Rev. Rul. 68-478

Advice has been requested regarding the treatment, for Federal income tax purposes, of the cost, of land and the costs of constructing a golf course and related recreational facilities, in connection with lots to be developed and sold under the circumstances described below.

The taxpayer acquired a large tract of land to be developed as a real estate subdivision. As part of the plan, the taxpayer conveyed to a nonprofit country club part of the land and the improvements thereon, including a golf course, lake, dam, and related recreational facilities, in order to enhance the value of the remaining property and make more saleable the lots he was developing for sale. In addition to the allocable cost of the land conveyed, the taxpayer incurred costs in cosntructing the golf course, the dam, lake, and related recreational facilities. The taxpayer did not retain any ownership in the property transferred.

The country club (a nonprofit membership corporation without capital stock or shares) was organized under the nonprofit laws of the state. It was organized (1) to own, operate, and manage a club exclusively for pleasure, recreation, and other nonprofitable purposes, and (2) to construct, build, own, lease, conduct, carry on, and operate a golf course for the use of club members and invited guests. No part of the net earnings inures to the benefit of any officer, director, or member of the corporation. Upon dissolution of the country club, all of its assets will be distributed to a similar corporation or corporations qualifying, under state law, as a nonprofit corporation.

Section 1011 of the Internal Revenue Code of 1954 provides, in pertinent part, that the adjusted basis for determining gain or loss from the sale or other disposition of property shall be the basis determined under section 1012 of the Code adjusted as provided in section 1016 of the Code. Section 1012 of the Code provides, in part, that the basis of property shall be the cost of such property.

In Country Club Estates, Inc. v. Commissioner , 22 T.C. 1283 (1954), acquiescence, C.B. 1955-1, 4, the taxpayer was incorporated to develop a tract of land as a residential subdivision. As part of the plan for development, taxpayer donated one-half of the tract to a nonprofit country club for the purpose of building a gold course thereon. The Tax Court of the United States held on this issue that the cost of the land donated to the country club was to be treated as part of the cost of lots sold by the taxpayer. There the taxpayer transferred the land to the club with a proviso that it be used for nonprofit country club and that it be kept as such and not sold by the club.

If a person engaged in the business of developing and exploiting a real estate subdivision constructs a facility thereon for the basic purposes of inducing people to buy lots therein, the cost of such construction is properly a part of the cost basis of the lots, even though the subdivider retains tenuous rights, without practical value, to the facility constructed (such as contingent reversion). However, if the subdivider retains ownership and control of the facility and does not part with the property then the cost of such facility is not properly a part of the cost basis of the lots. See Estate of M. A. Collins v. Commissioner , 31 T.C. 238 at 256, acquiescence, C.B. 1959-2, 4. Also, see Rev. Rul. 60-3, C.B. 1960-1, 284.

The basic purpose of the expenditures, in the instant case, was to make more saleable the lots in the remaining property. Accordingly, the cost of each lot, for the purpose of determining gain or loss, includes a pro rata portion of the cost of the land transferred plus a pro rata portion of the payments made for construction of the golf course, the dam, the lake, and related recreational facilities.