                       T.C. Memo. 2004-206



                      UNITED STATES TAX COURT



     TIMOTHY J. PHELAN AND DEBORAH A. PHELAN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14036-02.           Filed September 15, 2004.



     James E. Nesland and Jeffrey A. Smith, for petitioners.

     Frederick J. Lockhart, Jr. and John A. Weeda, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Chief Judge:   Respondent determined a deficiency in

petitioners’ Federal income tax for 1998 of $272,712.    The sole

issue in dispute is whether the gains on sales of realty are

capital gains or ordinary income.
                                 - 2 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable year at

issue.   All Rule references are to the Tax Court Rules of

Practice and Procedure.

                          FINDINGS OF FACT1

     Petitioners resided in Colorado Springs, Colorado, at the

time their petition was filed.    During 1994, real estate agent

Jim Perry contacted Timothy J. Phelan (petitioner) and informed

him that a 1,050-acre parcel in Regency Park was soon to be

listed for sale.   Having grown up in the vicinity of the Regency

Park property, petitioner and his brother, Thomas Phelan, were

familiar with the property.   During 1994, petitioner, his

brother, and Robert Oldach (Oldach), with the sole purpose of

investing in the 1,050-acre parcel, organized Jackson Creek Land

Co. (JCLC) as a limited liability corporation in the State of

Colorado.   At all relevant times, petitioner owned a 40-percent

interest in JCLC, petitioner’s brother also owned a 40-percent

interest, and Oldach owned the remaining 20-percent interest.

The members of JCLC did not own real estate licenses.

     The Regency Park property consisted of 1,776 acres of

unimproved real estate that was acquired during the early 1980s

by the Regency Group, a residential real estate developer.



     1
      The parties’ stipulation of facts is incorporated by this
reference.
                                - 3 -

Regency Park was located within the geographical limits of the

Triview metropolitan district (Triview).    Triview is an

independent quasi-municipal corporation and political subdivision

organized under the laws of Colorado.    Its purpose was to provide

services to the residents of the district, such as building

roads, providing water and sanitation services, and building and

maintaining parks.   For funding purposes, Triview had the ability

to levy taxes, issue general obligation and revenue bonds, and

assess fees.

     During 1987, Triview entered into two agreements obligating

itself to construct improvements to the infrastructure of the

Regency Park property.    After the approval of a master plan,

Regency Group and Triview, on March 6, 1987, entered into a Tap

Fee Agreement.   Under the agreement, Triview was to construct

water and sewer improvements to Regency Park, and Regency Group

would remit an initial payment and additional ongoing fees for

water and sewer taps.    On September 22, 1987, Triview, Regency

Group, and two other partnerships that owned property within the

Triview district, entered into an Intergovernmental Agreement

with the town of Monument, Colorado.    Under its terms, Triview

agreed to construct several public facilities within the Triview

district, including roads, water and sanitation plant facilities,

parks, and traffic control systems.     Regency Group agreed to be

responsible for the construction of infrastructure to deliver the
                                - 4 -

water, sewer, and irrigation services to the land.    The agreement

also allowed for Regency Group to assign this duty to Triview.

     Also during 1987, the adjacent town of Monument and several

land owners agreed to expand Monument’s town limits to include

more residential housing and business areas.    On September 22,

1987, the town of Monument annexed Regency Park and other areas

into its city limits pursuant to an Annexation and Development

Agreement with Regency Group and owners of the other land.      The

agreement further referenced Triview’s obligation under the

Intergovernmental Agreement to construct several public

facilities within the Triview district, including roads, water

and sanitation plant facilities, parks, and traffic control

systems.    JCLC was not a party to the Intergovernmental

Agreement.

     In conjunction with the Annexation and Development

Agreement, the town of Monument passed Annexation Ordinance No.

13-87, rezoning the 1,776 acres of Regency Park into a planned

development zone consisting of 1,674 acres.    The development zone

designated areas for single-family and multifamily homes,

commercial buildings, and industrial buildings.    Landowners

within the development zone could not build on their land until

they obtained a final site plan approval from the town of

Monument.
                                - 5 -

     Soon thereafter, Regency Group filed for bankruptcy.

