## Facts

- Taxpayers (husband and wife) purchased two contiguous parcels totaling about 10.63 acres near their home in 1953–1954.
- The tract contained timber and crops; surrounding land included residential subdivisions and vacant property.
- The tract was zoned residential by 1957 and remained residential after final zoning in 1959.
- Taxpayers subdivided and platted the tract in 1959; the plat was approved the same year.
- Taxpayers spent about $24,140 on subdivision-related improvements, including regrading and paving a road, installing curbs, and installing water lines; the improvements materially increased the lots’ value compared to unimproved lots.
- Taxpayers arranged for two builders to construct houses on the lots and deeded lots in exchange for promissory notes tied to sale of the house-and-lot (or within one year).
- Taxpayers later provided construction financing to the builders at 6% interest.
- For tax years 1961–1963, taxpayers reported gains from lot sales as long-term capital gains and asserted eligibility for I.R.C. § 1237.
- The Commissioner determined deficiencies, treating the gains as ordinary income.

## Issues

1. Whether gains from sales of subdivided lots were ordinary income because the lots were held primarily for sale to customers in the ordinary course of a trade or business under I.R.C. § 1221(1).
2. Whether taxpayers qualified for I.R.C. § 1237 capital-gain treatment for subdivided real property, including whether they made substantial improvements that substantially increased the value of the lots sold.

## Decision

- The Tax Court upheld the Commissioner’s deficiency determinations.
- The court treated the gains from the lot sales as ordinary income rather than long-term capital gains.
- The court concluded that taxpayers did not qualify for § 1237 treatment, based in part on the extent and effect of the improvements.
- The court also found the overall development, financing, and sales activity consistent with holding the lots primarily for sale to customers in the ordinary course of business.

## Legal Principles

- Property held primarily for sale to customers in the ordinary course of a taxpayer’s trade or business is excluded from “capital asset” status under I.R.C. § 1221(1); gains are ordinary income.
- I.R.C. § 1237 provides limited capital-gain treatment for certain subdivided real property sales by non-dealers only if statutory conditions are met.
- Substantial improvements—such as roads, curbs, and utility installations—that substantially increase the value of subdivided lots may disqualify a taxpayer from § 1237 treatment.
- Systematic subdivision and development efforts, coordinated home construction arrangements, and seller-provided financing can support characterization of the activity as a sales-oriented business rather than liquidation of an investment.

## Conclusion

The Tax Court held that taxpayers’ gains from selling lots in a subdivided, improved tract were ordinary income, rejecting capital-gain reporting because the taxpayers’ improvements and development-related activity prevented § 1237 treatment and supported classification of the lots as held primarily for sale to customers in the ordinary course of business.


Pointer v. Commissioner, 48 T.C. 906 (1967)