Route 231, LLC v. Comm'r
| Decision Date | 24 February 2014 |
| Docket Number | T.C. Memo. 2014-30,Docket No. 13216-10. |
| Parties | ROUTE 231, LLC, JOHN D. CARR, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
William Lee S. Rowe, Timothy L. Jacobs, and Hilary B. Lefko, for petitioner.
Timothy B. Heavner, John M. Tkacik, Jr., Warren P. Simonsen, and Mary Ann Waters, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
On March 17, 2010, respondent issued two notices of final partnership administrative adjustment (FPAAs) to John D. Carr (petitioner),as tax matters partner of Route 231, LLC (Route 231), one regarding Route 231's tax year 2005 and the other regarding its tax year 2006. The FPAA for tax year 2005 proposed an adjustment to ordinary income of $3,816,000, among other things.1 The FPAA for tax year 2006 did not involve an adjustment to ordinary income. Petitioner filed a timely petition for readjustment under section 6226 regarding the FPAA for tax year 2005. No petition was filed regarding the FPAA for tax year 2006.
Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.
After concessions we must decide (1) whether Route 231 engaged in a disguised sale under section 707 and, if so, (2) whether the proceeds from the disguised sale were income to Route 231 for tax year 2005.
Some facts have been stipulated and are so found. At the time petitioner filed the petition, Route 231's principal place of business was in Virginia. Route231 treated itself as a partnership for Federal income tax purposes at all relevant times.
During 2005 and 2006 Virginia provided an income tax credit to encourage the preservation and sustainability of its unique natural resources, wildlife habitats, open spaces, and forested areas. For 2005 this Virginia tax credit was equal to 50% of the "fair market value" of any land or interest in land in Virginia donated to a public or private conservation agency eligible to hold such land and interests therein for conservation or preservation purposes. The credit was available to individuals and corporations for use on their Virginia income tax returns. A partner in a passthrough entity that held Virginia tax credits could use the credits on his or her own Virginia income tax returns either in proportion to his or her interest in the entity or as set forth in the partnership agreement. Any taxpayer holding Virginia tax credits could transfer or sell unused but otherwise allowable credits to another taxpayer for use on his or her Virginia income tax return. A Virginia tax credit, however, could be claimed by only one taxpayer on his or her Virginia income tax return.
The Virginia Department of Taxation (VDT) verified a taxpayer's right to claim Virginia tax credits on his or her Virginia income tax return by requiringthat the credits be registered, among other things. In order to register the Virginia tax credits, the donor of a conservation easement was required to submit a completed Form LPC, Virginia Land Preservation Tax Credit Notification, and supporting documentation to the VDT. Supporting documentation included (1) a full copy of the qualified appraisal for the donated property, (2) a copy of the recorded deed for charitable donation, and (3) an Internal Revenue Service (IRS) Form 8283, Noncash Charitable Contributions, executed by the donee of the donated property.
While not prescribed by Virginia statute or regulation, the VDT required procedurally that the Virginia taxpayer submit a Form LPC before he or she could use any allocated or transferred tax credits on a Virginia income tax return. Likewise, while not prescribed by Virginia statute or regulation, the VDT directed donors and credit holders to submit the Form LPC and supporting documentation within 90 days of the origination or transfer of the Virginia tax credits or at least 60 days before filing the annual Virginia income tax return claiming the credits.
Section IV, Transfer Information, of the Form LPC contained spaces for information relating to the transfer and the resulting transferee of all or any portion of the Virginia tax credits, including the name of the transferee and the date of the transfer. Section V, Declaration, Signature and Notarization, contained a space forthe signature of the credit holder and was to be signed and notarized under the penalties provided by law. Section VI, Credit Allocation Schedule, contained spaces for information about each person receiving a credit from a passthrough entity and for the amounts of the credits.
