PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 14-1983

ROUTE 231, LLC, JOHN D. CARR, TAX MATTERS PARTNER,

Petitioner - Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent - Appellee.

Appeal from the United States Tax Court.

(Tax Ct. No. 013216-10)

Argued: October 28, 2015 Decided: January 8, 2016 

Before AGEE and WYNN, Circuit Judges, and HAMILTON, Senior 

Circuit Judge.

Affirmed by published opinion. Judge Agee wrote the opinion, in 

which Judge Wynn and Senior Judge Hamilton joined.

ARGUED: Timothy Lee Jacobs, HUNTON & WILLIAMS LLP, Washington, 

D.C., for Appellant. Richard Farber, UNITED STATES DEPARTMENT 

OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: William 

L.S. Rowe, Richmond, Virginia, Richard E. May, Hilary B. Lefko, 

Matthew S. Paolillo, HUNTON & WILLIAMS LLP, Washington, D.C., 

for Appellant. Caroline D. Ciraolo, Acting Assistant Attorney 

General, Regina S. Moriarty, Tax Division, UNITED STATES 

DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
2

AGEE, Circuit Judge:

Route 231, LLC, a Virginia limited liability company, 

(“Route 231”) reported capital contributions of $8,416,000 on 

its 2005 federal tax return.1 This number reflected, in relevant 

part, $3,816,000 it received from one of its members, Virginia 

Conservation Tax Credit FD LLLP (“Virginia Conservation”). Upon 

audit, the Commissioner of the Internal Revenue Service issued a 

Final Partnership Administrative Adjustment (“FPAA”) indicating

that Route 231 should have reported the $3,816,000 received as 

gross income and not a capital contribution. Route 231 

challenged the FPAA by petition to the United States Tax Court. 

After a trial, the Tax Court determined that the transaction was 

a “sale” and reportable as gross income in 2005. Route 231 now 

appeals, asserting that the Tax Court erred in finding the 

transfer was not a capital contribution or, alternatively, that 

any income was not reportable until 2006. For the reasons set 

forth below, we disagree with Route 231 and affirm the decision

of the Tax Court.

 1 The Internal Revenue Code treats limited liability 

companies with two or more members as a partnership unless the 

company elects otherwise. See 26 C.F.R. §§ 301.7701-1, 7701-2, 

7703-3. Route 231 filed returns consistent with being treated 

as a partnership for federal tax purposes. 
3

I.

In May 2005, Raymond Humiston and John Carr formed Route 

231, a limited liability company (“LLC”) registered in Virginia. 

Humiston and Carr each made initial capital contributions of 

$2,300,000 and each received a 50% membership interest in the 

LLC. Route 231’s initial operating agreement stated its purpose 

was “to own, acquire, manage and operate [certain] real 

property.” (J.A. 225.) Consistent with that purpose, Route 231 

purchased two parcels, known as Castle Hill and Walnut Mountain, 

in Albemarle County, Virginia, for approximately $24 million. 

Carr and Humiston personally guaranteed the bank loan financing 

the purchase. 

Carr and Humiston were interested in donating some of Route 

231’s property for conservation purposes and retained a 

consultant to assist with that process. At that time, Virginia 

offered state income tax credits “equal to 50 percent of the 

fair market value of any land or interest in land located in 

Virginia” donated to a public or private agency eligible to hold 

such land and interests therein for conservation or preservation 

purposes. Va. Code § 58.1-512 (2005). Through the consultant, 

Route 231 discussed the possibility of Virginia Conservation

joining the LLC by contributing money to Route 231 and receiving 

a majority of the Virginia tax credits that would be earned as a 

result of three proposed conservation donations.
4

These discussions led to Route 231’s first amended 

operating agreement, signed December 27, 2005, in which Virginia 

Conservation became a member of Route 231 with a 1% membership 

interest, with Humiston and Carr’s interests each being reduced 

to 49.5%. The amended operating agreement provided that 

Virginia Conservation agreed to make an “initial capital 

contribution” of $500 plus an additional sum “in an amount equal 

to the product of $0.53 for each $1.00 of [the tax credits] 

allocated to” it. (J.A. 477, § 2.2.) The first amended 

operating agreement anticipated that Route 231 would earn

Virginia tax credits “in the range of $6,700,000 to 7,700,000” 

as a result of the proposed conservation donations, and it 

provided that while Carr would receive $300,000 of credits, 

Virginia Conservation would receive “the balance.”2 (J.A. 479, § 

3.6.) 

Two days later, on December 29, 2005, Virginia Conservation 

paid $3,816,000 into an escrow account pursuant to three escrow 

agreements reflecting the three conservation donations Route 231 

 2 For tax credits earned during the time in question, 

taxpayers could claim up to $100,000 of tax credits on their 

state income tax returns as a $1 for $1 credit. If the value of 

tax credits earned exceeded this cap, taxpayers were permitted 

to carry over the tax credits for use up to five years after the 

tax credits were earned. See Va. Code § 58.1-512(C)(1) (2005). 
5

intended to make.3 The escrow agreements provided that the funds

would be released to Route 231 upon written confirmation by

Virginia Conservation that it had received copies of several 

documents verifying the conservation donations and Virginia tax 

credits. One item listed was the Virginia Department of 

Taxation’s transaction number for tracking the conservation 

donations and Virginia tax credits.

The next day, December 30, 2005, Route 231 recorded deeds 

conveying the following conservation donations of real property: 

(1) a deed of gift of an easement on Castle Hill to the Nature 

Conservancy, which was valued at $8,849,240; (2) a deed of gift 

of an easement on Walnut Mountain to the Albemarle County Public 

Recreational Facilities Authority, which was valued at 

$5,225,249; and (3) a fee interest in Walnut Mountain (subject 

to the above easement) to the Nature Conservancy, which was 

valued at $2,072,880. 

