United States: Can Post-Acquisition Land Use Restrictions Change Ordinary Income To Capital Gain?

Last Updated: February 3 2017
Article by Elizabeth M. Fialkowski Stieff

In Boree v. Commissioner, 118 AFTR 2d 2016-5742 (11th Cir., Sep. 12, 2016), the Eleventh Circuit held that the county's adoption of subdivision regulatory requirements after taxpayers had purchased certain real property was insufficient to show that the taxpayers had changed their intent in holding the underlying property from development to investment; accordingly, the taxpayers' gain from the sale of the underlying property constituted ordinary income.

The taxpayers in Boree acquired vacant real property in November 2002 (the "Property"). Shortly thereafter, the taxpayers sold one small parcel of land. The taxpayers then submitted plans to the county to rezone the Property for residential development. The county approved the plans proposed by the taxpayers and rezoned the Property to allow 10-acre lots. After the rezoning in 2003, the taxpayers sold an additional 15 lots. From 2003 to 2004, the taxpayers created a homeowners' association for the Property and held themselves out as the developers of the Property, both in writing and in actions taken by the taxpayers such as obtaining the county's approval for the Property development plan, applying for permits, establishing easements for utilities, and constructing an unpaved road.

In 2005, the county adopted a new requirement that all subdivision roads be paved. At this time, the Property had a number of unpaved roads. Accordingly, the taxpayers requested an exception from the county's new requirement, due to the high cost of compliance for the taxpayers. The county denied this request. The taxpayer submitted another rezoning request to the county for a planned unit development that would increase the density at the Property to offset the costs of paving the roads. Although the county recommended approval of this plan, the taxpayers withdrew the proposal and instead sold all of the Property to another developer that owned an adjacent tract of land.

The taxpayers reported gain from the sale to the developer as long-term capital gain, although the taxpayers had reported ordinary losses from various other lot sales occurring between the time of acquisition and the developer sale in 2007. The taxpayers argued that their purpose and intent in holding the Property changed when the county adopted the new paved roads requirement.

Generally, any property held by the taxpayer is a capital asset unless the property satisfies one of the statutory exceptions. However, a sale of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business" produces ordinary income rather than capital gain. I.R.C. § 1221(a)(1). Courts also review the following factors to determine whether the property was held for sale in the ordinary course of business: (1) the nature and purpose for acquiring the property and the duration of the taxpayer's ownership of the property; (2) the taxpayer's efforts to sell the property; (3) the frequency, number and continuous nature of any sales (including the taxpayer's profit from any sales); (4) the taxpayer's actions in subdividing, developing and advertising the property in an effort to increase sales (including any improvements made by the taxpayer to prepare the property for sale); (5) whether the taxpayer used a business office for selling the property; (6) the taxpayer's level of supervising or control over any third-party agent used to sell the property; and (7) the taxpayer's time and effort devoted to selling the property. In similar cases, courts also have reviewed the taxpayer's income from the sale or sales as compared to the taxpayer's total income for the period, how the taxpayer reported the transactions on his or her tax returns and whether the taxpayer subsequently acquired adjacent land.

The Eleventh Circuit upheld the Tax Court's determination that the taxpayers held the Property primarily for sale in the ordinary course of business. The court first acknowledged that the taxpayers initially acquired the Property for sale in the ordinary course of business. Although the taxpayers contended that their intent changed due to the subdivision requirements, the court rejected this argument. First, the court noted that the subdivision requirements did not deprive the taxpayer of all potential income-producing uses of the Property; the requirements simply increased the costs of certain types of development activities. Second, and more importantly, even after the county adopted the subdivision requirements, the taxpayers continued to take actions designed to position the Property for subdivision and sale in the ordinary course of business, specifically by (A) seeking exceptions from the county; and (B) applying to rezone the Property for higher-density residential development.

The Boree case is of particular importance to real estate practitioners because few cases consider the implications of post-acquisition land use restrictions on the character of a taxpayer's gain from a subsequent sale of the property. As Boree shows, the existence of subdivision regulatory requirements adopted after the taxpayer acquired the property is insufficient to show that the taxpayer's intent in holding the property changed to that of an investor. In such a case, all of the facts must be reviewed to determine whether the taxpayer's intent actually changed, including the taxpayer's actions subsequent to the imposition of the subdivision requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Brown Smith Wallace
McDermott Will & Emery
Bradley Arant Boult Cummings LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Brown Smith Wallace
McDermott Will & Emery
Bradley Arant Boult Cummings LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions