Rev. Proc. 75-25

Section 1. Purpose.

The purpose of this Revenue Procedure is to update and restate the requirements set forth in Mim. 4027, XII-1 C.B. 60 (1933). Under Mim. 4027 a subdivider of real estate may, in determining gain or loss resulting from the sale of lots, add to the actual cost or other basis of the property sold the estimated costs of future improvements to such property that the subdivider is contractually obligated to make and the cost of which is not properly recoverable through depreciation.

Sec. 2. Background

.01 Under Mim. 4027 before any part of such estimated costs were allowed as an addition to cost or other basis, the seller was required to furn- the extensive data to establish the correctness of the estimated costs. If the seller failed to comply with the requirements of Mim. 4027, the inclusion of such estimated costs of future improvements in the basis upon which gain or loss on sales made during the current year was computed would not be approved by the Internal Revenue Service, Washington, D.C.

.02 Mim. 4027 also required that the seller file Form 921, Consent Fixing Period of Limitation Upon Assessment of Income and Profit Tax, or Form 921A, Consent Fixing Period of Limitation on Assessment of Income and Profit Tax (Partnerships, Trusts, Syndicates, Pools, etc.), whichever was applicable, with the Commissioner of Internal Revenue, Washington, D.C.

.03 The current filing and information requirements with respect to the use of estimated costs of future improvements to determine the gain or loss on the sale of lots under this Revenue Procedure, as well as certain follow-up requirements where the taxpayer has received approval under this Revenue Procedure or Mim. 4027, are set forth below.

.04 Filing of the information requested will facilitate the granting of approval under this Revenue Procedure since it will generally assure that the request is as complete as possible when originally filed. However, depending upon the facts and circumstances of each request, additional information may be required.

Sec. 3. Request.

The Service will consider a request by a subdivider of real estate for permission to add to the actual cost or other basis of the property sold the estimated costs of future improvements for the purpose of determining the gain or loss resulting from the sale of property. The following conditions must be met:

.01 The subdivider must be contractually obligated to make such future improvements.

.02 The costs of such future improvements must not properly be recoverable through depreciation by the subdivider.

.03 The subdivider must sign a consent fixing the period of limitation on the assessment of income tax to expire one year after the expiration of the estimated period within which the subdivider expects to make the improvements, or one year after the expiration of a five-year period, whichever is shorter, calculated from the date of the filing of the return to which the consent relates. See section 6.01 of this Revenue Procedure.

.04 The subdivider must furnish the data and information set forth in section 4.02 of this Revenue Procedure in order to establish the correctness of the estimated costs.

Sec. 4. Procedure.

.01 A request prepared in accordance with the information requested in section 4.02 below must be filed by the subdivider, for the first year in which lots in a subdivision are sold, at the time for filing of his Federal income tax return for such year. The request, a copy of the subdivider's Federal income tax return for such years, and the consent required in section 6 of this Revenue Procedure are to be filed with the District Director of Internal Revenue for the district in which the subdivider resides. The district director will notify the subdivider of the approval or disapproval of the request within 30 days upon receipt of the request. A copy of the request must be filed with the Federal Income tax return filed with the Internal Revenue Service Center Serving the State in which the subdivider resides.

.02 The form of the request to be submitted is as follows:

1. At the top of a page type "Request to Use Estimated Costs of Future Improvements as Provided by Rev. Proc. 75-25."

2. State taxpayer's name, address, telephone number, and employer identification number. Indicate the Service Center where the return is filed.

3. Indicate the location of the tract or tracts of land involved (state, county, town, and plat map number). If this request involves a subdivision, give its name. If lots are involved, indicate their number. If a prior request has been submitted relative to this subdivision, indicate where request was filed, date of request, and whether request was approved.

4. If a prior request has been submitted under either the provisions of this Revenue Procedure or Mim. 4027 for another subdivision or lots that form a part of the above tract or tracts of land still under development, indicate the date the prior request was approved or disapproved and the name and location of the subdivision or lots.

5. Provide an inventory of lots in each subdivision covered by this request.

6. List cost or other basis of the entire tract or tracts of land of which the property covered by this request forms a part.

(a) List costs assigned to the subdivision covered by this request. Show how costs were determined.

(b) List costs assigned to each lot in the subdivision.

(c) If a subdivision is not involved, list costs assigned to each lot and show how costs were determined.

7. List future improvements that you are contractually obligated to make and estimated costs thereof for the entire tract or tracts of land. Provide a copy of the instrument that contains these contractual obligations. Do not include items properly recoverable through depreciation.

8. List estimated costs of all future improvements allocable to each subdivision and each lot covered by this request.

9. Provide a timetable projecting the estimated date of completion of the listed estimated future improvements for the subdivisions or lots covered by this request. Sec. 5. Follow-up Statements.

