                        T.C. Memo. 1999-290



                      UNITED STATES TAX COURT



            HARRY OLSTEIN, OLSTEIN FAMILY PARTNERSHIP,
                   H-EAB-O, WHITEHOUSE PARTNERS,
        HARRY OLSTEIN, TAX MATTERS PARTNER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10681-98.                     Filed August 30, 1999.



     Neil L. Prupis and Eric W. Olson, for petitioner.

     William S. Garofalo and Patrick E. Whelan, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   On May 29, 1998, respondent issued Whitehouse

Partners (Whitehouse) two notices of final partnership

administrative adjustment that reflected adjustments to

Whitehouse's partnership returns for the taxable years that ended

December 31, 1993 and 1994.   On June 12, 1998, Harry Olstein,
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Whitehouse's tax matters partner, petitioned the Court to

redetermine respondent's adjustments to partnership items.

Whitehouse's principal place of business was Morristown, New

Jersey, at the time the petition was filed.

     After concessions, the remaining issue for decision is

whether proceeds relating to the sale of 28 developed lots are

ordinary income or capital gain.

                         FINDINGS OF FACT

     Petitioner has been a real estate developer for over 30

years and has operated his business through several entities,

including OLS Corp. (OLS), Hamptons Joint Venture (HJV), and

Whitehouse.   In 1983, OLS, as a nominee for HJV, acquired 97

acres (Marlboro tract) in Marlboro Township, New Jersey.    HJV

subdivided the Marlboro tract into 133 lots.   In 1986, HJV

constructed single-family homes on 77 of these lots and sold them

to individual home buyers.

     Beginning in 1986, homeowners, dissatisfied with the

workmanship of the homes, filed lawsuits against HJV and

petitioner, and litigation ensued between HJV and Marlboro

Township (i.e., relating to subdivision approval granted to HJV).

As a result, HJV's and petitioner's reputations as home builders

were tarnished, HJV could not get the requisite municipal

approval for further development, and HJV closed its model homes
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and ceased development of the remaining 56 lots (i.e., 133 lots

minus 77 lots that were developed and sold).

     In 1987, petitioner asked several developers whether they

were interested in purchasing the 56 lots.    On February 10, 1988,

more than a year after it ceased developing the Marlboro tract,

HJV sold the 56 lots to Eli and Sol Kramer, real estate

developers and principals of the Kramer Group.    The Kramers

operated their real estate development business through several

entities.    The contract between HJV and the Kramers delineated

that the 56 lots would be sold in three transactions.    On May 5,

1988, 17 lots were sold for $2,650,000.    On May 15, 1989, 20 lots

were sold for $3,230,000, payable partially in cash with the

balance secured by a note and a mortgage on a portion of the 20

lots.   The sale of the remaining 19 lots was scheduled to occur

on May 6, 1991.

     Sometime after the 1989 sale, the Kramers began experiencing

financial difficulties and asked petitioner to renegotiate their

contract with HJV, but petitioner refused.    On February 15, 1991,

the Kramers defaulted on the note and mortgage relating to the

1989 sale.    On March 8, 1991, the Kramers filed a complaint

against HJV in the Chancery Division of the Superior Court of New

Jersey, claiming misrepresentation relating to the contract and

seeking rescission of the 1991 sale.    HJV filed a counterclaim

for damages relating to the Kramers' breach of contract.    Under
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the Superior Court's October 27, 1992, final judgment, HJV

received the amount due under the terms of the note and mortgage

relating to the 1989 sale, and it received interest and nominal

damages relating to the incomplete 1991 sale.   Both parties filed

notices of appeal.   In its appeal, HJV requested additional

damages relating to the incomplete 1991 sale because, due to the

current depressed real estate market, the 19 lots would sell for

an amount much lower than provided in the original contract.

