Last summer, as Woodside Group was negotiating with its creditors to restructure debt it was having trouble paying back, it was positioning itself to receive $140 million in tax refunds that would be passed on to its owners and stakeholders. When a consortium of its bank lenders led by JPMorgan Chase Bank, found out, they sued to force Woodside into involuntary bankruptcy, and then filed an adversarial case against the company, accusing Woodside of trying to funnel a total of $500 million in potential tax refunds out of the creditors' reach.

Woodside countered, saying it was perfectly legal and the company's past practice to pass tax refunds back to its principals who are responsible for paying the corporation's taxes, under both its new status as an LLC and partnership corporation and its former status as an S-corp. Besides, the banks' debt was not secured by any repayment guarantees.

In the end, the adversarial lawsut was settled in early February, freeing the company's owners to pocket the refund.

Score that a rare tax coup for a private builder. Even as public builders have been able to pad their cash caches with refunds of taxes paid in previous years, most privates have been unable to fully tap their tax carry-back potential.

When public builders get refunds, they can do with them what they may. Private builders, on the other hand, unless their debt lacks personal guarantees, have hungry banks ready to snatch away the cash they are legitimately owed.

While public home builders have been able to unload land at artificially low prices, further boosting their tax refunds, that same activity would spell disaster for most privately held builders who have bank debt attached to their land holdings that is greater than what the land is worth. Furthermore, public builders' fire sales have eroded the privates' land values even more, making the possibility of them capturing cash from sales even slimmer, some say.

“The biggest problem, unfortunately, is private builders are not taking advantage of this [tax carry-back provision] because they can't afford it,” says Jamie Pirrello, president of Berkeley-Columbia Partners. “When [D.R.] Horton sold large tracts of land at $0.25 or $0.30 on the dollar, they didn't have debt that was secured on that asset,” he says. “As a private builder, in most cases, [we have a loan that] probably was for as much as 85 or 75 percent of [the land's] value. But today, it could be 110 percent its value. If I sold it, I'd have to write a check [to the bank].”

Pirrello currently has a tract of land he is hesitant to try to sell because he owes more on it than it's worth right now. “So I sit on this land and have no cash, or I sell it and get $0.30 on the dollar, and 70 percent is lost,” he says.

A private builder incorporated as an S-corp or a partnership rather than as a C-corp would have more of a choice if the debt wasn't personally guaranteed, says Steve Friedman, national director of home building services for Ernst & Young.

That builder could collect a tax carry-back refund, then keep the money and use it however he may choose, including not repaying the banks that financed the land, Friedman says.