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Washington’s Bravern Case Update


At the last two Contractor, Homebuilder and Developer state tax updates, we’ve mentioned the Bravern case as it has raised some concern for the overall construction industry.  This case deals with a Joint Venture and how certain payments should be taxed.  Here is an overview of the facts:

  • Bravern is an LLC formed to build a residential condo tower
  • The LLC had two members: a real estate development company (RD) and a real estate construction company (RC)
  • RD contributed land to the LLC for 99% ownership, while RC contributed construction services and materials
  • There was a “services addendum” between RC and the LLC indicating that RC would manage all of the work related to the construction.

The taxpayer’s position is that the LLC is a speculative builder with construction services being performed by one of the members.  In addition, they held that RC’s contribution of services to Bravern in return for an increase in a capital account and the subsequent distributions from the capital account were nontaxable transactions under WAC 458-20-106.

The Washington Department of Revenue (DOR) has taken the position that the services addendum made the RC responsible for construction outside of their ownership in the LLC.  This meant that the LLC was a land owner who hired the RC to perform custom construction and the transactions should be taxed as such.  In response to the capital contribution and distribution issue, the DOR stated that the contribution of services does not equal a contribution of “capital assets” as required under the rule and, therefore, the distributions were payments for services.

The Washington Court of Appeals ruled in favor of the DOR on September 23, 2014.  You can see the full opinion at:

http://www.courts.wa.gov/opinions/pdf/D2%2044730-4-II%20%20Published%20Opinion.pdf

Bravern is considering an appeal to the Washington Supreme Court, so we don’t know if taxpayers will get final relief from our head court.  In the meantime, the structure of Joint Ventures should be fully considered to understand the overall taxation of the various transactions.  We’ll continue to inform you of developments and updates.