     On December 30, 1992, the parties entered into a settlement

agreement relating to the remaining lots.   Pursuant to the

settlement agreement, the Kramers conveyed 9 undeveloped lots

from the 1989 sale, and HJV conveyed 19 lots from the sale

scheduled to occur in 1991, to Whitehouse, a partnership created

in 1984 and composed of petitioner, the Olstein Family

Partnership and H-EAB-O (i.e., an S corporation owned by

petitioner).   Petitioner believed that the settlement agreement

was the only feasible way to dispose of the lots (i.e., because

of the pending appeal of the Superior Court's decision Whitehouse

could not convey clear title and, even if Whitehouse had clear

title, the real estate market for undeveloped lots was depressed)

and resolve the dispute with the Kramers (i.e., due to the

Kramers' financial difficulties, it was unlikely that they could

pay any judgment in full).   In addition, petitioner wanted to

avoid paying additional legal expenses relating to the appeal.
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Whitehouse held title to the 28 lots, provided financing to the

Kramers, and received 96 percent of the net proceeds from the

sale of the lots, while the Kramers performed all activities

necessary to develop, market, and sell the lots and received 4

percent of the net proceeds.   During 1993 and 1994, the developed

lots were sold to home buyers.

                               OPINION

     Respondent contends that Whitehouse's share of the 1993 and

1994 proceeds relating to the sale of the 28 lots was ordinary

income.   Petitioner contends that the proceeds were capital gain.

Under section 1221(1), the term "capital asset" does not include

property held by a taxpayer primarily for sale to customers in

the ordinary course of the taxpayer's trade or business.1    There

is no fixed formula or rule of thumb for making this

determination, and each case must rest upon its own facts.    See

Kaltreider v. Commissioner, 255 F.2d 833, 838 (3d Cir. 1958),

affg. 28 T.C. 121 (1957); see also Mauldin v. Commissioner, 195

F.2d 714, 716 (10th Cir. 1952), affg. 16 T.C. 698 (1951).

     Although HJV originally acquired the Marlboro tract to build

single-family homes to be sold in the ordinary course of its real

estate development business, Whitehouse, as HJV's successor, did



     1
        All section references are to the Internal Revenue Code
in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
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not hold the 28 lots for that purpose.    The lawsuits filed by the

homeowners and Marlboro Township forced HJV to abandon its plans

to sell developed lots to individual home buyers.    See, e.g.,

Eline Realty Co. v. Commissioner, 35 T.C. 1 (1960) (holding that,

because a taxpayer's intent is subject to change, the determining

factor relating to a taxpayer's intent is the purpose for which

the property is held at the time of sale).    HJV's primary

objective from this point on was to dispose of the 56 undeveloped

lots, and the contract with the Kramers was intended to allow HJV

to achieve its objective.    The Kramers, however, breached the

1988 contract, and the subsequent litigation resulted in the

settlement agreement.

     The settlement agreement allowed the Kramers to continue to

develop and sell the 28 lots and allowed Whitehouse to complete

the contract entered into by HJV.    In addition, Whitehouse would

not have to incur additional legal expenses.    Whitehouse held the

lots to facilitate the completion of the sale to, and resolve the

dispute with, the Kramers.    The lots were not held by Whitehouse

primarily for sale to customers in the ordinary course of its

business.   Accordingly, the proceeds relating to the sale of the

28 developed lots are capital gain.

     Respondent contends that the Kramers' activities are imputed

to Whitehouse, and, as a result, Whitehouse held the lots for

sale to customers in the ordinary course of business.    We
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conclude that the relationship between the Kramers and Whitehouse

is irrelevant because Whitehouse was seeking only to dispose of a

capital asset when it sold the lots.       See, e.g., Estate of Mundy

v. Commissioner, 36 T.C. 703 (1961) (holding that the activities

of a taxpayer, including the activities of an agent imputed to

the taxpayer, taken together with all other facts, must place the

taxpayer in a business so that the property in question can be

said to be held by the taxpayer for sale to customers in his

business); cf. Kaltreider v. Commissioner, supra (noting that the

taxpayers sold property to their closely held corporation to

develop and sell); Bauschard v. Commissioner, 31 T.C. 910 (1959)

(holding that the taxpayer's activities were sufficient to place

him in the real estate development business), affd. 279 F.2d 115

(6th Cir. 1960).

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,


                                              Decision will be entered

                                         under Rule 155.
