Pointer v. Commissioner

Robert and Maybelle Pointer (plaintiffs) owned a 10.63-acre tract of land that was held for over five years and located next to their residence. When 10 lots from the tract were sold, the concern became whether the resulting gain would be classified as ordinary income or capital-gains income. Robert owned a construction and manufacturing business during this period. If assets were held primarily for sale to customers in the ordinary course of business, the assets were excluded from the definition of capital assets, making the sale ordinary income. However, another special qualifier was present in 26 U.S.C. § 1237, which allowed some real estate transactions to qualify as capital assets. To qualify, Pointer had to establish that (1) the property had been held for at least five years, (2) Pointer had not held any part of the tract primarily for sale in the ordinary course of Pointer’s business nor had he held any other real property for that purpose in the year of sale, and (3) Pointer had not made any substantial improvements that substantially increased the value of the lots sold. The Commissioner of Internal Revenue (the commissioner) (defendant) disagreed with Pointer’s ability to qualify, particularly under the third component, as evidence indicated that utilities and a paved street had been added to the property at the expense of over $24,000 and that the overall value of the lots had essentially doubled over unimproved lots.