United States Tax Court

T.C. Memo. 2023-82

GLADE CREEK PARTNERS, LLC, SEQUATCHIE HOLDINGS, LLC, 

TAX MATTERS PARTNER,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent1

—————

Docket No. 22272-17. Filed June 29, 2023.

—————

Gregory P. Rhodes, David Mace Wooldridge, Michelle A. Levin, Sidney 

W. Jackson IV, and Ronald A. Levitt, for petitioner.

William Benjamin McClendon, Norah E. Bringer, Amber B. Martin, and 

Blake J. Corry, for respondent.

SUPPLEMENTAL MEMORANDUM OPINION

GOEKE, Judge: In 2012 Glade Creek Partners, LLC (Glade

Creek), donated a conservation easement on undeveloped real estate

that was part of a failed residential development and claimed a $17.5 

million charitable contribution deduction (easement deduction). We 

disallowed the easement deduction in its entirety on the basis that the 

easement’s conservation purposes were not protected in perpetuity 

under section 170(h)(5)2 as that requirement is defined in Treasury 

1 This Opinion supplements our previously filed opinion Glade Creek Partners, 

LLC v. Commissioner, T.C. Memo. 2020-148, aff’d in part, vacated in part and 

remanded, No. 21-11251, 2022 WL 3582113 (11th Cir. Aug. 22, 2022).

2 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are 

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, 

Served 06/29/23
2

[*2] Regulation § 1.170A-14(g)(6)(ii) (proceeds regulation), which directs

the allocation of any possible future proceeds from a judicial 

extinguishment of the easement. Glade Creek, T.C. Memo. 2020-148.

We upheld the procedural and substantive validity of the 

proceeds regulation in Oakbrook Land Holdings, LLC v. Commissioner, 

154 T.C. 180, 181 (2020), aff’d, 28 F.4th 700 (6th Cir. 2022). However, 

the Court of Appeals for the Eleventh Circuit held that the proceeds 

regulation is invalid. See Hewitt v. Commissioner, 21 F.4th 1336, 1339 

(11th Cir. 2021), rev’g and remanding T.C. Memo. 2020-89. Accordingly,

the Eleventh Circuit remanded this case for us to address respondent’s

alternative arguments for disallowing the easement deduction without 

reliance on the proceeds regulation. Glade Creek Partner, LLC v. 

Commissioner, 2022 WL 3582113, at *3. The Eleventh Circuit affirmed 

our determination of the easement’s fair market value as $8,877,771.

On remand respondent concedes that Glade Creek is entitled to 

an easement deduction. The sole issue before the Court is whether Glade 

Creek is entitled to deduct the fair market value of the easement or 

whether the amount of the easement deduction is limited to Glade 

Creek’s adjusted basis in the property on which the easement was 

granted.3 This issue turns on whether the property was inventory or 

investment property in the hands of the partner that contributed the 

property to Glade Creek. We hold that the easement property was 

inventory and the deduction is limited to Glade Creek’s basis. 

Background

We incorporate our findings in Glade Creek and summarize the 

relevant background for purposes of this Opinion. Glade Creek is a 

Georgia limited liability company (LLC) that elected partnership status 

for federal tax purposes. When its Petition was timely filed by 

Sequatchie Holdings, LLC (Sequatchie), Glade Creek’s tax matters 

partner, its principal place of business was in Georgia.

In January 2006 International Land Consultants, Inc. (ILC),

purchased nearly 2,000 acres of undeveloped land in Tennessee (ILC 

property) for over $9 million to develop into a residential vacation 

and Rule references are to the Tax Court Rules of Practice and Procedure, in effect at 

all relevant times. Some dollar amounts are rounded.

3 Respondent advanced this argument in his posttrial briefs, and petitioner had 

an opportunity to respond in its briefs.
3

[*3] community.4 ILC planned to develop and market the property in 

three phases. The first phase was tract I, a 677-acre parcel with 415 lots, 

with subsequent phases for tracts II and III, noncontiguous parcels of 

630.4 and 685.5 acres, respectively, connected by tract I, with an 

additional 391 lots. ILC planned to use the cashflow from phase I sales 

to fund development on phases II and III. All but three acres of tracts II 

and III are the subject of the conservation easement (easement 

property).

Shortly after the purchase, ILC engaged a licensed engineer to 

design a concept plan as a master-planned community with lots platted 

for all three tracts. The concept plan was completed in April 2006. By 

agreement dated July 24, 2006, ILC placed restrictive covenants on the 

ILC property. Sometime in 2006 it began to make infrastructure 

improvements that would support development of all three tracts. It

completed soil and water absorption testing on all three tracts and 

obtained permits and approvals for development on all three tracts. The

Tennessee Department of Environment and Conservation (TDEC)

approved the concept plan for the master-planned community on the 

three tracts. ILC entered into a 25-year contract to supply water for

development on all three tracts and constructed a hydraulic pump 

station and larger water mains to service the pump station with the 

capacity to transport water to all three tracts. It also installed electrical

infrastructure that can support service of electricity to homes on all 

three tracts. However, it installed electrical lines, water lines, and roads 

only within tract I, stopping at the borders of the easement property.

ILC spent approximately $6 million on the infrastructure and approval 

process and had “successfully completed numerous steps toward the 

development of all three tracts.” Glade Creek, T.C. Memo. 2020-148, 

at *39. ILC planned to use the cashflow from sales on tract I to pay for 

additional infrastructure work on tracts II and III and record and sell 

the subdivided lots after the lots on tract I sold out.

Before purchasing the ILC property, ILC had engaged James 

Vincent, a local businessman and real estate investor and developer, to 

evaluate the property for its development potential as a vacation 

community and to assist with the permits, government approvals, and 

infrastructure. Mr. Vincent did not have an ownership interest in ILC 

and was to be compensated through a profit-sharing arrangement. Mr. 

4 Approximately 4 acres of the 1,997-acre ILC property were not part of the 

planned development. Acreage amounts are rounded.
4

[*4] Vincent also worked to obtain financing for the infrastructure 

construction and personally guaranteed infrastructure loans.

In March 2007 ILC recorded the lots in tract I and began sales 

efforts. It did not record the platted lots for tracts II and III. Mr. Vincent 

believed that recording the lots could increase property tax on the 

easement property. ILC had some initial sales success, selling 

approximately 30% of the tract I lots in less than two years. Sales slowed

significantly by 2009 because of the 2008 economic recession and a 

depressed real estate market. Also, sometime in 2009 ILC stopped

marketing the vacation community because of a lack of funds, and it sold 

nine lots in 2009. Sometime in late 2009 or early 2010 one of ILC’s three

owners walked away from the project, placing an increased financial 

burden on the remaining two ILC owners, James Tague and Rocco 

Toscano, and Mr. Vincent, to make payments on ILC’s seller-financed 

mortgage for the ILC property and the infrastructure loans. 

In April 2010, facing pressure from the bank that had funded the 

infrastructure loans, Mr. Tague, Mr. Toscano, and Mr. Vincent 

organized Hawks Bluff Investment Group, Inc. (Hawks Bluff), an 

S corporation, as equal shareholders. On April 20, 2010, ILC transferred 

the unsold lots of tract I and the easement property to Hawks Bluff by 

warranty deed in exchange for the assumption of ILC’s debt.