Several years later, on March 3, 1993, the J&L Higby Trust

(Trust) purchased Regency Park from foreclosure proceedings

instituted against Regency Group.

     On October 31, 1994, the Trust sold the 1,050-acre portion

of the original 1,776-acre Regency Park parcel to petitioner for

$2.9 million.   The special warranty deed from the Trust to

petitioner reflected that the conveyance was made subject to the

Tap Fee Agreement, the Intergovernmental Agreement, and the

Annexation and Development Agreement.   At the time of purchase,

petitioner and the other members of JCLC were aware that

residential housing was planned for the 1,050-acre parcel and

that Triview was obligated to construct infrastructure

improvements on the property.

     Approximately 1 month later, on December 7, 1994, petitioner

quitclaimed the 1,050-acre parcel to JCLC for the same $2.9

million purchase price and the property was renamed Jackson

Creek.   At the time of this transaction, the intent of JCLC and

its owner was to hold the property as a long-term investment.

Conforming to that intent, JCLC did not advertise the Jackson

Creek property for sale or hire sales agents or representatives

to sell the property.
                               - 6 -

     During 1996 a Preliminary Geological Investigation was

conducted on the Jackson Creek property to evaluate subsurface

conditions for the development of the property.   Prior to the

sales of the Jackson Creek property by JCLC, amended and final

development plans were approved by the town of Monument, which

enabled the commencement of construction.    Approximately 1 year

later, a representative from Elite Properties of America Corp.

(Elite), inquired whether JCLC was willing to sell a portion of

the Jackson Creek property.   After negotiations, JCLC entered

into a Purchase and Sale agreement with Elite on August 28, 1997.

The agreement was amended on March 19, 1998, to permit conveyance

to Elite of 102.215 acres of the Jackson Creek property.   The

amended agreement was to occur by means of three separate closing

transactions.

     The first closing occurred on June 15, 1998, when a portion

of the Jackson Creek property was conveyed for $792,880.   JCLC’s

1998 partnership return reflected a long-term capital gain of

$607,344 with respect to this transaction.   Petitioner reported

his distributive share of the gain on his 1998 Federal income tax

return.   The second and third closings occurred during 1999 and

2000, respectively.   The March 19, 1998, amended agreement also

included terms requiring JCLC to cause Triview to install and

maintain irrigation and landscaping within the parcel, and for

JCLC, at its sole expense, to be responsible for any grading,
                                - 7 -

utility installation, or roadway improvements required by the

town of Monument in connection with the development of the

property.   Despite JCLC’s obligation under the agreement, Triview

completed all development work with respect to the Jackson Creek

property.

     Vision Development Corp. (Vision) was organized during 1996

by petitioner, petitioner’s brother, and Oldach, with the same

ownership interests as that of JCLC of 40 percent, 40 percent,

and 20 percent, respectively.   On January 5, 1998, JCLC conveyed

a 46.5-acre portion of Jackson Creek to Vision in exchange for

$1,571,145.   JCLC’s 1998 partnership return reflected a long-term

capital gain of $47,319 with respect to this transaction, and

petitioner reported his distributive share of the gain on his

1998 personal Federal income tax return.   Vision was organized to

develop the 46.5-acre parcel for resale to Keller Homes (Keller).

Keller, a home builder, was originally interested in buying the

same parcel from JCLC.   Keller was not interested in purchasing

the 46.5-acre parcel unless it was developed and suitable for

residential home building.   After Elite expressed no interest in

developing the parcel for Keller, Vision was formed to perform

the development work and resell the property to Keller.

     Despite terms in the contracts prescribing that JCLC was to

be responsible for some development activities, Triview completed

all infrastructure development work that was performed on each
                                - 8 -

parcel of Jackson Creek property prior to the sales from JCLC to

Elite and Vision.   As of 1996, however, Triview was experiencing

financial difficulty and was in default on general obligation

bonds issued in 1987 with a face value of $4.8 million and

accrued interest of approximately $3 million.

