Real estate Acquired by foreclosure; building and loan association; sales expenses. A domestic

412.1 Acquired by foreclosure; building and loan association; sales expenses. A domestic

building and loan association s expenses in disposing of foreclosed property are not deductible as business expenses but are taken into account in computing foreclosure gains and losses to be reflected in the reserve for losses on qualifying real property loans. 1.162 1, 1.166-4, 1.595-1. (Secs. 162, 166, 595; 86 Rev. Rul. 73-116, 1973-1 C.B. 300. 412.2 Acquisition cost; allocation of legal expenses. Legal expenses incurred in purchasing real estate must be allocated between the land and the improvements thereon for purposes of determining basis. 1.167(g) 1, 1.1012-1. (Secs. 167, 1012; 86 Rev. Rul. 68-528, 1968-2 C.B. 331. 412.3 Assumption of first mortgage; installment sales. Taxpayer built low-priced homes and obtained first mortgage loans on them prior to sale. Buyers, generally poor credit risks, assumed the first mortgages which averaged 65 percent of the sales price and gave a second mortgage for the difference between the sales price and the first mortgage. Held, the amount of the first mortgages assumed does not constitute a payment and the taxpayer properly reported income from sales on the installment method. (Sec. 453, 86 Denco Lumber Co., 39 T.C. 8, Acq. in result, 1963-2 C.B. 412.4 Basis; holding period; interests acquired at different times. The basis to be used in determining gain or loss on the sale of an undivided interest in certain real property, and the holding period thereof, by a taxpayer who owned an undivided one-half interest in the property, purchases the other one-half interest, and subsequently sells an undivided one-half interest. 1.1012-1, 1.1223-1. (Secs. 1012, 1223; 86 Rev. Rul. 67-309, 1967 2 C.B. 263. 412.5 Condominium apartments sold; land leased. A corporate land owner constructed condominium apartments on its land and sold them to individuals and leased them the land for a period of 75 years. The purchasers are required to pay their own taxes and insurance. There are no restrictions on the sale, assignment, or mortgaging of the interest in the apartment and the common elements other than that they cannot be sold separately. The ground lease rental payment is based solely on the fair market value of the land excluding improvements. Held, the purchasers have an equity interest in the condominium apartment and the amount of money received by the corporate land owner for each apartment is income from the sale of property which is not a capital asset. 1.61-6. (Sec. 61, 86 Rev. Rul. 70-607, 1970-2 C.B. 9. 412.6 Condominium conversions; capital gain v. ordinary income. Section 1237 does not apply to the conversion of rental units in an apartment building into condominiums and the sale of the condominiums to the general public. 1.237-1. (Sec. 1237, 86 Rev. Rul. 80-216, 1980-2 C.B. 239. 412.7 Condominium conversions; cost recovery method of accounting. A taxpayer who purchases a rental apartment building, converts that building into condominiums, and then sells the units individually may not use the cost recovery method of accounting for reporting income from the sales. 1.61-6, 1.446-1. (Secs. 61, 446; 86 Rev. Rul. 79-276, 1979 2 C.B. 200. 412.8 Consolidated under one deed. The transfer of separate adjoining properties to a nominee and the reconveyance back to the owner, where the purpose is to consolidate the properties under a single deed, does not result in gain or loss to either party and the basis of the consolidated property remains unchanged. 39.112(a)-1. (Sec. 112(a), 39 Code; Sec. 1002, 86 Rev. Rul. 55-142, 1955-1 C.B. 339. 412.9 Contracts purchased by finance company; cancellation. Taxpayer purchased real estate contracts, made between a vendor of land and individual purchasers, and took possession of the land upon default and the resultant contract cancellation. Held, neither the provisions for installment sales nor the provisions for repossession of real estate are applicable. However, a bad debt deduction is allowed if the property value is less than the unrecovered cost, and gain is realized if the property value exceeds the unrecovered cost. 1.61-1, 1.166-1, 1.453-6, 1.1038-1. (Sec. 44, 28 Rev. Act; Secs. 61, 166, 453, 1038, 86 Rev. Rul. 68 523, 1968 2 C.B. 82; Title & Trust Co., 33 B.T.A. 25, Acq. in result, 1968-2 C.B. 3. 412.10 Deposit on purchase price. A nominal payment made when a purchase contract for real estate is signed is treated as a deposit on the purchase price of the property and is taken into account in determining the character and amount of income in the year the actual sale is consummated. A.R.R. 13 and O. 988 superseded. 1.451-1. (Sec. 451, 86 Rev. Rul. 69-93, 1969-1 C.B. 139. 412.11 Depreciable improvements by lessee; subsequent purchase. Where a lessee places depreciable improvements on the leased land, and then purchases the land in fee, subject to a sublease running to the end of his original lease, the purchase price paid by the lessee shall be allocated as his cost basis for the land and improvements acquired therewith in proportion to (1) the purchase date fair market value of the land, (2) the purchase date value of the right to acquire the improvements he placed on the land at the end of the lease term, and (3) the purchase date value of the right to acquire at the end of the sublease the improvements made by the sublessee. 1.167(a)-1. (Sec. 167, 86 Rev. Rul. 60-180, 1960-1 C.B. 11 412.12 Development or sale; intended use; primarily defined. Section 1221 denies capital gains treatment to profits which result from the sale of property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. The term primarily as used in this section means of first importance or principally. 1.1221-1. (Sec. 1221, 86 Malet, 383 U.S. 569, Ct. D. 1906, 1966-1 C.B. 282. 412.13 Easement; business property. The consideration received for granting an easement constitutes the proceeds from a sale of an interest in real property. The amount received should be applied as a reduction of the cost or other basis of the land subject to the easement. Any excess over basis constitutes recognized gain. Where the land was used by the taxpayer in his trade or business and held for more than six months, any recognized gain qualifies for capital gains treatment. Clarified to provide that the consideration received for granting a right-of-way easement that affects only a specific portion of a tract of land reduces only the basis properly allocable to that portion. 1.1016-2, 1.1231-1. (Secs. 1016, 1231; 86 Rev. Rul. 59 121, 1959 1 C.B. 212; Rev. Rul. 68-291, 1968-1 C.B. 351. 412.14 Easement; flowage deed. Amounts received for a flowage deed granting a perpetual easement to flood designated portions of the taxpayer s property but not substantially affecting its use by the taxpayer constitutes a reduction in the basis of the property. G.C.M. 23162 superseded. 1.1016-2. (Sec. 1016, 86 Rev. Rul. 70-510, 1970-2 C.B. 159. 412.15 Easement; pipeline; adjusted basis. Amounts received for a pipeline right-of-way easement permanently affecting only a specific portion of an entire land tract reduces the basis of only the acreage included within the dimensions of the permanent easement and the preliminary wider temporary construction easement is not considered. Any excess over that basis is recognized gain. 1.61 1, 1.1016 2, 1.1231 1. (Secs. 61, 1016, 1231; 86 Rev. Rul. 73-161, 1973-1 C.B. 366. 412.16 Exchange; interests in three parcels for full title to one. The nonrecognition provisions of section 1031(a) apply to gain or loss realized by each of three taxpayers, not dealers in real estate, who exchanges his undivided interest in three separate unencumbered parcels of real estate held for investment solely for full title to one parcel to be held for the same purpose. 1.1031(a)-1. (Sec. 1031, 86 Rev. Rul. 73-476, 1973 2 C.B. 300. 412.17 Exchange; real estate for real estate subject to long-term lease. An exchange of unencumbered real estate for real estate subject to a long-term condominium lease, otherwise satisfying the requirements of section 1031(a), qualifies as a like kind exchange. 1.1031(a)-1. (Sec. 1031, 86 Carl E. Koch, 71 T.C. 54, Acq., 1979-1 C.B. 1. 412.18 Farm properties exchanged; jointly owned; one subject to mortgage. Two unrelated farmers transfered their undivided one-half interests in two jointly owned parcels of farmland, only one of which was subject to a mortgage, to each other so that each farmer became the sole owner of one parcel and continued to use that parcel as farmland. The farmer receiving the unmortgaged parcel gave the other a promissory note in the amount of one-half the mortgage on the other parcel. The transfer is an exchange under section 1001(a). Gain on the exchange is recognized only to the farmer receiving the note and only to the extent of the fair market value of such note. 1.1001-1, 1.1031(d)-2. (Secs. 1001, 1031; 86 Rev. Rul. 79-44, 1979-1 C.B. 265. 412.19 Farm properties exchanged. An exchange of encumbered farm lands, buildings, and unharvested crops for like property constitutes a nontaxable exchange within the meaning of section 1031(a). Where the exchange involves a reciprocal assumption of mortgages, any gain resulting from the exchange is subject to tax under the provisions of section 1231. An exchange of personal residences along with farm properties is treated as a separate exchange governed by the applicable provisions of section 1034 of the Code. 1.1016-5, 1.1031(d)-2, 1.1034-1, 1.1231-1, (Secs. 1016, 1031, 1034, 1231; 86 Rev. Rul. 59-229, 1959 2 C.B. 180. 412.20 Farmland; sale of development right; Suffolk County, New York. The tax consequences are set forth of a sale of a development right in agricultural land in Suffolk County, New York, where the law provides for such sales to the county to limit use of the land and improvements on it to designated agricultural purposes, by a taxpayer who is unable to allocate the basis in the property between the development right to reconveyed and the interests to be retained and who, in order to receive sale proceeds in installments, sells the development right to a bank that sells it to the county for a lump-sum payment. 1.453 1, 1.1001-1, 1.1221-1, 1.1231-1. (Secs. 453, 1001, 1221, 1231; 86 Rev. Rul. 77-414, 1977 2 C.B. 299. 412.21 Farmland sold by farmer-realtor. A partnership, engaged in both farming and the real estate business, purchased land, improved it, and used it for farming. The land was never advertised for sale and was sold pursuant to negotiations initi-

ated by the purchaser. Held, the land was not acquired and held for the sale to customers in the ordinary course of business and proceeds from its sale were taxable as capital gains. (Sec. 117(j), 39 Code; Sec. 1231, 86 W. Linton Atkinson, 31 T.C. 1241, Acq., 1959-2 C.B. 3. 412.22 FHA or VA mortgages. A lending institution which originates or purchases FHA or VA mortgage loans for sale or resale to permanent investors for the primary purpose of obtaining the servicing contracts may not inventory such mortgages since it does not qualify as a dealer in securities either with respect to the mortgages it originates or with respect to the mortgages it purchases. Further, the discount, so-called points, allowed the institution for making such loans is not includable in gross income the year the mortgage is originated. Modified by Rev. Rul. 72 523 to provide that a dealer in securities may inventory mortgage loans that it originates. 1.451-1, 1.471-5, 1.1236-1. (Secs. 451, 471, 1236; 86 Rev. Rul. 65 95, 1965 1 C.B. 208. 412.23 FHLMC participation certificates. The tax consequences of the purchase of mortgage participation certificates from an insured savings and loan association by the Federal Home Loan Mortgage Corporation (FHLMC) and the sale of corresponding participation sales certificates to other savings and loan associations and exempt employees trusts are set forth. 1.61 1, 1.162-1, 1.451-1, 1.501(a)-1, 1.593-11, 1.671-1, 1.856-2, 1.1232-1, 301.7701-2, 301.7701-13A. (Secs. 61, 162, 451, 501, 593, 671, 856, 1232, 7701; 86 Rev. Rul. 71 399, 1971 2 C.B. 433; Rev. Rul. 72-376, 1972-2 C.B. 647; Rev. Rul. 74-221, 1974-1 C.B. 365; Rev. Rul. 74-300, 1974-1 C.B. 169; Rev. Rul. 80-96, 1980-1 C.B. 317; Rev. Rul. 81-203, 1981-2 C.B. 137. 