holding that substantial compliance existed where an appraisal was three months premature
How later courts described this case
- holding that substantial compliance existed where an appraisal was three months premature
- finding appraisal “qualified” despite omission of any statement regarding income tax purpose
Written by the judges who cited it.
The opinion
T.C. Memo. 2009-290
UNITED STATES TAX COURT
CONSOLIDATED INVESTORS GROUP, STEVEN G. LUCA,
TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23703-06. Filed December 16, 2009.
Richard D. Panza and Robert P. Ellis, for petitioner.
John M. Tkacik, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Consolidated Investors Group (the
partnership) claimed a $641,000 charitable contribution deduction
on its 2003 Form 1065, U.S. Return of Partnership Income,
resulting from an alleged bargain sale. Respondent disallowed
the charitable contribution deduction because the partnership
- 2 -
allegedly failed to substantiate its entitlement to a charitable
contribution deduction, and the alleged bargain sale did not
satisfy the statutory requirements. In the alternative
respondent asserts that if the partnership is entitled to a
charitable contribution deduction related to the bargain sale,
the partnership’s apportionment of the adjusted basis of the
property between the sale portion and the contribution portion
must be adjusted. We conclude the partnership made a bargain
sale of the property for the amount it reported. We also
conclude that an adjustment should be made to the allocation of
the adjusted basis between the sale portion and the charitable
contribution portion of the property.
The Partnership
The partnership is an Ohio general partnership located in
Lorain County, Ohio. It consists of approximately 20 partners
and holds land for future development or investment purposes.
Most of the partnership’s investors are from Lorain County.
Steven Luca is the tax matters partner for the partnership.1
In 1979 the partnership purchased approximately 250 acres of
property consisting of two adjacent parcels along State Route 58
in Lorain County for investment purposes. Approximately 850 feet
1
Mr. Luca negotiated on behalf of the partnership with the
Ohio Turnpike Commission before the partnership hired an
attorney.
- 3 -
of the larger parcel of the property directly abutted State Route
58.
At the time the partnership purchased it, the property was
zoned residential/agricultural. In 1980 the partnership
petitioned for a change in the zoning, to commercial. The lots
on both sides of the property were already zoned commercial.
Forty acres of the property (including some which abutted State
Route 58) were rezoned commercial in July 2001.
Ohio Turnpike Commission
The Ohio Turnpike, a 241-mile-long highway traversing the
northern part of the State of Ohio, is a toll road that was
constructed in 1953. Originally the Ohio Turnpike had 17
interchanges;2 it currently has 31 interchanges. At the time of
trial Joseph Disantis was the right-of-way coordinator for the
Ohio Turnpike Commission (OTC), a position he had held since
1986. In that capacity he bought property for the construction
of interchanges along the Ohio Turnpike.
The OTC began studying the possibility of building an
interchange at State Route 58 in the late seventies and early
eighties. Among the purposes for constructing an interchange
are, first, to encourage economic development in the area of the
2
The interchange gives vehicles an opportunity to enter or
exit the turnpike.
- 4 -
interchange, and second, to generate toll revenues (through
ingress onto and egress from the turnpike).
On March 8, 1993, the OTC adopted Resolution No. 11-1993
titled “Resolution Approving the Location, Design and Acquisition
of Right-of-Way for an Interchange with State Route 58 and the
Ohio Turnpike in the Vicinity of Milepost 140.2 in Lorain County,
Ohio” (State Route 58 resolution). The State Route 58 resolution
approved the location, design, and acquisition of a right-of-way
for an interchange at State Route 58 (State Route 58
interchange). Once the OTC adopted the State Route 58
resolution, it began the design phase of the project. For
various reasons (sewer building, presence of wetlands, and a
scenic railway corridor), the State Route 58 interchange was
postponed until 2001.
I. Correspondence Between the Partnership and the OTC in
Respect of Acquiring the Property
The first written correspondence with the partnership about
the State Route 58 interchange was a letter from the OTC dated
April 9, 2001. That letter stated the OTC intended to acquire a
right-of-way and purchase real estate (property) from the
partnership, and it would pay the partnership $93,800 as fair
compensation for the property. The letter did not specify what
property was to be acquired and offered compensation as follows:
- 5 -
Parcel $93,000
Temporary construction easements 800
Improvements N/A
Damage N/A
There was no compensation provided for damage which might result
to the residue of the partnership’s property as a result of the
taking. In 1999 the OTC had offered the partnership
approximately $200,000 for this property; however, the offer was
never put in writing. The offer in the April 9, 2001, letter was
based on a February 2001 appraisal commissioned by the OTC. In
July 2001 approximately 40 acres of the partnership’s property
were rezoned commercial.