     Petitioner, his brother, and Oldach, in their personal

capacities and/or through the business entities which they owned,

executed three investment and financing transactions that were

related to Triview and Jackson Creek.    In addition to JCLC and

Vision, petitioner, his brother, and Oldach held ownership

interests in two additional entities which were parties to these

transactions.

     One such entity was Centre Development Co. of Colorado

Springs, LLC (Centre).   It was formed on July 27, 1993, for the

purpose of acquiring a shopping center.    At all relevant times,

petitioner, petitioner’s brother, and Oldach possessed ownership

interests in Centre of 40 percent, 40 percent, and 20 percent,

respectively.

     The second entity was Colorado Structures Corp. (Colorado

Structures).    Petitioner and his brother together owned a 49-

percent interest in Colorado Structures.    The remaining 51

percent is owned by an employee stock ownership plan (ESOP).

During 1998 petitioner served as the president of

Colorado Structures.   Other officers were Oldach who served as
                               - 9 -

vice president, and petitioner’s brother, who served as

secretary-treasurer.

     Colorado Structures is a commercial general contractor which

contracts to build commercial buildings such as large retail

stores, office buildings, and schools.    During 1998, Colorado

Structures did not contract to build residential buildings.     In

1998, the company employed approximately 50 people and earned

revenues of approximately $117 million.

     During 1996, Centre purchased general obligation bonds which

Triview had issued in 1987 and subsequently defaulted on.     In

exchange for $2.9 million, Centre received the bonds with a face

value of $4.8 million and accumulated unpaid interest of

approximately $3 million.   Centre purchased the bonds from

Massachusetts Financial and Kemper Financial.    Centre financed

the purchase through a stock brokerage margin account and a loan

in the amount of $1.5 million from a consortium of Mountain

States Telephone and Telegraph Co. and Mountain View Electric

Association (utility companies).

     In order to refinance the $1.5 million in loans from the

utility companies, Centre and JCLC borrowed the same amount from

Colorado National Bank (CNB) on September 22, 1997.    Under the

terms of the loan agreement, the borrowers were Centre and JCLC,

and the guarantors were petitioner and his brother in their

personal capacities, as well as Colorado Structures.    As
                               - 10 -

collateral, Centre pledged the 1987 Triview bonds and mortgaged

two buildings it owned, and JCLC placed a mortgage on the Jackson

Creek property.    JCLC did not receive any of the proceeds from

this loan.   JCLC was designated as a borrower on the loan so that

the Jackson Creek property could be used as collateral.

     Under a separate agreement, the utility companies agreed to

commit the $1.5 million they received from Centre’s repayment of

the loans to Triview.   In exchange, Triview issued new bonds to

the utility companies in the amount of $1.5 million.   In

addition, during 1998 and 1999 Colorado Structures purchased

newly issued Triview bonds.

     Also on September 22, 1997, Vision and JCLC agreed to a

revolving development loan of $600,000 from CNB.   Petitioner and

his brother personally, as well as Colorado Structures and

Centre, served as guarantors on the loan.   The purpose of the

loan was to finance the infrastructure development of a specific

parcel of the Jackson Creek property described in the agreement

as being 184.627 acres in size.   Among other terms, the loan

agreement required Vision to enter into contracts with qualified

homebuilders for the sale of the land, subject only to Vision’s

completion of development activities.   The loan agreement also

included a borrowing limit of 75 percent of the value of the

sales contracts.   Collateral for the loan included, inter alia,
                                - 11 -

the assignment of the sales contracts to CNB and a mortgage on

the Jackson Creek property.

                                OPINION

     This case presents the purely factual question of whether

gain from the sale of real property resulted in ordinary or

capital gain income.   Petitioner, his brother, and Oldach

acquired real property that was intended for residential

development.   Petitioner and the others generally earned their

income from and were involved in commercial real estate

development.   The property in question was held by a passthrough

entity which had no purpose and engaged in no significant

activity other than to hold the acquired realty for appreciation

and sale.   Respondent, because of petitioner's involvement in

commercial real property development, questioned whether gain

from the sale of the property should be reported as capital gain

or ordinary income.    After considering all of the evidence, we

find as an ultimate fact and hold that the gain was capital in

nature.

