Rev. Rul. 76-247

Advice has been requested whether, under the circumstances described below and for the purpose of adding estimated costs of future improvements to the cost of lots sold, the provisions in a United States Department of Housing and Urban Development (HUD) Property Report are contractual obligations within the meaning of Mim. 4027, XII-1 C.B. 60 (1933). Mim. 4027 has been updated and restated in Rev. Proc. 75-25, 1975-1 C.B. 720, which supersedes Mim. 4027 with respect to requests filed after May 12, 1975. This ruling applies to requests filed under Mim. 4027 from April 28, 1969, and through November 30, 1973, the period covered by regulations of the Office of Interstate Land Sales Registration, Department of Housing and Urban Development, 24 C.F.R. Part 1710 (1970).

The taxpayer, corporation M, acquired approximately 4,000x acres of land for the purpose of subdivision and sale of building lots. Lots were sold in the tax year ending June 30, 1970, under contracts of sale that included a statement in which the purchaser acknowledged receipt of a copy of a HUD Property Report. The contracts of sale did not expressly impose upon the developer any obligation under the property report and did not incorporate the report into the terms and conditions of the contract. The property report specified improvements planned by the developer and stated an estimated completion schedule. The improvements included lakes, a club house, a golf course, athletic areas, play grounds, beaches, and campsites some of which were under construction and some of which were merely proposed or planned.

The land was registered with the Secretary of Housing and Urban Development and the HUD Property Report was prepared in accordance with the rules and regulations of the Office of Interstate Land Sales Registration, Department of Housing and Urban Development in effect at the time of registration. See 24 C.F.R. Part 1710 (1970), effective April 28, 1969.

Mim. 4027 provides, in part, that the estimated cost of future improvements that a developer is contractually obligated to make may be added to the cost or other basis of lots sold by the developer. The developer of the property is required to furnish an accurate description of the proposed improvements, detailed estimates of their cost, and definite evidence showing the developer is contractually obligated to make the improvements.

Section 1011 of the Internal Revenue Code of 1954 provides, in part, that the adjusted basis for determining the gain or loss from the sale or other disposition of property shall be the basis determined under section 1012, adjusted as provided in section 1016. Section 1016 provides for adjustments for expenditures properly chargeable to capital account. Section 1.1016-2 of the Income Tax Regulations sets forth the types of items properly chargeable to capital account such as the cost of improvements and betterments made to the property.

When the HUD Property Report was prepared item 9(b) of the report format asked:

If facilities are proposed or partly completed, state promised completion date, provisions to insure completion, and all estimated costs or assessments to buyer or lessee. 24 C.F.R. sec. 1710.110 (1970).

The developer was not required to state whether it was obligated to complete the improvements, but could state its intention to make improvements even if no obligation existed.

In Campbell v. Glacier Park Co., 381 F. Supp. 1243 (D. Idaho 1974), the court held that the Interstate Land Sales Full Disclosure Act, 15 U.S.C. sec. 1701 et seq. (1970) "does not purport to confer a right of action for the enforcement of covenants contained in a . . . property report except where such covenants were untrue or contained material omissions at the time of purchase."

The provisions of the HUD Property Report furnished by the developer were neither contractual obligations of the developer nor definite evidence of an obligation.

Accordingly, the requirements of Mim. 4027 that the developer be contractually obligated and submit definite evidence of the obligation are not satisfied by the submission of a HUD Property Report prepared under the regulations contained in 24 C.F.R. Part 1710 (1970). No opinion is expressed with respect to HUD Property Reports prepared under later regulations of the Department of Housing and Urban Development that became effective after November 30, 1973.