is the result of an increase in the value of property while it was being held for investment over a period of time. Since these capital gains provisions are exceptions to the normal tax requirements of the Code, they do notapply to the profits arising from the everyday operation of a business.In order for the Plaintiff to qualify for capital gain tax treatment, thelaw requires (1) that the Plaintiff held each of the parcels of property formore than one year prior to sale; and (2) that the Plaintiff held theproperties in question as an investment and not primarily as inventoryor in the nature of stock in trade for sale to customers in the ordinarycourse of a trade or business. The Government has the burden of proof on this issue and must persuade you, by a preponderance of the evidence, of the correctness of its position. In this case the parties agree that the properties in question were held by the Plaintiff for more than one year prior to sale. The only question that you must decide is whether or not, at the time of sale, the Plaintiff was holding the properties in question as an investment or primarily as in the nature of stock in trade for sale to customers in the ordinary course of a trade or business. The word "primarily" as I have just used it means "of first importance" or "principally." In making that decision, you must carefully consider the circumstances surrounding the Plaintiff's ownership and sale of these properties. While the purpose for which the property was originally acquired is entitled to some weight, the ultimate question is the purpose for which the property was held by the Plaintiff at the time of sale. Property that was originally acquired for investment purposes as a capital asset may, while being held, change in character to property held for sale to customers in the ordinary course of a trade or business.If the Plaintiff held the property for investment in the hope that it would appreciate in value without any further activity on the Plaintiff's part, thiswould indicate that the property was a capital asset. However, if thePlaintiff held the property in the hope that it could be developed andthen resold it in the ordinary course of a trade or business, this wouldbe evidence that it was held primarily for sale. Various factors that youmay consider in arriving at your decision are:1. The extent to which the Plaintiff (or others acting for the Plaintiff) engaged in developing or improving the properties. If there was no development or improvement, this would indicate a passive capital investment; but if the Plaintiff did develop or improve the properties, this would indicate that the properties were being held for sale to customers in the ordinary course of a trade or business.2. The number, continuity, and frequency of the sales. The presence of extensive and continuous sales activity over a period of time would be an indication that the properties in question were held for sale to customers in the ordinary course of a trade or business.Limited sales on an infrequent basis is evidence that the propertieswere not held for sale to customers in the ordinary course of a trade orbusiness.3. The solicitation of customers. If the Plaintiff (or others acting for the Plaintiff) actively solicited customers, or routinely advertised properties for sale, this would be evidence of holding the properties for sale to customers in the ordinary course of a trade or business. Conversely, the absence of active solicitation of customers or ongoing advertising may be evidence that the properties were not held for sale to customers in the ordinary course of a trade or business.4. Income the Plaintiff derived from the sale of the properties in relation to the Plaintiff's income from other sources. If a substantial part of the Plaintiff's total income during the years involved came from sales of properties, this is an indication that the sales activity constituted the conduct of a trade or business. If the income derived from the sale of the properties was not substantial in relation to the Plaintiff’s income from other sources, this is an indication that the sale of the properties did not constitute a trade or business. 5. The holding period of the property. The shorter the elapsed time between the Plaintiff's acquisition and later disposition of the properties, the more reasonable it is to conclude that the properties were held for sale to customers in the ordinary course of a trade or business. Conversely, the longer the holding period, the more it appears that the properties were held for investment purposes. This is not an exclusive list of the factors that may be relevant to your decision in this case. I have merely attempted to give you some guidelines to follow. There may well be other factors that you may consider that I have not mentioned, and you should bear in mind that no one factor is determinative of the issue before you.VERDICT[A general verdict form will usually suffice] ANNOTATIONS AND COMMENTS See the Annotations and Comments following Federal Claims Instruction 10.1, supra.