Bradshaw v. United States

In 1961 Thomas E. Swift, a real estate developer, purchased land (the property) in Georgia for $60,000. In 1968 Swift created a corporation, Castlewood (plaintiff), to subdivide, develop, and sell lots in a subdivision, Castlewood Subdivision (the subdivision). The location and character of the land made it likely that the subdivision would be successful. That same year, Swift transferred the property to Castlewood for the subdivision. The fair market value of the property was $250,000, and Swift’s basis in the property was around $8,500. In exchange for the property, Castlewood gave Swift five promissory notes, each for $50,000 with a 4 percent interest rate. The notes matured annually, beginning in 1971. From 1970 to 1973, Castlewood sold 18 lots in the subdivision for a total of $240,000. After factoring in the proportional land and development costs, Castlewood made a profit of $80,500. Castlewood reported the sales on its income-tax returns. In 1976 the Commissioner of Internal Revenue (the Commissioner) (defendant) determined a deficiency against Castlewood, arguing that the transfer of property from Swift to the subdivision was not a sale but a capital contribution governed by § 351 of the Internal Revenue Code. Because the transfer was governed by § 351, the Commissioner calculated Castlewood’s basis in the property under § 362 and determined that its basis was $8,500, the same as Swift’s basis before the transfer. Therefore, Castlewood’s taxable income on the sale of the lots was higher than reported. Castlewood appealed, arguing that the transfer of land was a sale and that therefore its basis in the property was the sale price it paid Swift in the promissory notes totaling $250,000.