Accordingly, Mr. Vincent acquired an ownership interest in the ILC 

property. Mr. Vincent and Mr. Tague had invested vast sums of money

in the infrastructure, and the land transfer to Hawks Bluff gave them a 

controlling interest in the land. The land transfer was done to help

reassure the bank that financed the infrastructure loans. 

Initially, the three men equally made monthly payments on the

debt assumed by Hawks Bluff. Unfortunately, financial difficulties 

continued, and Mr. Toscano walked away and surrendered his interest

in Hawks Bluff. Mr. Vincent and Mr. Tague released him from liability

and assumed his share of the debt payments. But they struggled to make 

debt payments. In April 2011 Hawks Bluff owed approximately $5.2

million on the seller-financed mortgage. Mr. Vincent and Mr. Tague

transferred real estate not connected with ILC’s development as a $2.1 

million payment on the mortgage, and the seller agreed to reduce the 

remaining unpaid mortgage by $1.3 million. After the mortgage 

modification, Hawks Bluff owed approximately $1.8 million on the

mortgage and had total debt of approximately $3.3 million. 
5

[*5] Financial pressures continued. Hawks Bluff sold only a couple of 

lots during 2010 and 2011, and no lots in 2012. Mr. Tague stopped

making debt payments although he remained a shareholder of Hawks 

Bluff. Mr. Vincent knew that he would not be able to make the debt 

payments himself for an extended time. He did not have the money or 

desire to develop the easement property himself. He searched for a 

solution for the debt. He considered having the timber on the land

harvested or selling part of the property to other developers but believed 

that both options would negatively affect residential development of

tract I. After considering other options, in August 2012 he decided to 

pursue a syndicated conservation easement transaction to pay off part 

of Hawks Bluff’s debt. He believed that the other options might be more 

lucrative but chose the conservation easement because it would protect 

the natural beauty of the land in a manner consistent with the original

vision for a master-planned community and would protect the future 

development of the unsold lots on tract I, which Hawks Bluff retained 

and continued to market as a residential development after the 

easement transaction. Mr. Tague agreed to participate in the easement 

transaction.

Mr. Vincent sought assistance from Matthew Campbell about 

donating the easement. The easement transaction was designed to occur 

through two newly organized entities, one to hold the easement 

property, Glade Creek, and the second, Sequatchie, to promote the 

easement transaction to investors. Under the plan devised by Mr.

Campbell, Hawks Bluff would contribute the easement property to 

Glade Creek in exchange for a 98% membership interest, and after 

raising money through a private placement, Sequatchie would purchase 

a 90% to 95% interest in Glade Creek and then, as a controlling member, 

would vote to grant the easement.

Glade Creek was organized and was owned 98% by Hawks Bluff 

and 1% each by Mr. Tague and Mr. Vincent.5 On September 3, 2012, the 

members of Glade Creek entered into an operating agreement. On 

September 18, 2012, Hawks Bluff transferred the easement property to

Glade Creek by quitclaim deed subject to a $1.8 million mortgage in 

exchange for a 98% membership interest. Glade Creek had a $3,861,316 

carryover basis in the property. Hawks Bluff decreased the value of its 

inventory by $2,959,815 to account for the transfer. Glade Creek’s 

operating agreement states that Hawks Bluff contributed property in 

5 The parties stipulated that the Georgia secretary of state records provide 

August 3, 2012, as the date of organization.
6

[*6] exchange for its LLC interest and defines the property as 

“unimproved real estate.” The operating agreement does not include any 

terms that address the character of the real estate as inventory or 

investment property or the parties’ reporting of the character for tax 

purposes. Hawks Bluff retained the lots on tract I and continued to sell 

them with some success. In 2015 it sold 24 lots.

On August 12, 2012, Sequatchie was organized. Evrgreen Capital 

Administration, LLC (Evrgreen), was its managing member. Mr. 

Campbell is Evrgreen’s founder and became Glade Creek’s manager as 

part of the easement transaction. Mr. Campbell engaged the 

professionals necessary to complete the easement transaction including 

tax attorney Tim Pollock. Mr. Pollock discussed the significance of 

having the easement property classified as inventory or dealer property 

for purposes of section 170(e) at a meeting that Mr. Vincent attended.

Sequatchie entered into a share purchase agreement with Hawks 

Bluff, Mr. Vincent, and Mr. Tague to purchase a minimum membership 

interest of 90% and a maximum membership interest of 95% in Glade 

Creek. Sequatchie had a private placement memorandum (PPM) 

prepared to market its membership interests to raise money for it to 

purchase interests in Glade Creek. The PPM described the tax 

consequences of a conservation easement transaction at length and 

included a discussion relating to whether the easement deduction would 

be limited to Glade Creek’s adjusted basis in the easement property 

pursuant to section 170(e)(1)(A). It stated that Evrgreen believed that 

the easement property constituted a capital asset in Glade Creek’s 

hands and therefore an easement deduction would equal the easement’s 

fair market value. It stated that Sequatchie believed that the property 

had not been associated with any development or dealer activities and

that to Evrgreen’s knowledge neither Glade Creek nor Hawks Bluff had

sold any part of the easement property or undertaken marketing or 

development activities. It also stated that Evrgreen did not believe that 

the property could be characterized as property held primarily for sale

to customers in the ordinary course of a trade or business or ordinary 

income property in Glade Creek’s hands and did not anticipate that the 

easement deduction would be limited to Glade Creek’s adjusted basis in

the easement property.

On November 29, 2012, Sequatchie acquired a 91% membership 

interest in Glade Creek for $3.2 million and then voted to grant the 

conservation easement. By deed dated December 29, 2012 (easement 

date), Glade Creek granted the easement. Hawks Bluff’s sale of a 91% 
7

[*7] membership interest terminated Glade Creek’s taxable year under 

section 708(b)(1). See § 708(b)(1)(B) (providing for technical termination 

of a partnership upon a change in ownership of more than a 50% interest 

within a 12-month period); Treas. Reg. § 1.708-1(b)(2). 

Glade Creek filed partnership returns for the short tax periods 

September 3 to November 29, 2012 (first short-year return), and 

November 30 to December 31, 2012 (second short-year return). See 

Treas. Reg. § 1.708-1(d)(2)(i) (providing that partnerships must file a tax 

return for the taxable year beginning on the day after the date of a 

technical termination). It claimed the easement deduction on the second 

short-year return. The returns were prepared by Habif, Arogeti, &

Wynne, LLP. They reported that Glade Creek was organized on 

September 3, 2012, the date of its operating agreement and did not 

report that Glade Creek held inventory. Mr. Vincent was listed as Glade 

Creek’s tax matters partner on the first short-year return.

Hawks Bluff’s 2012 S corporation return was prepared by 

Sanders Associates, Inc. Hawks Bluff reported that it was a real estate 

dealer and reported the easement property as inventory. It decreased 

the value of its inventory by approximately $3 million to account for the 

transfer of the easement property to Glade Creek. It attached Form 

4797, Sales of Business Property, to its 2012 return, on which it reported 

a transaction described as “Sale to Glade Creek.” It reported that it 

acquired the asset on September 3, 2012, and sold it on November 30, 

2012. It reported a gross sale price of approximately $1.4 million and an 

ordinary loss on the sale of $194,262.