Between 2001 and 2003 representatives of the partnership and
the OTC communicated in person and through telephone calls and
letters about the possibility of the OTC’s acquiring the
partnership’s property. Mr. Luca was the representative of the
partnership and Mr. Disantis was the representative of the OTC in
these discussions until an action was filed in court. The
communications involved determining the property on which the OTC
sought a right-of-way and filing an action to appropriate the
property. Both Mr. Luca and Mr. Disantis testified as witnesses.
A. Determining the Location of the Right-of-Way
After a July 5, 2001, telephone call the OTC sent the
partnership a description of the property sought by the OTC for
the right-of-way for the State Route 58 interchange. In a July
- 6 -
9, 2001, letter the OTC stated it needed 13.1873 acres of the
partnership’s parcels (the property).
The partnership responded in a letter dated July 25, 2001.
In that letter the partnership complained about the delay in
receiving a response from the OTC and about the information the
OTC had given local media, and it stated the partnership was
embarrassed by the $93,800 offer because it was substantially
less than the OTC had offered the partnership in 1999. This
letter from the partnership also contained the following
statement: “Since 1990 our organization has been a strong
advocate of the OTC and its activities. Currently we continue to
support your activities with caution.”
After a written reminder dated August 17, 2001, by the
partnership that it still had not received a response to its July
25, 2001, letter, the OTC responded on August 24, 2001. The OTC
did not adjust its offer to reflect the rezoning of 40 acres of
the partnership’s property. The OTC asked how the partnership
could be embarrassed by the offer when the partnership did not
have an appraisal as to the fair market value of the property.
The OTC refused to meet with the partnership until the
3
We assume this number was subsequently adjusted because
all appraisals refer to a taking of approximately 12.4 acres.
This disparity and/or subsequent change is without consequence to
the outcome.
- 7 -
partnership had provided the OTC with a written appraiser’s
opinion of the fair market value of the property.
On August 28, 2001, the partnership requested the OTC to
provide a copy of its appraisal of the fair market value of the
property. The partnership also stated that it would be pleased
to obtain a current appraisal of the property once the OTC had
made a final decision as to whether the construction of the State
Route 58 interchange was going to proceed. The letter stated:
“In conclusion, our organization consists of various gentlemen of
the community that continue to support the activities of the
OTC.”
On September 5, 2001, the OTC requested the partnership to
either accept or reject its offer of $93,800 within 30 days.
This figure was not adjusted to reflect the July 2001 change in
zoning of 40 acres of the partnership’s property. On September
14, 2001, the partnership said it could not make a decision and
asked for specific additional information. The partnership
reminded the OTC that it had not received a response as of
September 28, 2001. The OTC replied on October 5, 2001, but did
not provide the specific additional information requested.
The partnership again asked for the following: Specific
additional information about the project, the assistance of the
OTC in conveying the property, the parcel numbers and acreage to
be purchased by the OTC, the placement of stakes currently in the
- 8 -
property, the documents sent by the OTC to all of the
partnership’s partners except the tax matters partner, a copy of
the OTC appraisal, all working drawings, legal descriptions and
surveys of the referenced property, property maps, acreage
required to preserve the railroad, water line easements, the
acquisition costs to the OTC of the railroad and a bridge over
State Route 58, and any information the OTC considered
appropriate to assist the partnership in its analysis.
B. Attempts To Negotiate
Eventually, the OTC provided the partnership with the
information it had requested to complete its appraisal report.
The partnership contacted the OTC on April 24, 2002, and reported
it was ready to proceed in discussions related to the project and
the value of the property. In response the OTC requested a
counteroffer and supporting documentation.
The partnership responded that it would be reluctant to
present a counteroffer, and it wanted to continue negotiations in
person. The letter stated the partnership’s intention to
complete the transaction within a 30-day period in a fair and
orderly manner for the benefit of all parties concerned and that
it was prepared to proceed in good-faith negotiations.
During a telephone call on July 17, 2002, the partnership
informed the OTC that its appraisal report on the property
suggested a fair market value of approximately $2,900,000
- 9 -
(including damages). The partnership informed the OTC that it
would consider all reasonable offers and would consider a
contribution/sale of the property to the OTC. In written
correspondence dated July 17, 2002, the partnership reminded the
OTC that it desired to meet and negotiate with the OTC. The
partnership wrote that it would consider a contribution/sale of
the defined property to the OTC and stated: “Since approximately
1990, our organization has been a strong advocate of the OTC and
its activities.” The partnership was willing to accept a minimal
amount in cash, as long as the partnership was receiving fair
market value for the property in the form of cash and
contribution. The partnership wanted to push the project along
because it felt the interchange would benefit Lorain County.
