Bramblett transaction - subsequent sale

Investor Partnership (A) owned land, which it sold to an LLC which was intended to be a developer S Corp (B) (with similar ownership) as part of a Bramblett transaction. B was to develop the land and sell it as individual residential lots at which point it would use the lot proceeds to pay down the installment note to A.

Prior to the sale, A held the land more than a year and thus qualifies for long-term capital gain treatment recognized as installment payments are received. Crisp, clean, no caffeine.

Except 3 wrinkles have arisen:

1. The installment sale took place in 2022. The sale and note are documented and recorded, but I was not made aware of the sale, so we did not file a 6252 on A's Form 1065. No payments were received at that time or subsequently. If this were the only issue, we would just amend the returns to document the sale and call it good, but...

2. Because the preparer was unaware of the sale, no S Election was made for B in 2022, and Form 1065 was filed in 2022 and 2023. It was always the intention to make the S Election prior to the sale, so it can easily be claimed we intended to make the S Election and qualify for late filing under Rev Proc 2013-30. It will be a little odd to file an amended 1120S for a 1065 filing, but I assume that is possible without late filing penalties. It's a little tricker to say we filed a corporate return consistent with our intention to be treated as an S Corporation when we filed 2 partnership returns, but with the amended returns and based on our intent I think that is supportable, but....

3. B, which actually performed minimal development - testing and entitlements, no dirt turned yet - now intends to sell the raw, undeveloped land to an unrelated 3rd party in early 2025.

My questions are several:

1. Is there any reason to believe B is anything but an investor? This is the only property they owned, they did no extensive development at all, and they are now flipping it. Feels like an investment company to me.

2. And if an investment company is there any reason to make the S Election. Could we just amend the 1065s to show the 2022 installment sale? Does that impact A's LTCG on installment note status - even though it doesn't follow the procedures outlined in Bramblett (i.e. no corporate buyer)? I think so, as it was still the sale of an investment held more than a year and there is no development income by either company.

3. So if we just amend 1065s, we now have 2 layers of Long Term capital gains being reported on Form 6252 of both partnerships - A's sale to B & B's sale to 3rd party. B held the land longer than 2 years so I believe A can continue to defer the gain until payments are received from B. Those payments will be made as lots are sold and the 3rd party pays B for the land.

That last one isn't a question but here it is - Is there anything in these transactions as structured that would lead us to believe either A or B has income that would not be capital gain. And is there anything for A or B that would prohibit the deferral of gain via installment sale until payments are received?

I think it's pretty straightforward except for the development that never came to be, and the S Election that as never made, but I kind of think those 2 pivots actually offset and make this work pretty well.

But if I have supreme confidence in TPT, it's the ability to poke legitimate holes in my best laid plans, which is what I'm inviting. What am I missing?

I've got two immediate thoughts. You say A SOLD the land to an S Corp? He's 100% on both?

The other is about intent. All the case law circles around that....so if was intended to be developed...and the developer is same owner....smells like ordinary income to me.

Agreed with JR.
I thought these were blow up around 2010 (?).

To your #3, it's near impossible to say you intended to be an s-corp back two years ago when you've filed two partnership returns since then. Was officer compensation issued too? I would assume 'no'. This is not a fact pattern that I would say qualifies for relief under RP 213-30.

Good thoughts. A and B, each have multiple members with identical ownership at the time of the sale from A to B, and currently. 2 of the 3 partners in B are purchasing some of the 3rd partner's interest in B prior to the sale to the 3rd party... not that that makes any difference. I understand it's less than ideal to have the same ownership but I don't believe it prohibits the use of a Bramblett transaction.

As to intent, B was absolutely initially intended to be a developer. The name of the company is XXXXX Development LLC. But let me add a layer. It actually was not land that was sold from A to B to 3rd Party (C). It was a contract from the original, unrelated land owner (D). A was under contract to purchase the land from D. It was an assignable contract sold by A to B with the intent to purchase the land (From D) and develop it. Entitlement work was done by B to that affect, but it never purchased the land nor turned a shovel and it will have owned the contract for 3 years.

The plan is to move forward as though it was an investment property contract in their hands. I still think based on facts and circumstances that's a supportable position, though I think you make a good point about the risk of it being considered ordinary income based on the original intent. But B did nothing but treat it as though it were investment property, so it's a risk we're going to likely take, but I definitely appreciate you bringing up that potential concern.

