SWF Real Estate LLC v. Comm'r
| Decision Date | 02 April 2015 |
| Docket Number | T.C. Memo. 2015-63,Docket No. 11190-11. |
| Parties | SWF REAL ESTATE LLC, YELLOWFISH INVESTMENTS, INC. TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
William L.S. Rowe and Timothy L. Jacobs, for petitioner.
Asif L. Raginwala and Paul T. Butler, for respondent.
WELLS, Judge: Respondent issued a notice of final partnership administrative adjustment (FPAA) dated February 16, 2011, to Yellowfish Investments, Inc. (petitioner), as tax matters partner of SWF Real Estate, LLC (SWF), with respect to SWF's 2005 tax year. The FPAA proposed an increase inordinary income and a corresponding decrease in capital contributions of $1,677,413, as well as a decrease in noncash charitable contributions of $4,921,233. On May 13, 2011, petitioner filed a timely petition pursuant to section 62261 for readjustment of respondent's determinations in the FPAA.
After concessions, the issues that we must decide are (1) whether SWF engaged in a disguised sale under section 707;2 (2) if we decide that there was a disguised sale, whether the proceeds from the disguised sale were income to SWF during its 2005 tax year; and (3) whether SWF overstated the value of a conservation easement on Sherwood Farm and, therefore, the amount of the charitable contribution deduction allowed pursuant to section 170.3
Some of the facts and certain exhibits have been stipulated. The parties' stipulated facts are incorporated in this opinion by reference and are foundaccordingly. Additionally, we take judicial notice of Route 231, LLC v. Commissioner, T.C. Memo. 2014-30 appeal filed (4th Cir. Sept. 16, 2014), for some facts relating to the general background of the State tax credits relevant to the instant case.4
At the time of filing the petition, SWF's and petitioner's principal place of business was in Virginia.
SWF is a Virginia limited liability company that was formed on May 4, 2001. Petitioner, who is the tax matters partner of SWF, was incorporated in 2000 as a Delaware corporation and elected to be taxed as a subchapter S corporation effective September 30, 2000. At all times relevant to this case, John L. Lewis IV owned 100% of the shares of petitioner.
On May 21, 2001, petitioner purchased a 674.65-acre contiguous tract of land in Albemarle County, Virginia, known as "Sherwood Farm" for $3,450,000.During 2001, petitioner contributed Sherwood Farm to SWF in exchange for 100% of the membership interests in SWF. From the time of that contribution during 2001 until December 2005, petitioner owned 100% of the membership interests in SWF and disregarded SWF as an entity separate from petitioner for Federal tax purposes.
During 2005 and 2006, SWF was starting its farming business and cattle breeding operation. SWF filed a Schedule F, Profit or Loss From Farming, for 2006, reporting $43,288 in gross income and $408,268 in expenses from its farming activity.
SWF owns all of the property at Sherwood Farm, including Mr. Lewis' residence, the businesses, the tractors, and the farm equipment. SWF reported $6,889,400 in assets on its 2005 tax return and $7,434,935 in assets on its 2006 tax return.
Sherwood Farm is in Albemarle County, Virginia, along the north side of Secretarys Road (SR 708) and the west side of Blenheim Road (SR 727),5 an area10 miles south of Charlottesville and Interstate 64. Sherwood Farm is in the southeast quadrant of Albemarle County6 and in the Charlottesville metropolitan statistical area, which during 2005 was a desirable place for residential and commercial purposes.
Sherwood Farm had variable topography, ranging from open to gently rolling wooded land with negligible critical slopes. A small portion of Sherwood Farm lies within a 100-year flood zone along the banks of Murphy's Creek, but experts considered it to be generally excellent terrain for development purposes. Sherwood Farm is in the foothills of the Blue Ridge Mountains and offers views of forests, pastures, and mountains from various points on its property; some of the wooded land has little view amenity, but about two-thirds of the property is open with distant mountain views, rolling meadow views, and pond views.
Sherwood Farm had contained the following building improvements: an existing primary dwelling built in 1950 and renovated in 1979, a number of barns, sheds, an ice house, an old school, and two old tenant houses.
