I cannot comment on any specific situation, but generally speaking you are entering into an extremely complicated (and contentious) area of tax law when you propose to restructure your arrangement with the tenant for the purpose of reducing your federal tax liability. I hinted at this issue above with my citation to
Hamilton National Bank of Chattanooga,
supra.
Under certain circumstances, a transaction can be disregarded for federal tax purposes if the transaction lacks "economic substance". See generally, e.g.,
AD Investment 2000 Fund v. Commissioner,
TC Memo 2015-223 at *23;
Palm Canyon X Investments v. Commissioner,
TC Memo 2009-288 at *41. The general rule is now partially (but not entirely) codified at
26 USC § 7701(o)(1), which reads as follows:
| In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if— (A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and (B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.
|
The opening words of this provision indicate that the rule applies if it is "relevant", but the statute does not say when this rule is "relevant", although it does say that (if otherwise "relevant") the rule applies to individuals for "transactions entered into in connection with a trade or business or an activity engaged in for the production of income" (which seemingly would include the rental of property).
26 USC § 7701(o)(5)(B). Neither the statute nor the judicial opinions are "a model of clarity",
United States v. Coplan,
703 F 3d 46, 91 (2nd Cir 2012), and there is significant debate over when this rule is "relevant" (within the meaning of the opening words of the provision). See, e.g., Andy Grewal,
Economic Substance and the Supreme Court,
Tax Notes, Vol 116, No 11 at *969 (2007) (arguing that economic substance is relevant only if a particular statute makes it relevant, and not otherwise).
To be on the safe side, it may be a good idea to be able to articulate, and to document, why the proposed transaction meets the conjunctive test of 26 USC § 7701(o)(1), quoted above, even if economic substance is not a relevant issue (and I express no view on whether it is a relevant issue). I also express no view on whether any of the proposed transactions discussed in this thread would meet the conjunctive test.