In Uncategorized on 08/11/2014 at 18:25

See my blogpost “Don’t Give a Sham”, 5/22/14, for background. Summarizing, this case involves a $33 million charitable deduction of a remainder in the membership interests in an LLC that is landlord of triple net leased property. IRS claims it’s about $29 million high.

Now, IRS moves for summary judgment in RERI Holdings I, LLC, Harold Levine, Tax Matters Partner, 143 T. C. 3, filed 8/11/14. But Judge James S. (“Big Jim”) Halpern is a firm believer that summary judgment is issue identification, not issue determination; and if the issue is a fact question, no summary judgment.

First is a prolonged joust over the applicability of the Section 7520 tables to valuing the remainder interest here. This I leave to the specialists, except to note that, although a single-member LLC is a disregarded entity for income tax purposes, a willing buyer of those interests cannot ignore the existence of the LLC in negotiating a purchase price for same, even if the single-member LLC has only one sole asset. The member’s interest is in the LLC, not the sole asset.

Of course, the membership interest may have no value apart from the value of the sole asset. And it doesn’t matter whether the membership interest (or the asset) is being valued for gift tax purposes or income tax purposes. The same tests apply.

There’s more jousting over whether the appraisal of the remainder interest is a “qualified appraisal” for Section 170 purposes, but we’ve been over that ground before (and in fact Judge Vasquez goes over it again today in Marco Zarlengo and Linda McMahon-Zarlengo, 2014 T. C. Memo. 161, filed 8/11/14), and in both these cases the appraisal survives the test as to regulatory compliance (although the resulting numbers in both cases encounter major judicial skepticism, Zarlengo’s going over the side altogether).

In fact, the very optimistic (shall we say) appraisal in RERI gets a yellow card from Judge Big Jim: “RERI’s contribution of the SMI [remainder interest] to the University resulted in a claimed deduction far in excess of RERI’s investment therein. That contribution was followed by the University’s sale of the SMI to HRK and HRK’s resale of it, which was followed, ultimately, by the last purchaser’s contribution of the SMI to another charitable organization, again allegedly resulting in a large deduction in excess of either HRK’s or the donor’s investment. That chain of events suggests the presence of a scheme to generate large deductions, through application of the sec. 7520 tables, for multiple charitable contributions of the same asset, in which each of the donors made a small investment. Such a scheme at least suggests tax shelter aspects that the parties may want to address at trial and on brief.” 143 T. C. 3, at p. 49, footnote 20.

The University got the remainder, subject to a hold-sell agreement, whereunder the University had to hold the remainder interest for two years (during which time the present interest was held elsewhere) and had to sell it at the end of the two years. The University got way less than the tax benefit to the donor.

And I note in passing that the donor is well-known New York City real estate entrepreneur Steven Ross, head of The Related Companies, builder of the Time-Warner Center, which “has transformed Columbus Circle into one of New York’s premier destinations”. Mr. Ross is also a major donor to the University of Michigan.

Full disclosure–both my mother and my nephew are alumni of that great institution.






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