Sherwood Farm sits in the middle of a large block of protected lands;7 it is surrounded by low-density uses and abuts property protected by a conservation easement held by the Virginia Outdoors Foundation. Sherwood Farm is located among other larger farm and estate parcels and smaller residential tracts in a low-density area known as "Carters Bridge".8 Other estates in the Carters Bridge area include the Kluge Estate winery and vineyards, Albemarle House, Blenheim, Cedar Grove, Redlands, Lower Sherwood, Mill Cottage, Morven, Murcielago Farms, and Featheridge.
In addition to indirectly owning Sherwood Farm, Mr. Lewis owned a 65.9-acre property near Sherwood Farm.
Sherwood Farm was in the "R-A Rural Areas" zoning district and therefore was eligible for rural subdivision, one of the three types of subdivisions permitted for "R-A Rural Areas". Rural subdivision allowed property to be divided such that each lot or parcel would (1) have a minimum of 250 feet of frontage on an existing public road and (2) contain at least five acres of land.9 Moreover, pursuant to the "by right" division method,10 the then-current zoning ordinance in Albemarle County11 provided that each parcel of record could be divided into either development right lots, i.e., 5 or fewer lots between 2 acres and 21 acres in size per parcel, or excess lots, i.e., as many 21-plus acre lots as might be created.12
On the basis of its location in the "R-A Rural Areas" zoning district and using the "by right" division method, Sherwood Farm had theoretical development rights for 42 lots and was suitable for low-density residential development. However, development rights allocated by the Albemarle County Code represented only the theoretical maximum number of lots that Sherwood Farm might be divided into; rights might not have been usable if the lot did not contain an appropriate building site that met other requirements of the zoning ordinance. In reality, the actual lots might not have been developed on account of topography or floodplains,13 soil suitability for well and septic purposes, and required internal subdivision roads built to Virginia Department of Transportation standards. Moreover, although up to five single-family dwellings could have been established on each parcel of record, only one dwelling unit was permitted on each of the excess lots of 21-plus acres.
During December 2005, Roger Ray prepared a rural subdivision analysis and development plan for Sherwood Farm, focusing on "by right" development as allowed by the Albemarle County zoning and subdivision ordinances. Mr. Ray's subdivision analysis took into account a variety of factors, including (i) the size of Sherwood Farm, (ii) road access, (iii) topography, including the location of critical slopes and the 100-year floodplain, and (iv) Albemarle County's zoning and subdivision ordinances. The parties agree that Mr. Ray is an expert in rural subdivisions who has done over 800 subdivision analyses in Albemarle County, Virginia. On the basis of his subdivision analysis and the proposed development plan, Mr. Ray concluded that 38 lots could be developed on Sherwood Farm and that development did not require any waivers or exceptions under the applicable Albemarle County zoning and subdivision ordinances.
During 2005, although population grew around the Charlottesville area at nearly double the rate found in other areas of Virginia, Albemarle County's population growth was partially restrained by zoning measures designed to limit growth in the R-A Rural Areas. Combined with high demand, this circumstance caused property values in Albemarle County to increase rapidly. During 2005, there was pressure to develop land; many larger farms were being developed intosubdivisions. During December 2005, Sherwood Farm was in a rising market; real estate prices in the area were high and were continuing to increase.
In the years leading up to 2005, the rural character of Albemarle County was in a state of decline due, in part, to the encroachment of significant development in its rural areas. Both the Federal Government and the Commonwealth of Virginia recognized the importance of land conservation and preservation by providing tax incentives, and Albemarle County adopted programs such as the Acquisition of Conservation Easements program to curtail development and to promote conservation of the County's rural areas.
During 1999, the Virginia General Assembly enacted the Virginia Land Preservation Tax Credit Program to allow qualifying landowners to receive tax credits for use on their State income tax returns. For the 2005 and 2006 tax years Virginia provided an income tax credit to encourage the preservation and sustainability of Virginia's unique natural resources, wildlife habitats, open spaces, and forested resources (Virginia tax credits). The Virginia tax credits were equal to 50% of the fair market value of any land or interest in Virginia that was donated to a public or private conservation agency eligible to hold the donated land and/or interests for conservation or preservation purposes. An interest in landincluded a conservation easement if the easement complied with section 170(h); was conveyed for certain purposes such as agricultural, forestal, and open space purposes; and was an unconditional donation in perpetuity. Accordingly, a landowner who donated a qualified...
To continue reading
Request your trial