In CCA 201537022, the IRS allowed a real estate developer to capitalize its required “advance” to the city for common infrastructure improvement costs, subject to later year adjustment to the extent the city repaid the funds. In form, the developer initially financed the capital improvements with an advance, but the city’s obligation to repay the funds was contingent on bond financing based on revenues derived from ad valorem property taxes. Thus, the ruling concluded that the entire risk of development rested with the developer with only a contingent repayment and therefore the taxpayer’s disregard of the form of the transaction and treatment in accord with its substance “appears to have been proper”. However, the IRS denied the taxpayer’s inconsistent treatment where it followed the form in part and treated some of the repayment of the advance as tax-free municipal bond interest under Code § 103. Instead, the IRS required that later repayments to the developer reduce the tax basis for real estate lots not yet sold by that time and be reported as ordinary income if the lots have already been sold.