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Assignment of Reimbursables

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ad1940

Junior Member
I’m own 99% of an LLC that owns 100 acres of raw land outside of Houston. I want to sell the property to another LLC for cash, plus I want them to agree to assign to me any future revenue that might come the from reimbursement of utility infrastructure (i.e. MUD reimbursables).

Assuming the sale qualifies for LTCG treatment, will the future reimbursables also be treated as LTCG?

Don’t mind paying for an advise (i.e. we’re looking for a tax advisor), just want someone who really knows the answer.
 


abezon

Senior Member
So, you put in utility services & added the costs to basis? Or did you expense them? If you added them to basis, the $$ would likely be long term capital gain (basis = $0). If you expensed the costs against you ordinary income (which would have been incorrect), the refund would likely be ordinary income.

Definitely get an opinion letter if this is a significant amount of money. On the other hand, if ordinary income v. LTCG classification only changes the bottom line by $500, the cost of an opinion letter may not be justified.

Do you have a Prepaid Legal membership? I know they used to do an hour of free research on any topic as part of your member benefits. The monthly fee (less than $30) is a business expense.
 

ad1940

Junior Member
So, you put in utility services & added the costs to basis?
There are no utilities to the property and I've done no development on the property. My contract just says that if the buyer does put utilities in, then I will be assigned any future reimbursable that might come from that.

Thx for your reply.
 

tranquility

Senior Member
I didn't want to respond in the first place as there are just too many facts missing to make and determination and it is likely original documents would need to be reviewed in order to have a good sense of what needs to be done. (A letter ruling may be needed if the money is big. This is clearly going to be a very fact-sensitive issue.)

However, off the top of my head (Don't rely on it, just take it to your tax guy and have him see if it fits.), I'd say this is a contingent payment sale to some degree. That is, it is an installment sale where the total price is not determinable by the close of the tax year in which the sale occurs. There may be issues if the majority of the payment comes up front and little or no comes later. You might look to the Temporary Regulations at 15A.453-1.
 

ad1940

Junior Member
Thx. We were planning on booking it as an installment sale. I'll look furhter into the regs you mentioned.

Do you think an opinion letter would have any real value if we were ever challenged?
 

tranquility

Senior Member
I think both abezon and I metioned letter ruling. An expensive process where the IRS makes a determination based on the specific facts. While you can challenge one in court, that is the way the IRS will hold.

An opinion letter can help you in the removal of penalties. On something like this, it can be expensive as well. It is from a tax professional and you use it to reasonably rely upon. It will not help you with interest or the tax itself. If the sale is big, because of the time line it will be open to audit (When would the sale be complete?) I'd get one even though it would cost thousands.
 

ad1940

Junior Member
The sale could take 4-5 years to complete (i.e. completion of the reimbursement installments). Obviously, we think there's a good chance that the property will be developed and utilities will put in place by the buyer, but then the tax base has to be established before bonds are issued and the actual reimbursement happens.

I just can't see the value of an opinion letter. I'd be happy to pay someone to cite relevant cases, but opinion letters seem like a bad deal all the way around. Aren't law firms are unwilling to put their name to them (understandably), and the IRS doesn't give much regard to them (seems to me they're going to make an independent evaluation no matter what).

How do I find someone who really knows this stuff? How do I know if they know?

Thx again for all the ideas.
 

tranquility

Senior Member
Since you can't reasonably rely on a bunch of cited cases, what does that get you? Only the format of an opinion letter is something you can rely on for the removal of penalties.

Both Law firms and CPA's can do an opinion letter, but they are not easy and are expensive. Do you know any CPA's or attorney's who like to make a lot of money? That's where you will find one who will do it.

How do you find any professional? Same way here.
 

ad1940

Junior Member
Sure anyone can start at point zero and investigate cases, but how do I find someone who already knows the answer?
 

LdiJ

Senior Member
Sure anyone can start at point zero and investigate cases, but how do I find someone who already knows the answer?
You aren't likely to find someone who already knows the answer, because the situation is fairly unique. Its something that is likely to require research.

However, the most likely professional to know the answer, is a tax attorney that specializes in real estate transactions, in your local area.
 

tranquility

Senior Member
I agree. No one will "know" the answer. Some with a great deal of education and experience in this particular field (not just real estate, but real estate development) may have a good sense of the issues, but would need to develop the facts before coming up with what they *think* is the answer. Even then, they would need to go through the process of creation of the opinion letter to give you an argument to avoid penalties if they are wrong. The only way to get an "answer" is to obtain a letter ruling from the IRS. Even then, that's not an answer, but their answer--challengable in court. In complex fact scenarios the answer only comes after a court decides and all appeals have ended.

Here, we don't even have enough facts to determine for sure if you will get capital gains treatment for any portion. If the LLC has made such sales before or has subdivided the land or has done any one of a number of things, it could be a dealer and the sale treated as ordinary income.
 

ad1940

Junior Member
Good points. We have a good CPA and he's done some good research. It's so darn hard to get a good feeling about how somehting like this would be decided. It all seems so gray.

Take the dealer property point you raised, I think we're in the clear, but I'm a member of several real estate LLCs, some of them have done development. I know this doesn't mean that I a dealer on this one, but this whole issue of "intent" makes it all look very loosy-goosy.

What I was really wondering is if anyone sees any immediate 'red flags' from booking the future receivables as LTCG... and it doesn't sound like anyone has flagged this.
 

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