2014 U.S. Tax Ct. LEXIS 34
Tax Ct.2014Background
- RERI Holdings I, LLC (a partnership for tax purposes) donated a successor member interest (SMI) in Holdings (an LLC owning Hawthorne LLC which owned a leased commercial property) to the University in 2003 and claimed a $33,019,000 charitable deduction; the IRS disallowed most of it.
- The SMI is a future remainder membership interest that becomes possessory after a long term-of-years interest (TOYS) ends on Jan. 1, 2021; the donor had purchased the SMI for a modest sum years earlier.
- RERI’s valuation relied on an appraisal by Gelbtuch of a hypothetical remainder interest in the underlying real property (the Hawthorne property), which applied the section 7520 actuarial tables to the property value (assuming it was free and clear of liens).
- The University was contractually required to hold the SMI for two years before selling (the hold-sell requirement); the SMI later sold for amounts far below Gelbtuch’s appraisal.
- The Commissioner moved for partial summary judgment arguing (1) section 7520 tables do not apply to value the SMI and (2) Gelbtuch’s appraisal was not a qualified appraisal under the DEFRA / 1.170A–13 rules.
- The Court denied summary judgment because genuine disputes of material fact remained about (a) whether the SMI could be valued via section 7520 (including whether the SMI was a restricted beneficial interest or whether the preservation/protection rule was met) and (b) whether the appraisal’s omissions were material to qualification.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §7520 actuarial tables apply to value the SMI | Pierre controls; single‑member LLC can be valued via its underlying asset; Gelbtuch’s use of tables on the property suffices | Pierre’s reasoning applies beyond gift tax; but §1.7520–3(b) protections and restrictions preclude use of standard tables here | Denied summary judgment — factual disputes (preservation/protection, effect of mortgage, and hold‑sell restriction) preclude ruling that §7520 is inapplicable |
| Whether the SMI is a ‘‘restricted beneficial interest’’ (so standard §7520 factors inapplicable) | Two‑year hold‑sell is not the sort of restriction that per se blocks §7520 application; cases valuing income streams are distinguishable | The hold‑sell, assignment limits, and risk of foreclosure/refinancing may materially impair the remainder and thus bar use of standard tables | Denied summary judgment — whether restrictions make §7520 valuation unrealistic/unreasonable is a fact question |
| Whether preservation and protection requirements under §1.7520–3(b)(2)(iii) are met | Covenants (assignment agreement) prohibit encumbrance without consent; risks are remote and commercial | Risk of sale/encumbrance, mortgage balloon payment default, and limited remedies could mean the SMI won’t get an undiminished interest | Denied summary judgment — disputed material facts about foreclosure/refinancing risk and adequate protections |
| Whether Gelbtuch’s appraisal was a "qualified appraisal" under 1.170A–13(c)(3) (DEFRA) | Appraisal of the hypothetical remainder in the property can substantially comply; omissions (e.g., hold‑sell, mortgage, depreciation) are nonfatal or supplied via Form 8283 | Appraisal omitted key terms (donation restriction, mortgage, depreciation) and valued the wrong property or labelled ‘‘investment value’’ rather than fair market value | Denied summary judgment — many alleged appraisal defects either go to accuracy (not qualification) or raise factual issues about materiality and substantial compliance |
Key Cases Cited
- Pierre v. Commissioner, 133 T.C. 24 (T.C. 2009) (an LLC disregarded for check‑the‑box purposes cannot necessarily be ignored when valuing transfers of interests in the LLC)
- Estate of Gribauskas v. Commissioner, 342 F.3d 85 (2d Cir. 2003) (restrictions on transferability can render §7520 tables inapplicable where they produce an unrealistic/unreasonable result)
- Cook v. Commissioner, 349 F.3d 850 (5th Cir. 2003) (Courts should prefer §7520 tables for annuities unless tables produce clearly unrealistic results)
- Anthony v. United States, 520 F.3d 374 (5th Cir. 2008) (reaffirming preference for §7520 tables in valuing income streams in many circumstances)
- Shackleford v. United States, 262 F.3d 1028 (9th Cir. 2001) (transferability restrictions can affect applicability of §7520 tables)
- Weller v. Commissioner, 38 T.C. 790 (T.C. 1962) (§7520 tables must be abandoned only where they yield an unrealistic and unreasonable value)
- Bond v. Commissioner, 100 T.C. 32 (T.C. 1993) (substantial compliance can cure procedural appraisal defects under DEFRA)