Haynsworth v. IRS
47 AFTR 2d 81-1443
U.S. Court of Claims
Summary of the Case
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 — investment property, for example — is taxed at much lower capital gains rates.
In this case, a real estate developer purchased a piece 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 the lot sales, the other half of the property increased dramatically in value. He then 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. 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 the developer to use the favorable capital gains rate on the sale of the other half.