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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3159
Experience:  I've prepared all types of taxes since 1987.
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What is the proper tax treatment on the sale of land ...

Customer Question

What is the proper tax treatment on the sale of land conservation tax credits? ordinary or capital?
Submitted: 8 years ago.
Category: Tax
Expert:  jgordosea replied 8 years ago.

Greetings,

For most taxpayers, the sale of the conservation credit will be a capital gain since the item will not meet one of the exceptions to that asset being a "capital asset".

This is similar to the situation in which the sale of land will be a capital gain (or loss) for most taxpayers; but developers, and others that trade in land, would have ordinary income since it is held by that taxpayer primarily for sale to customers in the ordinary course of his trade or business (See Sec. 1221(a)(1)).

A capital asset is defined in the Internal Revenue Code:

SEC. 1221. CAPITAL ASSET DEFINED.

1221(a) In General. -For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include -

1221(a)(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

1221(a)(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;

1221(a)(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by -

1221(a)(3)(A) a taxpayer whose personal efforts created such property,

1221(a)(3)(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or

Code Sec. 1221(a)(3)(C), below, prior to amendment by P.L. 107-16, applies to estates of decedents dying on or before December 31, 2009.

1221(a)(3)(C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);

Code Sec. 1221(a)(3)(C), below, as amended by P.L. 107-16, applies to estates of decedents dying after December 31, 2009. For sunset provision, see P.L. 107-16, §901, in the amendment notes.

1221(a)(3)(C) a taxpayer in whose hands the basis of such property is determined (other than by reason of section 1022, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);

1221(a)(4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);

1221(a)(5) a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by -

1221(a)(5)(A) a taxpayer who so received such publication, or

1221(a)(5)(B) a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);

1221(a)(6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless -

1221(a)(6)(A) it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and

1221(a)(6)(B) such instrument is clearly identified in such dealer's records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);

1221(a)(7) any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or

1221(a)(8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

As seen above, there are various items that are not included as a "capital asset" and so the gain upon sale would be ordinary income (such as if one was a dealer in these credits); but generally the sale of land conservation tax credits will result in capital gain (or loss).

I hope this is the information that you need in regard to determining if the gain is a capital gain.

jgordosea and other Tax Specialists are ready to help you
Customer: replied 8 years ago.
Thanks! Are there any court cases supporting this?
Expert:  jgordosea replied 8 years ago.

Hello again,

There are many court cases in regard to Section 1221.

At http://www.ustaxcourt.gov/UstcInOp/asp/HistoricOptions.asp you can enter section 1221 and get more than the limit of 50 results for Tax Court Opinions.

A quick search on that site and some other resources did not give any results for "conservation credit"

I hope this helps.

Thanks for the opportunity to be of service.