Agreed with JR.
I thought these were blow up around 2010 (?).

To your #3, it's near impossible to say you intended to be an s-corp back two years ago when you've filed two partnership returns since then. Was officer compensation issued too? I would assume 'no'. This is not a fact pattern that I would say qualifies for relief under RP 213-30.

They are still alive and well:

https://www.bizjournals.com/houston/new ... estor.html

There's nothing clean about the fact pattern, but the fact is they really did intend B to be an S Corporation ahead of the sale. Still, I think the S Election issue is moot as we'd just as soon now be a partnership/investment company (which conveniently is how we've filed), assuming that doesn't cause issues with the character or recognition timing of the sale from A to B.

I should add if we were to attempt to make an S Election, there was no income and no distributions, so no need for reasonable comp.

An additional hiccup is we reported the entitlement work as inventory on the 1065s as filed for B. But I think we would fix that on the amended returns as well.

It's going to be completely transparent with the IRS - we have "development" in the company name, and we reported inventory on an 1125A, and now we are going to amend and call those investment costs... since that's what they actually turned out to be despite the original intent. So yes, there is a fair chance we'd lose if challenged by the IRS based on case law regarding intent as JR points out (which I've not fully reviewed), but based on the actual facts of the use of the land, which B will actually never own, I'd argue it's a supportable position.

assuming that doesn't cause issues with the character or recognition timing of the sale from A to B.

That's really my lingering question. I know there are issues with the other details that we need to work through, but I just want to be sure we're not accelerating A's recognition of gain on the assignment of the contact on installment when B sells to C 3 years later.

Is the land contract real property or personal property? Probably does not matter if it was personal property since it was a a "casual" sale. But I'd at least think about it.

There's been no election out of installment treatment so they should be good on that.

Is the land contract real property or personal property? Probably does not matter if it was personal proerty since it was a a "casual" sale. But I'd at least think about it.

There's been no election out of installment treatment so theyshoid be good on that.

It's a good question. Probably isn't real property right? I mean we don't plan to take the Idaho capital gain deduction because it's not real property. But agree it would be a casual sale as you mention.

I appreciate you confirming the installment sale status.

Given your fact pattern and multiple owners of each LLC, why bother with the S election/amendments? Seems like a lot of work to affect no change to anything.

Just re-read this. So the re-sale by B to 3rd party is a contingent sale. That has rules of its own, but I think makes no difference here.

So it is actually the contract that was sold, not the real estate. Here is a good article:
https://www.journalofaccountancy.com/is ... ssets.html

My sense is that you have a good handle on the issues and a reasonable basis to report the transactions as LTCG.

gatortaxguy, do you mean reasonable as in sec 6662? No higher level?

My sense is that you have a good handle on the issues and a reasonable basis to report the transactions as LTCG.

As the dumbest guy in the room, I'm taking that response as a badge of honor .

So it is actually the contract that was sold, not the real estate. Here is a good article:
https://www.journalofaccountancy.com/is ... ssets.html

That is an excellent find. Very much supports my position. Thank you so much.

Given your fact pattern and multiple owners of each LLC, why bother with the S election/amendments? Seems like a lot of work to affect no change to anything.

You're right. Though we did intend for them to be an S Corp, it was missed, but now with there being no value to the S Election for Bramblett reasons, we are not going to bother with making the election.

We are however going to amend the 1065s to memorialize the A to B sale of the contract back in 2022.

What would you do with the entitlement expenditures? With the intent to develop it was originally filed as inventory. I'm on the fence on leaving it as inventory and writing it off when it is deemed worthless when the contract is sold vs amending 2022/2023 to add it to the basis of the contract.

Or would I be better to leave it as inventory for 2022-2023 and then reclassify the expenditures on the 2024 returns as we now view the costs differently?

We are however going to amend the 1065s to memorialize the A to B sale of the contract back in 2022.

Can you amend? Isn't it a BBA partnership?

We are however going to amend the 1065s to memorialize the A to B sale of the contract back in 2022.

Can you amend? Isn't it a BBA partnership?

So I don't do a ton of partnership returns and was unaware of that designation, but yes we have not elected out of the centralized partnership audit regime, so it appears we need to file Form 8082 instead?

As there is no impact on income I'm tempted to not bother especially with the added complexity of that form, and just make the 6252 magically appear on the 2024 returns with corresponding adjustments to the balance sheet.

Is that crazy or it s this something that is easier to report on the 8082 than it appears?