Mr. and Mrs. Boree had a real estate business in Florida in 2002. They bought 1,892 acres of vacant land, borrowing most of the money to make the purchase.
They did various development actions and requests for changes in zoning and subdivided the land from January 2003 through 2006. They got planning approval to divide the land into 10-acre parcels. They sold 15 parcels in 2003, sold 26 parcels in 2004, sold 8 parcels in 2005 and sold 4 more parcels in 2006. They got approval for higher density housing called a PUD (Planned Unit Development).
In January 2006, the county changed the requirement regarding roads in and to a subdivision. They required the roads be paved. Mr. Boree said that would cost an extra $4.4 million. Then he discovered the land next door was being developed by Adrian and sold Adrian the remaining 1,067 acres. Mr. Boree testified he segregated the interior land that was ultimately sold to Adrian. The lots that Mr. Boree sold were all on the perimeter and were sold to individuals.
The tax issue is whether the sale of the 1,067 acres was sale of an investment that qualified for the lower tax rate of long term capital gains. If the sale was by a business, then the higher tax rates for ordinary business income applied.
The Eleventh Circuit Court of Appeals said the actions by Mr. and Mrs. Borees in 2004 through the sale in 2007 indicated their true intent was to continue to develop the property. Since he did not just sit passively, he tried to get exceptions to the paving requirements for the entire parcel so the subdivision might continue. He was successful in establishing a new land use designation of “rural commercial.” In 2003, they created a homer owners association to maintain roads within the subdivision and had the right to elect at least one member of the board of directors.
The agreement to sell the 1,067 acres to Adrian was done in April 2006, but apparently the sale did not happen until 2007.
Mr. Boree argued they abandoned all intent to develop the property after the paving requirements were imposed in January 2006. However, the Court noted some individual lots were sold to individual purchasers in 2006.
After considering all the facts and circumstances, the Court found the sale to Adrian was a continuation of the business as a developer, the sales were ordinary in the course of that business and the higher income tax rates applied.
Did you hear? “The hardest thing in the world to understand is the Income Tax,” by Albert Einstein.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.