Petitioner’s expert witness Richard Norton testified that the 

highest and best use of the unencumbered easement property was 

residential development. Mr. Norton opined that the property had 

excellent development potential, citing the existing approvals and 

infrastructure from ILC’s development project. He prepared a concept 

plan as part of his expert report for a hypothetical vacation community, 

which according to petitioner “largely mirrored” and “was not materially

different” from ILC’s concept plan. Petitioner’s expert Claud Clark III

determined that the fair market value of the unencumbered easement

property was $17,314,049 on the basis of Mr. Norton’s development 

concept and determined that the easement had a fair market value of 

$16,425,000, slightly less than the $17,504,000 easement deduction that 

Glade Creek claimed on its return. Respondent’s expert, Ben Broome, 

opined that the highest and best use of the unencumbered easement 

property was rural residential, agricultural, and recreational use and
8

[*8] valued the unencumbered easement property at $1,580,000 for such 

use. Mr. Broome opined that a residential development was not 

economically feasible on the easement property. Mr. Broome valued the 

easement at $1,103,600. 

Relying on petitioner’s experts, we found that residential 

development on the easement property was economically feasible on the 

easement date and was the highest and best use of the easement 

property. Glade Creek, T.C. Memo. 2020-148, at *34. We found that on 

the easement date the unencumbered easement property had a fair 

market value of $9,354,171 and that the easement had a fair market 

value of $8,877,771. Id. at *53, *55.

Discussion

Section 170(a)(1) allows taxpayers to deduct charitable

contributions made within the taxable year. For contributions of 

property other than money, the deduction is generally equal to the 

property’s fair market value at the time of the contribution. Treas. Reg. 

§ 1.170A-1(c)(1). However, the amount of any charitable contribution 

deduction must be reduced by “the amount of gain which would not have 

been long-term capital gain . . . if the property contributed had been sold 

by the taxpayer at its fair market value.” § 170(e)(1)(A). If a sale of 

donated property would have generated ordinary income or short-term 

capital gain, the amount of the deduction is reduced by the amount of 

the ordinary income or short-term capital gain. Thus, in such a case, the 

deduction is limited to the taxpayer’s adjusted basis in the property.

Section 724(b) provides that if a partner contributes property to a 

partnership that is an “inventory item” in the partner’s hands 

immediately before the contribution, any gain or loss recognized by the 

partnership on the disposition of the property during the five years

beginning on the date the property was contributed to the partnership

is treated as ordinary income or loss. This provision was enacted to 

prevent conversion of a partner’s ordinary income property into capital 

gain property by contributing it to a partnership that has a different 

purpose for owning the property. See Jones v. Commissioner, 560 F.3d 

1196, 1199 (10th Cir. 2009), aff’g 129 T.C. 146 (2007); Strasburg v. 

Commissioner, T.C. Memo. 2000-94. If the easement property was 

inventory in Hawks Bluff’s hands, section 724(b) would require Glade 

Creek to carry over Hawks Bluff’s characterization of the easement 

property for five years after the contribution, and the easement

deduction would be limited to Glade Creek’s adjusted basis in the 
9

[*9] easement property under section 170(e)(1)(A). Accordingly, we 

must determine the character of the easement property in Hawks Bluff’s 

hands. 

Respondent argues that the easement property was inventory in 

Hawks Bluff’s hands immediately before it contributed the property to 

Glade Creek. He argues that under section 724(b) the amount of the 

easement deduction is limited to the part of Glade Creek’s adjusted basis 

in the easement property that is allocable to the easement determined 

by the ratio of the fair market value of the easement over the fair market 

value of the unencumbered easement property ($8,877,771/$9,354,171) 

multiplied by Glade Creek’s adjusted basis in the easement property 

($3,861,316), for a deduction of $3,664,622.6 See Treas. Reg. § 1.170A14(h)(3)(iii). 

Petitioner argues that the easement property was investment 

property in Hawks Bluff’s hands, and, accordingly, Glade Creek is 

entitled to an easement deduction equal to the easement’s fair market 

value. It argues that ILC’s activities are relevant to determine the 

character of the easement property, ILC acquired and held all three 

tracts as investment property, and only tract I converted to inventory. 

Alternatively, assuming that we find that ILC initially acquired the 

easement property as inventory, it argues that it converted to 

investment property in 2009 when ILC abandoned its intent to develop 

the ILC property on account of the recession and a lack of funding. It 

further argues that Hawks Bluff was organized to hold the easement

property as investment property and held it as such.

I. Definition of Inventory Item

The term “inventory item” for purposes of section 724(b) is defined 

in section 751(d) by reference to the definition of a capital asset in 

section 1221(a)(1). A capital asset is defined as “property held by the 

taxpayer (whether or not connected with his trade or business), but does 

not include . . . stock in trade of the taxpayer or other property of a kind 

which would properly be included in the inventory of the taxpayer . . . or 

property held by the taxpayer primarily for sale to customers in the 

ordinary course of his trade or business.” § 1221(a)(1). An inventory item 

is property held primarily for sale to customers in a trade or business.

It is the property that is specifically excluded from the definition of a 

6 Respondent has not argued that petitioner is liable for an increased penalty 

for the part of the claimed deduction in excess of Glade Creek’s adjusted basis.
10

[*10] capital asset in section 1221(a)(1). We interpret exclusions 

broadly. Capital gain treatment “is an exception from the normal tax 

requirements of the Internal Revenue Code, [and] the definition of a 

capital asset must be narrowly applied and its exclusions interpreted 

broadly.” Boree v. Commissioner, 837 F.3d 1093, 1100 (11th Cir. 2016)

(quoting Corn Prods. Refin. Co. v. Commissioner, 350 U.S. 46, 52 (1955)), 

aff’g in part, rev’g in part T.C. Memo. 2014-85.

Whether income derived from the sale of property is subject to tax 

as ordinary income or capital gain is a legal conclusion. Boree v. 

Commissioner, 837 F.3d at 1100. Whether the taxpayer held property 

primarily for sale to customers in the ordinary course of its business or 

held it as an investment is a question of fact. Id.; Pritchett v. 

Commissioner, 63 T.C. 149, 162 (1974). The Eleventh Circuit has stated 

that the latter question involves three separate inquiries: (1) whether 

the taxpayer was engaged in a trade or business, and if so, what 

business; (2) whether the taxpayer was holding the property primarily 

for sale in that business; and (3) whether the sales contemplated by the 

taxpayer were “ordinary” in the course of that business. Sanders v. 

United States, 740 F.2d 886, 888‒89 (11th Cir. 1984) (citing Suburban 

Realty Co. v. United States, 615 F.2d 171, 178 (5th Cir. 1980)).7

The Eleventh Circuit, to which this case is appealable, has 

identified the following factors as relevant to answer the three inquiries: 

(1) the nature and purpose of the acquisition of the property and the 

duration of the ownership; (2) the extent and nature of the taxpayer’s 

efforts to sell the property; (3) the number, extent, continuity, and 

substantiality of the sales; (4) the extent of subdividing, developing, and 

advertising to increase sales; (5) the use of a business office for the sale 

of the property; (6) the character and degree of supervision or control 

exercised by the taxpayer over any representative selling the property; 

and (7) the time and effort the taxpayer habitually devoted to the sales. 

Boree v. Commissioner, 837 F.3d at 1100 (citing United States v. 

Winthrop, 417 F.2d 905, 909–10 (5th Cir. 1969)); see Sanders, 740 F.2d 

at 889 (applying the Winthrop factors).

