U.S. Tax Court ruling could affect developers
By GREG MOORE
Express Staff Writer
An opinion by a U.S. Tax Court judge in a case involving
Ketchum City Councilman David Hutchinson could make income tax payments
more burdensome for developers.
Judge Stephen Swift ruled on March 14 in Portland, Ore.,
that Hutchinson and his three partners in Valley Ranch Inc. could not
deduct estimated future interest paid to finance construction of the
Valley Club. The planned 99-home residential development and golf course
is just south of Ohio Gulch Road, about midway between Hailey and Ketchum.
Sales on the lots began in 1994 and the golf course opened in 1996.
The case arose when the Valley Ranch partners contested an
Internal Revenue Service claim that they owed an additional combined $1.1
million on their 1994 taxes. Hutchinson was alleged to be deficient
$442,746. The IRS disputed the methods by which the partners had
calculated their capital gains from the project.
According to Swift’s 29-page opinion, the case involved
two issues: Could the partners allocate estimated costs of future
improvements to the golf course and club to their cost of doing business
in 1994? And second, could they add the estimated interest on those costs?
On the first issue, the court ruled in favor of the
partners, regarding $3.7 million in estimated construction costs. On the
second, it ruled in favor of the IRS, regarding $5.8 million in estimated
interest.
The court has not yet issued a decision, to be based on
Swift’s opinion, setting the amount of additional taxes that will be
assessed.
To decide the first issue, Swift relied on an IRS rule
that allows deduction of estimated future construction costs, with the
intent of spreading those deductions over the life of the project, so long
as the developer will not be able to deduct them as depreciation. He
determined that the partners’ case fit that criterion, since they could
not legally begin to deduct depreciation costs for the $17 million golf
facilities until they were opened for business, and once they were opened,
they were to be turned over to a new owner, the Valley Club, Inc.
On the second issue, the court concluded that an IRS rule
allows deduction of interest only during the year it is incurred.
The partners’ Portland attorney, Neil Kimmelfield,
contended in an interview that Swift’s ruling on the second issue was
"clearly wrong." He maintained that Swift had misinterpreted the
rules.
Kimmelfield said he and his clients have not decided
whether to appeal that ruling. He said they will have 90 days after a
court decision is handed down to file an appeal.
He said the financing cost issue "could affect many
other developers." However, he added, "I think there is a
reasonable chance that the IRS will see that the decision was wrong and
not apply it."
Kimmelfield said the ruling’s effect on the partners is
only to determine what year they could apply the deductions, not the
amount. However, he said additional interest payments would accrue if they
are deemed to owe more money in 1994 rather than in subsequent years.
