Chapter4Solutions

Chapter4Solutions - Chapter 4 Solution 1 Intention of the...

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Chapter 4 Solution 1 Intention of the Taxpayer (A) Primary intention: The corporation intended to construct an apartment building on the property, not to purchase the property itself for resale at a profit. Unexpected circumstances resulted in the sale of the property. These statements of intention must be substantiated by facts which can be observed objectively, as discussed below. (B) Secondary intention: The question of whether the corporation intended, at the time of purchase and as a motivation for the purchase, to resell the property at a profit if the primary intention was frustrated must be answered by reference to other factors discussed below. Factors Used to Substantiate the Intention of the Taxpayer (A) Relationship of the transaction to the corporation’s business: The corporation was not normally in the business of buying and selling land. This was a relatively new corporation at the time of the transaction. In addition to the land which it sold, it purchased another property which it has developed into a commercial/industrial plaza and which it holds as a rental property. Furthermore, the principal shareholder of the corporation owns and operates an electrical contracting business and, thus, cannot be said to be in the business of buying and selling land. (B) Nature of the activity surrounding the transaction: The transaction involving the sale of the property should not be considered of a business nature or “an adventure in the nature of trade”. The sale was made only after it was determined that the property location was not suitable for development into an apartment building. It was listed for sale with the realtor only at that time and not immediately after purchase. It could be argued that the minor improvements made were to make the property more marketable for resale purposes. (C) Type of asset: The land was to be developed for an apartment building used for rental purposes and, hence, would have been considered a capital asset rather than inventory. Plans were made for the development of the property to the extent that surveys were made and that the land was stripped and excavated in preparation for construction. The fact that no income was ever earned from the property as a capital asset could be used to suggest it was held as inventory. (D) Number and frequency of transactions: Since this is a new corporation and the transaction in question was the first of its nature, there is no track-record on which to base an assessment of number and frequency despite a short (i.e., six-month) holding period. As a result, this should not be a determining factor in this case. (E) Articles of incorporation: There is nothing in the Articles of Incorporation to suggest that the corporation can engage in the purchase and resale of land as a business activity. On the other hand, the articles are very broad and might be interpreted to encompass this type of business activity.
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