In a July 19, 2002, letter the OTC treated this as an
initial demand and reminded the partnership of its February 2001
appraisal report determining that the property was worth $93,800.
The OTC did not present a different figure for the partnership to
consider.
The partnership responded in a letter dated July 22, 2002,
that the $2,900,000 appraisal report determination was not a
demand, and it would be unable to provide the OTC with a demand
for the property until it was able to meet with the OTC. The
partnership reminded the OTC that it would consider all
reasonable offers and that it would consider a contribution/sale
- 10 -
of the defined property to the OTC. The letter ended with the
following: “Kindly correct your records. NO DEMANDS HAVE BEEN
MADE!!!!!”
In a July 24, 2002, letter after the partnership had been
unsuccessful in getting a meeting with the OTC, the partnership
informed the OTC that it planned to go forward with the
development and/or sale of the property.
On August 13 and 26, 2002, the partnership met with staff
members of the OTC, including OTC General Counsel Thomas Amato.
The partnership presented the results of its appraisal report and
an amount for the sale of the property that was less than the
appraisal report’s fair market value of $2,900,000. There was no
dollar amount presented for the partnership’s consideration other
than the OTC’s initial offer of $93,800.
In September 2002 the OTC had the partnership’s property
appraised at $600,000. The partnership was unaware of this
appraisal until July 2003.
After negotiations failed, the partnership contacted the OTC
on January 14, 2003, to withdraw its offer to sell the property
for less than $2,900,000. The partnership expressed frustration
with the costly and time-consuming process and the OTC’s
followthrough. The partnership further suggested that if the OTC
wanted to acquire its property, it initiate such action as
necessary to acquire it through appropriation.
- 11 -
C. Appropriation Action
On March 17, 2003, the OTC passed a “Resolution Declaring
the Necessity of Appropriating Property and Directing the
Proceedings to Effect Such Appropriation be Begun and
Prosecuted”. The resolution stated the OTC had negotiated for a
reasonable time for the purchase but was unable to enter into an
agreement, the OTC had complied with the relevant provisions of
the Ohio Revised Code, and the property was necessary for the
construction of an interchange. Before the OTC may bring an
appropriation action, it is required to enter into good-faith
negotiations with the property owner and offer to pay the
property owner fair market value.
The OTC filed a “Complaint For Appropriation For Public Road
Project, Quick Take Eminent Domain” on March 28, 2003, in the
Court of Common Pleas in Lorain County, Ohio. The OTC requested
a jury. The OTC deposited $93,800 with the Court and identified
this amount as the fair market value of the property, although
the OTC had obtained an appraisal report which determined the
fair market value of the partnership’s property was $600,000. As
of March 28, 2003, the OTC had not offered the partnership any
amount other than $93,800.
On June 11, 2003, the partnership’s counsel wrote to the OTC
and posed three questions pertaining to the involvement of the
Ohio Department of Transportation, the type of the interchange,
- 12 -
and the construction of the ramp. The information was needed for
purposes of completing the partnership’s second appraisal report.
On July 21, 2003, the partnership’s counsel wrote to the
outside counsel of the OTC regarding the documents produced and
forwarded to the partnership. The partnership had received an
updated version of the OTC’s appraisal report, and the updated
appraisal report determined the fair market value of the property
to be $600,000 instead of $93,800. The OTC’s certificate of
appraisal, which stated the fair market value of the property to
be $93,800, was dated February 24, 2001. Unbeknownst to the
partnership, the OTC’s appraisal report had been updated on
September 9, 2002 (approximately 7 months before the OTC filed
its quick take action on March 28, 2003). The partnership
alleged the OTC had used a statutorily obsolete appraisal report
in violation of Ohio State law. The partnership further alleged
the OTC had violated Ohio State law because of its knowledge that
an application for rezoning was pending when it relied on the
initial appraisal report (February 24, 2001), and the rezoning
that occurred in July 2001 constituted a substantial change
requiring a new appraisal report. Finally, the partnership
alleged the OTC had committed fraud upon the court by depositing
only $93,800 as the determined fair market value when the OTC had
an appraisal report estimating the fair market value of the
property to be $600,000.
- 13 -
On July 22, 2003, the OTC agreed to pay the partnership an
additional $511,000 within the week. The OTC claimed it had made
a “clerical” error and that was why it had not deposited the
correct amount. Before filing the appropriation action (March
28, 2003), the OTC had not offered to pay the partnership the
updated fair market value of $600,000 for the property.