     JCLC, a limited liability company formed under the State

laws of Colorado, filed a U.S. Partnership Return of Income for

Federal income tax purposes.    See sec. 301.7701-2(b), Proced. &

Admin. Regs.   Petitioner’s distributive share of income from JCLC

is of the same character as that realized by JCLC upon the sale

of the Jackson Creek parcels.    See sec. 702(b).   In order to
                                - 12 -

decide the question of whether petitioner’s distributive share

should be characterized as ordinary or capital gain income, we

must consider the character of the gain at the entity level.

Cannon v. Commissioner, 949 F.2d 345 (10th Cir. 1991), affg. T.C.

Memo. 1990-148; see Brannen v. Commissioner, 78 T.C. 471 (1982),

affd. 722 F.2d 695 (11th Cir. 1984); Podell v. Commissioner, 55

T.C. 429 (1970).    More particularly, we must decide whether JCLC

held the Jackson Creek property for sale in the ordinary course

of its business or whether it was held as a capital asset.

     Section 1201(a) provides for preferential treatment with

respect to gain realized on the sale of a capital asset.      See

sec. 1201(a).    Section 1221(1) defines a capital asset as

“property held by the taxpayer * * * but does not include * * *

property held by the taxpayer primarily for sale to customers in

the ordinary course of his trade or business.”

     Whether property held by a taxpayer was sold in the ordinary

course of business is a question of fact.2    See Friend v.

Commissioner, 198 F.2d 285, 287 (10th Cir. 1952), affg. a

Memorandum Opinion of this Court.    The term “primarily” for

purposes of section 1221    means “of first importance” or

“principally.”     See Malat v. Riddell, 383 U.S. 569, 572 (1966).


     2
      No question has been raised with respect to the burden of
proof under sec. 7491(a).
                              - 13 -

     In determining whether gains realized by JCLC from the 1998

sales of the Jackson Creek property were capital gains or income

derived from the sale of the property in the ordinary course of

business, we make three factual inquiries:   (1) Was JCLC engaged

in a trade or business, and, if so, what business?   (2) Was JCLC

holding the property primarily for sale in that business?   (3)

Were the sales contemplated by JCLC ordinary in the course of

that business?   Sanders v. United States, 740 F.2d 886, 888-889

(11th Cir. 1984); Suburban Realty Co. v. United States, 615 F.2d

171, 178 (5th Cir. 1980).

     The Court of Appeals for the Tenth Circuit, to which this

case would be appealable barring stipulation to the contrary,

articulated the following factors to be considered in making this

determination:

     the purposes for which the property was acquired; the
     activities of the taxpayer and those acting in his
     behalf or under his direction, such as making
     improvements or advertising the property to attract
     purchasers; the continuity and frequency of sales as
     distinguished from isolated transactions; and any other
     fact which tends to indicate whether the sale or
     transaction was in furtherance of an occupation of the
     taxpayer. [Friend v. Commissioner, 198 F.2d at 287.]3


     3
      Although these factors evolved in connection with the
Court’s consideration of sec. 117 of the 1939 Internal Revenue
Code, the statutory language is identical to that of sec.
1221(1), as in effect during the 1998 tax year, and the factors
established in Friend v. Commissioner, 198 F.2d 285, 287 (10th
Cir. 1952), affg. a Memorandum Opinion of this Court, continue in
use by the courts.
                                - 14 -


No one factor is determinative, and neither is the presence or

absence of any single factor determinative.    Each case is

considered in light of its own facts and circumstances.    See

Victory Housing No. 2, Inc. v. Commissioner, 205 F.2d 371, 372

(10th Cir. 1953), revg. 18 T.C. 466 (1952).