Most of the seven factors relate to sales and marketing. Arguably, 

these factors support a finding that the easement property was a capital

7 Fifth Circuit decisions issued before October 1, 1981, are binding precedent 

in the Eleventh Circuit. See Bonner v. City of Pritchard, 661 F.2d 1206, 1209 (11th Cir. 

1981).
11

[*11] asset because there were no lot sales on the easement property.8

However, the factors are not a balancing test that requires us to place 

equal weight on each factor. “[S]pecific factors, or combinations of them 

are not necessarily controlling.” Biedenharn Realty Co. v. United States, 

526 F.2d 409, 415 (5th Cir. 1976) (quoting Thompson v. Commissioner, 

322 F.2d 122, 127 (5th Cir. 1963), aff’g in part, rev’g in part 38 T.C. 153

(1962)). No factor or combination of factors is controlling, and each case 

must be decided on its particular facts. Id. The factors are not meant to 

be “mechanically applied so as to disallow a court from viewing the 

evidence in its totality and drawing appropriate inferences from that 

evidence.” Boree v. Commissioner, 837 F.3d at 1105. “Despite their 

frequent use . . . these seven [factors] ‘in and of themselves . . . have no 

independent significance, but only form part of a situation which in the 

individual case must be considered in its entirety . . . .’” Id. (quoting 

Winthrop, 417 F.2d at 910). We are not required to address each and 

every factor, and it may be appropriate for us to “give great weight” to 

facts not contemplated by the seven factors. Id. Under the circumstances 

of this case, we place significant weight on Hawks Bluff’s reporting.

II. Hawks Bluff’s Reporting as Inventory

On its 2012 return Hawks Bluff reported that it was in business 

as a real estate dealer, reported the easement property as inventory, and 

decreased the amount of its inventory on the transfer of the easement 

property to Glade Creek. Statements on tax returns may generally be 

treated as admissions by that taxpayer. Mendes v. Commissioner, 121 

T.C. 308, 312 (2003). Petitioner argues that Hawks Bluff’s reporting was 

incorrect. It asserts that Hawks Bluff erroneously reported the transfer

of the easement property as a sale to Glade Creek rather than a 

nontaxable partnership contribution so that it could claim a loss on the 

transfer and further argues that it mischaracterized the easement 

property as inventory to claim an ordinary loss.9 It further argues that 

Glade Creek should not be bound by Hawks Bluff’s reporting.

8 ILC’s sales and marketing activities with respect to tract I would likely have 

benefited future sales of lots on the easement property as the three tracts were one

master-planned community.

9 No gain or loss is recognized when a partner contributes property to a 

partnership in exchange for a partnership interest. § 721. Accordingly, it would have 

been incorrect for Hawks Bluff to report a loss on the contribution of the easement 

property to Glade Creek.
12

[*12] We find no error in Hawks Bluff’s reporting. We do not agree with 

petitioner’s contention that Hawks Bluff reported the contribution as a 

sale. The transaction at issue was reported on Form 4797, which

described the transaction as “Sale to Glade Creek.” However, it seems 

to us that it is the description of the transaction that is inaccurate and 

that Hawks Bluff was reporting the sale of its interest in Glade Creek, 

not the contribution of the easement property to Glade Creek. Hawks 

Bluff reported that it acquired the asset being sold on September 3, 

2012, the date of Glade Creek’s operating agreement and the date that 

Glade Creek reported that it was organized on its 2012 short-year

returns. Hawks Bluff reported the date that it sold the asset incorrectly

by one day. It reported the sale occurred on November 30, 2012, but it 

sold its membership interest on November 29, 2012. It reported the 

gross sale price of $1.4 million, which is the difference of $3.2 million 

received less the $1.8 million mortgage.

If Hawks Bluff was reporting the sale of its Glade Creek interest, 

as we understand it was doing, it would have been proper for it to report 

the transaction as resulting in ordinary income or loss assuming that 

the easement property is inventory. In general, the sale of a partnership 

interest is treated as a sale of a capital asset and results in capital gain 

or loss. § 741. There is an exception that requires taxpayers to report 

the sale of a partnership interest as resulting in ordinary income or loss 

if the partnership holds inventory.10 § 751(a)(2); Treas. Reg. § 1.751-

1(a)(2). In such a case, the partner is treated as selling an interest in the 

partnership assets. Rawat v. Commissioner, T.C. Memo. 2023-14, 

at *8‒9. Section 751 was enacted to prevent taxpayers from organizing 

partnerships to obtain capital gain treatment for the sale of inventory. 

S. Rep. No. 83-1622, at 99 (1954), as reprinted in 1954 U.S.C.C.A.N. 

4621, 4732. Thus, assuming that the easement property was inventory, 

it would have been proper for Hawks Bluff to treat the sale of its Glade 

Creek interest as the sale of an interest in inventory, and thus Hawks 

Bluff would have been required to report the sale as generating ordinary 

income or loss. 

10 In general, the character of partnership property as a capital asset, a section

1231 asset, or inventory is a partnership item. Treas. Reg. § 301.6231(a)(3)-1. However, 

section 751 requires that “we look through the partnership to the underlying assets 

and deem such a sale as the sale of separate interests in each asset.” Grecian Magnesite 

Mining, Indus. & Shipping Co. v. Commissioner, 149 T.C. 63, 79 (2017), aff’d, 926 F.3d 

819 (D.C. Cir. 2019). The character of gain or loss under section 751 is an affected item. 

Regents Park Partners v. Commissioner, T.C. Memo. 1992-336.
13

[*13] Nor do we believe that Hawks Bluff had a tax motive for 

mischaracterizing the easement property as inventory as petitioner 

alleges. Hawk Bluff reported an ordinary loss of less than $200,000 on 

Form 4797 and would have had a tax loss for 2012 even without claiming 

that tax loss. Notably, it also claimed a charitable contribution 

deduction of approximately $1.5 million from the easement donation. 

We believe that Hawks Bluff was reporting the sale of its Glade Creek 

interest consistent with its understanding that the easement property 

was inventory. 

Petitioner argues that Glade Creek should not be bound by 

Hawks Bluff’s reporting.11 It argues that Hawks Bluff’s reporting is 

irrelevant. But section 724(b) tells us otherwise. It is the very purpose 

of section 724(b) to make relevant the character of the property in 

Hawks Bluff’s hands. Congress enacted section 724 to prevent taxpayers 

from attempting to recharacterize ordinary income property as a capital 

asset by contributing the property to a newly organized partnership 

before the property is sold for a gain. H.R. Rep. No. 98-432, pt. 2, at 1222 

(1984), as reprinted in 1984 U.S.C.C.A.N. 697, 888. While Hawks Bluff’s 

reporting may not bind Glade Creek, petitioner has not provided a 

satisfactory explanation with reference to the statute as to why Hawks 

Bluff’s reporting should not be given significant weight especially in the 

light of the legislative purpose of section 724. It is true, as petitioner 

argues, that Glade Creek did not control Hawks Bluff when Hawks Bluff 

filed its 2012 return, but that is the fact that is irrelevant. Nothing in 

section 724(b) requires that the partnership have control of the 

contributing partner when the contributing partner files its return.

