Tri-S Corp.
v.
Comm'r of Internal Revenue

Tax Court of the United States.Jun 15, 1967
48 T.C. 316 (U.S.T.C. 1967)
48 T.C. 316T.C.

Docket No. 759-66.

1967-06-15

TRI-S CORPORATION, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Gene W. Reardon and Julie M. Reardon, for the petitioner. Marvin T. Scott, for the respondent.


Gene W. Reardon and Julie M. Reardon, for the petitioner. Marvin T. Scott, for the respondent.

CAPITAL ASSETS— SEC. 1221(1)— CONDEMNATION BY EMINENT DOMAIN.— Property was not held primarily for sale to customers in the ordinary course of the petitioner's business after notice of condemnation by eminent domain for State highway purposes.

The Commissioner determined a deficiency of $17,636.45 in income tax of the petitioner for its fiscal year ended October 31, 1961. The only issue for decision is whether the gain from the sale of land to the Colorado State Highway Department was ordinary income instead of capital gain as reported.

FINDINGS OF FACT

The petitioner is a Colorado corporation located in Denver, Colo., and filed its return for the tax year with the district director of internal revenue at Denver Colo. It was engaged ‘in the business of being a residential land developer which develops and sells improved lots with homes to individual home buyers.’

It sometimes purchases finished sites, builds houses on such sites, and sells them to prospective home owners.

It purchased 80 acres of raw land for $167,750 on October 10, 1960, and intended to develop the property with streets, sidewalks, curbs, gutters, sewer, water, etc., build on the lots, and sell the buildings and lots to prospective customers. However, it made no physical changes in that property during the tax year or at any time material hereto and it remained raw land. The petitioner had never made any attempt to sell any of the 80 acres.

The petitioner was notified by the Colorado State Highway Department on April 7, 1961, ‘that condemnation proceedings would be instituted to take a portion of the land * * * by eminent domain for use as an arterial highway extending southerly from Interstate Highway No. 70.’ The land involved was about 20 acres of the 80 acres which the petitioner had acquired on October 10, 1960.

The petitioner then negotiated with the Colorado State Highway Department and agreed on July 25, 1961, to convey a portion of the 80 acres to the State for $130,000. That portion was conveyed to the Colorado State Highway Department by the petitioner on October 6, 1961. It was still raw land at that time. The petitioner had never made any other sales of raw land and had not tried to sell any raw land.

Subsequently some of the remaining raw land was developed by the petitioner for use in its business of building houses for sale to prospective home buyers.

The petitioner was not holding the portion of the 80 acres here involved after April 7, 1961, ‘primarily for sale to customers in the ordinary course of his trade or business' within the meaning of section 1221(1) and it did not sell that land to a customer in the ordinary course of its business. It did not seek the sale to the highway department or any other sale of that raw land.

The property sold was a capital asset at the time of the sale.

All stipulated facts are incorporated herein by this reference.

OPINION

MURDOCK, Judge:

‘Capital asset’ does not include ‘property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.’

The sale here to the Colorado State Highway Department was made by agreement dated July 25, 1961, after notice from that purchaser on April 7, 1961, ‘that condemnation proceedings would be instituted to take a portion of the land * * * by eminent domain for use as an arterial highway.’ That notice referred to the land here involved later sold to the highway department. This was not a sale ‘in the ordinary course’ of the petitioner's business. The property had been held up to April 7, 1961, by the taxpayer primarily for sale to customers in the ordinary course of its business but after the condemnation notice this property was no longer held by the petitioner primarily for sale to customers in the ordinary course of its business. It then ceased to be held for any such purpose because thereafter it would either have to be sold to or taken by eminent domain by the Colorado State Highway Department for building the highway. The plan of the petitioner had been to improve the vacant land, of which this was a part, with streets, sidewalks, etc., build houses on all or most of it, and sell the resulting houses and lots to customers in the ordinary course of its business. That plan had to be abandoned when the condemnation notice was received. Cf. Charles E. Mieg, 32 T.C. 1314; Eline Realty Co., 35 T.C. 1. The petitioner had done nothing to the land up to that time or to the sale to the highway department and it made no improvements to the remaining land until much later. The petitioner did not seek the sale to the highway department.

The property sold to the highway department was a capital asset at the time of its sale.

Decision will be entered under Rule 50.