When approval has been received under this Revenue Procedure or under Mim. 4027, the subdivider is required to file a follow-up statement each year at the time for filing of his Federal income tax return. The follow-up statement is to be attached to the Federal income tax return. The follow-up statement should contain the following information:

1. At the top of the page type, "Follow-up Statement On Use of Estimated Costs of Future Improvements as Provided by Rev. Proc. 75-25."

2. Date request was approved.

3. Date of the expiration of the period of limitation on the assessment of income tax as consented to on Form 921 or Form 921A.

4. Name of subdivision and plat map number.

5. An updated schedule of: (a) Lots sold in the subdivision during the current year; (b) Unsold lots remaining on hand; (c) Total amount of the estimated costs of future improvements expended during the taxable year. Also show original estimated costs of future improvements as shown on original request.

6. An updated time table with respect to the estimated date of completion of the remaining estimated future improvements and their costs.

Sec. 6. Consent Fixing Period of Limitation on Assessment of Income and Profit Tax.

01. The subdivider requesting permission to include estimated costs of future improvements in the basis of property sold as provided for by this Revenue Procedure must execute and file a consent on Form 921 with his request. If the subdivider files a fiduciary return on Form 1041, or a partnership return on Form 1065, then a consent must be filed on Form 921A by each beneficiary of the estate or trust or each member of the partnership with the request. The consent and the request are to be sent to the district director of the district in which the subdivider resides. See section 4 for procedure.

02. The date on which the period covered by the consent will expire should permit the assessment of a deficiency within one year after the expiration of the estimated period within which the taxpayer expects to make the improvements, or one year after the expiration of a five-year period, whichever is shorter, calculated from the date of the filing of the return to which the consent relates.

.03 The district director will consider a supplemental request from the subdivider at the end of the estimated period or the five-year period, whichever is shorter, to extend the deferment of the estimated improvements not completed at that time based upon the following:

(a) The subdivider must show that, for a valid reason, all of the estimated improvements he is contractually obligated to make, with respect to the lots sold during any year, cannot be completed within the estimated period or the five-year period, whichever is shorter, and

(b) It can be determined that the contractual obligations required to be made by the subdivider permit the deferment of making of such improvements beyond the estimated period or the five-year period, whichever is shorter.

The district director will consider this supplemental request from the subdivider upon receiving a signed consent Form 921 or Form 921A, extending the period of limitation on the assessment of income tax as indicated by the district director.

04. If the subdivider has previously complied with the requirements under section 4 of this Revenue Procedure and has continued to file the information required under section 5 of this Revenue Procedure, he is not required to furnish such information at the time the supplemental request is submitted. However, he must continue submitting the follow-up statements required under section 5 of this Revenue Procedure.

05. The final determination of the taxable gain resulting from the sale of lots in each year, upon the basis of actual costs, cannot be deferred indefinitely as might be the result if that actual determination were to be postponed until the sale of all of the lots contained in the entire tract. Unless the requirements set forth in this Revenue Procedure are complied with, it will be necessary that the gain on all lots sold in each year be computed on the basis of their actual cost or other basis, including the amount previously expended for improvements, but without including in that cost or other basis any part of the estimated costs of contemplated future improvements.

06. The district director may, on or before the expiration date stated in the consent, assess any additional tax that may be found to be due computed upon the basis of the actual costs of the improvements that have been made, in either of the following instances:

(1) Where the improvements have been completed, but the estimated costs exceed the actual expenditures for the total improvements, or the portion allocable to a particular subdivision.

(2) If for any reason it appears that all of the proposed improvements will not be made by the taxpayer.

07. Consent Form 921 or Form 921A will be required only in those cases where the issue of estimated future improvement is involved.

08. If subsequent to the filing of a request and the consent Form 921 or Form 921A under this Revenue Procedure it is determined that the subdivider owes a deficiency based on other items of income or expense, and the subdivider declines to waive the restrictions on the assessment and collection of the deficiency, the Internal Revenue Service will recompute the profit and losses reported from the sale of the lots covered under the requests on the basis of actual costs of the improvements made.

Sec. 7. Failure to Comply.

A subdivider who fails to comply with the provisions of this Revenue Procedure will not be permitted to add the estimated costs of future improvements to the cost or other basis of the property sold for the purpose of determining the gain or loss resulting from the sale of such property.

Sec. 8. Effect on Other Documents.

This Revenue Procedure supersedes Mim. 4027 with respect to requests filed after May 12, 1975, the date of publication of this Revenue Procedure.

Sec. 9. Inquiries.

Any inquiries concerning this Revenue Procedure should refer to its number and be addressed to Assistant Commissioner (Technical), Attention: T:C:C Internal Revenue Service, Washington, D.C. 20224.

¹ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.