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?