1All section references are to the Internal Revenue Code for

the year at issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure, unless otherwise indicated. 

 T.C. Memo. 2009-142

UNITED STATES TAX COURT

BRUCE A. AND DONNA M. RICE, Petitioners v. 

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10669-07. Filed June 16, 2009.

Robert E. Reetz, Jr. and Carleton A. Davis, for petitioners.

Huong T. Bailie, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KROUPA, Judge: Respondent determined a $39,250 deficiency

in petitioners’ Federal income tax and a $7,850 accuracy-related

penalty under section 6662 for 2004.1 After concessions, there
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2Respondent included alternative figures regarding the

calculation of basis but provided insufficient information for us

to address this issue.

are two issues for decision.2 The first issue is whether

proceeds from the sale of excess lots are properly classified as

capital or ordinary under section 1221(a). Resolution of this

issue depends on whether the excess lots were held primarily for

sale to customers in the ordinary course of business or were held

for investment purposes. We hold that the excess lots were held

for investment purposes and the proceeds are capital gains and

losses. The second issue is whether petitioners are liable for

the accuracy-related penalty under section 6662. We hold that

they are not.

FINDINGS OF FACT

The parties have stipulated some facts. The stipulation of

facts and the accompanying exhibits are incorporated by this

reference and are so found. Petitioners resided in Texas when

they filed the petition.

Petitioners live and work in Texas, where they have a

business that designs and administers 401(k) plans and manages

investments for trust instruments, 401(k) plans, and individuals. 

Mr. Rice is a certified public accountant (CPA) and did tax

planning and consulting work at accounting firms before he and

his wife started their own business. Petitioners were successful

in this business, reporting income in excess of a million dollars
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each year from their business. They provided an accountant with

information regarding their finances for 2004, and he prepared

the income tax return they filed. 

Petitioners’ Dream Home

Petitioners were looking to purchase a lot in Austin to

build their dream home. Petitioners looked at two other

properties before settling on the lot they purchased. The first

property included half-acre lots for $200,000 each, but

petitioners would have needed to buy at least two lots for their

dream home. The second property they considered offered larger

lots but was in an undesirable location. 

Petitioners saw a sign advertising 14.4 acres of undeveloped

property in a desirable location near a preserve. They took down

the sign, put it in their car, and made an inquiry the same day. 

Petitioners purchased the property within a week for $300,000

with no financing. The property was for sale as a unit--it was

not subdivided, and petitioners had no option to purchase a

portion of it. 

Petitioners initially wanted to keep the entire property for

themselves for their dream home. Ultimately, Mrs. Rice changed

her mind. Mr. Rice still wanted to keep the entire property and

build a single home for them and their two children. But Mrs.

Rice decided that she did not want to live on the property alone

for fear of feeling isolated. Mr. Rice wanted the house to be
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his wife’s dream home, so he relented. They decided to subdivide

the property to share it with others. 

Division of the Property

Petitioners had never engaged in the sale of real estate

other than sales of their own personal residences before they

purchased this property, nor have they engaged in it since. 

Petitioners first identified the portion of the property they

wanted for their lot. This lot was the largest and was in a

desirable place on the property. 

Petitioners had to hire consultants for zoning, access,

water and wastewater service, construction, and environmental

issues. After they decided to subdivide the property, they hired

a consultant to provide a subdivision layout. Petitioners

applied for and received a zoning change to subdivide and develop

the property. Petitioners divided the property into ten smaller

lots, reserving eight lots for homes and two lots for

environmental purposes. 

Construction of Their Dream Home

Petitioners were building their dream home, and they wanted

to create a certain aesthetic for their home and its

surroundings. They changed the name of the subdivision from Mesa

Vista to Sette Terra after seeing Cinque Terre on a trip to the

Italian Riviera. They did not want just any neighbors. They

wanted neighbors with money. They registered the subdivision for
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a homeowner’s association and executed a declaration of

covenants, conditions and restrictions, which applied to all the

lots in the subdivision (other than Lots 9 and 10 that fell

outside the subdivision). 

Petitioners took two years to construct their dream home. 

They hired an architect to build it in an Italian style. The

home has 8,000 square feet of interior space and 4,000 square

feet of garages and porches. Petitioners devoted a significant

amount of their spare time to building their home, and their home

was the focus of their attention.

Sales and Advertising Activities

Petitioners did not devote much time to selling the excess

lots. They made their first lot sale to friends in 2000. In

2002, two years after their first sale, they placed a wooden sign

at the entrance to the subdivision advertising that Sette Terra

had lots available for sale. This was their only advertising. 

Petitioners sold all their lots through word of mouth rather than

the sign or other advertising. 

The 2004 Lot Sales

Petitioners sold Lots 1, 9, and 10 next, the lots at issue. 

