In Uncategorized on 09/07/2016 at 17:04

I cannot, in a blog meant for family reading, repeat the old joke about those who forfeit the earnest money, contract deposit or downpayment (known to the trade as “the down”) in a real estate transaction and do not sue for its return.

Judge Laro has some discouraging words for the fortunate parties who get to keep a dropped down in CRI-Leslie, LLC, Donald W. Wallace, Tax Matters Partner, 147 T. C. 8, filed 9/7/16.

It was Florida in 2008, and CRI was selling a hotel for $39.2 million, with $9.7 down. That’s all you need to know.

So $9.7 million wound up with CRI, and they claimed capital gain, as the property as to which the down was dropped was a hotel and restaurant. Using Section 1234(a), CRI argues that, as the hotel and restaurant are clearly Section 1231 depreciable property used in a trade or business, and as such property gets capital gains on sale at a gain pursuant to Section 1231(b)(1), what’s the beef?

Well, says IRS, Section 1234(a) doesn’t apply to Section 1231 property. The relevant law is Section 1234A. Section 1234A certainly takes in capital assets (see Section 1221(a)), but Section 1221(a)(2) expressly excludes Section 1231 property.

Everyone agrees that if CRI had sold the property itself, that would have been taxed as a capital gain per Section 1231. So why different treatment to the dropped down? CRI claims that when 1234A was enacted, Congress was concerned that some transactions were taxed differently from others. So the statute may be ambiguous, but Congressional intent is not. All capital gains are the same.

IRS’ counter? “Capital asset” means capital asset. Plain meaning. Section 1221 defines capital asset, which excludes Section 1231 property, and, although gains on the sales of Section 1231 property are taxed as capital gains, Section 1231 property isn’t a capital asset.

Judge Laro: “Since section 1234A expressly refers to property that is ‘a capital asset in the hands of the taxpayer’ and no other type of property, and since property described in section 1231 is excluded explicitly from the definition of ‘capital asset’ in section 1221, we must conclude that the plain meaning of ‘capital asset’ as used in section 1234A does not extend to section 1231 property.  We therefore are not convinced by petitioner’s argument that the statute is inherently ambiguous.” 147 T. C. 8, at pp. 16-17.

Now I guess you’re expecting a reference to Pilgrim’s Pride, more particularly as bounded and described in my blogpost “Just Walk Away? – Part Deux,” 3/10/14, as amended.

Judge Laro canvasses the Pilgrims, as well as a bunch of other cases, but finds nothing to change the result.

“Although in Pilgrim’s Pride we dealt with an issue different from that with which we deal here, our analysis of the statute’s purpose remains unchanged:  Congress originally enacted section 1234A to combat ‘straddles and other transactions exploited by tax shelter promoters’ and in 1997 extended the statute’s application “to all types of property that are (or on acquisition would be) capital assets in the hands of the taxpayer.” The Court of Appeals for the Fifth Circuit reversed our ultimate decision in Pilgrim’s Pride and held that section 1234A applies to the abandonment of rights or obligations with respect to capital assets but not to the abandonment of the assets themselves.  However, the Court of Appeals did not dispute our interpretation of the legislative purpose underlying the enactment of section 1234A.  The Court of Appeals further reiterated the understanding, underlying the entire body of section 1234A jurisprudence, that ‘[b]y its plain terms, § 1234A(1) applies to the termination of rights or obligations with respect to capital assets (e.g. derivative or contractual rights to buy or sell capital assets).’”  147 T. C. 8, at p. 21. (Citations omitted).


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