412.24 FNMA participation certificates. Participation certificates which may be sold by the Federal National Mortgage Association pursuant to the Participation Sales Act of 1966 are stock or obligations of an instrumentality of the U.S. for purposes of section 7701(a)(19)(C)(ii), relating to the definition of a domestic building and loan association. A participation certificate so issued is either stock or a security as that term is defined in section 165(g)(2)(C) and is not, therefore, a qualifying real property loan under section 593(e)(1). 1.165-5, 1.593-11, 301.7701-13. (Secs. 165, 593, 7701; 86 Rev. Rul. 66-238, 1966-2 C.B. 521. 412.25 Foreclosed property. Real estate acquired by a bank, mortgage finance company, or an insurance company in foreclosure, or by deed in lieu of foreclosure, that was not held for the production of rental income but was advertised and sold as soon as possible, was held primarily for sale in the ordinary course of trade or business and results in ordinary gain or loss even though improvements were made to unimproved properties. Rev. Rul. 57 468 superseded. 1.1221 1. (Sec. 117, 39 Code; Sec. 1221, 86 Rev. Rul. 74-159, 1974-1 C.B. 232; Girard Trust Corn Exchange Bank, 22 T.C. 1343, Acq., 1955-2 C.B. 6. 412.26 Foreclosed property; building and loan association. Amounts realized upon the sale of real property previously acquired by foreclosure by a domestic building and loan association using the reserve method of computing bad debts, which are in excess of the adjusted basis of such property and are credited to the appropriate bad debt reserve account, in accordance with reg. 1.595-1(e)(6)(i), would not be reflected in earnings and profits accounts of the taxable year of sale or in accumulated earnings and profits accounts after December 31, 1951. However, such amounts would be reflected in gross income if, in any year, the bad debt reserve account is required to be restored to gross income. 1.312-6, 1.593 7, 1.595-1. (Secs. 312, 593, 595; 86 Rev. Rul. 70-256, 1970-1 C.B. 69. 412.27 Holding period; commencement. The holding period of real property which is the subject of an unconditional contract of sale begins on the day following that on which title passes, or on the day following that on which delivery of possession is made and the burdens and privileges of ownership are assumed by the purchaser, whichever comes first. A delivery of possession under a mere option is without significance until a contract of sale comes into being through the exercise of the option, so that the holding period of the seller cannot end prior to that date. 39.117(a)-1, 39.17(h)-1, 39.117(j)-1. (Secs. 117(a), 117(h), 117(j), 39 Code; Secs. 1221, 1223, 1231, 86 Rev. Rul. 54-607, 1954-2 C.B. 177. 412.28 Houses furnished mining employees. The owner-lessor of land joined with the lessee to sell the lessor s land and the lessee-constructed houses thereon that had been furnished mining employees. Taxpayers did not purchase or sell other real estate, employ agents or brokers, or solicit or advertise for purchasers during the years involved. Held, the property sales resulted from the taxpayers desire to liquidate their capital assets and the gain was capital gain. (Secs. 117(a), 117(j), 39 Code; Secs. 1221, 1231, 86 Altizer Coal Land Co., 31 T.C. 70, Acq., 1959-1 C.B. 3. 412.29 Installment sales; condominium units. An individual taxpayer selling condominium units, who assumed all risks relating to possible default of a purchaser and reimbursed a mortgage company for expenses relating to the loans under a contract that provided that the company make loans in its name to purchasers of the units, insure the purchaser s payments on the notes, transfer the notes to the taxpayer at face value following each loan, and collect the installment payments, is not considered as having received any payments from the purchasers and may elect to report income from the sale of the units on the installment method. 1.453 1. (Sec. 453, 86 Rev. Rul. 76-269, 1976-2 C.B. 129. 412.30 Installment sales; custom-built houses. A building contractor who constructs custom-built houses under contracts with individuals on their land and with their materials is not considered to be (1) a dealer in personal property, (2) making sales or other dispositions of real property, nor (3) making casual sales or other dispositions of personal property, even though under State law the houses may be chattels of the builder until completion; therefore, he may not adopt the installment method of accounting. Rev. Rul. 59-250 superseded. 1.453-1. (Sec. 453, 86 Rev. Rul. 73-438, 1973-2 C.B. 156. 412.31 Installment sales; deferred lump sum payment. A taxpayer may not elect to report income from the sale of real property on the installment method where the total purchase price is payable in a lump sum in a taxable year subsequent to the year of sale. Amplified by Rev. Rul. 71-595, 1.453-1. (Sec. 453, 86 Rev. Rul. 69-462, 1969-2 C.B. 169. 412.32 Installment sales; deferred payment agreement. The sale of real property pursuant to an agreement, demanded by the seller in lieu of full payment immediately, providing payment of ten percent of the purchase price at closing and delivery of nine equal interest-bearing notes payable annually without right of prepayment, qualifies as a deferred payment sale within the meaning of reg. 1.453-4(a) and the seller may elect the Real estate installment method of reporting gain. 1.453- (Sec. 453, 86 Rev. Rul. 73-396, 1973-2 C.B. 160. 412.33 Installment sales; deposit received before year of sale. A deposit on real property, forfeitable upon default, received by the seller in a year prior to the year of sale and applied to the selling price is considered part of the sale price and is treated as part of the amount received in the year of sale for purposes of determining whether the seller may report gain from the sale on the installment method. 1.453-1. (Sec. 453, 86 Rev. Rul. 73-369, 1973-2 C.B. 155. 412.34 Installment sales; election; timeliness. Circumstances are described in which the election to report income from sales of real property and casual sales of personal property on the installment method is valid, if such election was not made on a timely filed original return for the year of sale. Rev. Rul. 93 revoked; Rev. Rul. 56-396 modified. 