Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 59-91

1959-1 C.B. 15

Sec. 61

Sec. 1221

Sec. 1231

IRS Headnote

For Federal income Tax purposes, where section 1237 of the Internal Revenue Code of 1954 is inapplicable, gain realized by a corporation from the sale of lots subdivided from land which it had held as an investment and on which it made sizeable improvements in order to facilitate the sale of the lots, such as the construction of streets or the installation of utilities, constitutes ordinary income to the corporation.

Full Text

Rev. Rul. 59-91

Advice has been requested whether gain realized by a corporation from the sale of lots which it subdivided from land held for investment constitutes capital gain or ordinary income.

The taxpayer corporation is engaged in, and derives its income from, the purchase, improvement, and rental of real estate. It has never in the past bought or held any of its assets primarily for sale to customers, and such sales as it has made have been casual and isolated.

During the taxable year, the taxpayer found it necessary to sell a tract of its nonproductive land which had not been acquired in a foreclosure and which had been held as an investment. In order to derive the maximum proceeds from the sale, the taxpayer subdivided the land into residential lots, graded and surfaced the streets, and installed the required drainage and utilities. An independent real estate broker advertised and negotiated the sales of the lots.

Sections 1221 and 1231 of the Internal Revenue Code of 1954, in setting forth the rules for the determination of capital gains and losses, exclude from the definition of a capital asset and from the definition of property used in trade or business, property held by a taxpayer primarily for sale to customers in the ordinary course of its trade or business.

In the case of R. J. Richards v. Commissioner , 81 Fed.(2d) 369, it was held that gain from the subdivision and sale of land, originally purchased for farming purposes, constituted ordinary income, not capital gain. This decision was based on the fact that, at the time of the sales, the subdivided land was held by the taxpayers primarily for sale to customers in the ordinary course of trade or business. See also C. W. Oliver v. Commissioner , 138 Fed.(2d) 910; Myra C. Brown v. Commissioner , 143 Fed.(2d) 468; Robert Swanston v. Commissioner , Tax Court Memorandum Opinion, entered April 28, 1943.

A similar conclusion was reached in C. E. Mauldin v. Commissioner , 195 Fed.(2d) 714, wherein it was held that ordinary income resulted from the subdivision and sale of land originally purchased for cattle raising. The court, in affirming the decision of the Tax Court of the United States in that case, stated, in part, as follows:

Admittedly, Mauldin originally purchased the property for purposes other than sale in the ordinary course of trade or business. When, however, he subdivided and offered it for sale, he was undoubtedly engaged in the vocation of selling lots from this tract * * *

The facts of the instant case indicate that the taxpayer subdivided land and made improvements thereon in order to facilitate the sale and derive the maximum proceeds from the disposition of the property. After such division and improvement, the lots were held by the taxpayer primarily for sale to customers in the ordinary course of trade or business.

The provisions of section 1237 of the Code are inapplicable in the instant case inasmuch as that section applies to a corporation only if no shareholder of such corporation directly or indirectly holds property for sale to customers in the ordinary course of trade or business, and the property subdivided is acquired in a foreclosure, as defined in section 1237(b)(3). Here, such real property was not acquired through foreclosure.

Accordingly, it is held that for Federal income tax puruposes, where section 1237 of the Code is inapplicable, gain realized by a corporation from the sale of lots subdivided from land which it had held as an investment and on which it made sizeable improvements in order to facilitate the sale of the lots, such as the construction of streets or the installation of utilities, constitutes ordinary income to the corporation.