Haynesworth vs. IRS
641 F.2d 253
U.S. Court of Claims
If handled properly, ordinary gain from the sale of a single piece of property can be converted to capital gains.
In general, gain on the sale of inventory is taxed at high ordinary income tax rates. However, gain on the sale of capital assets (e.g. investment property) is taxed at much lower capital gains rates.
In this case a real estate developer purchased a pieced of land and subdivided half of it into lots for sale to customers (inventory). He reported the income from the sale of these lots at high ordinary income tax rates.
Because of this lot sales, the other half of the property increased dramatically in value. He sold the other half of the property and reported the income at the favorable capital gains rates.
The Federal Court held that a taxpayer may hold different portions of . the same property for different purposes. Stated differently, one may hold part of a single piece of real estate for sale to customers (inventory) and another part of the same property for appreciation in value (capital gain).
The Court allowed him favorable capital gains rate on the sale of the other half.