In Uncategorized on 02/07/2020 at 14:36

I just the other day stressed the importance of appraisals when valuation is in play. An appraisal, even if it barely slides under the tag, is the blocker to IRS’ summary J motion, and gives the petitioner a chance to settle based on litigation risk, or a possible judicial mix-and-match after the trial.

But to get there, clear out the non-essentials, the law stuff that summary J can resolve. And sweat your expert. The valuation report must clear the bar.

Brannan Sand & Gravel Co., LLC, J. Curtis Marvel, Tax Matters Partner, Docket No. 27474-16, filed 2/7/20, gives me a fine opportunity to second-guess the Gravel Gang’s strategy in going with Rule 122 stipulated facts. The Gravel Gang claimed a $200K charitable for water storage rights; IRS said that doesn’t qualify for Section 170 treatment, or any other provision.

Judge Mary Ann (S.E.C. = “She Eschews Cognomens”) Cohen has a heavy lift.

“Upon review of the briefs of the parties, it appears that they dispute complicated issues, including but not limited to: whether certain materials attached to the partnership return constituted a qualified appraisal of the property donated; whether other technical requirements concerning the contents of a return reporting a charitable deduction (on Form 8283) were satisfied; whether the claimed contribution was part of a quid pro quo transaction; or whether the transaction should be treated as a bargain sale so that part of the value of the property is treated as a deductible contribution. These issues are made more difficult because of the relatively unusual property involved, that is, water storage rights.” Order, at p. 1.

But Judge Mary Ann (S.E.C.) Cohen is not wanting heavy lifts. Rule 122 doesn’t shift burden of proof, what constitutes proof, or what happens if the party with the burden drops the same. And Rule 149(b) lets her toss any party with burden of proof on an issue who adduces no proof of same.

“In the interest of judicial economy, the Court may decide a dispositive issue without addressing all of the issues and arguments presented by the parties. If one issue is dispositive, an opinion’s discussion of other issues is dictum. This maybe an appropriate case for application of Rule 149(b) to decide that the partnership is not entitled to the $200,000 charitable contribution deduction claimed because petitioner has failed to prove the fair market value of the water storage rights transferred.” Order, at p. 4.

The valuation here has some real problems.

“The ‘valuation opinion’ is based on the author’s experience as a litigator and purportedly comparable transactions indicating a price per acre-foot of $3,500 to $4,000. He gives no indication that he is familiar with the details of the interrelated transactions entered into by the partnership or why he would choose the high end of the range for the water storage rights here in issue. There are inadequate explanations of whether the identified transactions involved a willing buyer and a willing seller and thus are an indication of fair market value. In other words, there is no comparison to the comparables except by general geographic area.

“The parties argue about the qualifications of the author of the opinion to provide an appraisal. However, whether or not he is qualified with respect to the property in issue, there are serious questions about the reliability or admissibility of his opinion in the absence of an adequate discussion of the specific circumstances in which the water storage rights were donated. Respondent criticizes the opinion at length in contending that it does not constitute a ‘qualified appraisal’. Whether or not a qualified appraisal, the valuation opinion has not been received as evidence and might not qualify if offered at trial. Expert opinions that disregard relevant facts affecting valuation are rejected.” Order, at p. 3.

And if one issue is dispositive (like the valuation is worthless) then the others need not be resolved, as such resolutions are dictum.

So let the parties “…show cause, if any they have, why the remaining issue in this case should not be decided against petitioner and in favor of respondent under Rule 149(b), Tax Court Rules of Practice and Procedure, by reason of petitioner’s failure to present evidence in support of the charitable deduction claimed on the partnership’s 2010 return.” Order, at p. 4.

Note- There are lots of cases (the historic building easement cases) where appraisals, even if not of the best, pass muster. I’ve blogged a number of those. Make sure you have them in your memo of law files, because this is the latest countergambit.

Edited to add, 2/14/20: I don’t wish to belabor the point, but Judge Holmes didn’t toss IRS’ expert witness even when he lied under oath; he said “Only when an expert report becomes absurd or ‘so far beyond the realm of usefulness’ does bias make an expert report inadmissible. See Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 335-36 (2011).” See my blogpost “He Lied – So What?” 9/29/17. Take away the expert here, and IRS wins by suppression of petitioner’s only witness, in a matter that everyone admits is at least a “relatively unusual property involved.”

Taishoff says let the witness testify, face a solid cross-examination, and toss his testimony thereafter if worthless.

Edited to add, 10/23/20: Brannan stiped to dropping the $200K water storage deduction a couple weeks ago (hi, Judge Holmes). But the stip shows over $80 million in total deductions were on the table, so why bother with a trial?  


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