Lots 9 and 10 were excess lots that were sold together because

only one of them was suitable for construction. These sales

occurred in 2004, four years after the first sale and two years

after petitioners displayed the sign. 
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Petitioners sold Lots 9 and 10 at a loss to Mrs. Rice’s

sister and her husband (related party sale). Petitioners sold

another excess lot, Lot 1, to friends the same year, and they

realized an $89,329.79 gain from that sale. 

Remaining Lot Sales

Petitioners eventually sold the four remaining excess lots

(one of which was an environmental lot attached to another

property) to friends and acquaintances, reserving a lot for their

daughter. These sales occurred in 2005, 2007, and 2008 but are

not at issue. 

Petition

Respondent issued a deficiency notice challenging

petitioners’ characterization of the sales of Lots 1, 9, and 10

in 2004. Respondent also challenged the loss petitioners claimed

for the related party sale. Petitioners timely filed a petition

for redetermination with this Court. 

OPINION

This case presents two issues. We discuss each in turn.

I. Capital Gain or Ordinary Income

This first issue is whether petitioners who purchased a

property to build their dream house properly claimed capital

gains treatment on their sale of Lot 1. The answer depends upon

whether petitioners held the property primarily for sale to

customers in the ordinary course of business or if it was held,
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3They agree that sec. 1237 does not apply.

alternatively, as a capital asset. If they held the property

primarily for sale in the ordinary course, as respondent argues,

the proceeds to petitioners will be treated as ordinary income

and we must sustain respondent’s determination with respect to

that income. If the property was held as a capital asset, then

we must find for petitioners on this issue. 

A. Section 1221

The parties agree that we must look to section 1221 to

determine whether the property petitioners sold was held

primarily for sale to customers in the ordinary course of their

trade or business, so as to be denied treatment as a capital

asset.3 A “capital asset” is broadly defined as property held by

the taxpayer, whether connected with his or her trade or

business, subject to a number of exceptions. Sec. 1221(a). 

These exceptions include stock in trade, property of a kind that

is properly included in a taxpayer’s inventory, and 

property held primarily for sale to customers in the ordinary

course of a taxpayer’s trade or business. Sec. 1221(a)(1). 

The United States Supreme Court has defined “primarily” as

used in this context to mean “principally” or “of first

importance.” Malat v. Riddell, 383 U.S. 569, 572 (1966);

Biedenharn Realty Co. v. United States, 526 F.2d 409, 422-423

(5th Cir. 1976). The question of whether property is held
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4The Court of Appeals for the Fifth Circuit, where appeal in

this case would lie, has enumerated similar factors to determine

whether property is held for investment or for sale: (1) The

nature and purpose of the acquisition of the property and the

duration of the ownership; (2) the extent and nature of the

taxpayer’s efforts to sell the property; (3) the number, extent,

continuity and substantiality of the sales; (4) the extent of

subdividing, developing, and advertising to increase sales; (5)

the use of a business office for the sale of the property; (6)

the character and degree of supervision or control exercised by

the taxpayer over any representative selling the property; and

(7) the time and effort the taxpayer habitually devoted to the

sales. United States v. Winthrop, 417 F.2d 905, 909-910 (5th

Cir. 1969). All factors are not equal. Suburban Realty Co. v.

United States, 615 F.2d 171 (5th Cir. 1980); Biedenharn Realty

Co. v. United States, 526 F.2d 409 (5th Cir. 1976). 

Substantiality and frequency of sales are among the most

important factors, and improvements to land, solicitation and

advertising efforts and brokerage activities also play a

significant role in the analysis. Biedenharn Realty Co. v.

United States, supra at 416-417. The taxpayer’s claim to capital

gain is accorded greater deference when sales are few and

isolated, rather than when they are particularly numerous and

extend over a long period. Id. at 416. Our holding would be the

same under these similar factors. 

primarily for sale to customers in the ordinary course of a

taxpayer’s business is “purely factual,” and to answer it, we

look to the taxpayer’s intent at the time he or she disposes of

the property. Pritchett v. Commissioner, 63 T.C. 149, 162

(1974); Raymond v. Commissioner, T.C. Memo. 2001-96 (citing

Cottle v. Commissioner, 89 T.C. 467, 487 (1987)). Generally, we

examine several different factors4 when analyzing such a

scenario, including: (1) The taxpayer’s purpose in acquiring the

property; (2) the purpose for which the property was subsequently

held; (3) the taxpayer’s everyday business and the relationship
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of the income from the property to total income; (4) the

frequency, continuity, and substantiality of sales of property;

(5) the extent of developing and improving the property to

increase the sales; (6) the extent to which the taxpayer used

advertising, promotion, or other activities to increase sales;

(7) the use of a business office for the sale of property; (8)

the character and degree of supervision or control the taxpayer

exercised over any representative selling the property; and (9)

the time and effort the taxpayer habitually devoted to the sales. 

