## Facts

- Fairfield Plaza, Inc., a West Virginia corporation, bought a 10-acre tract in Huntington, West Virginia, for $110,941.12 to develop a shopping center to rent to tenants.
- Due to financing problems, it sold two “end” parcels from the tract:
  - In 1957, about 30% of the tract (east side, fronting 17th Street) to Big Bear Stores Co. for $100,000.
  - In 1958, about 30% of the tract (west side, fronting 16th Street) to Paisley and associates for $150,000.
- The remaining center parcel (about 40%) was retained and accessed via easements across the sold parcels.
- The 1957 sale contract placed $50,000 of the purchase price in escrow pending completion of specified improvements.
- Fairfield Plaza spent $40,146.32 for paving and lighting on the retained center parcel (not on the 1957 sold parcel).
- For 1957 and 1958, Fairfield Plaza allocated basis among the sold and retained portions in a way that minimized gain on the sales.
- The Commissioner determined deficiencies for 1957 ($413.74) and 1958 ($17,669.70), reallocating basis under Treas. Reg. § 1.61-6 and allocating the escrow/improvement costs solely to the retained center parcel.

## Issues

1. How must a taxpayer allocate the basis of a single tract when disposing of two portions in different years under Treas. Reg. § 1.61-6?
2. May amounts placed in escrow for required improvements, or the costs actually incurred to pave and light the retained center portion, be allocated to the basis of the parcels sold in 1957 and/or 1958 rather than only to the retained parcel?

## Decision

- The court sustained the Commissioner’s deficiency determinations, subject to the court’s valuation-based computations.
- The basis of the original tract had to be apportioned among the portions sold based on their relative fair market values at the time of disposition, not by acreage.
- No part of the $50,000 escrow or the $40,146.32 paving/lighting expenditures was allocable to the basis of either parcel sold; those costs were capitalizable only to the retained center parcel.

## Legal Principles

- When a taxpayer sells part of a larger property, basis must be apportioned among the parts in proportion to their relative fair market values at the time of the sale (Treas. Reg. § 1.61-6).
- Basis allocation by area or other mechanical measures is improper when the severed portions have materially different values (e.g., differing street frontage).
- Capital expenditures must be capitalized to the specific property improved; costs of improving retained property may not be shifted to property already sold to reduce recognized gain.
- Escrowed amounts tied to improvements are treated consistently with the substance of the improvements and the property benefited.

## Conclusion

The Tax Court held that basis for partial dispositions of a single tract must be allocated by relative fair market value, and that escrowed funds and actual improvement costs for paving and lighting the retained center parcel could not be added to the basis of parcels already sold to reduce taxable gain.


Fairfield Plaza, Inc. v. Commissioner, 39 T.C. 706 (1963)