The final value of these conservation donations – and hence 

the amount of Virginia tax credits – was slightly lower than 

Route 231’s consultant had anticipated. Consequently, Carr 

agreed to defer receiving approximately $84,000 of the $300,000 

in tax credits he had been promised in the first amended 

 3 The escrow agreements contain nearly identical language, 

with each agreement corresponding to one of Route 231’s proposed 

conservation donations. 
6

operating agreement so as to allow Virginia Conservation to

receive tax credits equivalent to the formula for the full 

amount of money it had paid into escrow.

On January 1, 2006, Humiston, Carr, and Virginia 

Conservation executed a second amended operating agreement for 

Route 231. The agreement described the three specific 

conservation donations the LLC had made and set out the Virginia 

tax credits Route 231 had earned as a result of those donations. 

It indicated that those credits “have been allocated as follows: 

(i) $215,983.00 . . . to Carr and (ii) $7,200,000.00” to 

Virginia Conservation. (J.A. 508, § 3.5.) 

After execution of the second amended operating agreement, 

Route 231 submitted three Virginia Land Preservation Tax Credit 

Notification Forms (“Forms LPC”) to the Virginia Department of 

Taxation. The forms stated that Route 231 had earned its 

Virginia tax credits on December 30, 2005 (the date of the 

conservation donations), and that it allocated those credits to 

Carr and Virginia Conservation in the amounts reflected in the 

second amended operating agreement. 

In March 2006, the Virginia Department of Taxation provided 

Virginia Conservation and Carr with the transaction numbers for 

Route 231’s conservation donations and the tax credits. The 

Virginia Department of Taxation’s letter stated that these tax 

credits were “effective” in 2005. 
7

Soon after Virginia Conservation received these tax credit 

transaction numbers, the escrow funds were released to Route 

231.

In April 2006, Carr – acting as Route 231’s tax matters 

partner – filed Route 231’s 2005 federal Return of Partnership 

Income Tax.4 Schedule M-2 of that form lists total annual 

capital contributions received in 2005 in the amount of 

$8,416,000, which includes the amounts Humiston and Carr had 

provided as capital contributions as well as the $3,816,000

Virginia Conservation paid into escrow. In addition, Schedule 

K-1 of Route 231’s tax form lists Virginia Conservation as a 

partner that had contributed $3,816,000 in capital “during the 

[taxable] year.” (J.A. 120.) 

 4 While there are substantive legal differences, 

particularly for state law purposes, between partnerships and 

limited liability companies, they are treated alike as 

partnerships for federal income tax purposes. See supra n.1. 

For convenience, we refer to partners and partnerships 

interchangeably with members and limited liability companies in 

our discussion of the federal tax issues in this opinion.

Under the Internal Revenue Code, a partnership is a “passthrough” entity, meaning that although the partnership prepares 

a tax return, the partnership does not pay federal income taxes. 

Instead, its taxable income and losses pass through to the

individual partners, who in turn are liable for their 

distributive shares of the partnership’s tax items on their own 

individual returns. United States v. Woods, 134 S. Ct. 557, 562 

(2013). 
8

The Internal Revenue Service sent Route 231 an FPAA 

indicating, in relevant part, that Route 231 had improperly 

characterized the $3,816,000 received as a capital contribution 

rather than as income from the sale of the Virginia tax credits

to Virginia Conservation.5 Route 231 challenged that 

determination in a petition for readjustment in the Tax Court. 

In a detailed memorandum opinion, the Tax Court upheld the 

Commissioner’s determination that the transaction between 

Virginia Conservation and Route 231 constituted a “disguised 

sale” that occurred in 2005, and it adjusted Route 231’s 2005

tax return to reflect the $3,816,000 as gross income.

At the outset of its opinion, the Tax Court described our 

decision in Virginia Historic Tax Credit Fund 2001 LP v. 

Commissioner, 639 F.3d 129 (4th Cir. 2011), as “squarely on 

point” with the case before it. (Cf. J.A. 1518.) Following 

much of the same analysis we applied in Virginia Historic, the 

Tax Court first concluded that Route 231’s Virginia tax credits 

were “property” so their transfer would fall within the scope of 

I.R.C. § 707. Next, the Tax Court determined that under the 

applicable tax regulations of § 707, the transaction was a 

 5 The FPAA made additional adjustments that were resolved by 

the parties. While those adjustments were included in the Tax 

Court’s final decision reflecting all of the adjustments to 

Route 231’s 2005 tax return, they are not at issue in this 

appeal. 
9

“disguised sale” because the record demonstrated that (1) Route 

231 would not have transferred the Virginia tax credits to 

Virginia Conservation “but for” the fact that Virginia 

Conservation transferred $3,816,000 to it, and (2) Route 231’s 

transfer of the Virginia tax credits was not dependent on the 

ongoing entrepreneurial risks of Route 231’s operations. In 

examining the totality of the facts and circumstances relevant 

to this inquiry, the Tax Court observed that the amended 

operating agreements set out the timing and amount of the 

exchange with “reasonable certainty”; they established Virginia 

Conservation’s binding contractual right to the Virginia tax 

credits; and they secured Virginia Conservation’s rights by an 

indemnification clause. In addition, the Tax Court observed 

that Virginia Conservation’s share of the Virginia tax credits 

was disproportionately large in comparison to its membership 

interest and that it had no obligation to return the credits to 

Route 231. As such, the Tax Court held that the transfer 

between Route 231 and Virginia Conservation was a disguised sale 

and that the $3,816,000 received was thus gross income.

Lastly, the Tax Court rejected Route 231’s argument that 

the transfer occurred for tax purposes in 2006, instead of 2005,

for three separate and independent reasons. First, for purposes 

of federal tax law, the factual circumstances indicate the sale 

occurred in 2005; second, because Route 231 used the accrual 
10

method of accounting, it had to report the transfer as income in 

2005 regardless of when it received Virginia Conservation’s 

payment; and, third, Route 231’s statements in its 2005 tax 

return constituted binding admissions that the transfer of money 

(however characterized) occurred in 2005. 

