Question

Sean Willens owns various plots of land in Duval County, FL. He acquired the land at various times during the last 20 years. About every third year, Sean subdivides one of the properties he owns into lots. He then has sewer, water, natural gas, and electricity hookups put in each lot and paves new streets. Sean has always treated his sales of such lots as sales of capital assets. His previous tax returns were prepared by an accountant whose practice you recently purchased. Has the proper tax treatment been used on the prior tax returns? Explain.

Your memorandum should include the Facts, tax issue conclusion and analysis.

You will find guidance from the regulations under Section 1221 and 1237. (You’ll find relevant provisions for the facts of this case in § 1237(a)(2) and Reg 1.1237-1(c)(3)(ii)).

Answer 1

1221 code of IRS defines capital asset as-

capital asset means property held whether or not connected to his business but does not include-

(a) stock in trade or other property of a kind which would be included in inventory or property held primarily for sale to customers;

(b) property, used in his trade or business, of a character which is subject to the allowance for depreciation or real property used in business or trade;

(c) a patent, invention, model or design, a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property

(d) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property

Regulations 1237 provides that a lot or parcel which is part of a tract of real property shall not be deemed to be held primarily for sale to customers in the ordinary course of trade or business at the time of sale solely because of the taxpayer having subdivided such tract for purposes of sale or because of any activity incident to such subdivision or sale, if

(a) such tract, or any lot or parcel thereof, had not previously been held primarily for sale to customers in the ordinary course of trade or business and, in the same taxable year in which the sale occurs, such taxpayer does not so hold any other real property; and

(b) no substantial improvement that substantially enhances the value of the lot or parcel sold is made by the taxpayer on such tract while held by the taxpayer or is made pursuant to a contract of sale entered into between the taxpayer and the buyer.

In the given case, Sean Willen over the 20 years has acquired the land and every third year, Sean Willen has developed one the properties by subdividing the property into lots and then he has sewer, water, natural gas, and electricity hookups put in each lot and paves new streets.

Regulation 1237 provides that land or parcel shall not be deemed to be held primarily sale to customers in ordinary business if no substantial improvement on the land parcel has been performed and a taxpayers does not hold another real estate property. Further, regulation 1221 provides that a capital asset shall exclude a property held primarily for sale to customers.

Further, on perusal of both the regulations, it is amply clear that a taxpayer dividing the property in lots and performing other activities to sale it to customer is excluded from definition of capital asset and shall be treated as stock in trade.

Hence, activities of Sean Willen does not meet the definition of capital assets and shall be taxed as stock in trade.