The Code gives taxpayers flexibility in how they arrange their 

business affairs to achieve desired tax consequences. See Estate of 

Durkin v. Commissioner, 99 T.C. 561, 571 (1992). While a taxpayer is 

free to organize its affairs as it chooses, once it has done so, the 

Commissioner may bind the taxpayer to its decision. Bradley v. United 

11 Petitioner cites only one case, King’s Court Mobile Home Park, Inc. v. 

Commissioner, 98 T.C. 511 (1992), for the proposition that one taxpayer’s 

characterization of property does not bind another taxpayer. That case does not 

support petitioner’s argument. It involved a corporation’s attempt to characterize 

payments to its controlling shareholder as deductible wages. The Court held that the 

corporation’s payments were nondeductible dividends but noted that their 

characterization as wages or dividends had the same tax consequences to the recipient. 

Id. at 515. Thus, there was no issue relating to whether the corporation’s 

characterization bound the recipient.
14

[*14] States, 730 F.2d 718, 720 (11th Cir. 1984);12 see Commissioner v. 

Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974). Glade 

Creek and Hawks Bluff could have set out in the operating agreement 

that Hawks Bluff was contributing investment property or that Hawks 

Bluff was to report the easement property as a capital asset. See Wray 

v. Commissioner, T.C. Memo. 1978-488 (stating that partnership 

agreement stated that real property was held for investment). Glade 

Creek knew the significance of the characterization of the easement 

property for federal tax purposes and was aware that the easement 

deduction would be limited to Hawks Bluff’s adjusted basis if the 

property was inventory in Hawks Bluff’s hands immediately before the 

contribution. The characterization of the easement property as 

inventory was discussed in the PPM, and Glade Creek’s tax attorney, 

Mr. Pollock, discussed the issue at a meeting before the easement 

transaction took place. Glade Creek could have negotiated with Hawks 

Bluff to have it report the easement property as investment property.

While a taxpayer’s labels are not determinative for tax purposes, 

because the parties failed to attach labels in the organizational 

documents the only evidence in the record that objectively establishes 

how Hawks Bluff characterized the easement property is its 2012 

return.

Petitioner has failed to present any evidence that ILC or Hawks

Bluff treated the easement property as investment property in its books 

and records.13 It produced Mr. Vincent as a witness but failed to elicit 

testimony that ILC or Hawks Bluff held the easement property for 

investment purposes. In the light of section 724(b) and its purpose, we 

place great weight on Hawks Bluff’s reporting of the easement property 

as inventory. Statements on a return are not conclusive, however, and 

we examine whether the facts otherwise support a finding that the 

12 The Eleventh Circuit recognizes an exception to this principle that allows 

taxpayers to challenge the tax consequences of the chosen form only if they prove the 

existence of mistake, undue influence, fraud, duress, etc. Bradley, 730 F.2d at 720 

(citing Spector v. Commissioner, 641 F.2d 376, 382 (5th Cir. Unit A Apr. 1981), rev’g

71 T.C. 1017 (1979)).

13 Petitioner has not requested that we reopen the record. Both parties 

addressed the section 170(e) issue in their posttrial briefs, and petitioner had the 

opportunity to present evidence at trial. Accordingly, we see no need to reopen the 

record. Whether to reopen the record on remand is “left to the sound discretion of the 

trial court.” Cambridge Univ. Press v. Albert, 906 F.3d 1290, 1302 (11th Cir. 2018) 

(quoting Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 551 (1983)).
15

[*15] easement property was a capital asset. Suburban Realty, 615 F.2d 

at 181. 

III. Factor Test

A. Purpose for Holding Property

The Eleventh Circuit recognizes that a taxpayer’s purpose for 

holding property can change over time and has indicated that the 

purpose at the time of sale is not determinative. Boree v. Commissioner, 

837 F.3d at 1101 (“[T]he Fifth Circuit rejected the notion that ‘the 

decisive question is the purpose for which (the property) “primarily” was 

held when sold.’” (quoting Suburban Realty, 615 F.2d at 182)).14 It has 

instructed that “a proper analysis of a taxpayer’s primary purpose in 

holding property should take into account a reasonable period of time 

prior to the sale.” Id.; see Sanders, 740 F.2d at 889 (considering years 

leading up to the sale and holding that the sale profit was ordinary 

income);15 Suburban Realty, 615 F.2d at 183–84 (stating that the 

inquiry may consider “purpose over the entire course of his ownership

. . . [and] should start at the time the property is acquired”).

Petitioner argues that Hawks Bluff was organized to hold the 

easement property as an investment. It further argues that we should 

also consider ILC’s purpose for holding the easement property while

respondent focuses primarily on Hawks Bluff’s holding purpose. 

Petitioner argues that ILC treated the easement property as investment 

property from the time of its acquisition or, alternatively, the easement 

property converted to investment property in 2009 when ILC abandoned 

the development project. 

The first inquiry according to the Eleventh Circuit in Boree is 

whether Hawks Bluff was in a trade or business as a real estate dealer. 

Hawks Bluff reported that its business was real estate dealer on its 2012 

return even though its sales had been minimal since its organization. It

continued its efforts to sell lots on tract I after the easement transaction. 

“The taxpayer’s claim to capital gain treatment is likely to be weaker if 

14 We have stated that generally the purpose at the time of sale is 

determinative, but we consider earlier events to decide the purpose at the time of sale. 

Cottle v. Commissioner, 89 T.C. 467, 487 (1987).

15 In Boree v. Commissioner, 837 F.3d at 1101, the Eleventh Circuit found that

consistent with Suburban Realty “[t]he Sanders court also analyzed the taxpayer’s 

activities over multiple years” leading up to the sale. 
16

[*16] he can point to no other business activities . . . .” Suburban Realty, 

615 F.2d at 179 n.24; see Boree v. Commissioner, 837 F.3d at 1105 

(finding that taxpayer engaged in no other income-producing activity 

although it had no sales during years at issue). Petitioner argues that 

Hawks Bluff was organized to hold the ILC property for investment 

purposes but failed to address Hawks Bluff’s reporting that it was a 

dealer. Mr. Vincent did not testify that Hawks Bluff held the easement 

property for investment. Nor did he contest Hawks Bluff’s reporting that 

it was in the real estate business. He blamed the lack of sales on the 

economy and lack of marketing, likely because it served petitioner’s 

argument that residential development of the easement property was 

economically feasible on the easement date. As explained further below, 

Hawks Bluff was not organized to hold the ILC property as an 

investment. Accordingly, we find that it was a real estate dealer.

Petitioner argues that a real estate dealer may hold real estate 

for investment purposes. See Pritchett, 63 T.C. at 163. We find that 

Hawks Bluff was a real estate dealer. See Sugar Land Ranch Dev., LLC 

v. Commissioner, T.C. Memo. 2018-21 (finding that tax return

statements on business activity were not conclusive because they may 

have been inadvertently carried over from earlier returns). When a real 

estate dealer holds both inventory and investment property, it must 

segregate investment property from its inventory. Pritchett, 63 T.C. at 

163. The Eleventh Circuit places the burden on the taxpayer to establish 

that it segregated the real estate purportedly held as an investment 

from its inventory. Boree v. Commissioner, 837 F.3d at 1104. The Court 

of Appeals has stated that “[t]he mere lack of development activity with 

respect to parts of a large property does not sufficiently separate those 

parts from the whole to meet the taxpayer’s burden.” Id. (quoting 

Suburban Realty, 615 F.2d at 185). Our caselaw considers whether the 

taxpayer treated the property at issue differently from its other 

property, made improvements or subdivided the property, held the 

property out for sale or advertised it, and solicited the offer that led to

the sale at issue. Pritchett, 63 T.C. at 164‒68; Wray, T.C. Memo. 1978-

488. We have stated that holding title to real property in a different 

name or entity does not conclusively establish segregation but is a factor 

to consider. Pritchett, 63 T.C. at 164; Paullus v. Commissioner, T.C. 