Route 231 noted a timely appeal, and this Court has 

jurisdiction pursuant to 26 U.S.C. § 7482(a)(1).

II.

Route 231 reasserts its two arguments on appeal. It

principally contends that the Virginia tax credit transaction 

with Virginia Conservation constituted a nontaxable capital 

contribution followed by a permissible allocation of partnership 

assets to a bona fide partner. In the alternative, Route 231

asserts that even if Virginia Conservation’s payment was part of 

a sale of tax credits, then the sale occurred in 2006 and not 

2005. If that is so, then because 2006 is a closed tax year as 

to Route 231, the IRS could not adjust income the LLC received 

in that year.6 

 6 At the same time it issued the 2005 FPAA, the Commissioner 

issued an FPAA with respect to Route 231’s 2006 tax return. 

However, Route 231 did not challenge those adjustments before 

the U.S. Tax Court. Accordingly, the limitations period for the 

IRS to adjust Route 231’s 2006 return expired one year and 151

days after the date of the FPAA, see I.R.C. § 6229(d), or in 

August 2011. Therefore, 2006 is now a closed tax year. 
11

In addressing these arguments, we review the decision of 

the Tax Court “on the same basis as [a] decision[] in [a] civil 

bench trial[] in United States district court[].” Waterman v. 

Comm’r, 179 F.3d 124, 126 (4th Cir. 1999). Accordingly, we

review the Tax Court’s legal conclusions de novo and its factual 

findings for clear error. Va. Historic, 639 F.3d at 142.

A. Disguised Sale

It comes as no secret that taxpayers often seek to 

structure transactions creatively in an effort to minimize the 

tax consequences. Id. at 138. In response, Congress has 

enacted various statutes that look beyond form to substance in 

order to differentiate taxable and nontaxable events. Id. The 

characterization of the structure of Route 231’s transaction 

with Virginia Conservation – a contribution to partnership 

capital or a sale of assets – has significant tax consequences: 

“[w]hereas a partnership must report any proceeds received from 

the sale of its assets as taxable income, partners’ 

contributions to capital and a partnership’s distributions to 

partners are tax-free.” Id.

Relevant to this case is I.R.C. § 707, which “prevents use 

of the partnership provisions to render nontaxable what would in 

substance have been a taxable exchange if it had not been ‘run 

through’ the partnership.” Id. In such a circumstance, the 

transaction between the partner and partnership is treated as if 
12

a transaction between third parties regardless of the 

partnership format: “[i]f a partner engages in a transaction 

with a partnership other than in his capacity as a member of 

such partnership, the transaction shall, except as otherwise 

provided in this section, be considered as occurring between the 

partnership and one who is not a partner.” I.R.C. § 

707(a)(1)(A). 

Particularly applicable in this case is § 707(a)(2)(B), 

which provides:

(B) Treatment of certain property transfers. If--

(i) there is a direct or indirect transfer of 

money or other property by a partner to a 

partnership, 

(ii) there is a related direct or indirect 

transfer of money or other property by the 

partnership to such partner (or another 

partner), and 

(iii) the transfers described in clauses (i) and 

(ii), when viewed together, are properly 

characterized as a sale or exchange of 

property,

such transfers shall be treated either as a 

transaction described in paragraph (1) . . . .

The treasury regulations further explain when such transactions 

are “properly characterized as a sale or exchange of property.” 

See 26 C.F.R. § 1.707-3.7 In general, a partner/partnership 

 7 The regulation describes such “disguised sales” as 

transactions in which a partner transfers “property” to the 

partnership and the partnership transfers “money or other 

consideration to the partner.” 26 C.F.R. § 1.707-3(a)(1). 

(Continued)
13

transaction is a sale “if based on all the facts and 

circumstances,” “[t]he transfer of money or other consideration 

would not have been made but for the transfer of property” and, 

when the transfers are not simultaneous, “the subsequent 

transfer is not dependent on the entrepreneurial risks of 

partnership operation.” § 1.707-3(b)(1). 

The regulations additionally provide a non-exclusive list 

of ten relevant facts and circumstances “that may tend to prove 

the existence of a sale,” including whether “the timing and 

amount of a subsequent transfer are determinable with reasonable 

certainty at the time of an earlier transfer”; “the transferor 

has a legally enforceable right to the subsequent transfer”; 

“the partner’s right to receive the transfer of money or other 

consideration is secured in any manner”; “the transfer of money 

or other consideration by the partnership to the partner is 

disproportionately large in relationship to the partner’s 

general and continuing interest in partnership profits”; and 

“the partner has no obligation to return or repay the money or 

other consideration to the partnership[.]” § 1.707-3(b)(2). 

The regulations also create a presumption of a sale whenever the 

 

However, we have observed that the regulations specifically 

provide that these principles also apply when a partnership 

transfers “property” to a partner in exchange for “money or

other consideration.” See Va. Historic, 639 F.3d at 139 (citing 

26 C.F.R. § 1.707-6(a)). 
14

partner/partnership transfers occur within a two-year period 

“unless the facts and circumstances clearly establish that the 

transfers do not constitute a sale.” § 1.707-3(c)(1). “This 

presumption places a high burden on the partnership to establish 

the validity of any suspect partnership transfers.” Va. 

Historic, 639 F.3d at 139.

Route 231 takes issue with the Tax Court’s reliance on 

Virginia Historic in the application of § 707. Its arguments 

largely attempt to distinguish its transaction with Virginia 

Conservation from what occurred in that case, where a 

partnership “reported a series of transactions with investor 

partners” as capital contributions rather than as income from 

“sales” of state historic rehabilitation tax credits. Id. at 

132-33. The Virginia Historic partnership actively sought 

investors to contribute “capital” in exchange for a less-thanone-percent partnership interest and an “allocation” of the 

state tax credits. Id. at 133-35. The Commissioner asserted 

that the investors were not bona fide partners and that “under 

the relevant Code provisions and regulations,” “the transactions 

between the investors and the [partnership] should nevertheless 

be classified as sales for federal tax purposes[.]” Id. at 137. 

