SCOTUS Reports

Tag: 26 C.F.R. 1.170A-13

  • RERI Holdings I, LLC v. Comm’r, 143 T.C. 41 (2014): Valuation of Charitable Contributions and Use of Actuarial Tables

    RERI Holdings I, LLC v. Comm’r, 143 T. C. 41 (2014)

    In RERI Holdings I, LLC v. Comm’r, the U. S. Tax Court rejected the IRS’s motion for partial summary judgment, affirming the use of actuarial tables for valuing a charitable contribution of a future interest in a limited liability company (LLC). The court clarified that the LLC’s future interest could be valued using the same tables applied to the underlying real property, despite IRS arguments that the tables were inapplicable. This ruling underscores the importance of adhering to established valuation methods for charitable contributions, impacting how taxpayers and the IRS approach such deductions.

    Parties

    RERI Holdings I, LLC (Petitioner), represented by Randall Gregory Dick and Rebekah E. Schechtman, and Harold Levine, Tax Matters Partner, versus Commissioner of Internal Revenue (Respondent), represented by Travis Vance III, Kristen I. Nygren, John M. Altman, and Leon St. Laurent. The case was heard at the trial level in the U. S. Tax Court and on appeal would lie to the Court of Appeals for the D. C. Circuit.

    Facts

    RERI Holdings I, LLC (RERI) was formed as a Delaware LLC on March 4, 2002, and dissolved on May 11, 2004. RERI contributed a future interest (Successor Member Interest or SMI) in RS Hawthorne Holdings, LLC (Holdings) to the University of Michigan (University) on August 27, 2003. Holdings indirectly owned the Hawthorne property through its wholly-owned subsidiary, RS Hawthorne, LLC (Hawthorne). The SMI was set to become possessory on January 1, 2021, following a term of years interest (TOYS interest) held by Red Sea Tech I, Inc. (Red Sea). RERI claimed a charitable contribution deduction of $33,019,000 for the SMI, which was appraised using actuarial tables under IRC section 7520 by Howard C. Gelbtuch. The IRS challenged the valuation, asserting that the actuarial tables were inapplicable and that RERI failed to substantiate the value with a qualified appraisal.

    Procedural History

    The IRS issued a notice of final partnership administrative adjustment to RERI, challenging the valuation of the charitable contribution and imposing an accuracy-related penalty. RERI filed a petition in the U. S. Tax Court on April 15, 2008, contesting the IRS’s determinations. The IRS moved for partial summary judgment, arguing that the actuarial tables under IRC section 7520 did not apply to the SMI and that RERI’s appraisal did not meet the standards for a qualified appraisal under the regulations. The Tax Court denied the IRS’s motion, finding genuine disputes as to material facts concerning the applicability of the actuarial tables and the qualification of the appraisal.

    Issue(s)

    Whether the actuarial tables under IRC section 7520 apply to value the future interest (SMI) that RERI contributed to the University?
    Whether RERI substantiated the value of its charitable contribution with a qualified appraisal as defined in 26 C. F. R. 1. 170A-13(c)(3)?

    Rule(s) of Law

    IRC section 170(a)(1) allows a deduction for charitable contributions if verified under regulations prescribed by the Secretary. 26 C. F. R. 1. 170A-1(c)(1) states that the amount of a contribution in property is its fair market value at the time of the contribution. IRC section 7520(a) and 26 C. F. R. 1. 7520-1(a)(1) provide that the value of any remainder interest shall be determined using tables prescribed by the Secretary and an interest rate based on the Federal midterm rate. 26 C. F. R. 1. 7520-3(b)(1)(ii) defines a restricted beneficial interest as one subject to a contingency, power, or other restriction, for which standard section 7520 tables may not apply. 26 C. F. R. 1. 170A-13(c)(3) defines a qualified appraisal as one that includes specific information about the donated property and its valuation.

    Holding

    The Tax Court held that the actuarial tables under IRC section 7520 could be used to value the SMI, applying the rationale from Pierre v. Commissioner that disregarded entities under the check-the-box regulations cannot be disregarded for valuation purposes. The court also held that there were unresolved factual issues regarding whether RERI’s appraisal was a qualified appraisal under the regulations, particularly concerning whether the appraisal accurately described the donated property and considered all relevant restrictions and encumbrances.

    Reasoning

    The court reasoned that the SMI was the property transferred to the University, not a hypothetical remainder interest in the Hawthorne property, based on the principle from Pierre v. Commissioner. However, the court allowed for the possibility that the value of the SMI could be equivalent to the value of a hypothetical remainder interest in the Hawthorne property if certain conditions were met, such as no restrictions burdening the SMI. The court found that genuine disputes of material fact existed regarding the impact of the two-year hold-sell requirement imposed on the University, the risk of foreclosure due to the balloon payment on the mortgage, and the applicability of the actuarial tables given these restrictions. The court also considered whether the significant disparity between the appraised value and the actual sale prices of the SMI violated the unrealistic and unreasonable fair market value standard. Regarding the qualified appraisal issue, the court determined that the appraisal’s failure to discuss certain restrictions or encumbrances did not automatically disqualify it as a qualified appraisal under the regulations, but rather depended on whether these omissions affected the donated asset’s value.

    Disposition

    The Tax Court denied the IRS’s motion for partial summary judgment, finding that genuine disputes of material fact precluded a ruling on the applicability of the actuarial tables and the qualification of the appraisal.

