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Miles, as trustee, sold parcel 1 for $120,000 on October 13,
1986. On May 13, 1987, Mr. Miles, as trustee, sold parcels 2 and
3 for $1,611,000.50 Petitioner realized a gain of $72,039 from
the sale of parcel 1 in 1986, and a gain of $823,079 from the
sale of parcels 2 and 3 in 1987. Petitioner did not report those
gains on his Forms 1040 for 1986 and 1987.
At the time of the sales of petitioner’s interests in the
Prather Ranch Property, the property was raw land with no
improvements or site development.
OPINION
The only issue with respect to the Prather Ranch Property is
whether petitioner realized capital gains on the sales of the
parcels in 1986 and 1987, or ordinary income. Respondent
determined that petitioner realized ordinary income.
In order for taxpayers to obtain preferential long-term
capital gains tax rates, the gain must arise from “the sale or
exchange of a capital asset”. Sec. 1222(3). The term “capital
asset” means “property held by the taxpayer (whether or not
connected with his trade or business)”, but does not include
“property held by the taxpayer primarily for sale to customers in
the ordinary course of his trade or business”. Sec. 1221(1).
50At the time of the sale, petitioner was the beneficiary of
a 90.689-percent interest in parcels 2 and 3, which interest was
held in trust by Mr. Miles.
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