We assumed, without deciding, that the investors were bona 

fide partners, but found that the Commissioner correctly 

classified that series of transactions. Id. After rejecting
15

the partnership’s contention that the tax credits did not 

constitute “property” for purposes of the “disguised sales” 

rules, we concluded the partnership failed to overcome the 

presumption that the exchange was a “sale” based on the 

applicable regulatory factors. Id. at 140-46.

In attempting to distinguish Virginia Historic, Route 231 

points to its “emphas[is] that [the Court was] not deciding 

whether tax credits always constitute ‘property’ in the 

abstract. Rather, [the Court was] asked to decide only whether 

the transfer of tax credits acquired by a non-developer 

partnership to investors in exchange for money constituted ‘a 

transfer of property’ for purposes of § 707.” Id. at 141 n.15. 

Route 231 contends this language limited Virginia Historic’s 

holding to sham partnerships that “ceased to exist as soon as 

the credits were transferred” and that the “disguised sale rules 

do not apply to a valid partnership with economic substance like 

Route 231.” (Opening Br. 26.) Furthermore, Route 231 posits

that because Virginia Conservation remains a bona fide partner 

in an ongoing partnership, the transfer of tax credits was 

“simply an allocation [of partnership assets] among partners, 

and not a sale of property by a sham entity to transitory 

investors.” (Opening Br. 27.)

Route 231’s argument misses the mark. We note initially 

that Route 231 does not challenge the validity of § 707 or the
16

corresponding regulations. For the most part, Route 231 also 

does not challenge the Tax Court’s application of the § 1.707-

3(c) “facts and circumstances” test to the circumstances 

surrounding its transaction with Virginia Conservation. 

Although Route 231 denies doing so, most of its arguments center 

on the premise that as Virginia Conservation is a bona fide 

partner in a bona fide partnership, its partner/partnership 

transactions are immune from the scope of § 707 and related 

provisions. Put another way, Route 231 contends § 707 cannot 

apply to the transaction at issue here because the entities 

involved are bona fide entities in a genuine contractual 

relationship.

The Commissioner does not contest that Route 231 is a valid

entity or that Virginia Conservation is a true partner in it.

Neither did the Tax Court rely on a failure of the bona fides of 

the entities in reaching its decision. There was no need to do 

so as Route 231’s argument fails under the plain language of § 

707, which expressly applies to transactions between a partner 

and partnership without qualification whenever a partner 

“engages in a transaction with a partnership other than in his 

capacity as a member of such partnership.” The bona fides of 

Virginia Conservation’s status as a member of Route 231, or that 

entity’s status as a valid limited liability company (and valid 

partnership for tax purposes) do not matter for this inquiry. 
17

In short, the analysis under § 707 goes to the bona fides of a 

particular transaction, not to the general status of the 

participants to that transaction. Contrary to Route 231’s 

repeated assertions, I.R.C. § 707 applies by its plain terms to

designated transactions between otherwise valid ongoing 

partnerships and their legitimate partners.8 

Relatedly, in Virginia Historic we expressly did not 

analyze whether the partnership itself was legitimate, nor did 

we limit § 707’s scope to sham partnerships. Quite the 

contrary, the Court expressly assumed the existence of a bona 

fide partnership and proceeded directly to analyzing whether the 

transaction nonetheless constituted a disguised sale under § 

707. Cf. Va. Historic, 639 F.3d at 137. So, too, here: this 

case does not turn at all on characteristics of the Route 231 

 8 To supports its contention that § 707 and the disguised 

sale rules apply only when a partnership is illegitimate or a 

sham, Route 231 points to Historic Boardwalk Hall, LLC v. 

Commissioner, 694 F.3d 425 (3d Cir. 2012). There, the Third 

Circuit observed that some of the same principles applicable to 

disguised sales also apply in the separate context of 

determining whether a bona fide partnership exists. Where those 

points overlapped, the court relied in part on our decision in 

Virginia Historic. See id. at 454-55. Nothing about the 

Commissioner’s position or the analysis in Historic Boardwalk

suggests that the two analyses can only take place together, or 

that a bona fide partnership cannot engage in a transaction that 

§ 707 recognizes as a disguised sale between a partnership and 

its partner. To the extent that its analysis is persuasive 

authority, Historic Boardwalk stands for the unremarkable 

principle that in certain instances, factors relevant to the one 

of these inquiries may overlap with factors relevant to the 

other.
18

entity or its members. Instead, as contemplated by § 707(a), 

this case turns on the nature of the transaction at issue: the 

exchange of Virginia tax credits for money.9

Turning to the specific circumstances of Virginia 

Conservation and Route 231’s transaction, we first determine 

whether the Virginia tax credits constitute “property” within 

the scope of I.R.C. § 707 (regulating the “transfer of money or 

other property”). We agree with the Tax Court’s analysis and 

its conclusion that the Virginia tax credits are “property” for 

purposes of I.R.C. § 707. The tax credits’ status as “property” 

is evidenced by their value as an inducement to Virginia 

Conservation to join Route 231. It bears noting that Virginia 

Conservation was paying fifty-three cents on the dollar for a 

credit worth a full dollar in tax relief from Virginia state 

income tax: a transaction of real economic value. Moreover,

Route 231’s ownership of the Virginia tax credits gave rise to 

such essential proprietary rights as the right to own or use an 

item, to exclude others from ownership, and the right to 

 9 Nor did Virginia Historic limit § 707(a)’s scope to nondeveloper partnerships as Route 231 contends. To be sure, in 

examining the transaction at issue in Virginia Historic, we 

pointed out that our holding that the tax credits were property 

arose in the factual context of a “non-developer partnership,” 

and that tax credits may not categorically constitute 

“property.” But this language simply recognizes the factual 

setting of Virginia Historic and reflects the requisite analysis 

of “property” must be made in each case and not taken as a per 

se rule. 
19

transfer them as permitted under state law. In addition, as we 

explained in greater detail in Virginia Historic, treating the 

tax credits as “property” is consistent “with Congress’s intent 

to widen [§ 707’s] reach” when that statute was amended in 1984. 

