Court Opinion

ID: 3168238
Source: CourtListenerOpinion
Date Created: 2016-01-08 20:00:54.118347+00
Date Added: 2024-06-11T11:51:30.135594
License: Public Domain

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.
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.

                                              2
                                        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.

                                         3
         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).

                                               4
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.

                                                  5
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.

                                                       6
       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 “pass-
through” 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).

                                         7
         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.

                                                  8
“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

                                            9
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.

                                             10
       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

                                              11
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

       7The 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)
                                             12
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)).

                                                        13
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-than-

one-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

                                                14
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

                                               15
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.

                                             16
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.

                                            17
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 non-
developer 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.

                                        18
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:

                                          19
         • 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.

                               20
               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

                                              21
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

                                         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

                                           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.

                                           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

                                     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

      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.

                                                 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

                                                 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 cash-

to-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.

                                    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

                                       35