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Juleo Inc. v. Commissioner of Internal Revenue

filed: June 27, 1973.

JULEO, INC., A NEW JERSEY CORPORATION
v.
COMMISSIONER OF INTERNAL REVENUE, APPELLANT



Author: Staley

Before STALEY, ADAMS and GIBBONS, Circuit Judges

Opinion OF THE COURT

By STALEY, Circuit Judge.

This is an appeal from the decision of the Tax Court that a 16.5 acre tract of land was a capital asset at the time it was transferred to the State of New Jersey as a result of condemnation proceedings. The following is a statement of the Tax Court's findings as to the basic facts - the actual happenings - in this case.

The taxpayer is a New Jersey corporation organized for the purpose of real estate development, homebuilding, and sales. In 1955 it purchased a 100 acre tract of land for the purpose of development and sale. Shortly thereafter the process of development began. Subdivision maps were filed, engineering work was done, and preliminary approval for the subdivision of the entire 100 acres was obtained. In 1957 final approval was secured from the township for residential development of the section of the tract which included a small portion of the 16.5 acres involved in this case.

During the year 1958 the taxpayer became aware of New Jersey's plan to condemn approximately 16 acres of the larger tract in highway construction. At that point all planning for the development of the land scheduled for condemnation ceased. Work did continue, however, on the remainder of the 100 acre tract. After the taxpayer learned of the condemnation plans with respect to the 16.5 acre parcel, it advertised and sold residential lots in the remaining portions of the 100 acre tract. In addition, two commercial lots of 5 acres each were sold, and 10 acres on the highway were leased.

On January 7, 1966, the sale to the State of New Jersey was consummated. The income derived from this transaction was reported by the taxpayer as capital gain. On petition for review from the Commissioner's ruling that the gain represented ordinary income, the Tax Court upheld the taxpayer.The court in so doing held that:

"After the petitioner was notified by the state that 16.5 acres of the 100 acre tract held by the petitioner were subject to condemnation, the petitioner was not holding that portion of the tract "primarily for sale to customers in the ordinary course of his trade or business' within the meaning of section 1221(1). The 16.5 acre portion of the tract was a capital asset at the time of its sale to the state."

Prior to the condemnation notice, according to the court's findings, the land in question was held primarily for sale to customers in the ordinary course of trade or business.

In reaching its conclusion that after the condemnation notice the land became a capital asset, the court relied upon CIR v. Tri-S Corp., 400 F.2d 862 (C.A.10, 1968). The Tri-S case was cited as holding that a condemnation notice converted land held primarily for sale to customers in the ordinary course of business into a capital asset. Although this was the reasoning of the Tax Court in Tri-S,*fn1 the circuit court of appeals did not affirm on that ground. Rather, the appeals court held that the taxpayer never held the land in question for sale in its raw state to customers in the ordinary course of its trade or business. That court did not comment upon the Tax Court's finding that up to the time of condemnation the land involved was not held as a capital asset. Clearly, the Tax Court's reliance on the Tri-S case was error.

Of course, this court is not bound by a conclusion induced by an erroneous view of the law. Municiapl Bond Corp. v. CIR, 341 F.2d 683(C.A. 8 1965). A condemnation notice does not change land held primarily for sale to customers in the ordinary course of business into a capital asset. See Stockton Harbor Industrial Co. v. CIR, 216 F.2d 638 (C.A. 9 1954).

Further, if there had been no condemnation, the land which was part of the development would have been sold as such and the proceeds treated as ordinary business income. When the condemnation took place, the owner sought to establish a value, for purposes of the condemnation award, that reflected what the owner would have received if the land had been sold as developed. Consequently, to treat the income actually received, which in large part reflected the intent and plan of the owner, as capital gains rather than ordinary income would appear to be inequitable. What development occurred on the remainder of the 100 acres prior to notice of condemnation necessarily enhanced the value of the 16 acres condemned. This is illustrated by the fact that the pro-rated purchase price of the 16 acres was $10,032.62 and the condemnee received $97,650.63. In view of the present concern about the uneven impost of the tax laws, it does not appear warranted to interpret the law in such manner as to confer still another benefit not clearly mandated by the statute and regulations, and as stated above, there is no case authority for doing so.

For the foregoing reasons, the decision of the Tax Court will be reversed and the cause remanded for further ...


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