See 639 F.3d at 142. 

Having determined that the Virginia tax credits constitute 

“property,” we turn to whether the transfer of this property 

from Route 231 to Virginia Conservation constituted a “sale.” 

Because the exchange of tax credits for money occurred within a 

two-year period, the presumption that the transaction is a 

disguised sale arises unless the “facts and circumstances 

clearly establish” otherwise. See 26 C.F.R. § 1.707-3(c)(1). 

The regulations provide that transactions of this nature are in 

fact sales if, “based on all the facts and circumstances,” (1) 

the transfer of money would not have been made without the 

transfer of property, and (2) the subsequent transfer was not 

dependent on the entrepreneurial risks of the partnership. 26 

C.F.R. § 1.707-3(b)(1). 

The analysis of these two considerations is based on the 

totality of the “facts and circumstances,” including the ten

potentially applicable factors noted earlier. 26 C.F.R. § 

1.707-3(b)(2). As the Tax Court noted, among the items that 

“tend to prove the existence of a sale” in this case are:
20

• the fixed cash-to-credit ratio for the transaction as 

set out in the amended operating agreements, coupled 

with Route 231’s agreement to earn those tax credits 

by December 31, 2005 (cf. 26 C.F.R. § 1.707-

3(b)(2)(i); Va. Historic, 639 F.3d at 143); 

• Virginia Conservation’s contractual right under the 

amended operating agreement to all but Carr’s share 

of the tax credits Route 231 earned (cf. 26 C.F.R. § 

1.707-3(b)(2)(ii); Va. Historic, 639 F.3d at 143); 

• Virginia Conservation’s right to be indemnified by 

Route 231, Carr, and Humiston should it not receive 

all the tax credits for which it provided Route 231 

money (cf. 26 C.F.R. § 1.707-3(b)(2)(iii); Va.

Historic, 639 F.3d at 143-44)10; 

• Carr’s agreement to reduce the amount of tax credits 

he would receive so that Route 231 could transfer to 

Virginia Conservation the full amount of tax credits 

for which it had contracted and paid (cf. 26 C.F.R. § 

1.707-3(b)(2)(v)); 

• That Virginia Conservation received a 1% interest in 

the LLC and yet received 97% of Route 231’s state tax 

credits for the “contribution” of $3,816,000 while 

Carr and Humiston each received a 50% (later reduced 

 10 We reject Route 231’s argument that the amended operating 

agreements’ indemnity clause should not serve as proof that 

Virginia Conservation’s right to the tax credits or their value 

was secured. Route 231 contends that the indemnity clause did 

not “fully protect [it] from partnership risks” because Route 

231, Carr, and Humiston had minimal available assets should any 

one of them have been required to pay Virginia Conservation in 

satisfaction of the indemnity obligation. That argument 

misunderstands the relevant factor, which is whether “the 

partner’s right to receive the transfer of money or other 

consideration is secured in any manner[.]” 26 C.F.R. § 1.707-

3(b)(2)(iii). The regulation only asks whether the secured 

right exists, not whether there is a risk that the secured party 

may not in fact be able to collect on a judgment for breach of

contract at some point in time. Because the indemnity clause 

creates a legally enforceable right of indemnity, the Tax Court 

appropriately concluded that this factor weighed in favor of a 

disguised sale.
21

to 49.5%) interest in the partnership and yet 

received 3% and 0% of Route 231’s conservation tax 

credits for their “contributions” of $2,300,000 (cf.

26 C.F.R. § 1.707-3(b)(2)(ix); Va. Historic, 639 F.3d 

at 144); and

• That Virginia Conservation had no obligation to return 

or repay the tax credits to Route 231, but exercised 

full ownership rights in them (cf. 26 C.F.R. § 1.707-

3(b)(2)(x); Va. Historic, 639 F.3d at 144). 

 

These facts and circumstances form the basis for our 

conclusion that the Tax Court correctly determined that this

transaction was a sale under 26 C.F.R. § 1.707-3(b)(1). Viewing 

all the circumstances surrounding this transaction, and in 

particular the terms of the amended operating agreements, the 

Tax Court did not err in finding that “Route 231 would not have 

transferred $7,200,000 of Virginia tax credits to Virginia 

Conservation but for the fact that Virginia Conservation had 

transferred $3,816,000 to it” and vice versa. J.A. 1526; cf. 26 

C.F.R. § 1.707-3(b)(1)(i). 

Moreover, Virginia Conservation’s right to the tax credits 

did not depend on the entrepreneurial risks of Route 231’s

operations. Cf. 26 C.F.R. § 1.707-3(b)(1)(ii). Arguing to the 

contrary, Route 231 points to Virginia Conservation’s assuming 

certain entrepreneurial risks as a partner in an ongoing 

partnership, but 26 C.F.R. § 1.707-3(b)(1)(ii) focuses on 

whether the later of the two transfers depended on the 

entrepreneurial risks of Route 231. Here, the plain language of 
22

the amended operating agreements created a fixed cash-to-credit 

ratio to determine what each party would exchange. They also 

contained a specific guarantee that Virginia Conservation would 

receive all of the tax credits it paid for and that it would be 

entitled to reimbursement in cash for any shortfall. At bottom, 

Virginia Conservation’s right to the tax credits depended on 

fixed contractual terms, not the entrepreneurial risks of Route 

231’s operations. 

