Interesting article in today’s Wall Street Journal:  Lennar’s $800 Million Tax Refund, by David Reilly:

Lennar Corp. has found a way to salvage something from the huge losses it incurred by overpaying for land during the housing boom. Late last year, the Miami-based home builder sold a big swath of land — about 11,000 home sites — for $525 million to a partnership that it formed with Morgan Stanley. At first glance, the deal seemed terrible for Lennar, which had the land valued on its books at about $1.3 billion.

But the deal’s structure allowed Lennar to recognize a big loss that it applied against taxes paid the previous two years. The result: Lennar is expecting a tax refund of more than $800 million. …

As an added bonus, because of the way Lennar and Morgan Stanley structured their partnership, Lennar still effectively owns 20% of the land, according to the company. It also has a 50% voting interest in the partnership, meaning it will have a say in how the land is developed.

That means Lennar gets the tax loss, but still holds an interest in the land on its books. "That’s the holy grail," said Robert Willens, president of tax and accounting advisory firm Robert Willens LLC. "The accounting is saying that they’re not really selling it, whereas the taxes are more formal in the way they look at it."

Now, those benefits could prove a boon to other hard-hit home builders if the Senate has its way with the economic-stimulus package moving through Congress. In its version of the legislation, which the chamber is due to vote on in coming days, companies would be allowed to apply losses against taxes paid in the previous five years, as opposed to the current two-year period. That would allow home builders to offload land for a loss and then apply to the IRS for refunds based on what they paid in taxes possibly going as far back as 2002, or in some cases 2001. The longer look-back period could take some pressure off the builders and housing markets. …

[T]here is always a chance that the IRS will challenge the deal. One possible vulnerability is an option that Lennar has to repurchase some of the land. Whether the IRS agrees that this isn’t an obligation, as Lennar says, will depend on the exact terms of the option. "If they’re economically compelled to buy it back, that’s where the weakness would be," Mr. Willens said.

In its annual results, Lennar said that it "has no obligation to exercise these options." … But if the deal, and Lennar’s big refund, pass muster with the tax man, others are likely to follow suit. "Favorable tax treatment from the IRS on land sales as Lennar’s press release implies could be a boost to all home builders," Goldman Sachs said in a recent research note.