    Significance/Impact

    This case is significant for clarifying the application of IRC section 7520 actuarial tables in valuing charitable contributions of future interests in LLCs. It reinforces that such tables can be used for valuation purposes, provided that the donated interest is not subject to restrictions that would render the tables inapplicable. The decision also highlights the importance of ensuring that appraisals for charitable contributions meet the regulatory requirements for qualified appraisals, particularly in describing the donated property and considering all relevant factors affecting its value. The ruling may influence future cases involving the valuation of charitable contributions and the use of actuarial tables, as well as the IRS’s approach to challenging such valuations.

  • Van Dusen v. Comm’r, 136 T.C. 515 (2011): Deductibility of Unreimbursed Volunteer Expenses

    Van Dusen v. Commissioner, 136 T. C. 515 (2011)

    Jan Elizabeth Van Dusen, a volunteer for Fix Our Ferals, sought a charitable-contribution deduction for her unreimbursed expenses in caring for foster cats. The Tax Court ruled that while some expenses were deductible, those exceeding $250 required a contemporaneous written acknowledgment from the charity, which Van Dusen did not obtain. The decision clarifies the deductibility of volunteer expenses under the Internal Revenue Code and sets standards for recordkeeping requirements.

    Parties

    Jan Elizabeth Van Dusen, the petitioner, was the plaintiff in this case. She sought a charitable-contribution deduction for her expenses related to fostering cats. The respondent, the Commissioner of Internal Revenue, contested the deduction, asserting that Van Dusen did not meet the requirements for deductibility.

    Facts

    Jan Elizabeth Van Dusen, an attorney residing in Oakland, California, was a volunteer for Fix Our Ferals, a section 501(c)(3) organization dedicated to trap-neuter-return activities for feral cats. In 2004, Van Dusen incurred out-of-pocket expenses totaling $12,068 for caring for between 70 and 80 cats, of which approximately 7 were her pets. Her expenses included veterinary services, pet supplies, cleaning supplies, and household utilities. Van Dusen claimed these as a charitable-contribution deduction on her 2004 tax return. The IRS issued a notice of deficiency denying the deduction, prompting Van Dusen to petition the Tax Court.

    Procedural History

    The IRS issued a notice of deficiency to Van Dusen for the tax year 2004, determining an income-tax deficiency of $4,838. Van Dusen contested this determination and filed a petition with the United States Tax Court. The parties settled all issues except those related to the $12,068 claimed as a charitable-contribution deduction for her foster-cat care expenses. The Tax Court held a trial to determine the deductibility of these expenses.

    Issue(s)

    Whether Van Dusen’s unreimbursed expenses for caring for foster cats are deductible as charitable contributions under section 170 of the Internal Revenue Code?

    Whether Van Dusen’s records met the recordkeeping requirements of section 1. 170A-13 of the Income Tax Regulations for contributions of less than $250?

    Whether Van Dusen’s expenses of $250 or more were deductible without a contemporaneous written acknowledgment from Fix Our Ferals?

    Rule(s) of Law

    Section 170(a) of the Internal Revenue Code allows a deduction for any charitable contribution. A charitable contribution is defined as a contribution or gift to or for the use of a charitable organization under section 170(c). Section 1. 170A-1(g) of the Income Tax Regulations specifies that unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution. Section 1. 170A-13(a) of the Income Tax Regulations requires taxpayers to maintain canceled checks or other reliable written records to substantiate contributions of money. For contributions of $250 or more, section 170(f)(8)(A) and section 1. 170A-13(f)(1) of the Income Tax Regulations require a contemporaneous written acknowledgment from the donee organization.

    Holding

    The Tax Court held that Van Dusen’s expenses for veterinary services, pet supplies, cleaning supplies, and utilities were deductible to the extent they were attributable to her services for Fix Our Ferals. Specifically, 90% of her veterinary and pet supply expenses and 50% of her cleaning supply and utility expenses were deemed deductible. However, expenses of $250 or more were not deductible because Van Dusen did not obtain the required contemporaneous written acknowledgment from Fix Our Ferals. Additionally, Van Dusen was allowed to deduct a $100 check donation to Island Cat Resources and Adoption.

    Reasoning

    The court determined that Van Dusen’s foster-cat care was a service provided to Fix Our Ferals, as she had a strong connection with the organization and her activities aligned with its mission. The court analyzed the deductibility of various expenses, excluding those not directly related to foster-cat care, such as pet cremation, bar association dues, and DMV fees. The court applied the substantial compliance doctrine, as established in Bond v. Commissioner, 100 T. C. 32 (1993), to find that Van Dusen’s records met the recordkeeping requirements for expenses under $250. However, for expenses of $250 or more, the court strictly enforced the contemporaneous written acknowledgment requirement, denying deductions for those expenses due to Van Dusen’s failure to obtain such acknowledgment from Fix Our Ferals. The court also considered the impact of section 280A on Van Dusen’s household utility bills, ruling that they were deductible under the exception in section 280A(b).

    Disposition

    The Tax Court ruled that Van Dusen was entitled to deduct certain expenses related to her volunteer work with Fix Our Ferals, but denied deductions for expenses of $250 or more due to lack of contemporaneous written acknowledgment. The court also allowed a deduction for a $100 check donation to Island Cat Resources and Adoption. A decision was to be entered under Rule 155.

    Significance/Impact

    The Van Dusen case provides important guidance on the deductibility of unreimbursed volunteer expenses under the Internal Revenue Code. It clarifies that such expenses must be directly connected with and solely attributable to services rendered to a charitable organization. The decision also underscores the importance of maintaining adequate records and obtaining contemporaneous written acknowledgment for contributions of $250 or more. The application of the substantial compliance doctrine in this context offers flexibility in substantiating smaller expenses, while the strict enforcement of the acknowledgment requirement for larger expenses emphasizes the need for formal documentation in such cases. This ruling has implications for volunteers and charitable organizations, affecting how they manage and report expenses related to volunteer services.