Memo. 1996-419. 

1. Hawks Bluff’s Purpose

On remand, petitioner argues that Hawks Bluff was organized as 

part of a plan to cease development, marketing, and sale activities and 
17

[*17] to develop a plan for long-term investment of all three tracts. It 

states that Hawks Bluff was organized in April 2010 after Mr. Vincent, 

Mr. Tague, and Mr. Toscano “devise[d] a new plan [for] developing a 

long-term investment plan for the property” and “solidified the ILC’s 

members’ intent in holding the property as investment property.”

Petitioner has not offered any evidence that Hawks Bluff was 

organized for the purpose of holding real estate for investment purposes. 

Its argument is speculative, not supported by the record, and contradicts 

Mr. Vincent’s testimony. Its argument on remand contradicts its 

proposed findings of fact in its posttrial briefs where it stated: 

The property was transferred to Hawks Bluff because Mr. 

Vincent and Mr. Teague [sic] had invested vast sums of 

money to fund the utilities, roads, water and infrastructure

for the property. Transferring the property to Hawks Bluff 

provided Mr. Teague [sic] and Mr. Vincent a controlling 

interest over the ILC Property. This was also done to help 

reassure the bank, which had significant money invested 

in the property through loans to Mr. Vincent.

(Citations omitted.)

Mr. Vincent testified that Hawks Bluff was organized and the ILC 

property was transferred to it to “help reassure the bank” that funded 

the infrastructure loans. We do not understand this testimony to mean 

that Hawks Bluff was formed to hold the property for investment 

purposes. By petitioner’s own admission, a fundamental part of the plan 

was to give Mr. Vincent an ownership interest in the ILC property.

Significantly, Mr. Vincent did not testify that Hawks Bluff was 

organized with the intent to hold the ILC property for long-term 

investment. Notably, petitioner has failed to produce any evidence

relating to the infrastructure loans and how ILC or Hawks Bluff 

represented that it held the ILC property to secure financing. We find 

that Hawks Bluff was organized to take over a failing real estate 

development with Mr. Vincent as a part owner, find a solution for the 

ongoing financial problems, and continue to sell the lots to customers in 

the ordinary course of business. 

Furthermore, the evidence shows that Mr. Vincent and Mr. Tague 

did not want to relinquish ownership of any part of the ILC property or 

to do anything that might negatively affect the master-planned 

community for the ILC property after Hawks Bluff acquired it from ILC. 
18

[*18] They wanted to protect their ownership and the development 

potential. After Hawks Bluff was organized, Mr. Vincent and Mr. Tague 

transferred unrelated real estate as partial payment of the unpaid 

mortgage. Notably, they did not surrender the easement property. The 

primary reason Mr. Vincent chose the easement transaction was that it 

solved the debt problems while protecting ILC’s original vision of the 

vacation home community. After Hawks Bluff found the solution to its 

debt in the form of the easement donation, it continued its real estate 

business activities. Hawks Bluff did not passively hold the easement 

property in the hopes that it could sell it for the highest price to a third 

party. Under such circumstances it is difficult for us to conclude that 

Hawks Bluff was organized to hold the ILC property or the easement 

property for investment.

Petitioner produced Mr. Vincent as a witness and could have 

elicited testimony from him that Hawks Bluff was organized to acquire 

and hold the easement property as an investment but failed to do so, 

perhaps because it was concerned that such testimony would have 

adversely affected its argument that residential development was 

economically feasible and the highest and best use of the land. After we 

had agreed with petitioner that development was feasible, it 

conveniently changed its position on remand and argues for the first 

time that residential development was not feasible in 2009 to advance 

its argument that the easement property was investment property

without having presented any evidence at trial to support the 

infeasibility of development in 2009.

Instead, petitioner cites Mr. Vincent’s testimony that he did not 

want to develop the easement property alone and did not have the 

finances to do so after Mr. Toscano and Mr. Tague stopped making debt 

payments. However, neither statement means that Hawks Bluff was 

organized to hold the property for investment or requires a finding that 

its purpose for holding the property changed to investment. As 

Suburban Realty, 615 F.2d at 182, instructs, the fact that the taxpayer 

is not still actively engaged in the trade or business is not determinative 

under the statute. “The statutory language does not demand that 

property actually be sold while a taxpayer is still actively engaged in its 

trade or business for ordinary income treatment to be required. Rather, 

it demands that the property have been held primarily for sale in that 

business.” Id. Hawks Bluff was organized as a real estate dealer and 

held itself out as such. It used the easement transaction to eliminate 

debt so that it could continue its business. It was actively engaged in 

that business after the easement transaction.
19

[*19] Petitioner’s argument that Hawks Bluff was organized for 

investment purposes is speculative and unsupported by the evidence in 

the record. Objective factors carry more weight than the taxpayer’s 

subjective statements of intent. See Guardian Indus. Corp. v. 

Commissioner, 97 T.C. 308, 316 (1991), aff’d, 21 F.3d 427 (6th Cir. 1994)

(unpublished table decision). Accordingly, we place significant weight on 

Hawks Bluff’s reporting that it was a real estate dealer and held the 

easement property as inventory. Hawks Bluff’s organizational 

documents are not in the record. There is no evidence in the record that 

Hawks Bluff was organized because its members decided to hold the 

property as investment property or that it treated the ILC property as 

an investment. It was organized to take over a failing real estate 

developer to reassure a major lender and continue the residential 

development business albeit unsuccessfully.

2. ILC’s Purpose

Petitioner argues that ILC acquired and held the easement 

property as an investment. It argues the three tracts were separate 

assets and that ILC took specific steps to segregate the easement 

property from tract I to preserve the investment character of the 

easement property. It cites the decision not to record the platted lots and 

the lack of physical improvements on the easement property. To the 

extent that ILC’s holding purpose is relevant, we find that ILC held the 

easement property as inventory.

ILC was in the real estate business and acquired the land because 

it was suitable for development. We find petitioner’s argument that ILC 

purchased all three tracts for investment to be disingenuous considering

the quick turnaround in development. ILC purchased all three tracts in 

one purchase in January 2006 after engaging Mr. Vincent to evaluate 

the property for a residential development. In its posttrial brief, 

petitioner stated:

The purchase was made after an extensive and thorough 

investigation of its development potential. Specifically, ILC 

spent significant time and money to verify the property

contained the topography and attributes suitable for a

high-end, second-home development. The $9 Million was

not spent on a whim. It was spent after an investigation by

sophisticated land investors.
20

[*20] Shortly thereafter ILC engaged a licensed engineer to design a 

concept plan for the development of the three tracts into one masterplanned community. The concept plan was completed in April 2006. 

Then in July 2006 ILC placed restrictive covenants on all three tracts in 

accordance with the concept plan. These actions are inconsistent with 

petitioner’s claim that ILC purchased any part of the ILC property to 

hold as an investment for future appreciation. See Wray, T.C. Memo. 

1978-488 (finding that taxpayer had not made development decision at 

time of purchase).