For these reasons, our review of the record leads us to the 

firm belief that Route 231 failed to rebut the presumption that 

the transaction between Route 231 and Virginia Conservation was 

a sale. Cf. 26 C.F.R. § 1.707-3(c) (creating a presumption that 

transfers made within two years are presumed to be a sale 

“unless the facts and circumstances clearly establish” 

otherwise). Accordingly, we hold that the Tax Court did not err 

in agreeing with the Commissioner that the money Route 231 

received from Virginia Conservation was “income” for federal tax 

purposes. 

B. Applicable Tax Year

Route 231 contends that even if the funds it received from 

Virginia Conservation should have been reported as “income,” 

that income was reportable in 2006 rather than 2005. If Route 

231 is correct, then the determination that the Virginia tax 

credit transfer constituted “income” would have no impact on it 
23

because the IRS did not seek an adjustment of Route 231’s 2006 

tax return on that ground and any change to that tax year is now 

barred by the statute of limitations. See I.R.C. § 6229 

(articulating the limitations period for making assessments).

As we discuss below, we find none of Route 231’s arguments 

on the applicable tax year to be meritorious. The Tax Court 

correctly determined that the tax credit sale occurred in 2005 

for federal tax purposes.11

1.

As an initial matter, Route 231 remains bound by its 

affirmative representation on its 2005 federal tax form that it 

received $3,816,000 from Virginia Conservation in 2005. That 

factual representation to the Commissioner sets the parameters 

of the legal dispute between the Commissioner and Route 231: 

given that this transaction occurred, how does the Internal 

Revenue Code characterize it? 

We have previously recognized with approval the Fifth 

Circuit’s decision in Wichita Coca Cola Bottling Co. v. United 

States, 152 F.2d 6 (5th Cir. 1945), where the court recognized 

that a “duty of consistency in tax accounting” does not require 

 11 Route 231 also raises evidentiary challenges to some of 

the exhibits the Tax Court relied upon in concluding the sale 

occurred in 2005. Because other independent evidence fully 

supports the Tax Court’s conclusion, it is unnecessary to 

address those arguments. See 28 U.S.C. § 2111.
24

a “willful misrepresentation” to be proven, nor does it require 

“all the elements of a technical estoppel. It arises rather 

from the duty of disclosure which the law puts on the taxpayer, 

along with the duty of handling his accounting so it will fairly 

subject his income to taxation.” Id. at 8, relied on favorably 

in Interlochen Co. v. Comm’r, 232 F.2d 873, 877-78 (4th Cir. 

1956). Thus, in Wichita Coca Cola Bottling Co., the Fifth 

Circuit concluded that if a taxpayer mistakenly “represented a 

transaction as to defer taxation on it to a later year he ought 

not, when the time for taxation under his view of it comes, to 

be allowed to assert the tax ought to have been levied in the 

former year if it is then too late so to levy it.” 152 F.2d at 

8.

The same basic principle applies here. Through its 2005 

tax return, Route 231 represented to the IRS that the events 

constituting the transaction occurred in 2005. Upon proof that 

the reported tax credit transaction is properly characterized as 

a disguised sale and thus taxable as income, Route 231 cannot 

then be allowed to assert the transaction occurred in a 

different year than it represented, given that it is too late to 

require Route 231 to report it as income in the later year, 

2006. 

The bottom-line principle remains constant: A taxpayer may 

be barred from taking one factual position in a tax return and 
25

then taking an inconsistent position later in a court proceeding 

in an effort to avoid liability based on the altered tax 

consequences of the original position. E.g., Janis v. Comm’r, 

461 F.3d 1080, 1085 (9th Cir. 2006) (“‘[T]he duty of consistency 

not only reflects basic fairness, but also shows a proper regard 

for the administration of justice and the dignity of the law. 

The law should not be such a[n] idiot that it cannot prevent a 

taxpayer from changing the historical facts from year to year in 

order to escape a fair share of the burdens of maintaining our 

government. Our tax system depends upon self assessment and 

honesty, rather than upon hiding of the pea or forgetful 

[equivocation].’” (quoting Estate of Ashman v. Comm’r, 231 F.3d 

541, 544 (9th Cir. 2000))); Alamo Nat’l Bank v. Comm’r, 95 F.2d 

622, 623 (5th Cir. 1938) (“It is no more right to allow a party 

to blow hot and cold as suits his interests in tax matters than 

in other relationships. Whether it be called estoppel, or a 

duty of consistency, or the fixing of a fact by agreement, the 

fact fixed for one year ought to remain fixed in all its 

consequences, unless a more just general settlement is proposed 

and can be effected.”). Accordingly, the Tax Court did not err 

in concluding Route 231 remained bound by its original factual 
26

representation that the transfer of funds from Virginia 

Conservation occurred in 2005.12

2.

Quite apart from the equitable consistency consideration, 

we also conclude that the record demonstrates the sale of 

Virginia tax credits in fact occurred in 2005. In particular, 

the record supports the Tax Court’s determination that Route 231 

transferred to Virginia Conservation before January 1, 2006 the 

 12 Route 231 urges that the duty of consistency should not 

apply because, among other things, the IRS could have, and yet 

did not, challenge Route 231’s 2006 return in light of its 

position with respect to Route 231’s 2005 return. As such, it 

contends the Commissioner is responsible for its inability to 

adjust the 2006 return. In addition, it contends the 

Commissioner’s position in this case is inconsistent with its 

position in Virginia Historic, where adjustments were proposed 

to two years of tax returns based on the argument that the 

challenged transactions constituted sales and where the 

Commissioner agreed that any adjustments should be made to the 

second year’s returns. 