1.453 8. (Sec. 453, 86 Rev. Rul. 65-297, 1965-2 C.B. 152; John F. Bayley, 35 T.C. 288, Acq., 1961 2 C.B. 4; Jack Farber, 36 T.C. 1142; Nathan C. Spivey, 40 T.C. 1051; John P. Reaver, 42 T.C. 72; F. E. McGillick Co., 42 T.C. 1059, Acqs., 1965-2 C.B. 412.35 Installment sales; future payments from escrow. An agreement to sell real property for a 10 percent down payment and six equal interest bearing notes due annually and secured by a deed of trust, which was changed in the year of sale under an agreement calling for the seller to cancel the deed of trust and the purchaser, although continuing to be liable for the note payments, to make an irrevocable escrow deposit of the remainder of the purchase price from which the escrow agent would make annual payments that could not be accelerated by either the buyer or seller, does not qualify for the installment method of reporting income from the sale. Rev. Rul. 68-246 revoked. Amplified by Rev. Rul. 79-91. 1.453-1, 301.7805-1. (Secs. 453, 7805; 86 Rev. Rul. 77-294, 1977-2 C.B. 173. 412.36 Installment sales; future payments from escrow. The installment method of reporting income does not apply to a sale of real property under a sales contract where, pursuant to an escrow agreement, the purchaser deposits the balance of the purchase price in escrow to be released to the seller in six yearly installments by the escrow agent. Rev. Rul. 68 246 distinguished. 1.453-1. (Sec. 453, 86 Rev. Rul. 73-451, 1973-2 C.B. 158. 412.37 Installment sales; payment in trust. A payment of 80 percent of the sale price of real property paid in the year of sale to a trust for the seller s benefit is considered received by the seller and he may not elect the installment method of reporting gain. 1.451-1, 1.453 1. (Secs. 451, 453; 86 Rev. Rul. 71-352, 1971-2 C.B. 221. 412.38 Installment sales; seller s note cancelled. Income from the sale of realty may not be reported under the installment method where the buyer, as part of the consideration for the property, cancels the seller s first mortgage note in an amount exceeding thirty percent of the selling price. Further, the amount of the note is includable as an amount received in the year of sale. I.T. 2351 superseded. 1.453 1. (Sec. 453, 86 Rev. Rul. 71-515, 1971-2 C.B. 222. 412.39 Installment sales; selling expenses. Commissions and other selling expenses paid or incurred in connection with the sale of real property reported on the installment method by a person other than a dealer are an offset against the selling price in determining the gross profit to be realized, but are not taken into account in determining the payments, the total contract price, or the selling price. The Service will not follow the

decision in Kirschenmann that selling expenses are an adjustment to basis in determining whether the sale qualifies for installment sale treatment. I.T. 2340 superseded. 1.453-5. (Sec. 453, 86 Rev. Rul. 74-384, 1974 2 C.B. 152. 412.40 Installment sales; separate pareels. A cash basis taxpayer sold land to a real estate dealer for cash and a mortgage. The settlement sheet and the deed recited one conveyance of 52.56 acres, but 19.67 acres were specifically excepted from the mortgage, leaving 32.89 acres encumbered. Held, there was a transfer and payment for two separate properties and the taxpayer was entitled to report the long-term capital gain on the 32.89 acres on the installment method. (Sec. 453, 86 Charles A. Collins 48 T.C. 45, Acq., 1967-2 412.41 Installment sales; separate parcels; single contract. The total selling price and amounts received in the year of sale of three unrelated parcels of real property under a single contract must be allocated, on the basis of proportionate net fair market value, between one parcel sold at a loss and the two parcels sold at a gain, to determine whether the two parcels sold at a gain, considered in the aggregate, would qualify for the installment method of reporting. 1.453 1. (Sec. 453, 86 Rev. Rul. 76-110, 1976 1 C.B. 126. 412.42 Installment sales; shell homes. A taxpayer engaged in selling standardized homes, commonly referred to as shell homes, constructed by him on customers lots, from precut material that he furnishes is a dealer in personal property under section 453(a) and may adopt the installment method of accounting. 1.453 1. (Sec. 453, 86 Rev. Rul. 73-437, 1973-2 C.B. 156. 412.43 Inventories by dealers. Real estate held for sale by a taxpayer engaged in the real estate business cannot be inventoried in computing taxable income, O.D. 848, superseded. 1.471 1. (Sec. 471, 86 Rev. Rul. 69-536, 1969-2 C.B. 109. 412.44 Investment; joint venture. Taxpayer purchased a hospital and transferred title to a joint venture which explored various plans for the property s use but implemented none before selling the property. Held, the property was not held primarily for sale to customers in the joint venture s ordinary course of business and gain from its sale was taxable as capital gain. (Sec. 1221, 86 George W. Mitchell, 47 T.C. 120, Acq., 1967-1 412.45 Investment; sales by broker. An active real estate broker-developer sold three parcels of unimproved land and one parcel with minimal improvements. The parcels were held for two to eleven years, were never offered for sale, and were sold as the result of unsolicited offers. Held, the parcels were not held primarily for sale to customers in the ordinary course of business and the profits are capital gains. (Sec. 1221, 86 Richard H. Pritchett, 63 T.C. 149, Acq., 1975-1 412.46 Investment; sales by contractor. Gain on the sales of widely scattered parcels of real estate, purchased with excess funds by a con struction partnership and one of its partners who did no advertising, erected no improvements, subdivided none of the properties, employed no agents, and held no real estate licenses, were capital gains. (Sec. 117(a), 39 Code; Sec. 1221, 86 James G. Hoover, 32 T.C. 618, Acq., 1959-2 C.B. 5. 412.47 Investment; safes by dealer-investor. Taxpayer, who was in the real estate business, built defense housing units at the request of the FHA. Some units were sold soon after completion; others were held as rental investment property for years before being sold. Held, taxpayer was both a dealer and an investor in real estate and was entitled to long-term capital gain treatment on gains from the sale of properties held for investment. (Sec. 117, 39 Code; Sec. 1231, 86 Walter R. Crabtree, 20 T.C. 841, Acq., 1954-1 C.B. 412.48 Investment; sold unsubdivided. Taxpayers participated in a joint venture which invested in farm land suitable for subdividing which, before selling as unimproved property, the taxpayers tried to assure future availability of water and sewer service. Held, taxpayers were not in the real estate business and profit from the sale was long-term capital gain. (Sec. 1221, 86 Morris Cohen, 39 T.C. 886, Acq., 1974-1 C.B. 1. 