Tax News
Boree v. Comr: Tax Planning Left on the Back Burner, Sometimes it Comes to Bite You
May 15, 2014
I see this over and over. The reality is that to business people, particularly in M&A, tax is an afterthought. This is more so true for smaller investment funds and investors. Larger entities with more extensive experience, while dreading dealing with tax, at least know what’s at stake. In ordinary income v. capital gain differential situation with penalty exposure, a mishap easily would bite over 20-30% into your profitability. That’s a large percentage! This is what Mr. Boree is learning from experience right now. I am talking about the newest real estate case of Boree v. Comr. T.C. Memo. 2014-85 (May 12th, 2014). The issue is as old as the sun – developer v. investor in the real estate universe. If you are a developer, you get ordinary income when you sell your property. If you are an investor you get capital gains. This issue, as many other issues in taxation, boils down to a facts and circumstances analysis. In a facts and circumstances situation, it is extremely important to have records, and act, in a manner that reflects your overall intent. If your intent was to be an investor, do not represent yourself as a developer. Do not go and obtain plans and do not sell myriad of subdivided lots.

That’s one point. The other point is, that in this domain, there are of the shelf planning approaches that could accomplish the desired tax result (i.e. capital gains) without significant controversy. One such approach is a sale to a related entity. While the approach requires particular attention to the various cases and rulings, it does not require some esoteric knowledge or institutional biglaw know-how. I’d venture to say that any CPA that deals with real estate transactions could have educated Boree on related party sales, and with the help of a real estate attorney, structure the transaction in a way where Boree could have accomplished the desired result within the confines of the law. I don’t know every single fact in the case and why the taxpayer did not do any of this, but it seems to me that a consultation with a competent tax professional early on, could have solved Boree a lot of trouble. Maybe some people’s approach to tax is the ostrich approach. I would not be audited. If I do, I’ll think about it. Well, considering the audit rate in the US, this approach may sound good, but all that sound logic goes out of the window when the IRS knocks on the door.
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Tags: dealer v. investor, real estate fund and installment sale, real estate funds capital gains