Once the VDT received the Form LPC and supporting documentation, it would review the submitted documents for compliance with applicable rules and procedures. If this preliminary review suggested compliance, the VDT would provide a tax credit acknowledgment letter. The credit acknowledgment letter included a "credit transaction number", the "effective year" for the tax credits--i.e., the first year for which they could be claimed--and the "expires tax year" for the tax credits--i.e., the last year for which they could be claimed. The credit acknowledgment letter stated: If a taxpayer wished to use his or her Virginia tax credits on a Virginia income tax return, the VDT required that the taxpayer provide a copy of the credit acknowledgment letter.
During the 2006 legislative session Virginia made several changes to the statutory provisions applicable to the Virginia tax credit. These changes applied only to conveyances of property made on or after January 1, 2007. On November30, 2007, the Virginia tax commissioner released a summary of the changes in the form of a ruling. The ruling explained that the VDT would "no longer simply acknowledg[e] the Credit as has been done in the past" but would have to "actually issue the Credit" for the Virginia tax credit to be valid.
In 2001 Raymond Humiston, a securities trader from Connecticut, moved his family to a farming community in Albemarle, Virginia. In the farming community there were two tracts of property named Castle Hill and Walnut Mountain. Castle Hill consists of 1,203 acres, including a historic manor home dating to 1764. Walnut Mountain consists of 345 acres.
Mr. Humiston met petitioner, a businessman, in 2005. Petitioner owns two farms and an apartment rental business, and he sits on the boards of several materials companies. Petitioner and Mr. Humiston decided to acquire Castle Hill and Walnut Mountain together.
In May 2005 Mr. Humiston and petitioner formed Route 231, a Virginia limited liability company. Petitioner and Mr. Humiston signed an initial operating agreement for Route 231, effective May 3, 2005, in which they agreed to eachmake an original capital contribution of $2 million.2 The initial operating agreement stated that petitioner and Mr. Humiston each owned a "percentage interest" equal to 50% in Route 231. The initial operating agreement further stated that the purpose of Route 231 was to "own, acquire, manage and operate" certain real property not described in the initial operating agreement.
In or around June 2005 Route 231 engaged Conservation Solutions to provide consulting services regarding Route 231's potential acquisition of Castle Hill and Walnut Mountain, the initial management of those properties, the division of those properties, and the placing of conservation easements on those properties. At all relevant times Melton McGuire was the principal and owner of Conservation Solutions. At a meeting on June 3, 2005, Mr. McGuire gave a presentation to Route 231 about placing a conservation easement on Castle Hill; the presentation discussed the tax benefits that could be derived from the easement.
On June 28, 2005, Route 231 purchased Castle Hill and Walnut Mountain for $24 million. Route 231 financed the purchase with a loan from BB&T Bank that was guaranteed personally by petitioner and Mr. Humiston. Walnut Mountainwas subdivided into 24 lots before Route 231 purchased it. On November 30, 2005, Route 231 sold 4 of the 24 lots to an individual for $2,200,000.
On December 9, 2005, Route 231 obtained an appraisal report valuing a conservation easement on Castle Hill (Castle Hill easement) at $8,849,240; a conservation easement on Walnut Mountain (Walnut Mountain easement) at $5,225,249; and a fee interest in Walnut Mountain subject to the Walnut Mountain easement (Walnut Mountain fee interest) at $2,072,880. Route 231 obtained the appraisal report in anticipation of making charitable contributions. The effective date of the appraisal report was December 2, 2005.
Effective December 30, 2005, Route 231 made three separate charitable contributions of property: (1) a deed of gift of the Castle Hill easement to the Nature Conservancy; (2) a deed of gift of the Walnut Mountain easement to the Albemarle County Public Recreational Facilities Authority; and (3) a deed of gift of the Walnut Mountain fee interest to the Nature Conservancy.
Virginia Conservation is a Virginia limited liability limited partnership that was interested in acquiring Virginia tax credits. Virginia Conservation acquired Virginia tax credits via partnership arrangements with landowners who placedconservation easements on property in Virginia. When dealing with other partnership arrangements with landowners, Virginia Conservation generally contributed $0.53 for each dollar of Virginia tax credits that the landowner partnerships would allocate to it. Once Virginia Conservation received these Virginia tax credits, it would allocate them to individual...
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