Sugar Land Ranch Development, LLC v. Commissioner

Sugar Land Ranch Development, LLC (SLRD) (plaintiff) was formed in 1998 to acquire land in Sugar Land, Texas, and develop it into residential lots and commercial tracts. That year, SLRD purchased 888.5 acres of land consisting of four contiguous parcels. The land, formerly an oil field, bordered a planned community being developed by parties related to SLRD. SLRD planned to clean up the property and subdivide it into residential units for inclusion in that community. To that end, between 1998 and 2008, SLRD engaged in several property-development activities. During that period, SLRD sold or otherwise disposed of relatively small portions of the property. In late 2008, amid the subprime-mortgage crisis, SLRD’s managers decided to abandon all subdivision, development, and sales efforts and instead hold the property as an investment until the market recovered enough to sell it. This decision was memorialized in a 2008 unanimous consent and a 2009 member resolution. From 2008 to 2012, SLRD did not develop or market the land, nor did it subdivide or sell any lots. In 2011, Taylor Morrison of Texas, Inc. (Taylor Morrison) approached SLRD about purchasing three contiguous parcels, totaling 580.2 acres (TM parcels). In 2012, SLRD sold the TM parcels to Taylor Morrison for a lump sum. Afterward, SLRD decided to close out its property holdings by selling its remaining 133.2 acres in four transactions between 2012 and 2016. On its 2012 tax return, SLRD reported an aggregate capital gain of $9.5 million from the sale of the TM parcels. The commissioner of the Internal Revenue Service (defendant) assessed a deficiency, reclassifying the gain as ordinary income. SLRD petitioned the tax court for a redetermination.