Attorney-at-Law

DON’T GIVE A SHAM – REDIVIVUS

In Uncategorized on 07/03/2017 at 14:39

The hard-laboring clerks and flailing date-stampers at 400 Second Street, NW, in the homeplace of tomorrow’s birthday honoree, must already be on their way to the beach and barby, because the opinions that usually emerge at 3:30 EDT were up this morning before noon.

But it now falls to the hard-laboring blogger, here in The City That Never Sleeps, who has before him neither beach nor barbecue, to lay before the public the saga of RERI Holdings I, LLC, Jeff Blau, Tax Matters Partner, 149 T. C. 1, filed 7/3/17.

If somewhere in the dimmer recesses of the reader’s mind a faint tintinnabulation is heard, the reader is one sharp cookie. See my blogposts “Don’t Give a Sham,” 5/22/14, and “Don’t Give a Sham – Part Deux,” 8/11/14.

But today’s iteration of the charitable donee’s celebrated fight song “Hail to the Victors Valiant,” goes not to the chaps in yellow and blue, but to IRS, as Judge James S. (“Big Jim”) Halpern tells us in 69 pages.

You’ll remember that a remainder interest in realty that cost a hair less than $3 million gave rise to a $33 million charitable deduction, although the charitable donee, alma mater to both my mother and my nephew (but not in the same class), get way less than $33 million.

After plowing through nearly 20 pages contrasting and comparing dueling appraisals of the worth of the remainder interest transferred to the donee, Judge Big Jim goes off on the Form 8283, which does not state the cost basis of the interest donated in the hands of the donor.

RERI, the donor, claims substantial compliance.

No, says Judge Big Jim.

“The significant disparity between the claimed fair market value and the price RERI paid to acquire the SMI just 17 months before it assigned the SMI to the University, had it been disclosed, would have alerted respondent to a potential overvaluation of the SMI. Because RERI failed to provide sufficient information on its Form 8283 to permit respondent to evaluate its reported contribution, cf. Smith v. Commissioner, 2007 WL 4410771, at *19, we cannot excuse on substantial compliance grounds RERI’s omission from that form of its basis in the SMI. Therefore, RERI did not “[a]ttach a fully completed appraisal summary” to its 2003 return as required by section 1.170A- 13(c)(2)(i)(B), Income Tax Regs. Because RERI did not meet the substantiation requirements provided in section 1.170A-13(c)(2), Income Tax Regs., it is not entitled to any deduction under section 170 for its contribution of the SMI to the University. See sec. 170(a)(1); sec. 1.170A-13(c)(1), Income Tax Regs.” 149 T. C. 1, at pp. 26-28, footnotes omitted.

Since this is a petition from a FPAA, determination is made at entity level. So on with the 400% overvaluation chop.

But no chop if FMV of the donated interest cannot be proven, or proves to be under the radar for the overvaluation chop. The Section 7520 tables to be used for remainders fail to consider that the holder of the donated interest couldn’t sue for damages or to enforce the tenant for years to make good any damage, only evict the tenant for years. Thus inadequate protection for the remainder, throwing the Section 7520 tables off the table. Check out Reg, 1.7520-3(b)(1)(iii).

Follows the usual mix-and-match among appraisers, and whoever has burden of proof for enhanced chop, the evidence to prove good-faith reliance is the same. The words and deeds at time of donation are what they are.

And RERI relied on 18-month old numbers for FMV when it made the contribution. Not good enough for good-faith reliance.

IRS wins. Rule 155 beancount follows.

But individual partners may have an out. “Although the liability of a particular partner for the gross valuation misstatement penalty will depend on the arithmetic threshold provided in section 6662(e)(2), no partner will be able to avoid the penalty on the basis of the reasonable cause exception provided in section 6664(c).” 149 T. C. 1, at p. 69.

 

 

 

 

 

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