412.49 Investment; unimproved lands. A fulltime accountant purchased twelve and sold ten parcels of undeveloped land within a four-year period. The properties were not improved or subdivided, and his involvement in the purchase and sale activities was minimal. Held, the taxpayer was merely an investor in speculative real estate, and gains on the sales were capital gains. (Sec. 1221, 86 Robert L. Adam, 60 T.C. 996, Acq., 1974-1 C.B. 1. 412.50 Leasehold interest in real property. Amounts received by a lessee for the surrender of certain leasehold interests in real properties are taxable as proceeds from the sale of capital assets, but amounts received for the relinquishment of simple contract rights constitute ordinary income. Clarified by Rev. Rul. 72-85. 39.22(a)-1, 39.117(a)-1. (Secs. 22(a), 117(a), 39 Code; Secs. 61, 1221, 86 Rev. Rul. 56-531, 1956 2 C.B. 983; Isadore Golonsky, 16 T.C. 1450, Acq., 1956-2 C.B. 6; McCue Bros. & Drummond, Inc., 19 T.C. 667, Acq., 1956-2 C.B. 7; Louis W. Ray, 18 T.C. 438, Acq., 1956-2 C.B. 8. 412.51 Leasehold interest in real property; person other than dealer. Treatment of lessee s gain or loss upon the sale of a leasehold of land, including improvements, used in the trade or business of the lessee, who is not a dealer in leases, is outlined. Rev. Rul. 56-531 clarified; Rev. Rul. 60-4 superseded. 1.167(a)-3, 1.1221-1, 1.1231-1, 1.1245-1, 1.1250-1. (Secs. 167, 1221, 1231, 1245, 1250; 86 Rev. Rul. 72-85, 1972-1 C.B. 23 412.52 Maintenance and upkeep expenses; unproductive property. Advertising expense on unproductive property, and maintenance and upkeep costs attributable to improved and unimproved unproductive real property are not carrying charges chargeable to capital account. I.T. 2284 and I.T. 2701 superseded. 1.266-1, 1.1016-2. (Secs. 266, 1016; 86 Rev. Rul. 71-475, 1971-2 C.B. 30 412.53 Mortgage acquisition costs; banks. Finders fees (buying commissions) paid to brokers, title companies, and other third parties by banks in connection with the placement of mortgage loans constitute a part of the mortgage acquisition cost to be capitalized and amortized over the lives of the applicable mortgage loans. 39.113(b)(1)- (Sec. 113(b), 39 Code; Sec. 1016, 86 Rev. Rul. 57-400, 1957-2 C.B. 520. 412.54 Mortgage-backed certificates; mortgage pool. Tax consequences associated with purchases by various investors (savings and loan associations, real estate investment trusts, or exempt employees trusts) of straight passthrough or fully-modified pass-through mortgage backed certificates which are guaranteed by the Government National Mortgage Association and issued by savings and loan associations, engaged in the financing of residential mortgages, against a pool of mortgages insured by the Federal Housing Administration, Farmers Home Administration or are insured and guaranteed by the Veterans Administration. Modified by Rev. Rul. 74-169. 1.61-1, 1.162-1, 1.212-1, 1.501-1, 1.671 1, 1.856-1, 1.1232-1, 301.7701 13. (Secs. 61, 162, 212, 501, 671, 856, 1232, 7701; 86 Rev. Rul. 70-544, 1970-2 C.B. 6; Rev. Rul. 70-545, 1970-2 C.B. 7. 412.55 Mortgage-backed certificates; residential mortgage pool. Tax consequences associated with straight pass-through mortgage-backed certificates, representing undivided interests in a pool of residential mortgage loans, sold to building and loan associations, real estate investment trusts, and individuals are explained. 1.61, 1.162 1, 1.212 1, 1.671 1, 1.856-2, 1.1232-1, 301.7701-2, 301.7701-13. (Secs. 61, 162, 212, 671, 856, 1232, 7701; 86 Rev. Rul. 77-349, 1977 2 C.B. 20. 412.56 Mortgage commitment fee. The nonrefundable fee of a corporation paid, under a loan agreement for construction and permanent mortgage financing and on or before initial receipt of funds, as compensation for the cost of specific legal, architectural, and engineering services incurred by the lender is a cost to be deducted ratably over the duration of the loan. 1.461 1. (Sec. 461, 86 Rev. Rul. 75-172, 1975 1 C.B. 145. 412.57 Option to purchase exercisable after death; basis. The granting of an option to purchase real estate, exercisable only after the optionor s death, is not a sale, exchange, or other disposition of the real estate. On death of the optionor, the real estate will pass to his estate within the meaning of section 1014(b). The basis of the real estate in the hands of the decedent s estate is determined under section 1014(a) taking into account the existence of the option on the-property. 1.1014-1. (Sec. 1014, 86 Rev. Rul. 71-265, 1971-1 C.B. 223. 412.58 Partition proceeding; purchase by coowner. Where a co-owner of property enlarges his undivided interest in the property through a partition sale, the transaction does not result in recognized gain or loss. 39.112(a) 1. (Sec. 112(a), 39 Code; Sec. 1002, 86 Rev. Rul. 55-77, 1955 1 C.B. 339. 412.59 Perpetual easement; portions of a tract of land. The sale of a perpetual easement is treated as a sale of land and each portion of a tract of land sold including the perpetual easement is considered a separate transaction requiring an accounting of gain or loss on the sale. The cost is allocated on the basis of an equitable apportionment of the total cost of the tract to each portion sold, with proper adjustments to basis. O.D. 1072 superseded. 1.1001 1. (Sec. 1001, 86 Rev. Rul. 72 255, 1972-1 C.B. 221. 412.60 Perpetual water rights for fee interest in land. Where, under applicable state law, water rights are considered real property rights, the exchange of perpetual water rights for a fee interest in land constitutes a nontaxable ex-change of property of like kind, provided the requirements relative to holding for productive use in a trade or business or for investment are met. Distinguished by Rev. Rul. 67 255, with respect to like kind replacement of involuntarily converted property.