This argument overlooks key factual differences between 

this case and Virginia Historic. There, the partnership engaged 

in multiple transactions with partners that occurred “between 

November 2001 and April 2002.” 639 F.3d at 135. The 

Commissioner challenged the partnership’s tax returns for both 

2001 and 2002 because the transactions at issue occurred in both 

tax years. Furthermore, the Commissioner stipulated that any 

adjustments for all of the transactions should apply to the 

partnership’s 2002 tax returns. Id. at 136. That stipulation 

has no bearing on the Commissioner’s position in this case and 

even less on the appropriate analysis. Here, in contrast, the 

Commissioner only challenged one transaction. The Commissioner 

appropriately challenged Route 231’s characterization of that 

transaction for the tax year where Route 231 reported the 

transaction as having occurred. Far from being inconsistent 

positions, the Commissioner has taken its position based on the 

facts of the cases before it. 
27

tax credits that it had earned because of the December 30 

conservation donation. 

Under the then-applicable Virginia statute, Va. Code § 

58.1-512 (2005), Route 231 earned tax credits as a matter of law 

as soon as it made a qualifying conservation donation. The

statute set out – among other things – the value of the tax 

credits (“50% of the fair market value”), what type of donation 

qualified, and how the fair market value of the donation was to 

be substantiated. See Va. Code § 58.1-512 (2005). As the Tax 

Court observed, this statutory language was later amended to add 

language requiring taxpayers to “apply for a credit” that would 

then be “issued” by the Virginia Department of Taxation. Va. 

Code § 58.1-512(D)-(E) (2007). But that amended language was 

not the law of Virginia in 2005.

Based on the applicable Virginia statutory language, Route 

231 earned the tax credits by making the statutorily compliant 

donation on December 30, 2005. Notably, Route 231 does not 

contend that it had failed to meet any of the Virginia statutory 

requirements, and it only speculates that the Virginia 

Department of Taxation might have decreased the anticipated 

number of earned tax credits despite having satisfied those 

requirements. The point remains, under the applicable state 
28

statutes, Route 231 earned – and therefore owned – tax credits 

as of the time of its donation, which occurred in 2005.13 

The record also shows that Route 231 transferred all but 

Carr’s share of those tax credits to Virginia Conservation in 

2005. Under 26 C.F.R. § 1.707-3(a)(2), a 

sale is considered to take place on the date that, 

under general principles of Federal tax law, the 

partnership is considered the owner of the property. 

If the transfer . . . from the partnership to the 

partner occurs after the transfer . . . . to the 

partnership[,] the partner and the partnership are 

treated as if, on the date of the sale, the 

partnership transferred to the partner an obligation 

to transfer to the partner[.]

As noted earlier, a corollary principle applies when the 

transfer from the partner occurs after the transfer from the 

partnership. See 26 C.F.R. § 1.707-6(a). 

Under federal tax law, an entity “owns” property when it 

possesses the benefits and burdens of ownership. The Tax Court

appropriately applied a multi-factor analysis to determine 

whether Route 231 owned the tax credits in 2005. The relevant 

 13 Route 231’s argument that while it might have been able 

to use the tax credits immediately, it could not transfer the 

credits without registering them misreads the applicable 

Virginia statute. Va. Code § 58.1-513(C) (2005) allowed the 

transfer of “unused but otherwise allowable credit for use by 

another taxpayer on Virginia income tax returns” without 

reservation. While that statute required taxpayers to file a 

notification of the transfer with the Virginia Department of 

Taxation, nothing in the statute required that the notification 

occur prior to the transfer of tax credits. See Va. Code § 

58.1-513(C) (2005).
29

factors in that analysis include: whether legal title passed; 

how the parties treated the transaction; whether an equity 

interest in the property was acquired; whether the contract 

created a present obligation on the seller to execute and 

deliver a deed and a present obligation on the purchaser to make 

payments; whether the right of possession was vested in the 

purchasers; which party bore the risk of loss or damage to the 

property; and which party received profits from the operation 

and sale of the property. Calloway v. Comm’r, 691 F.3d 1315, 

1327-28 (11th Cir. 2012); Arevalo v. Comm’r, 469 F.3d 436, 439 

(5th Cir. 2006); Crooks v. Comm’r, 453 F.3d 653, 656 (6th Cir. 

2006); Upham v. Comm’r, 923 F.2d 1328, 1334 (8th Cir. 1991). No 

one of these factors controls, as the determination of ownership

is based on all the facts and circumstances of a particular 

case, and some factors may be “ill-suited or irrelevant” to a 

particular case. Calloway, 691 F.3d at 1327.

Under the totality of the relevant circumstances here, the 

Tax Court correctly determined that the sale occurred in 2005. 

We already discussed Route 231’s representation on its 2005 

federal tax forms, but that is just one of several instances 

where Route 231 treated or represented the transfer as occurring

in 2005. Route 231’s Forms LPC represented to the Virginia 

Department of Taxation that the tax credits had been transferred 

to Virginia Conservation in December 2005. In addition, the 
30

first amended operating agreement (signed on December 28) 

created a present contractual obligation for Route 231 to convey 

to Virginia Conservation all but $300,000 of any tax credits 

Route 231 earned from a conservation donation before December 

31, 2005. Thus, as soon as Route 231 earned the tax credits by 

recording the statutory-compliant conservation donation on 

December 30, 2005, Virginia Conservation had the legal right to 

those credits. 

