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In 2014, Connor Inc. (a calendar year C corporation) announced its intention to construct a manufacturing facility in the Shenandoah Valley in Virginia. In order to convince the corporation to locate the facility in Augusta County, the county contributed a six-acre tract of undeveloped municipal land to Connor Inc. The appraised value of the land at date of contribution (December 6, 2014) was $475,000. During 2015, Connor Inc. paid $9,300 to an attorney to do a title search to make sure that the corporation had uncontested ownership of the land. The corporation also paid $3,850 2015 real property tax on the land, $16,400 for a complete survey and detailed site map of the six acres, and $7,900 for two water wells drilled on the land.
In January 2016, the attorney discovered that the Estate of Elsa Reynolds claimed title to the six acres and was preparing to file suit in Virginia state court to regain ownership and possession. The attorney advised Connor Inc. that the estate’s claim appeared valid and would be upheld by the court. Consequently, the corporation informed Augusta County that it was renouncing all claim to the land and would build its new manufacturing facility in Rockingham County.
In August 2014, Connor Inc. purchased 115 acres of land in the Tidewater area of Virginia for a total price of $1,896,000. At date of purchase, the State Planning Commission zoned the land for agricultural use. Connor planned to formally request that the land be rezoned for residential development. Once the land was rezoned, Connor planned to subdivide it into half-acre lots and build single-family residences. At the time of Connor’s purchase, the State Planning Commission was decidedly pro-development and routinely approved such rezoning requests. Thus, at the time of purchase, Connor Inc. foresaw no legal impediment to its development plan.
Before Connor’s attorney could file the rezoning request with the State Planning Commission, the Virginia Environmental Protection Agency issued new regulations expanding the definition of protected wetlands. According to Virginia law, protected wetlands may not be developed for residential or commercial use under any circumstances. Unfortunately for Connor Inc., the 115 acres in the Tidewater clearly fell within the definition of protected wetlands under the new regulations. After several conversations with members of the VEPA, Connor’s attorney concluded that Connor Inc. had no basis for requesting an exception to the non-development rule.
For 2016 local real estate tax purposes, the 115 acres of wetlands have an assessed value of $50,000. Connor wants to sell the land but cannot find an interested buyer. Connor is now permitting the Virginia Audubon Society and the Boys Scouts of America to use the property for free to conduct bird and wildlife watching trips for their members.

Identify the tax issues suggested by these facts and formulate your research questions accordingly. After each question, show the IRC source, regulations and any court cases which may help you answer the questions.

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