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In the case of a taxpayer other than a corporation, section
1211(b) allows losses from the sales or exchanges of capital
assets only to the extent of the gains from such sales or
exchanges, plus (if such losses exceed such gains) the lower of
(1) $3,000 ($1,500 in the case of a married individual filing a
separate return), or (2) the excess of such losses over such
gains. Any net capital loss in excess of the amount allowed by
section 1211(b) for the taxable year must be carried over to the
succeeding taxable year. Secs. 1212(b), 1222(10).
A capital asset is generally defined as property held by the
taxpayer, whether or not connected with his trade or business.
Sec. 1221. However, section 1221(1) provides in part that
property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business does not constitute
a capital asset. The purpose of the section 1221(1) exclusion is
to "differentiate between gain derived from the everyday
operations of a business and gain derived from assets that have
appreciated in value over a substantial period of time." McManus
v. Commissioner, 65 T.C. 197, 212 (1975), affd. 583 F.2d 443 (9th
Cir. 1978) (citing Malat v. Riddell, 383 U.S. 569, 572 (1966)).
Petitioner's position is that the East Lyme property was
held primarily for sale to customers in the ordinary course of
his construction business and therefore does not constitute a
capital asset under section 1221(1). He argues that he is
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Last modified: May 25, 2011