Land Sale Gain Deemed Ordinary Income!

A California District Court recently held that a taxpayer sustained ordinary income, not long term capital gain income, from a land sale because the underlying facts showed an intent to develop the property, as opposed to holding it for long term investment gain.

The decision (Frederic Allen v. U.S. (DC CA 5/28/14) 113 AFTR 2d) reminds us that conclusions in matters of this sort are directly dependent on the facts of each case in the context of factors which courts have identified, including:

  • The nature of the acquisition of the property,
  • The frequency and continuity of sales over an extended period,
  • The nature and the extent of the taxpayer’s business,
  • The activity of the seller concerning the property, and
  • The extent and substantiality of the transactions.

The Court in Allen found that the evidence was demonstrable that the taxpayer intended to develop the property when he purchased it and that he undertook substantial efforts to develop it during the time that he owned it.