39.112(b)(1)-1. (Sec. 112(b), 39 Code; Sec. 1031, 86 Rev. Rul. 55-749, 1955-2 C.B. 295. 412.61 Points, commitment and service fees; lending institutions. Examples illustrate the rule for determining the taxable year in which lending institutions should include in their income the points, commitment fees, and service fees charged by them in connection with real estate mortgage loans. Amplified by Rev. Rul. 74-607. 1.451-1. (Sec. 451, 86 Rev. Rul. 70-540, 1970-2 C.B. 101. 412.62 Points; construction and development loans; accrual-method lender. Points representing interest in construction loans received by an accrual-method taxpayer engaged in making such loans, either discounted from the loan proceeds with no rebate for prepayment or repaid at the end of the loan, are includible in gross income ratably on a straight-line basis over the life of the loan unless they are received or become due earlier. Rev. Rul. 72-100 clarified and Rev. Rul. 70-540 amplified. Clarified by Rev. Rul. 83-8 1.451-1. (Sec. 451, 86 Rev. Rul. 74-607, 1974-2 C.B. 149. 412.63 Possessor interest retained upon sale. The amount realized from a sale of real property does not include the value of a 20-year possessory interest retained in part of the property. To compute gain from the sale, the adjusted basis of the property is allocated between the interest sold and the interest retained in the proportions that their respective fair market values bear to the fair market value of the entire property. 1.1001 1. (Sec. 1001, 86 Rev. Rul. 77-413, 1977-2 C.B. 298. 412.64 Realty company; maintenance assessments. Maintenance charges assessed against owners of residential property to provide municipal services and improvements are includable in the gross income of the development company and are not deductible as taxes by the property owners. No portion of the amount assessed is a capital expenditure. If an owner converts the property to rental property, such charges would be deductible business expenses. 39.22(a)-1, 39.23(a)-1. (Secs. 22(a), 23(a), 39 Code; Secs. 61, 162, 86 Rev. Rul. 55-154, 1955-1 C.B. 216. 412.65 Redeemable ground rents. Periodic rental payments made under a redeemable ground rent agreement pursuant to the Residential Ground Rent Act of Virginia may be deducted as interest for Federal income tax purposes. 1.163-1, 1.1055-1. (Secs. 163, 1055; 86 Rev. Rul. 75-281, 1975-2 C.B. 65. 412.66 Remainder interests in farm land exchanged. The exchange of a remainder interest in one-half of a tract of land for a remainder interest in one-half of another tract of land by a taxpayer who farms and will continue to farm both tracts for profit and who as a result of the exchange will own one tract entirely in fee simple and will have a life estate in the other tract is an exchange of like kind property and qualifies for nonrecognition of gail or loss. Rev. Rul. 72 601 distinguished. 1.1031(a)-1. (Sec. 1031, 86 Rev. Rul. 78-4, 1978-1 C.B. 256. 412.67 Repossession; losses. Losses sustained by a purchaser-debtor as a result of the repossession of his real property acquired for investment are capital losses subject to the limitations of section 1211(b) regardless of whether or not he held legal title to the property at the time of repossession. I.T. 3135 superseded. 1.1211-1. (Sec. 1211, 86 Rev. Rul. 73-36, 1973-1 C.B. 372. 412.68 Residence and adjacent lot sold as unit. Taxpayer exchanged property obtained for speculative purposes for a lot adjacent to their residence to enhance its salability. The residence and lot were sold at a loss. Held, the lot retained the speculative character of the property exchanged and the loss was a long-term capital loss. (Sec. 117(a). 39 Code; Sec. 1221, 86 E.R. Fenimore Johnson, 19 T.C. 93, Acq., 1953-1 C.B. 5. 412.69 Residence converted to rental use; accelerated depreciation. If a taxpayer, as the original purchaser and user, acquires and occupies a personal residence after December 31, 1953, and subsequently converts it to rental property, the rental property meets the new in use test, and the taxpayer may obtain the benefits of accelerated depreciation deductions. 1.167(c)-1. (Sec. 167, 86 Rev. Rul. 60-67, 1960-1 C.B. 117. 412.70 Residential estate sold in two parcels. Where a residential estate, held for a number of years as a single unit, is sold in two parcels during the taxable year, the sale of each parcel is treated as a separate transaction and gain or loss is computed separately on each sale. Losses sustained on the sale of a personal residence are not deductible. 39.111-1. (Sec. 111, 39 Code; Sec. 1001, 86 Rev. Rul. 54-95, 1954-1 C.B. 98. 412.71 Restrictive covenant released. Amounts received for the release of a restrictive covenant in a deed to land are proceeds from the sale of a capital asset. 1.1221 1. (Sec. 1221, 86 Rev. Rul. 70-203, 1970-1 C.B. 171. 412.72 Rezoning denied; real estate partnership. A real estate partnership, upon learning that land it purchased could not be rezoned for apartment or commercial development as was hoped, decided to hold the land for appreciation. Later, without advertising, the land was sold. Held, the land was not held primarily for sale to customers in the ordinary course of business and the gain realized was capital gain. (Sec. 1231, 86 Louis Lesser, 42 T.C. 688, Acq., 1966-2 C.B. 5. 412.73 Riparian rights. Where, under state law, water rights or riparian rights are considered interests in real property, the gain or loss resulting from the sale of river frontage and riparian rights by a corporation which is forced to abandon the use of the river for transportation purposes, constitutes gain or loss from the sale of real property used in the trade or business which is subject to the provisions of section 1231. (Sec. 1231, 86 Rev. Rul. 57-445, 1957-2 C.B. 568. 412.74 Sale and leaseback. The simultaneous conveyance for cash, and leaseback for 30 years and three days, of business property is considered one integrated transaction under which there is an exchange of like properties, with cash as boot. The Jordan Marsh Co. decision, which holds that such a transaction must be treated as a separate sale, will not be followed. 29.112(b)(1)-1, 1.1031(a)-1. (Sec. 112(b), 39 Code; Sec. 1031, 86 Rev. Rul. 60-43, 1960-1 C.B. 687. 412.75 Sale to controlled real estate development corporations. Taxpayer sold an option to purchase a tract of land and an interest in another tract of land to two real estate development corporations in which he was the majority stockholder. Held, the real estate activities of the taxpayer s corporations could not be imputed to him, and the gain on each transaction was a capital gain. (Sec. 117, 39 Code; Sec. 1221, 86 Ralph E. Gordy, 36 T.C. 855, Acq., 1964-1 (Part 1) C.B. Real estate 412.76 Sale to pay estate debts. The part of the gain from the sales of an intestate decedent s real estate which is proportionate to the portion of the proceeds payable to the administrator under North Carolina law for the discharge of the debts of the estate is includable in the gross income of the estate. The remainder of the gain which arises from the partition of the real estate at the suit of the heirs is not an amount received by the estate, 1.641(a)-2, 1.643(b)-1. (Secs. 641, 643; 86 Rev. Rul. 59-375, 1959-2 C.B. 161. 