Tax: Good News/Bad News From The IRS On Developer Advances For Financing Project Infrastructure

October 1, 2015

In Internal Revenue Service ("IRS") Chief Counsel Advice #201537022, the IRS has determined that amounts advanced by a real estate developer to special municipal districts for the construction of infrastructure for the developer's real estate project should be treated as costs of developing the project even though the amounts advanced were structured as loans through bonds or other debt instruments. As a result, the tax bases of lots held for sale by the developer would include allocable shares of such costs.

In the Chief Counsel Advice, the IRS also determined that repayments of the advance that the developer receives from the special municipal districts are to be treated as a reduction in the project costs, regardless if the repayment is characterized as principal or interest on the bonds or other debt instrument, thereby resulting in reduced allocations to the bases of such lots. However, if any repayments are received by the developer after all lots have been sold, such repayments will be characterized as ordinary income to the developer and no portion can be treated as tax-exempt interest received from a municipality.

The IRS Chief Counsel Advice prevents the real estate developer from treating any portion of the repayment of the advance for the construction of infrastructure as tax-exempt income but sanctions such advance as costs of developing the property for tax purposes.

Stanley E. Heyman specializes in federal, state and local tax planning, estate and gift planning, probate, estate and trust administration, property taxation, employee benefits and tax controversy matters.

Mr. Heyman represents all forms of business organizations in tax matters from formation through dissolution. Mr. Heyman also advises clients on pension, ERISA and executive compensation matters. Mr. Heyman further represents high net worth individuals in tax, estate planning and wealth preservation matters. Additionally, Mr. Heyman is licensed in California as a Certified Public Accountant.

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