By petitioner’s own admission in its proposed findings of fact, ILC 

expanded substantial amounts of time and money to develop all three 

tracts. “ILC . . . expended millions of dollars . . . preparing Tracts I, II, 

and III for development as a master-planned community.” “By March of 

2007, the infrastructure (roads, underground water, electricity, utilities, 

soil testing, storm water plans) was in place to service all 806 lots 

depicted in the Concept Plan.” “ILC negotiated and entered into a 25-

year contract . . . that provided the ILC property with . . . enough water 

to cover all potential development . . . . ILC had to build a pump station 

[and] . . . construct a mile of water mains (pipes) to service the pump 

station . . . . After this process, the ILC property had the infrastructure 

in place to service all of the proposed 806 lots . . . .” ILC “enjoyed huge 

success” with tract I sales. To support its valuation, petitioner argued 

that “ILC invested over $6 Million into the property obtaining approvals 

for the property, accessing water, utilities, roads and obtaining platted 

approvals for the Easement Property.” On the basis of petitioner’s own 

admissions through its proposed findings of fact, we find that ILC 

developed the easement property and did not segregate the easement 

property from tract I as investment property. 

Petitioner also proposed a finding of fact that “Tracts II and III

were specifically held out as ‘investment’ property for potential future 

development or sale to a third-party.” However, it failed to provide a 

reference to the record as required by Rule 151, and we have found no 

support for this proposed finding in the record.16 ILC’s decision to delay 

infrastructure improvements directly on the easement property was not 

based on a decision to hold it as investment property. Rather, it made a 

business decision to develop the ILC property in phases because of

financial constraints. Mr. Vincent testified that ILC planned to develop 

16 Rule 151(e)(3) requires that the parties’ posttrial briefs contain proposed 

findings of fact based on the evidence and include references to the pages of the 

transcript, exhibits, or other sources relied on to support the findings.
21

[*21] the land in phases because it did not make business sense to 

develop all 806 lots and place them on the market at one time. Such a 

business plan does not establish that ILC segregated the easement 

property and held it for investment purposes especially in the light of 

the substantial amounts of time and money ILC expended to develop all 

three tracts. 

Petitioner argues that ILC did not record the platted lots on the 

easement property because it intended to segregate the easement 

property and hold it as investment property. Such a position is not 

supported by the record. Mr. Vincent testified that ILC did not record 

the lots to avoid a property tax increase. He testified that normally 

developers would not record lots until roads and amenities were

completed because recording can increase property tax. He stated that 

if lots were recorded the property would be appraised per lot so it is a 

“terrible mistake” to record the lots too early before the developer is 

ready to sell them. We do not understand Mr. Vincent’s testimony to 

mean that ILC decided to hold the easement property for investment 

purposes. We relied on Mr. Vincent’s explanation for not recording the 

platted lots in our decision that residential development was the highest 

and best use for the easement property. Respondent argued that the lack 

of recording weighed against that use. We stated that “ILC’s decision 

not to record the platted lots in tracts II and III until it was ready to 

develop those tracts is irrelevant to their development potential. It did 

not record the lots to avoid a potential property tax increase.” Glade 

Creek, T.C. Memo. 2020-148, at *34. 

There is no testimony or other evidence that ILC decided not to 

record the platted lots because it planned to hold the easement property 

for investment. Petitioner has not presented any evidence that ILC 

evaluated the investment potential of the easement property including 

the expectation of an appreciation in value and the costs of holding the 

property for investment purposes. Instead, petitioner stated in its 

posttrial brief that “[t]he property was specifically identified and 

investigated by ILC in 2006 for its development potential.” No witness 

testified that ILC treated any part of the ILC property as an investment 

in its books and records when it acquired it or at any time thereafter. 

Without more, ILC’s decision not to record the lots on the easement 

property does not establish that ILC segregated it from tract I or held it 

for investment purposes.

Nor has petitioner established that ILC treated any part of the 

ILC property as an investment in 2009 when petitioner argues ILC 
22

[*22] abandoned its intent to develop the property because of economic 

conditions and lack of funding. In 2009 ILC stopped marketing the ILC 

property and sales decreased sharply. On remand, petitioner argues 

that residential development was not economically feasible in 2009.

However, the character of the property does not change simply because 

of a change in market conditions. When a company is going out of 

business, it is still in that business while it winds down. See Suburban 

Realty, 615 F.2d at 182. ILC was a failed real estate developer that held 

the entire ILC property out for sale to customers in the ordinary course 

of its business as a master-planned community. ILC continued to hold 

the ILC property in that business when it transferred its unsold 

inventory to Hawks Bluff although it may not have been actively 

engaged in that business.

B. Sales Activities

The Eleventh Circuit has stated that frequency and 

substantiality of sales is the “most important” factor in determining the 

character of property. Boree v. Commissioner, 837 F.3d at 1100 (quoting

Biedenharn Realty, 526 F.2d at 416). This is because sales are “highly 

relevant” to each of the three statutory inquiries for the characterization 

of property as a capital asset or inventory including whether the 

taxpayer is engaged in a trade or business and whether it held the 

property for sale in that business. Suburban Realty, 615 F.2d at 178.

“[T]he presence of frequent sales ordinarily belies the contention that 

property is being held ‘for investment’ rather than ‘for sale.’” Id.

As we stated above, most of the seven factors relate to sales 

activities. There were no lot sales on the easement property. However, 

the lack of sales on the easement property does not require a finding 

that the easement property was investment property where other facts 

establish otherwise. No one factor or combination thereof is controlling. 

Biedenharn Realty, 526 F.2d at 415. ILC’s original plan was to develop 

the property in three phases and to use the cashflow from tract I sales 

to fund development on the easement property. In view of this plan, we 

place little weight on the lack of sales on the easement property. ILC did 

not plan to hold the easement property for investment until lots on tract 

I were sold out and then make a decision about whether to develop the 

easement property. It had a concept plan designed for a single masterplanned community of the three tracts and completed significant 

infrastructure to enable development of all three tracts. ILC’s intent was 

to hold the easement property as inventory for development. In the light 

of Hawks Bluff’s reporting, ILC’s development activities, and the lack of 
23

[*23] credible evidence to support petitioner’s argument, we find that 

the lack of sales on the easement property does not require a finding 

that ILC or Hawks Bluff segregated the easement property and held it

for investment.

C. Development Activities

Development activities are relevant to whether a taxpayer is in a 

real estate business and also to its purpose for holding land. Suburban 

Realty, 615 F.2d at 178‒79. Lack of improvements can indicate that the 

property is not held primarily for sale. Adam v. Commissioner, 60 T.C. 

996, 1000 (1973); see also Brown v. Commissioner, 143 F.2d 468 (5th Cir. 

1944) (finding that taxpayer was a real estate dealer as it subdivided 

the land, installed utilities, built streets and storm sewers, and sold 20 

to 30 lots a year); Gates v. Commissioner, 52 T.C. 898 (1969) (finding 

that property was dealer property where taxpayer subdivided lots, 

installed improvements, and sold home construction building 

materials); Conner v. Commissioner, T.C. Memo. 2018-6 (citing lack of 

development, finding that the taxpayer was not in the real estate 

business and was not entitled to business deductions), aff’d, 770 F. App’x

1016 (11th Cir. 2019).

On remand petitioner argues that the easement property was 

never improved or developed although it acknowledges that the 

easement property “economically benefited from the development” on 

tract I and that ILC’s development activities “increased the likelihood of 

developing, subdividing, and selling lots” on the easement property. 