412.77 Sale to perfect title. An auction sale of real property and its repurchase by the owners merely to perfect title may result in a nontaxable transaction. 39.112(a)-1. (Sec. 112(a), 39 Code; Sec. 1002, 86 Rev. Rul. 55-179, 1955-1 C.B. 340. 412.78 Subchapter S corporation formed to invest in single tract. A small business corporation that was formed to acquire a tract of land for investment purposes and carried on no other activities sold the land at a gain. Held, the corporation s lack of business activity was not a bar to its subchapter S election and, since the tract would have been a capital asset in the hands of the shareholders, the gain was a capital gain. (Secs. 1221, 1371, 1372, 1375; 86 William B. Howell, 57 T.C. 546, Acq., 1974-1 412.79 Subchapter S corporation; formed to invest in single tract. A corporation that did not operate an active trade or business, but was merely a passive investor receiving only capital gains from its sale of unimproved real estate, did not have passive investment income and its election under subchapter S will not be terminated. 1.1372-1. (Sec. 1372, 86 Rev. Rul. 75-188, 1975-1 C.B. 276. 412.80 Subdivided; city paving expenses; substantial improvements. Where a taxpayer is assessed for paving expenses on land he donated to a city government, and the paving increases the basis of adjacent land which he retains, he will be deemed to have made improvements to such retained land. However, for purposes of sale of the adjacent property, the improvement will not be considered substantial if the requirements of section 1237(b)(3) of the Code are met. 1.1237 1. (Sec. 1237, 86 Rev. Rul. 59-31, 1959-1 C.B. 215. 412.81 Subdivided; improvements made by lessee. Houses and other improvements made on undeveloped land, which has been leased to unrelated developers by the landowners and subsequently by a trust created by the owner s will, that were sold to tenants with an assignment of the developers nonrenewable lease-hold interest at fair rental value while the owner retained the fee interest in the land were not improvements attributable to the trust under section 1237(a)(2), and the sale of the fee interest by the trust was not a sale of land held primarily for sale to customers in the ordinary course of a trade or business. 1.1237-1. (Sec. 1237, 86 Rev. Rul. 77-338, 1977-2 C.B. 312. 412.82 Subdivided; investment property. Gain realized by a corporation from the sale of lots subdivided from land held as an investment and on which it made necessary improvements in order to facilitate the sale of the lots constitutes ordinary income to the corporation. 1.61-1, 1.1221 1, 1.1231-1. (Secs. 61, 1221, 1231; 86 Rev. Rul. 59-91, 1959-1 C.B. 15. 412.83 Subdivided; originally purchased for residence. Taxpayer, attempting to immediately dispose of land he was unable to afford but was required to purchase to obtain a residence situated on part of the land, improved and subdivided it into lots. Held, the purpose of acquiring and dis-

posing of the land, the frequency and continuity of sales activity, and the activities in developing and selling the lots were determinative events showing that the lots were not held primarily for sale to customers in the ordinary course of business; accordingly, taxpayer was entitled to treat the proceeds as capital gains. (Sec. 1221, 86 Wellesley A. Ayling, 32 T.C. 704, Acq., 1959-2 C.B. 3. 412.84 Subdivision; inherited land. The taxpayer, having neither the funds nor the ability to subdivide and sell inherited land at a fair price, entered into a contract with a realtor who assumed full control of the development and sales activities. Held, the lots were not held primarily for sale to customers in the ordinary course of a trade or business, and the gain realized was capital gain. (Sec. 1221, 86 William D. Munday, 36 T.C. 703, Acq., 1962-2 C.B. 5. 412.85 Subdivision; isolated strip of property. Taxpayer sold improved lots subdivided from a farm and reported gain as ordinary income. Due to the established pattern of streets, one lot became isolated and several years later was sold to an adjoining landowner. Held, treatment of the proceeds from the isolated lot as long-term capital gain was proper. (Sec. 117, 39 Code; Sec. 1231, 86 Eline Realty Co., 35 T.C. 1, Acq., 1961-1 C.B. 412.86 Subdivision; land surrounding homesite. In order to obtain a desired homesite, taxpayers were compelled to buy excess land, and in an unplanned manner and to protect their original investment also purchased additional adjacent land part of which they subdivided. They planned to liquidate their investment by selling a lot or two each year but due to financial necessity eight or nine lots a year were sold over a five-year period. Held, the lots were not held primarily for sale to customers in the ordinary course of a trade or business and the gain on the sale was capital gain. (Sec. 1221, 86 Ralph J. Oace, 39 T.C. 743, Acq., 1963-2 C.B. 5. 412.87 Subdivision; land unsuitable for lots. Taxpayers was a member of a joint venture which purchased mountain acreage for the purpose of subdividing and selling lots on the front slope. The back of the mountain was not suitable for subdivision. Held, rear slope parcels were not held primarily for sales to customers in the ordinary course of business and profit from sales of such parcels was a capital gain. (Sec. 1221, 86 Charles E. Mieg, 32 T.C. 1314, Acq., 1960-2 C.B. 6. 412.88 Subdivision; sale by trust; liquidation of property. The taxpayers created a trust to liquidate a gift of land which they divided into lots, 22 of which were sold over an 11-year period. Held, the development and sales activities did not constitute a trade or business and the gain realized was taxable as long-term capital gain. (Secs. 117(a), (b), and (j), 39 Code; Secs. 1202, 1221, 1231, 86 Allen Moore, 30 T.C. 1306, Acq., 1959-1 C.B. 412.89 Subdivision lots; basis; estimated costs of improvements. Requirements are set forth which must be met by subdividers of real estate for permission, in determining gain or loss from sales of lots, to add to the cost or other basis of the property sold the estimated costs of future improvements that they are contractually obligated to make and the cost of which is not properly recoverable through depreciation. Amplified by Rev. Proc. 78 25. Mim. 4027 superseded. 