The Herald Tribune published an interesting article on September 10, 2006, "Accountants, Others Question Settlement Between Buchanan, Wealthy Developer" with a follow-up asking "Can We All Use Buchanan's Tax Trick" (both noted on the Tax Prof blog on September 13).
Here's the deal based on those stories' description. In 2001, an auto magnate, Vern Buchanan, sued the developers of the Ritz Carlton in Sarasota for cutting him out of the development deal. The settlement amount was $1.35 million, but Buchanan didn't get cash. Instead, he bought a unit in the Ritz from one of the Buford developers for $5 million--about $2 million more than any apartment has sold for before or since in the building. The purchase contract was accompanied by a re-sale agreement--the condo would be resold to a related party of the seller on the first contract. The resale agreement was dated the same date as the purchase agreement, though not executed til just over a year later. The resale was at a price of $6.35 million. The difference between the purchase and resale price is the $1.35 settlement amount, which now could be claimed as a capital gain subject to tax at the low preferential rate for capital gains. Thus, it appears that the result of the settlement structuring was a federal income tax savings of more than $200,000.
Was this purchase/resale just a sham transaction that should be disregarded, under general tax "substance over form" principles, so that Buchanan should lose the preferential rate on the $1.35 million settlement? Part of the answer lies in the analysis of tax ownership. Did Buchanan actually own the condo between the date of the purchase and the re-sale? The agreement for re-sale eliminated market risk. Did he have an opportunity for gain and right to dispose? He reportedly tried to sell it to someone for more than the inflated price the Bufords agreed to pay, but wasn't successful in finding a buyer. Is that possibility so remote as to be not worthy of consideration, since no disinterested buyer would pay the inflated price provided in the resale contract? (Note that if resale to an unrelated party at that inflated price were a real possibility, it would mean Buchanan would have gotten nothing at all from the settlement. That would be a peculiar outcome to the lawsuit, since Buchanan could have purchased the apartment for less than the original purchase price without the lawsuit ever being waged!)
This analysis is complicated by three issues. First, the sale contract was with one Buford brother but the repurchase contract was with a related party. Does that prevent this deal from being viewed as a circular transaction? One might speculate that the Bufords had agreed to share the cost of the $1.35 million settlement. The one who repurchased the property might be entitled to a partial payment from the other to settle that deal. But that is speculation.
Second, Buchanan took out a multi-million dollar loan to be able to purchase the condo, so he was "on the hook" to repay that loan (though with a guarantee that he would be able to do so through the resale agreement). If this loan was secured by the condo (which the first Herald Tribune story suggests), one wonders (as did the writer of the Herald Tribune story) why a bank would offer a loan for more than $4 million on the basis of collateral that changed hands for $2.368 million between the developers shortly before the sale to Buchanan? It seems possible that the bank that provided the loan was aware of the contract for resale at $6.35 million, and thus saw that contract as removing any risk to the bank from the $5 million purchase price.
Third, what about the fact that Buchanan and his partners apparently used the condo for the year as a place to hold high profile charity events? That use was a benefit to Buchanan of holding the property. But that use also provided a benefit to the former and future owners--showcasing the Ritz penthouse suites to fat cats (who might be influenced as well by the ostensible sales price of $5 million to think the condos worth more than they could fetch in a functioning market). In fact, it was like having Buchanan host a series of 100 open houses for the benefit of the developers throughout the year that attracted just the right people for the developers to court. People seeing the purported $5 million penthouse wouldn't know about the repurchase agreement, because the records in the court case were conveniently and apparently inappropriately sealed by the judge at Buchanan's request and with the consent of the other parties. (The Florida Bar website's daily news summary for September 5, 2006 states that this was not a valid reason for sealing court documents. See this link. ) So the deal also provided some useful sales price puffery for the developers. Perhaps the use for Buchanan's events/showcasing for the developers is a quid pro quo exchange and not substantiation of Buchanan's claim for ownership.
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