U.S. Tax Court: Transfers of real estate to liquidating trusts not bona fide dispositions

Transfers of real estate to liquidating trusts

The U.S. Tax Court today held that the transfers of parcels of real estate by a real estate developer to liquidating trusts (for the benefit of mortgage holders) did not have the effect of producing the losses claimed for the years because there were no bona fide dispositions or completed transactions regarding the property transfers to the liquidating trusts.


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The case is: Sage v. Commissioner, 154 T.C. No. 12 (June 2, 2020). Read the Tax Court’s opinion [PDF 132 KB]


The taxpayer (a real estate developer) owned through a subchapter S corporation, three parcels of real estate in Oregon that were encumbered by liabilities in excess of their fair market values. In response to the 2008 economic recession, the S corporation in December 2009 engaged in a series of transactions designed to transfer the parcels to three separate liquidating trusts for the benefit of the mortgage holders. These were unilateral transactions in which the properties were placed in the trusts without any involvement from the beneficiaries.

Between 2010 and 2012, the liquidating trusts disposed of the parcels, and the mortgage holders applied the proceeds from these dispositions against the outstanding liabilities of the S corporation and its wholly owned limited liability company (LLC).

The S corporation reported significant losses as a result of the 2009 transactions—losses that the taxpayer claimed on his 2009 individual tax return. These losses gave rise to a net operating loss (NOL), which the taxpayer carried back to his 2006 tax year as an NOL carryback deduction and carried forward to his 2012 tax year as an NOL carryover deduction.

The IRS disallowed the losses reported by the S corporation and claimed by the taxpayer for the 2009 tax year; made correlative adjustments to the 2006 and 2012 NOL deductions; and determined deficiencies for 2006 and 2012. The taxpayer timely filed a petition with the Tax Court.

Today, the Tax Court held the NOL deductions were properly disallowed, finding that:

  • The proceeds of the Oregon parcels held by the liquidating trusts were applied to discharge certain liabilities of the S corporation and its wholly owned LLC between 2010 and 2012, and the S corporation and the LLC were the owners of the corresponding liquidating trusts during those years under the “grantor trust” provisions of sections 671-679.
  • Because the S corporation and the LLC owned the liquidating trusts beyond the close of the 2009 tax year, the losses reported by the S corporation and claimed by P for 2009 were not bona fide dispositions and not “evidenced by closed and completed transactions, fixed by identifiable events, and * * * actually sustained during” that year pursuant to Reg. section 1.165-1(b).

The Tax Court sustained the deficiencies and also the assessment of an accuracy-related penalty under section 6662 for 2012.

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