BIR Ruling

October 9, 1970 MEMORANDUM FOR: The-Chief, Personnel Audit Division This refers to your letter dated August 20, 1970 requesting a ruling on whether the following shall form part of the taxable income of a corporation engaged in the subdivision business: cd "(a) balance of provision for estimated development, improvement, planning, supervision and selling costs at the end of the fiscal year; "(b) amount credited to trustees account of the firm relative to the improvement fund; "(c) accrual for the firm's improvement fund; "(d) reserve for road construction." You explained, in this connection, that items (a) to (d) adverted to in your inquiry actually constitute reserves or estimated future expenditures for the improvement and development of a particular subdivision in pursuance of a contract of sale entered into by and between the vendor-corporation and the vendees; that the said reserve or improvement fund is held in trust solely for the future development of the subdivision, e.g. road construction; and that disbursements for the aforesaid purpose are subject to periodical audit. Reserves for future development of subdivided lots do not form part of the taxable income of a taxpayer engaged in the subdivision business. On the contrary, the unexpended provisions and/or reserves for future developments of subdivided lots are allowed as deductions for income tax purposes, provided the following conditions are complied with, viz.: 1. There must be a specific provision in the contract of sale that the seller agrees to provide for certain specific improvements on the lots sold at his or its own expense, and 2. The obligation of the seller to provide for said improvements must be enforceable at law. In other words, should the owner or seller fail to comply with his obligation, the purchaser can compel him to put up the said improvements (Milton A. Mackay, 11 B.T.A. 569; Cambria Development Co., 34 B.T.A. 1155, cited in B.I.R. Ruling No. 65-121 dated November 2, 1965) Since the taxability or deductibility of reserves for estimated expenses involve a question of fact to be properly established, the provisions of the contract of sale entered into between the vendor and the vendees and the circumstances under which they were made should be considered. (B.I.R. Ruling No. 65-121, supra) In the light of the foregoing, this Office is of the opinion and so holds that as long as the above enumerated requirements are punctiliously complied with, the whole amount representing reserves or estimated future expenditures for contractual improvements or for the development of subdivided lots are deductible from the gross income of the vendor-corporation, and should be treated as part of the cost of the entire subdivision. (See B.I.R. Ruling No. 70-034 dated June 29, 1970) cdta CONDRADO P. DIAZ Acting Commissioner of Internal Revenue