Daily Development for Friday, December 22, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

It being that time of year, I thought that I'd proffer up some tax items gleaned from the latest Quarterly Report, which goes to typesetting today. Some of these may be a bit dated for those who pore over the tax flimsies every day, but for the average real estate specialist who just has to know a dabble about tax, some of these items may prove helpful.

This will be the last Daily Development until December 27, as your editor will take a few days off to celebrate Christmas with his family. But regular DIRT service will continue unabated, as your editor has an addiction to it.

A happy, safe, prosperous and wonderful holiday season to all of our readers.

FEDERAL INCOME TAX; INCOME; CAPITAL GAINS; "ORDINARY COURSE OF BUSINESS:" Taxpayer, a developer, who could not obtain municipal approval for further development and sold undeveloped lots to another developer, who later defaulted causing Taxpayer's successor to enter into settlement agreement whereby Successor held the properties and received proceeds from the sale of = the lots after their development by the other developer, realized capital = gain and not ordinary gain. Olstein v. Commissioner, T.C. Memo 1999290. Successor held the properties to resolve the dispute with the other developer, and not for sale to customers in the ordinary course of business, making the property capital gain property.

FEDERAL INCOME TAX; INCOME; CAPITAL GAIN; SALE OF RESIDENCE; REINVESTMENT: Taxpayers not entitled to deferment of gain on sale of residence because, at the end of the statutory = period, the new residence was still an ongoing uninhabitable construction project. Parker v. Commissioner, T.C. Memo 1999347. Since the new structure was not placed into residential use within two years, none of = its cost could be included to defer gain. FEDERAL INCOME TAX; DEDUCTIONS; TRAVEL EXPENSES; MOBILE HOME: Taxpayers, selfemployed artisans, who travel in a mobile home attending craft shows throughout the year, and who use their stationary motor home (on blocks) for work and storage but live = out of the mobile home, are not entitled to travel expense deductions. In = re Bechtelheimer, 992 U.S. Tax Cas. (CCH) =B650,781(Bankr. M.D. Fla.). The maintenance of a home involves substantial continuing expenses, which are duplicated by travel expenses, not present in this case. Taxpayers never lived in the stationary motor home.

FEDERAL INCOME TAX; INCOME; DISCHARGE OF INDEBTEDNESS; EXCLUSION: A determination of insolvency for purposes of determining whether discharge of indebtedness income should be excluded does should not take into account a liability = unless the taxpayer proves by a preponderance of evidence that he will be = called upon to pay the obligation claimed to be a liability. Merkel v. Commissioner, 992 U.S. Tax Cas. (CCH) =B650,848 (9th Cir.). Taxpayers' personal guaranty was not a liability to be considered in determining taxpayers' insolvency.

FEDERAL INCOME TAX; INCOME; INTEREST; EMINENT DOMAIN AWARDS: Interest accrued on a condemnation award due to delay in settlement is includible in gross income in the year of = receipt. Vezey v. United States, 992 U.S. Tax Cas. (CCH) =B650,863 (9th Cir.) (unpublished).

FEDERAL INCOME TAX; INCOME; PASSIVE ACTIVITY: Taxpayer's income from rental of building to corporation of which he is sole shareholder is nonpassive activity income. Fransen, Jr. v. United States, 992 U.S. Tax Cas. (CCH) =B650,882.

FEDERAL INCOME TAX; LIKEKIND EXCHANGES; NONRECOGNITION: Parent corporation of consolidated real estate group failed to prove that its president's residence, partially = purchased with escrowed sales proceeds, qualified as likekind property, as corporation acquired no other residential properties and president continued to live rent free in the residence. Florida Indus. Inv. = Corp. v. Commissioner, T.C. Memo 1999346.

FEDERAL INCOME TAX; LIKEKIND EXCHANGES; NONRECOGNITION; LLC: Singleowner LLCs classified as sole proprietorships, used to purchase rental real property to replace = property under threat of condemnation, will be disregarded for tax purposes, allowing election of nonrecognition of gain. LTR 199945038, August 18, 1999. FEDERAL INCOME TAX; TAX LIENS; PRIORITY; EQUITABLE SUBROGATION: A trust that guaranteed a mortgage and paid the mortgage after the mortgagor's default is equitably subrogated to the mortgagee, and thus had priority over tax liens = arising after the mortgage was recorded.. Harley J. Robinson Trust v. Ardmore Acres, Inc., 992 U.S. Tax Cas. (CCH) =B650,860 (E.D. Mich.). It thus had priority over tax liens arising after the mortgage was recorded.

FEDERAL INCOME TAX; TAX LIENS; QUIET TITLE ACTIONS: IRS presented Certificates of Assessment and Payment, sufficient to satisfy Code requirements and create tax liabilities, = despite acknowledged destruction of supporting documentation. Sato v. Commissioner, 992 U.S. Tax Cas. (CCH) =B650,905.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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