Research Problem: Ben Brown owns various plots of land in Folsom County, Califor

Question

Research Problem: Ben Brown owns various plots of land in Folsom County, California. He acquired the land at various times during the last 20 years. About every fourth year, Ben subdivides into lots one of the properties he owns. He then has water, sewer, natural gas, and electricity hookups put in each lot and paves new streets. Ben has always treated his sales of such lots as sales of capital assets. His previous tax returns were prepared by an accountant whose practice you recently purchased. Has the proper tax treatment been used on the prior tax returns? Prepare a Tax File Memo and a client letter answering question. Partial list of research aids: §§ 1221 and 1237 and Ben W. and Betty J. English, 65 TCM 2160, T.C.Memo. 1993–111.

Explanation / Answer

Hello,

Taxation is different for different countries. Here we can discuss on the accounting treatment in different cases:-

Case-1 : Ben Brown has purchased land for real estate (land business)

If the person is in real estate business, purchase of land, its division, plotting and all other expenses would be revenue in nature and the income generated will also be revenue in nature (revenue Sales) and not Capital sales.

Case2:- Ben Brown has purchased the land in Individual capacity and he is not in the real estate business

If the person is not in real estate business, such investment in land is regarded as capital investment and similarly the sales are also treated as Capital sales.

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