As further support for our conclusion, the language used in 

Route 231’s second amended agreement (signed January 1, 2006) 

recited the salient sale events as having occurred in the past, 

not as prospective acts. For example, that agreement refers to 

Virginia Conservation as having “made” its contribution, Route 

231 as having “duly earned” the tax credits, and those credits 

having “been allocated” to Carr and Virginia Conservation, 

respectively. (J.A. 504, 508, 517.) Lastly, in additional 

correspondence between Route 231, Virginia Conservation, and the 

escrow agent, Route 231 specifically recognized the potential 

tax consequences of the transaction occurring in 2005 versus 

2006, and maintained that it occurred in 2005. Consistent with 

that view, when a concern arose as to who bore the risk of loss 

and owned any interest earned while the funds were held in 

escrow, Route 231 and Virginia Conservation agreed that Route 

231 bore that risk and would also be entitled to any interest 
31

earned. During those discussions, Route 231 affirmed that 

Virginia Conservation’s payment of the funds into escrow (in 

December 2005) “satisfied [its] contractual obligation to 

contribute to the capital of Route 231.” (J.A. 608.) 

To recap, Virginia Conservation had legal title, an equity 

interest in, and the right to possess the tax credits as soon as 

Route 231 earned them in 2005; Route 231, Virginia Conservation, 

and other parties to the transaction all intended for the 

transaction to occur, and treated the transaction as having 

occurred, in 2005 throughout the negotiations up until the 

Commissioner challenged how Route 231 characterized the transfer 

on its federal tax return; and the first amended operating 

agreement gave rise to a present obligation on the part of Route 

231 to transfer the tax credits earned in 2005, while the second 

amended operating agreement documented that this obligation had 

been satisfied. All of these circumstances demonstrate that the 

sale occurred in 2005.

Route 231 argues that this analysis ignores the language of 

the escrow agreements and the fact that Virginia Conservation 

did not authorize release of the funds from escrow until March 

2006, after it confirmed receiving various documents related to 

the conservation donation and the Virginia tax credit 

transaction numbers. To the contrary, the above analysis takes 

the totality of circumstances into consideration rather than 
32

focusing on the escrow agreements apart from the whole. This 

conclusion also finds support in the language of the escrow 

agreements, which provide that only two events automatically 

required the escrow agent to return the funds to Virginia 

Conservation and thus cancelled the sale: failure to record the 

charitable donations “on or before December 31, 2005” or failure 

to admit Virginia Conservation as a Route 231 partner “on or 

before December 31, 2005.” (J.A. 532, 536, 540.) Both those

events were known and satisfied before the end of 2005, so the 

escrow agreements’ contingency could not have occurred in 2006. 

The remaining acts Route 231 points to as showing a sale of 

tax credits did not occur in 2005 – that it provide Virginia 

Conservation copies of certain documents relating to the 

conservation donation and the tax credits, and that Virginia 

Conservation provide written confirmation of receiving them –

are of no consequence. These acts are ministerial, not 

substantive. The escrow agreements only speak to Route 231 

providing copies of documents and are not directly contingent on 

the outcome of the Virginia Department of Taxation’s review 

process. Providing copies is a quintessential ministerial task. 

See Black’s Law Dictionary 1011 (defining “ministerial” as “[o]f 

or relating to an act that involves obedience to instructions or 

laws instead of discretion, judgment, or skill”); see also Ray 

v. United States, 301 U.S. 158, 163 (1937). In the unlikely 
33

event that the Virginia Department of Taxation reduced the 

amount of tax credits Virginia Conservation would receive, the 

amended operating agreements (not the escrow agreements) 

directed how Virginia Conservation would be compensated. 

Moreover, it would have no bearing on the fact that Route 231 

sold a portion of its earned tax credits to Virginia 

Conservation in 2005. That is to say, it would not impact the 

fact of the sale. 

Based on the totality of the evidence, the sale of tax 

credits for money occurred in 2005, and all that remained in 

2006 were ministerial formalities. 

3.

Route 231’s argument fails for a third reason: it uses the 

accrual method of accounting, and under the principles 

applicable to the accrual method, the sale occurred in 2005. 

Gross income must be “included in the gross income for the 

taxable year in which received by the taxpayer, unless, under 

the method of accounting used in computing taxable income, such 

amount is to be properly accounted for as of a different 

period.” I.R.C. § 451(a). “Under an accrual method of 

accounting, income is includible in gross income when all the 

events have occurred which fix the right to receive such income 

and the amount thereof can be determined with reasonable 

accuracy.” 26 C.F.R. § 1.451-1(a). Generally speaking, this 
34

means that “income . . . is taxable in the year the income is 

accrued, or earned, even if it is not received in that year.” 

IES Indus., Inc. v. United States, 253 F.3d 350, 357 (8th Cir. 

2001). Although we do not have any published authority 

elaborating on what “all the events” means for purposes of 

applying this regulation, the Tax Court adopted a reasonable 

interpretation that other cases have used: (1) the required 

performance takes place, (2) the payment is due, or (3) the 

payment is made, whichever comes first. Johnson v. Comm’r, 108 

T.C. 448, 459 (1997), rev’d in part on other grounds, 184 F.3d 

786 (8th Cir. 1999).

Here, Route 231 earned Virginia Conservation’s $3,816,000 

payment with reasonable certainty in 2005 when it made the 

conservation donations that gave rise to the Virginia tax 

credits. Under the terms of the amended operating agreements, 

that act was sufficient to obligate Route 231 to transfer all 

but Carr’s share of the tax credits to Virginia Conservation. 

And, in turn, that occurrence was sufficient to obligate 

Virginia Conservation to pay Route 231 the pre-determined cashto-credit ratio for the tax credits. Consequently, by December 

31, 2005, “all the events [had] occurred which fix[ed] the right 

to receive [Virginia Conservation’s money] and the amount 

thereof c[ould] be determined with reasonable accuracy.” Cf. 26 

C.F.R. § 1.451-1(a). Accordingly, the Tax Court correctly 
35

determined that under the accrual method of accounting, Route 

231 was obligated to report the $3,816,000 in income from 

Virginia Conservation on its 2005 federal tax forms.

III.

For the reasons set out above, we affirm the Tax Court’s 

decision adjusting Route 231’s 2005 Return of Partnership Income 

federal tax form to reflect, in relevant part, income of

$3,816,000.

AFFIRMED