I.   Purpose of Acquisition

      With respect to JCLC’s purpose of acquisition, it was

organized with the intent and for the purpose of purchasing the

Jackson Creek property and holding it for investment and

appreciation in value.   JCLC purchased the Jackson Creek property

with knowledge that the land would eventually be developed into

residential housing.   The initial master plan to develop the

property was approved by the town of Monument, and the town

enacted an annexation ordinance rezoning the property, subject to

final site approval.   In addition, pursuant to the Tap Fee

Agreement, the Intergovernmental Agreement, and the Annexation

and Development Agreement, Triview was obligated to improve the

land and prepare it for further development.    The investors in

JCLC were familiar with these aspects and acquired and held the

property for its appreciation in value.

      Although the purpose for the acquisition of property is of

some weight, ultimately, the purpose for which property is held

is of great significance.     Mauldin v. Commissioner, 195 F.2d 714,
                              - 15 -

717 (10th Cir. 1952), affg. 16 T.C. 698 (1951); see also Cottle

v. Commissioner, 89 T.C. 467, 488 (1987).

II. Activities of the Taxpayer and Those Acting in the
Taxpayer’s Behalf--Such as Making Improvements or Advertising
for the Sale of the Property

     With respect to the second factor, the sales of JCLC’s

unimproved realty by JCLC were unsolicited.    The owners of JCLC,

including petitioner, did not hold real estate or broker’s

licences.   JCLC did not advertise the property for sale or hire

representatives to assist in selling the property.    Respondent,

however, argues that the development activities performed on the

Jackson Creek property by Triview were done on behalf of JCLC and

petitioner or at petitioner’s direction.    Respondent relies on

the sales agreement with Elite requiring that JCLC be responsible

for some infrastructure improvements.   Respondent also argues

that the loan agreements between Vision, JCLC, and CNB, and the

purchase of Triview bonds by Centre and Colorado Structures

provided the financing for Triview’s development activities.     In

that regard respondent argues that these financing arrangements

caused Triview to operate under the direction of JCLC.

Respondent’s argument is based on the fact that there was common

ownership of JCLC, Centre, Vision, and Colorado Structures.

     Petitioner acknowledges that JCLC was contractually

obligated for some improvements to the Jackson Creek property,

but petitioner notes that Triview was not contractually obligated
                              - 16 -

to Elite for the completion of the improvements.   As a result,

the term was included as a means for Elite to have a contractual

remedy with respect to JCLC should Triview fail to complete the

improvements.   Petitioner also points out that the loans and bond

purchases of Centre, Vision, and Colorado Structures did finance

Triview’s activities, but they did not give JCLC the means to

direct Triview’s development activities.

     While JCLC was responsible for limited improvements to the

land it sold to Elite, JCLC did not have employees or engage in

any business activities outside of holding and selling a limited

number of parcels of the Jackson Creek property.   JCLC relied on

the existing contractual obligation of Triview to complete the

improvements.   Had Triview failed to complete the improvements,

JCLC was contractually obligated to do so, but JCLC was without

the ability to complete the improvements itself.   Elite had

contractual recourse against JCLC, and JCLC would have had

contractual recourse against Triview.   In the course of events,

Triview satisfied its obligation and completed the development

work.   Accordingly, the contractual obligation in of itself, did

not give rise to development activity on the part of JCLC.

     Centre, which had similar ownership interests to those of

JCLC, purchased Triview bonds, issued in 1987, at a discounted

price of $2.9 million.   That payment represented approximately 40

percent of the $4.8 million face value of the bonds, along with
                              - 17 -

approximately $3 million of accrued interest.   In addition,

Colorado Structures also purchased newly issued 1998 and 1999

Triview bonds.

     Centre financed $1.5 million of the purchase price of the

bonds through loans obtained through two utility companies.

Centre subsequently refinanced the $1.5 million through CNB.

Under a separate agreement, the utility companies agreed to

commit the $1.5 million they received from Centre’s repayment of

the loans to Triview.   In exchange, Triview issued new bonds

totaling $1.5 million to the utility companies.   The $1.5 million

in new working capital assisted Triview in performing development

activities, but neither Centre or JCLC had the ability to control

the purpose for which the funds were used.   Further, there is no

evidence in the record to support respondent’s assertion that

land owned by JCLC, and not other property within the Triview

district, was the recipient of Triview’s development activities

resulting from this infusion of cash.

