Opinion ID: 3168238
Heading Depth: 2
Heading Rank: 2

Heading: Applicable Tax Year

Text: 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 22 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
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. 23 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 24 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 25 representation that the transfer of funds from Virginia Conservation occurred in 2005. 12
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 12Route 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. 26 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 27 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). 28 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 29 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 30 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 31 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 32 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.
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 33 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 34 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.