The U.S. Tax Court had ruled that the $5.75 million a real estate developer received from the sale of rights in a lawsuit was ordinary income. An appeals court, however, has overturned the decision and allowed the developer to treat the proceeds as capital gains.1
The appeals court decision focused on the fact that the developer never actually owned the land. What the developer sold was the exclusive right to purchase the land. In the view of the appeals panel, that contractual right and not the land itself was the real asset in the matter.
With this framework established, the court came in on the side of treating the sale of proceeds as capital gains. The IRS had argued, unsuccessfully, that the proceeds from the sale of the contract rights were merely a lump sum substitution for the ordinary income the developer would have earned if he had developed the land and sold it to the buyers.
1 Long v. Commissioner, 11th Circuit, 2014 BL 326907, No. 14-10288, 11/20/14