Internal Revenue Service
Revenue Ruling
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smRev. Rul. 70-7
1970-1 C.B. 175
Sec. 61
Sec. 1311
Sec. 1312
IRS Headnote
An erroneous cost basis of subdivided lots sold in years barred by statute for deficiency assessment cannot be corrected; cost basis of remaining lots is determined by equitably apportioning the actual cost of the entire tract to each of the original lots.
Full Text
Rev. Rul. 70-7
Advice has been requested concerning the treatment of basis under the circumstances described below.
The taxpayer, in 1958, purchased a tract of land to which he assigned a cost of 150x dollars which he subdivided into 15 building lots. Pursuant to section 1.61-6(a) of the Income Tax Regulations, the 150x dollars cost of the tract was equitably apportioned to each of the lots (10x dollars to each of the lots) and the subsequent sale of each lot was treated as a separate transaction with gain or loss being computed separately thereon.
In 1968, it was determined that the 1958 cost basis of the tract in fact was 75x dollars and not 150x dollars. Eight of the fifteen lots had been sold in years for which the statutory period for the assessment of a deficiency against the taxpayer had expired. In computing gain and loss on each of the eight lots sold, 80x dollars of basis was taken into account by the taxpayer (10x dollars for each lot).
The questions presented in the instant case are: (1) whether on the sale of the remaining seven lots, the taxpayer is entitled to take into account any basis in computing gain or loss since the total basis taken into account in computing gain or loss on the prior sales of the eight lots exceeds the amount of the redetermined basis of the entire tract; and (2) whether the provisions of sections 1311 through 1315 of the Internal Revenue Code of 1954, relating to corrections of errors otherwise prevented by operation of law or rule of law, are applicable to correct the treatment of the basis used in determining gain or loss upon the prior sales of the eight lots.
Section 1.61-6(a) of the regulations states, in part, that when a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts with the gain realized or loss sustained on the part of the entire property sold being the difference between the selling price and the cost or other basis allocated to such part. This section further provides that the sale of each part is treated as a separate transaction and gain or loss shall be determined at the time of sale of each part and not deferred until the entire property has been disposed of.
In Laguna Land & Water Co. v. Commissioner, 118 F. 2d 112 (1941), a tract of land was purchased and subdivided into lots. Pursuant to regulations under the Revenue Act of 1928 comparable to section 1.61-6(a) of the present regulations, the cost basis of the tract was equitably apportioned to the lots and the sale of each lot was treated as a separate transaction with gain or loss being separately determined and reported upon each such sale when made. In taxable years preceding the taxable year in question that were barred by the statute of limitations, lots had been sold and the total cost basis used in determining and reporting gain or loss on such sales exceeded the correct cost basis of the entire tract as subsequently determined. It was held that the taxpayer was entitled to basis in the remaining lots for computing gain or loss upon their sale even though the correct cost basis of the tract had been recovered in determining and reporting gain or loss upon the lots sold before the correct basis of the entire tract was determined. This conclusion was based on the requirement of the regulations that each lot be apportioned a part of the total basis of the tract and that gain or loss on the sale of each lot be separately determined and reported when made. Also see Commissioner v. Cedar Park Cemetery Ass'n, Inc., 183 F. 2d 553 (1950).
Sections 1311 through 1315 of the Code provide, under certain conditions, rules for the correction of the effect of an erroneous treatment of an item in a taxable year which is closed by the statute of limitations or otherwise, in cases where, in connection with the ascertainment of the tax for another taxable year, it has been determined that there was an erroneous treatment of such item in the closed year. Section 1312 of the Code specifies the circumstances under which such a correction can be made.
Section 1312(2) of the Code provides, in part, that a correction can be made if the determination allows the taxpayer a deduction which was erroneously allowed the same taxpayer for another taxable year. Section 1312(7) of the Code provides, in part, that a correction can be made if the determination establishes the basis of property and there occurred one of the following types of errors in respect of a prior transaction upon which such basis depends, or in respect of a prior transaction which was erroneously treated as affecting such basis: (1) an erroneous inclusion in, or omission from, gross income, or (2) an erroneous recognition or nonrecognition of gain or loss, or (3) an erroneous deduction of an item properly chargeable to capital account or an erroneous charge to capital account of an item properly deductible.
Sections 1311 through 1315 of the Code are predicated on the principle that correction of the erroneous treatment of an item barred by the statute of limitations is only made where the subsequent determination involves the same item, or, in the case of a basis determination, the subsequent determination depends upon the treatment of the prior transaction. See generally Senate Report No. 1567, Seventy-fifth Congress, C.B. 1949-1 (Part 2) 779, at 814. Sections 1311 through 1315 of the Code do not permit adjustments in barred years for items or transactions that are merely similar to those with respect to which a subsequent determination is made. See D. A. MacDonald v. Commissioner, 17 T.C. 934 (1951), acquiescence, C.B. 1952-1, 3.
In the instant case, the prior items barred by the statute of limitations (the gain or loss upon the sale of the eight lots) are not the same as the items involved in the subsequent determination (the 1958 cost basis of the entire tract), nor does the subsequent determination of basis of the seven remaining lots depend upon the prior transactions (the sales of the eight lots).
Accordingly, the taxpayer is entitled to take 5x dollars of basis into account on each of the seven remaining lots in computing gain or loss upon their subsequent sale (the 1958 cost basis of the entire tract as determined in 1968, 75x dollars, equitably apportioned to each of the original 15 lots). Further, the basis of the eight lots sold in taxable years barred by the statute of limitations cannot be corrected under the provisions of sections 1311 through 1315 of the Code.