Biedenharn Realty Co. v. United States, supra at 415; United

States v. Winthrop, 417 F.2d 905, 910 (5th Cir. 1969); David

Taylor Enters., Inc. v. Commissioner, T.C. Memo. 2005-127; Wood

v. Commissioner, T.C. Memo. 2004-200, affd. 138 Fed. Appx. 168

(11th Cir. 2005). These factors are meant only to aid the finder

of fact in determining, on the entire record, the taxpayer’s

primary purpose for holding property. They have no independent

significance, and individual comment on each factor is not

necessary or required. Wood v. Commissioner, supra.

B. Analysis

We now apply these factors to the facts of this case. 

Petitioners purchased the property to build their dream home. 

The record demonstrates that they sold the excess lots to dispose

of unwanted property, not that they purchased the property

primarily for sale to customers in the ordinary course of
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business. Petitioners looked at other properties, but the one

they purchased was in the school district where they wanted to

live, provided them with enough space to build their dream home,

and was much cheaper than the other properties they considered

purchasing. Petitioners did not have the option to buy a smaller

portion of the property. When petitioners initially purchased

the property, they wanted to build a single-family home on it. 

They planned a series of improvements to the property. During

this period Mrs. Rice decided that she wanted neighbors. 

Petitioners disposed of the excess lots after subdividing the

property and creating a homeowner’s association so that they

could ensure a certain aesthetic and create a neighborhood. In

doing so, they were protecting their home value and their

investment by creating that aesthetic. 

The number of lots petitioners sold in toto was small. The

Court of Appeals for the Fifth Circuit, to which this case is

appealable, has held that substantiality and frequency of sales

is among the most important factors. Biedenharn Realty Co. v.

United States, supra at 416-417. Petitioners did not sell an

average of a lot a year. Among the eight lots suitable for

construction, they sold one lot in 2000, three lots in 2004, one

lot in 2005, one lot in 2007, and one lot in 2008, and they are

holding one in reserve for their daughter. These sales are few

and infrequent in comparison to the sales in the cases respondent
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cites. See, e.g., Biedenharn Realty Co. v. United States, supra

at 411; United States v. Winthrop, supra at 907. The taxpayers

in Winthrop sold 456 lots, while the taxpayers in Biedenharn

Realty Co. sold 158 lots. Biedenharn Realty Co. v. United

States, supra at 411; United States v. Winthrop, supra at 907; 

This case is more consistent with Ayling v. Commissioner, 32 T.C.

704, 706 (1959), cited by petitioners in which proceeds from

sales of 13 lots over the course of four years were held to be

eligible for capital gains treatment. 

Petitioners made significant improvements to develop and

sell the excess lots. We note, however, that many of those

improvements would have been necessary even had they not

subdivided the property. Building their own residence on the

property required significant expenditures for improvements. 

Solicitation and advertising efforts and brokerage

activities are also significant factors in analyzing whether

property sales are eligible for capital gains or ordinary

treatment. Biedenharn Realty Co. v. United States, supra at 416-

417. Petitioners devoted very little time to the sale of the

excess lots. The lots were sold primarily to friends, friends of

friends, and relatives. Other than posting a sign outside the

subdivision, petitioners did not advertise or promote the sale of

lots. Petitioners’ solicitation and advertising efforts are more

characteristic of those of investors than of dealers. 
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Finally, petitioners had full-time jobs and devoted little

time to the sale of the excess lots. Lot sales accounted for a

small percentage of their income each year, and petitioners

retained the proceeds rather than buying additional inventory. 

Petitioners were not real estate developers, had never developed

land before, and have never developed land since. We conclude

that petitioners purchased the property as an investment and not

as property held for customers in the ordinary course of

business. The gain from the sale of excess Lot 1 is entitled to

capital gains treatment.

C. Sale to a Related Party

Petitioners claimed a loss from the related party sale. 

Respondent claims that petitioners are not entitled to recognize

the loss. Petitioners do not address this issue on brief, and we

treat petitioners as having abandoned the issue. See Rule

149(b). Accordingly, petitioners are not entitled to a deduction

for this loss, and we hold for respondent on this issue.

II. Accuracy-Related Penalty

We finally consider whether petitioners are liable for the

accuracy-related penalty under section 6662(a). Petitioners

properly claimed capital gains treatment from the sale of Lot 1

and maintained adequate records. They also cooperated with the

audit of their taxes. Mr. Rice is a CPA. He and Mrs. Rice

provided their records to their accountant, who prepared their
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income tax returns. Based upon all of the facts and

circumstances, we hold that petitioners are not liable for the

accuracy-related penalty. 

To reflect the foregoing,

Decision will be entered

under Rule 155.