     With respect to the bond purchases, respondent makes much of

the fact that petitioner, his brother, and Oldach each owned

identical interests in Centre and JCLC, as well as being officers

of Colorado Structures.   As such, respondent argues that the bond

purchases caused Triview to act on JCLC’s behalf or under its

direction.   Respondent’s argument, however, fails to take into

account the fact that the bond purchases were all arm’s-length
                                - 18 -

investment transactions.   The investment risk for petitioner, his

brother, and Oldach, through Centre, JCLC, and Colorado

Structures, focused on Triview’s potential success in developing

infrastructure for the Triview district; taxing and assessing

fees as a result of the development activity; and repaying the

bonds it issued, including interest.      Triview was independent in

its control and management, and the risk of loss on the bonds

purchased by Centre and Colorado Structures was the same as that

of any other uninterested investor.      The risk included

mismanagement of finances and operations, which given Triview’s

previous insolvency, may have been substantial.      We conclude that

Triview’s development activities were not made on behalf of or

for the direct benefit of JCLC.

     Respondent next argues that the 1998 sale of parcels by JCLC

to Vision was done solely for tax avoidance and had no

independent business purpose.    In that regard, respondent asserts

that the development activities performed by Vision should be

attributed to JCLC, resulting in JCLC’s holding the property for

sale in the ordinary course of business.

     In Bramblett v. Commissioner, 960 F.2d 526, 528 (5th Cir.

1992), revg. T.C. Memo. 1990-296, the Court of Appeals for the

Fifth Circuit analyzed a similar factual situation to the one we

consider here.   In that case, the taxpayer was a partner in a

partnership formed to acquire land for investment purposes.     The
                              - 19 -

taxpayer and his partners subsequently formed a separate

corporation for the purpose of developing and selling real

estate.   The partners held ownership interests in the corporation

in the same proportions as they did in the partnership.    The

partnership later sold land to the corporation for development.

The Court of Appeals for the Fifth Circuit held that the record

reflected that the business activities of the corporation were

not attributable to the partnership.

     The Court of Appeals for the Fifth Circuit relied on the

holding of the Supreme Court to the effect that where the form

chosen by the taxpayer “'is compelled or encouraged by business

or regulatory realities, is imbued with tax-independent

considerations, and is not shaped solely by tax-avoidance

features'”, the form should be honored by the Government.     Id. at

533 (quoting Frank Lyon Co. v. United States, 435 U.S. 561, 583

(1978)); see also Lemons v. Commissioner, T.C. Memo. 1997-404.

The Court of Appeals for the Fifth Circuit found it significant

that the Commissioner had accepted the fact that the partnership

and corporation were separate business entities and that the

corporation was not a sham.   The Court of Appeals also found

significant the fact that there was an independent business

reason to organize the corporation, that being to protect the

partnership from unlimited liability from a multitude of sources.
                               - 20 -

       Respondent contends that no legitimate business purpose

prompted the incorporation of Vision because, as members of a

limited liability company, the members of JCLC did not have a

need to protect themselves from unlimited liability as was the

case for the partners in Bramblett.      Conversely, petitioner

contends that he, his brother, and Oldach possessed a legitimate

business reason to organize Vision.     Although the members of JCLC

were not exposed to unlimited liability as were the partners in

Bramblett, by incorporating Vision to perform development work on

a relatively small parcel of land, they protected JCLC’s sole

asset, the remaining land, from obligations arising from Vision’s

development activity.    For those reasons and because Vision was

organized for a legitimate business purpose and all corporate

formalities were followed, we conclude that Vision’s development

activity is not attributable to JCLC.

III.    The Continuity and Frequency of Sales as Distinguished From
        Isolated Transactions

       In determining whether property was held for sale in the

ordinary course of business, the frequency and substantiality of

sales is the most important factor to be considered.      See

Suburban Realty Co. v. United States, 615 F.2d 171, 176 (5th Cir.

