RERI Holdings I, LLC v. Commissioner, 143 T. C. No. 3 (2014)

In a significant ruling on charitable contribution valuations, the U. S. Tax Court in RERI Holdings I, LLC v. Commissioner denied the Commissioner’s motion for partial summary judgment, rejecting claims that actuarial tables could not be used to value a successor member interest (SMI) donated to the University of Michigan, and that the appraisal provided was not qualified. The decision underscores the court’s reluctance to summarily rule on complex valuation disputes, particularly when involving novel legal interests like the SMI, and highlights the stringent requirements for qualified appraisals under tax law.

Parties

RERI Holdings I, LLC (Petitioner), represented by Harold Levine, Tax Matters Partner, contested the Commissioner of Internal Revenue’s (Respondent) determinations regarding the charitable contribution of a successor member interest in a limited liability company to the University of Michigan.

Facts

RERI Holdings I, LLC, a Delaware limited liability company, was formed on March 4, 2002, and dissolved on May 11, 2004. It reported a charitable contribution of $33,019,000 on its 2003 income tax return, related to the transfer of a 100% remainder estate in a membership interest in H. W. Hawthorne Holdings, LLC (Holdings), to the University of Michigan. Holdings indirectly owned the Hawthorne property through RS Hawthorne, LLC (Hawthorne), which was purchased with significant debt. The property was leased to AT&T under a triple net lease. RERI’s principal investor, Stephen M. Ross, pledged a $5 million gift to the University, contingent on the donation of the SMI, which became effective on August 27, 2003. The SMI, a future interest in Holdings, was appraised at $32,935,000 by Howard C. Gelbtuch, using actuarial tables under IRC section 7520. Subsequent sales of the SMI were significantly lower, ranging from $1,610,000 to $3,000,000.

Procedural History

The Commissioner moved for partial summary judgment, seeking rulings that the actuarial tables under IRC section 7520 were inapplicable to value the SMI and that RERI failed to substantiate the SMI’s value with a qualified appraisal. Prior motions by both parties were addressed by the court, with the court denying the Commissioner’s motion regarding the reduction of the property’s value by the entire indebtedness due to genuine disputes over material facts.

Issue(s)

• Whether the actuarial tables under IRC section 7520 apply to value the successor member interest donated by RERI to the University of Michigan?
• Whether the appraisal provided by RERI constitutes a qualified appraisal under the regulations governing charitable contribution deductions?

Rule(s) of Law

• IRC section 7520 and its regulations provide for the valuation of remainder interests using prescribed tables based on interest rates and, where applicable, mortality components.
• IRC section 170(a)(1) and related regulations require substantiation of charitable contributions, including a qualified appraisal for contributions over $5,000, as defined in section 1. 170A-13(c)(3), Income Tax Regs.

Holding

The court held that the actuarial tables under IRC section 7520 could potentially apply to value the SMI, rejecting the Commissioner’s motion for summary judgment on this issue due to unresolved factual disputes. The court also held that the appraisal provided by RERI could potentially constitute a qualified appraisal, again denying the Commissioner’s motion due to unresolved factual disputes regarding the appraisal’s compliance with the requirements for a qualified appraisal.

Reasoning

The court’s reasoning focused on several key points:

• The applicability of the section 7520 tables to the SMI turned on unresolved issues of fact regarding the preservation and protection of the underlying property and whether the SMI constituted a restricted beneficial interest due to a two-year hold-sell requirement.
• The court applied the rationale from Pierre v. Commissioner, which held that a disregarded entity’s value could not be determined solely by its underlying assets for tax purposes, but found unresolved factual issues as to whether the appraised remainder interest in the Hawthorne property could serve as a proxy for the SMI.
• On the qualified appraisal issue, the court found that the appraisal’s failure to consider certain restrictions and encumbrances, such as the two-year hold-sell requirement, raised unresolved factual disputes about its compliance with the regulatory requirements.
• The court emphasized that gross overvaluation or the appraisal of the “wrong” property did not automatically disqualify an appraisal, provided the appraisal could be shown to substantially comply with the regulations.

Disposition

The court denied the Commissioner’s motion for partial summary judgment, finding genuine disputes as to material facts that precluded summary adjudication on both the applicability of the section 7520 tables and the qualification of the appraisal provided by RERI.

Significance/Impact

The RERI Holdings I, LLC decision underscores the complexity of valuing novel legal interests like the SMI for charitable contribution purposes and the stringent requirements for qualified appraisals. It highlights the court’s reluctance to summarily resolve such disputes without a full factual record. The case’s significance lies in its clarification that even significant discrepancies in valuation or the appraisal of related but not identical property interests may not necessarily disqualify an appraisal if substantial compliance with the regulations can be demonstrated. This ruling has practical implications for taxpayers and practitioners in planning and substantiating charitable contributions of complex interests, emphasizing the need for detailed and accurate appraisals that address all relevant restrictions and encumbrances.