1.1011-1. (Sec. 601.105, S.P.R.; Sec. 1011, 86 Rev. Proc. 75-25, 1975-1 C.B. 720. 412.90 Subdivision lots; basis; estimated costs of improvements. A subdivider of real estate that adds to the basis of real property the estimated costs of future improvements pursuant to Rev. Proc. 75 25 and in a later year determines the estimate to have been understated or overstated must make an adjustment to such costs in and for the year the correct determination is made, not for the prior taxable year. Rev. Proc. 75 25 amplified. 1.1011 1. (Sec. 601.105, S.P.R.; Sec. 1011, 86 Rev. Proc. 78 25, 1978-2 C.B. 505. 412.91 Subdivision lots; basis; estimated costs of improvements. A U.S. Department of Housing and Urban Development Property Report specifying planned future improvements, prepared under regulations in effect from April 28, 1969, through November 30, 1973, and furnished with sales contracts to purchasers of building lots by the real estate developer, is not evidence of the contractual obligations required by Mim. 4027 to add estimated costs of future improvements to the basis of the lots sold. 1.1016-2. (Sec. 1016, 86 Rev. Rul. 76-247, 1976-1 C.B. 217. 412.92 Subdivision lots; basis; land donated to country club. A pro rata portion of the cost of land and recreational facilities donated to a nonprofit country club by a taxpayer engaged in the development and sale of subdivision lots is included in the cost of each remaining lot in the subdivision for purposes of determinating gain or loss. 1.1011-1. (Sec. 1011, 86 Rev. Rul. 68-478, 1968-2 C.B. 330. 412.93 Subdivision lots; basis; sewage system. Taxpayer, a developer of real estate subdivision, constructed a sewage disposal system to service a subdivision. Through a trust arrangement, the lot owners were given an equitable interest in the system, which was operated by taxpayer s wholly owned corporation. Held, a proportionate part of the cost of the system, constructed for the sole purpose of inducing the sale of lots in the subdivision, may be included in the cost basis of the lots sold. (Sec. 113(b), 39 Code; Sec. 1016, 86 M. A. Collins, 31 T.C. 238, Acq., 1959-2 C.B. 412.94 Subdivision lots; basis; sewerage and water systems. To secure a commitment for FHA loan insurance guarantees, the developer of subdivisions constructed a water and sewerage system to service the lots, adding the cost to the basis of the new homes and executing trust deeds to give the lot owners equitable ownership in the system. After all new homes were sold and the subdivision was annexed, which had operated at a profit, the system was sold to the city at a profit. Held, the system was constructed to aid in the sale of lots, not to be a profit making business, and the costs were properly allocated to the basis of the lots. (Sec. 1011, 86 Willow Terrace Development Co., 40 T.C. 689, Acq., 1968-2 C.B. 3. 412.95 Subdivision lots; basis; sewerage revenue bonds. A building corporation agreed to pay for village sewerage revenue bonds to obtain building permits for its subdivision which the village would not have approved until assured of the provision of an adequate sewerage system. Held, the corporation purchased bonds in order to enable it to build and sell houses and could allocate the cost of such bonds to the cost basis of the land. (Sec. 1011, 86 Herzog Building Corp., 44 T.C. 694, Acq., 1968-2 412.96 Subdivision lots; basis; utility lines and meter installations. A pro rata portion of the utility line installation cost is included in the basis of each lot sold by a subdivision developer and the basis of each house includes the cost of meter installation. 1.1011 1. (Sec. 113(b), 39 Code; Sec. 1011, 86 Rev. Rul. 60 3, 1960 1 C.B. 284; Colony, Inc., 26 T.C. 30, Albert Gersten, 27 T.C. 756, Acqs., 1958-2 C.B. 4, 5. 412.97 Subdivision lots; basis; water lines conveyed for water services. A water company issued shares of its stock to a developer in exchange for extending the company s lines to a subdivision owned by the developer, The stock pays no dividends and attaches irrevocably to the lots in the subdivision. The water company did not receive the lines in exchange for stock and must include their fair market value in income. The developer must add a portion of the value of the water lines to the basis of each lot and realizes no gain or loss on receipt or transfer of the stock. 1.1032-1. (Sec. 1032, 86 Rev. Rul. 81-83, 1981-1 C.B. 43 412.98 Subdivision lots; cost erroneously reported. 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 equally apportioning the actual cost of the entire tract to each of the original lots. 1.61-6, 1.1311(a)-1, 1.1312-2, 1.1312-7. (Secs. 61, 1311, 1312; 86 Rev. Rul. 70-7, 1970-1 C.B. 175. 412.99 Subdivision plats; taxes and carrying charges. Land covered by subdivision plats will be considered unimproved and unproductive real property for purposes of electing to capitalize taxes and carrying charges until the time each such plat is recorded. 1.266-1. (Sec. 266, 86 Rev. Rul. 69-105, 1969 1 C.B. 88. 412.100 Taxes; allocation; corporate dissolution. Section 164(d) which provides for the allocation of real property taxes between the seller and the buyer of real estate does not apply to a transfer resulting from the dissolution of a corporation. However, where inclusion of more than a pro rata amount of real estate taxes in the final return of a dissolving corporation will not clearly reflect income, section 164(d) will not prevent the Commissioner s allocation of such taxes under section 482 between the corporation and the distributee of the real estate. Distinguished by Rev. Rul. 72 237. 1.164-6. (Secs. 164, 482; 86 Rev. Rul. 62-45, 1962-1 C.B. 27. 412.101 Taxes; apportionment; foreclosure sale; building and loan association. The apportionment of real property taxes between seller and the purchaser under section 164(d) is applicable to secured real property acquired by a building and loan association through a foreclosure sale. Rev. Rul. 62-45 distinguished. 1.164-6, 1.595-1. (Secs. 164, 595; 86 Rev. Rul. 72-237, 1972-1 C.B. 51. 412.102 Transfer under divorce settlement. Under an agreement incorporated into a divorce decree and in full satisfaction of the wife s rights to alimony and support, the taxpayer conveyed to her a life estate in his undivided one-half interest in a ranch, with the remainder to their children. Held, the taxpayer realized gain only to the extent of that part of the appreciation in value of his entire interest allocable to the life estate. Under local law the transfer of the remainder interests could not limit the taxpayer s legal duty to support his children and no taxable gain was received by the taxpayer upon the conveyance of the remainder interests. (Sec. 112(a), 39 Code; Sec. 1002, 86 E. Eugene King, 31 T.C. 108, Acq., 1959-1 C.B.