149 T.C. No. 1
Tax Ct.2017Background
- RERI Holdings I, LLC (RERI) purchased a successor member interest (SMI) in an entity owning the Hawthorne, CA property and assigned that SMI to the University of Michigan on Aug. 27, 2003. RERI paid about $2.95 million in March 2002; it claimed a charitable deduction of $33,019,000 on its 2003 Form 1065.
- The assignment creating the SMI contained covenants intended to preserve property value but limited the remainder holder’s remedy for breach to immediate possession of the property and disclaimed any right to damages.
- RERI attached Form 8283 to its return but left blank the space for the donor’s cost/adjusted basis; it relied on an appraisal (Gelbtuch) valuing the fee interest at $55M and applying section 7520 factors to compute an “investment value.”
- The IRS issued an FPAA disallowing RERI’s deduction (valuing the contributed interest far lower) and asserted substantial and, by amendment, gross valuation-misstatement penalties under I.R.C. §6662(e) and (h).
- The Tax Court found RERI failed the 26 U.S.C. §170/Reg. §1.170A-13(c) substantiation rules (Form 8283 omitted donor basis) and therefore disallowed the deduction in full; it also determined the SMI’s actual fair market value on Aug. 27, 2003 was $3,462,886 and that RERI’s claimed $33,019,000 was a gross valuation misstatement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Compliance with §1.170A-13 substantiation (Form 8283 completeness) | RERI relied on its appraisal and substantial compliance; omission of basis was harmless. | Commissioner: omission of donor cost/basis violated the regulation and prevented detection of overvaluation. | Held: omission violated §1.170A-13(c)(4)(ii)(E); substantial compliance not available because disclosure would have alerted IRS to overvaluation; deduction denied. |
| Applicability of §7520 actuarial tables to value the remainder (SMI) | RERI used §7520 factors (Gelbtuch appraisal) to compute remainder value. | Commissioner: SMI lacked adequate protections (limited remedies), so §7520 factors inapplicable; must determine actual FMV. | Held: §7520 tables inapplicable because SMI lacked trust-like protections; must use actual FMV based on all facts and circumstances. |
| Correct fair market value of the SMI on 8/27/2003 | RERI (Myers/Voith): higher values (e.g., ~$16.55M per Myers). | Commissioner (Cragg/Abraham): much lower values (e.g., ~$2.09M–$3.38M). | Held: Court adopted a fact-specific blend (use Myers’ cashflow with vacancy adjustment and a 17.75% discount rate) and found FMV = $3,462,886. |
| Penalties under §6662(e)/(h) (substantial/gross valuation misstatement) and reasonable-cause defense | RERI: relied on appraisal and market comparables; good-faith investigation; reasonable cause. | Commissioner: claimed gross misstatement and that RERI failed to make a good-faith investigation; appraisal not necessarily qualified. | Held: RERI’s claimed $33,019,000 exceeded actual FMV by >400% → gross valuation misstatement under §6662(h); reasonable-cause exception fails because RERI did not make a sufficient contemporaneous, good-faith investigation. |
Key Cases Cited
- Bond v. Commissioner, 100 T.C. 32 (Tax Ct.) (directory vs. mandatory nature of §1.170A-13 requirements; substantial compliance analysis)
- Hewitt v. Commissioner, 109 T.C. 258 (Tax Ct.) (refused substantial compliance where required appraisal/attachments were absent)
- Todd v. Commissioner, 89 T.C. 912 (Tax Ct.) (pre-AHG precedent limiting valuation penalties when disallowance rests on non-valuation grounds)
- AHG Invs., LLC v. Commissioner, 140 T.C. 73 (Tax Ct.) (overruled Todd/McCrary and held valuation-misstatement penalties can attach even if disallowance also sustainable on other grounds)
- Whitehouse Hotel Ltd. P’ship v. Commissioner, 139 T.C. 304 (Tax Ct.) (good-faith investigation and appraisal requirements under §6664(c)(2))
- Estate of Gribauskas v. Commissioner, 116 T.C. 142 (Tax Ct.) (discussion of marketability discounts and valuation of annuity-like interests)