837 F.3d 1093
11th Cir.2016Background
- Gregory and Melanie Boree (through Glen Forest, LLC) bought 1,892 acres in Baker County, FL (2002) and engaged in subdividing and selling lots as a development activity over several years.
- Glen Forest prepared subdivision plans, filed covenants calling itself the “developer,” built an unpaved road, obtained permits, and sold ~60 lots (~600 acres) between 2002–2006; it deducted development expenses as ordinary business expenses on tax returns.
- Baker County adopted moratoria and later paving and road-connection requirements (2004–2006) that increased development costs; Boree sought rezoning and a higher-density Planned Unit Development to justify paving expense.
- In February 2007 Borees sold ~1,067 acres in bulk to Adrian Development for ~$9.6 million; they reported the gain as long-term capital gain on their 2007 tax return.
- IRS issued a deficiency (2011) recharacterizing the gain as ordinary income ($1,784,242 deficiency) and assessed a 20% substantial understatement penalty; Tax Court sustained liability and penalty. Borees appealed.
- Eleventh Circuit affirmed the Tax Court’s recharacterization of the gain as ordinary income but reversed the penalty, finding Borees reasonably relied in good faith on their long-time CPA’s tax preparation.
Issues
| Issue | Boree's Argument | Commissioner/Respondent's Argument | Held |
|---|---|---|---|
| Whether 2007 bulk sale gain is ordinary income or capital gain | Borees: property was held primarily for investment at time of sale; changed purpose after county restrictions so bulk sale was non-business disposition | IRS: Borees held property primarily for sale in the ordinary course of business (development and lot sales) | Held: Ordinary income — facts (subdivision activity, frequent sales, development efforts, treatment on returns) show held for sale in ordinary course |
| Whether Borees segregated bulk‑sold acreage as investment separate from inventory | Borees: interior acreage was segregated and not part of inventory sold to individual lot buyers | IRS: No segregation; plans and maps treated whole tract as development; parcels included in earlier phases | Held: No segregation — Borees failed to establish that bulk parcel was segregated from development inventory |
| Whether gain was merely market appreciation (favoring capital gain) | Borees: profit mainly from market appreciation, not from Glen Forest’s ordinary business activities | IRS: Appreciation does not automatically convert business‑held property into capital asset when sale arises from ordinary course of business | Held: Rejected Borees’ argument — appreciation alone insufficient to convert property held for sale into capital asset |
| Whether substantial-understatement penalty should apply (reasonable cause and good faith) | Borees: reasonably relied on long-time, reputable CPA; provided full records; return preparer reported expenses and gain as treated | IRS: Borees should not have relied; return not prepared in good faith | Held: Penalty reversed — Borees showed reasonable cause and good‑faith reliance on competent tax advisor; Tax Court clearly erred in denying relief |
Key Cases Cited
- Gustashaw v. Comm’r, 696 F.3d 1124 (11th Cir. 2012) (standard of review for Tax Court factual and legal conclusions; reasonable reliance on professional advice)
- Long v. Comm’r, 772 F.3d 670 (11th Cir. 2014) (distinguishing capital asset treatment and §1221 exclusions)
- Comm’r v. Gillette Motor Transp., Inc., 364 U.S. 130 (Sup. Ct. 1960) (purpose of capital gains treatment)
- Corn Prods. Ref. Co. v. Comm’r, 350 U.S. 46 (Sup. Ct. 1955) (narrow construction of capital asset definition)
- United States v. Winthrop, 417 F.2d 905 (5th Cir. 1969) (seven-factor test for whether property was held primarily for sale in ordinary course)
- Sanders v. United States, 740 F.2d 886 (11th Cir. 1984) (applying Winthrop factors over multi-year activities)
- Suburban Realty Co. v. United States, 615 F.2d 171 (5th Cir. 1980) (analyzing purpose over time; investment vs. held for sale)
- Biedenharn Realty Co. v. United States, 526 F.2d 409 (5th Cir. 1976) (weight of frequency and substantiality of sales)
- Ridgewood Land Co. v. Comm’r, 477 F.2d 135 (5th Cir. 1973) (distinguishing cases where government action renders development futile)
- United States v. Boyle, 469 U.S. 241 (Sup. Ct. 1985) (reasonable reliance on accountant or attorney can demonstrate ordinary business care)