Tax Court broadly applies UNICAP rules to real estate developer.

• Author: Garrett, Richard
• Position: Uniform capitalization

Businesses that develop real estate should be aware of a recent Tax Court decision that very broadly applies Sec. 263A, and reaches an unfavorable result for the real estate developer involved. In Von-Lusk, 104 TC No. 8 (1995), the court held that costs (e.g., engineering and architectural fees) incurred by a partnership prior to the time actual production began were related to production and were required to be capitalized into the basis of the assets that would be constructed. The case significantly expands what many developers would have considered to be Sec. 263A costs in this context.

The Von-Lusk limited partnership was formed in 1966 for the purpose of managing, holding and developing approximately 278 acres of raw land in southern California. During 1988, 1989 and 1990, no construction took place on the land. Rather, the land was leased and used to grow grains and grass, while the partnership endeavored to receive the necessary permission from local governments to begin construction. The partnership proposed to construct residential housing on the land. Some preliminary governmental approval was received.

Based on the text of the court opinion, it appears that the Von-Lusk limited partnership had no employees, and conducted its business through the general partner's obtaining the services of independent contractors, who provided lobbying, engineering and architectural services and would meet with government officials. They also obtained building permits and zoning variances, negotiated permit fees, performed engineering and feasibility studies and drafted architectural plans. The contractors then billed the partnership.

Administrative and management services were provided to the partnership by a company that employed executives, project managers, secretaries and accountants. This...