LLC sells improved land

[Lion]

I have a headache and just can't get going on this one. LLC was gifted land worth $13,000 in a swamp by 90-something mom; LLC members are son and wife. 1065 sat dormant with just the $13,000 on the balance sheet as Land for a year or more. In 2004, LLC hired lawyers to deal with town to be able to sell land. Lawyers trafficked applications through the town multiple times and charged big bucks, as did the water experts, and the contractors that had to widen and strengthen a bridge before the town would let the LLC sell the property. $600,000 in expenses to make land saleable. Actually sold by year end for $980,000. How do I deal with this on the 1065? Is it no longer land (an asset), but inventory? Are we talking COGS and not 4797? The more I read the directions, the more confused I become and the more my head aches. Where do I start? Is it going to be ordinary income on the K and K-1? And, no longer investment income on Schedule D? Yes, I'll be doing the personal return, also! Thanks for any direction.

[JG EA]

NATP Report

NATP just had an article about an LLC taxed as a partnership that won the case over the IRS. The IRS wanted to count their land sales as ordinary income instead of capital gain. However, the reasons they won were very specific. If I remember correctly the reasons were: They formed the LLC for an investment vehicle to hold one large tract of land (over 1000 acres), they didn't advertise, they didn't do improvements within the legal entity of the LLC, the sales were infrequent.

It has been pointed out to me that in other cases, the key to not having such sales counted as ordinary income was the lack of improvements and lack of advertising. Just subdividing can make sales ordinary income unless the rules of sec.1237 are followed.

[Armando Beaujolais]

I have a headache and just can't get going on this one. LLC was gifted land worth $13,000 in a swamp by 90-something mom; LLC members are son and wife. 1065 sat dormant with just the $13,000 on the balance sheet as Land for a year or more. In 2004, LLC hired lawyers to deal with town to be able to sell land. Lawyers trafficked applications through the town multiple times and charged big bucks, as did the water experts, and the contractors that had to widen and strengthen a bridge before the town would let the LLC sell the property. $600,000 in expenses to make land saleable. Actually sold by year end for $980,000. How do I deal with this on the 1065? Is it no longer land (an asset), but inventory? Are we talking COGS and not 4797? The more I read the directions, the more confused I become and the more my head aches. Where do I start? Is it going to be ordinary income on the K and K-1? And, no longer investment income on Schedule D? Yes, I'll be doing the personal return, also! Thanks for any direction.

I'm confused with a $13,000 piece of land selling for $980,000 a couple years later. Capital improvements would affect value, but not administrative costs. It seems to me that the nature of the original gift is where you need to start, because that will affect basis inside and outside the partnership.

As far as the transaction, it sounds like investment property to me. Capital gain. Again, I'm wondering what else is going on here. Why did the mom gift the property to the LLC instead of directly to the kids?

[Lion]

Land

Unfortunately, the son did some things that make the LLC seem more like a business than just a holding place for an investment. He did subdivide the land into five lots. He even got a contractors's license to handle this transaction! And, the LLC is still open;although, will close after paying taxes, he assures me. And, of course, he did use an LLC with his wife (Form 1065) instead of receiving the land personally from mom.

Think a lawyer convinced him to put the land in an LLC and not hold it personally for liability reasons. Land had been mom's for years, and suspect the appraisal was not all that recent. However, we're talking Fairfield County, CT, so prices do skyrocket. There's not much undeveloped land left here, now. A two-acre building lot in my town next door to his goes for $385,000 this year; his town has minimum three-acre zoning. There's a sister who's abandoned the other family members, so maybe getting the land out of any of their individual names had more to do with the family feud than any business reason. Client is letting contractor's license lapse and is closing the LLC (it has no other activity). Major expense was repairing an existing bridge to current code before a sale was allowed by town -- with or without any improvements. 90-something, blind, diabetic mom couldn't sell land as is or deal with making it saleable. Son said he'd sell land and take care of mom (proceeds of land sale repaired mom's residence). Son never bought any land. Son will never again sell any land. I wish he'd come to me BEFORE he went into this venture, but I think his intent was to deal with mom's white elephant.

Just don't know if IRS will view it the way son does or say he was in business and earned ordinary income....

Thanks, everyone, for giving me all the views.

[jainen]

wrong form

I don't think he ran a business. He just sold family property. I would capitalize all the expenses including the bridge, permits, subdividing and everything else required by the county. Too bad about the 1065, I hope he didn't try to claim expenses as an ordinary loss. But the wrong form doesn't change the facts of the deal.

[Lion]

Land

Thanx, Jainen and Armando. No losses shown in prior years, just carrying asset at gifted value. How do I capitalize items (that client is just now getting around to listing for me) so they show up as long-term? Don't know why this is so hard for me. I think I'm seeing the picture, the flow; but am blocked when trying to put it on the 1065 and K-1 and 1040. Thanx for providing some direction to me.

[JON]

Some information confusing

First, I hope the gift was long before there was any idea what the land was worth. IRS loves the old "step transaction" if main reason was to move taxation to another. Why would the "bridge" ever be a landowner's expense??? Unless it is a private road or an assessment. Legal costs I do not count as a land improvement-the bridge is a strange thing, but I dout if there is any ownership in the bridge.

Additional costs not short term, but do not ask me Code Sec

[Lion]

Land, etc.

Thanx for your thoughts, Jon. The gift was a few years before the 2004 tax year (I did mom's gift tax return, so should have a copy around here somewhere). Mom owned (maybe she inherited it, don't know) land with an existing bridge in a wet area, several acres, probably became wet and less saleable after water company built a dam to flood a corner of the town to create a reservoir many years ago. So not worth much to mom. Lawyer worked up the paperwork for the gift and convinced the son to use an LLC to receive the gift and provided appraisal and charged son big bucks to form LLC. Wish he were doing the tax returns, too! Town wouldn't let LLC sell land without meeting current codes in wetlands, such as the bridge meeting new specifications. Took three tries through conservation commission and wetlands commission and planning and zoning and don't really know what all, just saw application fees and legal fees and water expert fees, etc. I think LLC subdivided into five lots, but client a bit blurry on whether or not mom's land was already separate building lots or not. (Think mom and maybe late husband may have subdivided, but not accepted by current boards and commissions.) So, how do I show the bridge repair, etc., as part of a long-term investment? Do I have to amend 2003? It won't change anyone's 2003 taxes. This guy has talked to me and faxed me and emailed me and had his lawyer contact so much that my head is too full to sort out all the information!