1980); Medlin v. Commissioner, T.C. Memo. 2003-224; Hancock v.

Commissioner, T.C. Memo. 1999-336.      Frequent and substantial

sales of real property more likely indicate sales in the ordinary

course of business, whereas infrequent sales for significant
                              - 21 -

profits are more indicative of real property held as an

investment.   See Bramblett v. Commissioner, supra at 531; Hancock

v. Commissioner, supra.

     JCLC purchased the Jackson Creek property in 1994 and held

it for approximately 4 years before selling parcels to Elite and

Vision in 1998.   In a case cited by respondent, the taxpayer was

in the real estate business, but they maintained that the purpose

for holding the property switched to investment when the taxpayer

began full-time activity in the lumber business.    See Mauldin v.

Commissioner, 195 F.2d at 716.   During an 8-year period the

taxpayer sold real property in 25 separate transactions.    The

Court of Appeals for the Tenth Circuit agreed with this Court’s

holding that the taxpayer’s transactions in Mauldin were

sufficiently substantial and frequent to be sales in ordinary

course of the taxpayer’s business.     The Court of Appeals found it

important that a significant portion of the taxpayer's income was

derived from the sale of real estate.

     In arguing that JCLC’s sales were sufficiently frequent and

substantial, respondent emphasizes that substantially all of

JCLC’s 1998 income derived from gains on the sale of real

property.   We do not find this fact to be fatal, as JCLC does not

engage in any other activity from which it could economically

benefit, and two sales of real property by JCLC in 4 years were

of insufficient frequency to support the conclusion that JCLC’s
                              - 22 -

sales were in the ordinary course of its business.   More

importantly, JCLC held the property for 4 years during which time

the value appreciated.   JCLC began selling the property at a time

when it was believed that the investment and appreciation goals

had been achieved.

IV.   Other Facts

      During October 1996 a Preliminary Geotechnical Investigation

was done on behalf of JCLC for a cost of $2,200.   The purpose of

the report was to evaluate soil conditions for the development of

the property.   In addition the amended and final development

plans for the parcels sold to Elite and Vision were approved by

the town of Monument prior to the 1998 completion of the sales

transactions.   Respondent argues that these facts are indicative

of development activity with respect to JCLC.

      In Thrift v. Commissioner, 15 T.C. 366 (1950), the taxpayer

improved and developed property for the purpose of facilitating

the disposition of the property to a limited group of builders to

whom the taxpayer had already reached agreement.   In that case,

we held that the taxpayer’s course of conduct did not establish

any ordinary “course of business as to the sale of lots such as

is required to convert the property from the character of a

capital asset held for investment purposes to property held for

sale in the ordinary course of * * * business.”    Id. at 371.   We

reach the same conclusion here.   The soil test and obtaining
                                   - 23 -

preliminary and final site plan approvals for the Jackson Creek

property are less significant than the activities performed by

the taxpayer in Thrift.

      Further, in Buono v. Commissioner, 74 T.C. 187, 204 (1980),

we noted that “many cases have allowed capital gains treatment

for taxpayers who subdivided their property even though

improvements have been made thereto”.       JCLC purchased the Jackson

Creek property as an investment for appreciation in value and

subsequent sale.    Prior to JCLC’s purchase of the property, it

had been rezoned by the town of Monument for residential

purposes.   The soil test was performed to ensure that the land

was suitable for its intended purpose.      Further, in the context

of this case, JCLC’s efforts in obtaining approval of site plans

is not, by itself, indicative of development activity.

V.   Conclusion

      Based on our analysis of the foregoing factors, we conclude

that JCLC held the Jackson Creek property as an investment, and

therefore was not engaged in the real estate development

business.   Accordingly, we hold that petitioner’s distributive

share of income attributable to gain on the sale of property by

JCLC during 1998 is properly characterized as income from a

capital asset.     Sec. 1221(1).
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     To the extent not herein discussed, we have considered all

other arguments made by the parties and conclude that they are

moot or without merit.

     To reflect the foregoing.


                                      Decision will be entered

                                 for petitioners.
