Sean Willens owns various plot
Sean Willens owns various plots of land in Duval County, FL. Heacquired the land at various times during the last 20 years. Aboutevery third year, Sean subdivides one of the properties he ownsinto lots. He then has sewer, water, natural gas, and electricityhookups put in each lot and paves new streets. Sean has alwaystreated his sales of such lots as sales of capital assets. Hisprevious tax returns were prepared by an accountant whose practiceyou recently purchased. Has the proper tax treatment been used onthe prior tax returns? Explain.
Your memorandum should include the Facts, tax issueconclusion and analysis.
You will find guidance from the regulations underSection 1221 and 1237. (You’ll find relevant provisions for thefacts of this case in § 1237(a)(2) and Reg1.1237-1(c)(3)(ii)).
Answer:
1221 code of IRS defines capital asset as-
capital asset means property held whether or not connected tohis business but does not include-
(a) stock in trade or other property of a kind which would beincluded in inventory or property held primarily for sale tocustomers;
(b) property, used in his trade or business, of a characterwhich is subject to the allowance for depreciation or real propertyused in business or trade;
(c) a patent, invention, model or design, a secret formula orprocess, a copyright, a literary, musical, or artistic composition,a letter or memorandum, or similar property
(d) accounts or notes receivable acquired in the ordinary courseof trade or business for services rendered or from the sale ofproperty
Regulations 1237 provides that a lot or parcel which is part ofa tract of real property shall not be deemed to be held primarilyfor sale to customers in the ordinary course of trade or businessat the time of sale solely because of the taxpayer havingsubdivided such tract for purposes of sale or because of anyactivity incident to such subdivision or sale, if
(a) such tract, or any lot or parcel thereof, had not previouslybeen held primarily for sale to customers in the ordinary course oftrade or business and, in the same taxable year in which the saleoccurs, such taxpayer does not so hold any other real property;and
(b) no substantial improvement that substantially enhances thevalue of the lot or parcel sold is made by the taxpayer on suchtract while held by the taxpayer or is made pursuant to a contractof sale entered into between the taxpayer and the buyer.
In the given case, Sean Willen over the 20 years has acquiredthe land and every third year, Sean Willen has developed one theproperties by subdividing the property into lots and then he hassewer, water, natural gas, and electricity hookups put in each lotand paves new streets.
Regulation 1237 provides that land or parcel shall not be deemedto be held primarily sale to customers in ordinary business if nosubstantial improvement on the land parcel has been performed and ataxpayers does not hold another real estate property. Further,regulation 1221 provides that a capital asset shall exclude aproperty held primarily for sale to customers.
Further, on perusal of both the regulations, it is amply clearthat a taxpayer dividing the property in lots and performing otheractivities to sale it to customer is excluded from definition ofcapital asset and shall be treated as stock in trade.
Hence, activities of Sean Willen does not meet the definition ofcapital assets and shall be taxed as stock in trade.
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