Petitioner relied on ILC’s infrastructure and development activities to 

support its valuation of the easement property. In its posttrial briefs 

petitioner repeatedly stated that ILC made improvements that 

benefited all three tracts and added value to the easement property. It 

asserted that ILC spent $6 million on infrastructure related to the 

development of all three tracts. It criticized respondent’s expert’s 

valuation for failing to take into account the $6 million in improvements 

made for all 806 lots. It stated that “[a]ll three tracts . . . had readyaccess to water, electricity, utilities, and septic tank capacity. All three 

tracts had paved road access. Moreover, all three tracts had obtained 

the required TDEC approvals, and lots were platted on all three tracts.” 

It argued that the paved roads extending to the borders of the easement 

property provided the easement property with a “valuable amenity.” It 

stated that “ILC successfully completed the steps necessary to transform 

the ILC Property into a fully-approved and shovel-ready 806-Lot 

development.”
24

[*24] We agreed with petitioner that the highest and best use of the 

easement property was residential development. We relied on the fact 

that the easement property had platted lots, a concept plan designed by 

a licensed engineer, and significant infrastructure work had been 

completed including upgraded utility and water capacity, soil testing, 

approvals for septic tanks, sewage, and storm water plans. Glade Creek, 

T.C. Memo. 2020-148, at *34. We found that the easement property had 

been improved for development and, in this respect, agreed with 

petitioner. Mr. Vincent testified that ILC’s development activities 

increased the value of the easement property, and we relied on his 

testimony to support our valuation. We found that Mr. Broome erred by 

failing to take into account “extensive development work ILC performed 

on the property,” which contributed to the easement property’s 

suitability for residential development. Id. at *32. We concluded that 

“[i]n the light of the improved real estate market and the significant 

infrastructure work and approvals previously granted, a hypothetical 

buyer would have reasonably purchased the property for the 

development of a vacation or residential community.” Id. at *34.

We also agreed with petitioner that ILC’s infrastructure and 

other development activities increased the fair market value of the 

easement property. Id. at *53. In our decision on the valuation, we 

stated:

Mr. Vincent and ILC invested vast amounts of time and 

money on the development of all three tracts, spending 

over $6 million. Most infrastructure work took place on 

tract I. However, ILC had successfully completed 

numerous steps toward the development of all three tracts. 

ILC constructed a pumping station and installed upgraded 

pipelines to service all three tracts, upgraded electrical 

lines that could service residential developments on all 

three tracts, paved access roads leading up to tracts II and 

III, platted lots on the basis of a design by a licensed 

engineer, completed soil testing, and obtained development 

approvals for all three tracts. Tracts II and III clearly 

benefited from ILC’s work even though ILC had not yet 

extended utilities to those tracts. Mr. Broome [respondent’s 

valuation expert] erred by disregarding the value added to 

the easement property from ILC’s infrastructure and 

approvals.

Id. at *39.
25

[*25] We held that the unencumbered easement property had a fair 

market value of approximately $9.3 million using a discounted cashflow 

method and found that value was supported by ILC’s purchase price for 

the easement property and the value added by ILC’s infrastructure 

improvements and development activities. Id. at *52; see Boree v. 

Commissioner, 837 F.3d at 1105 (finding that taxpayer’s activities 

“increase[d] the value of lots in future sales”). We stated:

We also consider ILC’s $6 million investment in 

infrastructure and its work to obtain approvals which 

benefited all three tracts, including ensuring a water 

supply, upgrading water and electrical capacity, soil 

testing, Government approvals, and access roads leading to 

the easement property. Mr. Vincent credibly testified that 

ILC performed soil testing on tracts II and III. ILC's 

infrastructure and approval work clearly increased the fair 

market value of the easement property. . . . We find it 

reasonable that the unencumbered easement property 

would have increased by $2 and $2.5 million on the basis 

of appreciation and ILC’s infrastructure work.

Glade Creek, T.C. Memo. 2020-148, at *53.

The development activities weigh against a finding that ILC 

segregated the easement property from tract I to hold it for investment 

purposes. ILC did not treat the easement property as a passive 

investment. Notably, Hawks Bluff did not undertake any additional 

development. But we place little weight on this fact because Hawks Bluff 

was organized to take over ILC’s failing real estate business, to give Mr. 

Vincent an ownership interest, and to appease the bank that financed 

the infrastructure. Furthermore, ILC had completed the necessary 

infrastructure to sell the lots on tract I, making further development by 

Hawks Bluff with respect to those lots unnecessary. 

ILC’s infrastructure improvements and development activities 

significantly contributed to the increase in the unencumbered easement 

property’s value over the course of ILC’s and Hawks Bluff’s ownership. 

“[C]apital gain treatment will be proper only if the gain emanates from 

appreciation in value.” Boree v. Commissioner, 837 F.3d at 1104 (quoting 

Suburban Realty, 615 F.2d at 186); see Commissioner v. Gillette Motor 

Transp., Inc., 364 U.S. 130, 134 (1960) (stating that courts should

construe capital asset narrowly “in accordance with the purpose of 

Congress to afford capital-gains treatment only in situations typically 
26

[*26] involving the realization of appreciation in value accrued over a 

substantial period of time”); Jersey Land & Dev. Corp. v. United States, 

539 F.2d 311, 315 (3d Cir. 1976) (holding property to be dealer property 

where the gain resulted from substantial improvements made to the 

property by the taxpayer as opposed to long-term market appreciation).

But even an increase in land value attributable more to market 

appreciation than to improvements does not automatically mean that 

the land is a capital asset, and profit from appreciation may be treated 

as ordinary income. Boree v. Commissioner, 837 F.3d at 1104. 

Petitioner did not provide any expert testimony or other evidence 

as to the appreciation of the land over the six years of ILC’s and Hawks 

Bluff’s ownership from 2006 through 2012 in the absence of the 

infrastructure improvements. Instead, it argued the opposite. It argued 

that the real estate market was distressed beginning in 2008 but began 

to recover by December 2012.17 Glade Creek, T.C. Memo. 2020-148,

at *6, *38. It repeatedly faulted Mr. Broome’s comparable sales analysis 

for using sales that occurred on average four years before the easement 

date during what petitioner called the “trough” of the recession. 

Petitioner has not established that the amount of the increased value of 

the easement property was from appreciation in the absence of the 

infrastructure improvements. 

IV. Conclusion

On the basis of the totality of the facts and circumstances, we find 

that ILC and Hawks Bluff did not segregate the easement property from 

tract I in a manner sufficient to meet petitioner’s burden to show that 

the easement property was investment property. Petitioner has not 

presented any evidence to substantiate its argument that Hawks Bluff 

was organized to hold the easement property or to dispute Hawks Bluff’s 

reporting that it held the property as inventory. ILC held the easement 

property as inventory and did not segregate it from tract I. Petitioner’s 

position on remand that ILC did not develop the easement property is 

inconsistent with our findings of fact and petitioner’s own posttrial brief. 

Petitioner relies on speculation that is unsupported by the record. We 

place significant weight on the only evidence in the record of how Hawks 

Bluff or ILC characterized the easement property, Hawks Bluff’s 2012 

17 Mr. Clark testified that a hypothetical residential development would have 

a seven-year absorption period for lot sales beginning in 2012 and that unsold lots 

would appreciate 3% to 4% annually. 
27

[*27] return. Accordingly, Glade Creek’s easement deduction is limited 

to the adjusted basis pursuant to sections 724(b) and 170(e).

Decision will be entered under Rule 155.