The partnership and the OTC entered into a settlement
agreement on December 17, 2003. The OTC agreed to pay the
partnership $350,000 in addition to the $600,000 already offered
for the property. In addition, the settlement agreement
acknowledged and recognized that the partnership would file a
Form 8283, Noncash Charitable Contributions, with its 2003 return
to indicate that the partnership had made a charitable
contribution to the OTC as a result of the settlement of the
litigation. The OTC agreed that it would execute part IV of
section B of Form 8283 entitled “Donee Acknowledgment”.
The partnership filed a Form 8283 with its Form 1065 for
2003. The partnership listed $1,591,000 as the fair market value
of the appraised land as of December 17, 2003. The partnership’s
appraiser, Richard Masters, signed Part III, Declaration of the
Appraiser, and the OTC signed Part IV, Donee Acknowledgment, of
section B.
- 14 -
II. Fair Market Value: Appraisals of the Property Transferred
The partnership’s larger parcel of property, which directly
abuts State Route 58, is approximately 150 acres and located in
Amherst Township, Ohio. Approximately 48.5 acres are zoned
commercial (since rezoning in July 2001), and the remaining 101.5
acres are zoned agricultural/residential.4
The OTC taking had three components: (1) Actual taking of
approximately 12.4 acres of property, (2) restriction of access
to State Route 58 from the property along approximately .470 acre
by construction of a fence,5 and (3) temporary easements on
approximately .303 acre during construction of the interchange.
Four appraisal reports on the partnership’s property were
received into evidence, and three6 were admitted as expert
reports. The following table lists the basic differences among
the three expert reports:
4
The total number of acres owned by the partnership zoned
commercial and zoned residential varied in each appraisal. We
state the respective acres used by each appraiser for purposes of
explaining the determined fair market value. We accept the
allocation of acreage from Richard Masters’ appraisal.
5
Approximately 846 feet of the partnership’s property was
accessible to and from State Route 58. Since the OTC taking,
approximately 506 feet of the partnership’s property is
accessible to and from State Route 58. This resulted in a loss
of 340 feet of exposure and access to State Route 58.
6
Appraisal reports by Richard Masters, Jay Arthur Berk
III, and Richard Racek were admitted as expert reports. The
appraisal report by Wesley Baker was admitted as evidence for
background purposes only.
- 15 -
Masters Berk Racek
Date 7/2/03 3/4/02 12/17/03
Commissioned The partnership The partnership Respondent
by
Fair market $1,591,000 $2,875,726 $953,671
value of
taking
Fair market 77,000 155,000 75,000
value per (without frontage)
acre of 197,000
commercial (with frontage)
property
Fair market 21,300 22,000 17,500
value per
acre of
residential
property
Trees 13,678 -- --
Damage 905,000 1,674,550 309,399
Temporary 3,800 2,225 1,771
damage
All three experts appraised the property subject to the OTC
taking by using the sales comparison approach. This utilization
approach recognizes the similarities and dissimilarities between
the subject property and similar real property recently sold and
makes appropriate adjustments relative to the subject property in
estimating its indicated value. Each appraiser used the sale
price per acre as the unit of comparison.
- 16 -
A. Masters’ Appraisal
Richard D. Masters has been designated an MAI-SRA-ASA by the
Appraisal Institute. He issued an appraisal report for the
partnership on July 21, 2003, based on a July 2, 2003,
inspection. He determined the fair market value of the OTC
taking to be $1,591,000 as of July 2, 2003. He signed the
partnership’s Form 8283.
Mr. Masters determined the highest and best use of the
partnership’s property was commercial and residential
development. The highest and best commercial development would
be to create commercial lots facing State Route 58, build a
service road with at least two lanes, and develop the remaining
commercial property. The highest and best use of the residential
property would be residential development.
Mr. Masters valued the partnership’s property in three parts
because of its large size and to account for zoning differences.
First, Mr. Masters valued the partnership’s commercial property
with frontage on (abutting) State Route 58 because it would bring
in the highest dollar from a buyer or buyers. Then he valued the
remaining commercial property. Lastly, he valued all of the
residential property as a whole.
1. Commercial Property With State Route 58 Frontage
Mr. Masters determined the partnership had approximately
9.7077 acres of commercial property with State Route 58 frontage.
- 17 -
He used four properties from recent sales as comparable
properties. Two of the comparable properties were on State Route
58, and the other two were on main thoroughfares. In weighing
the properties as comparables, he considered the time that had
passed since the sales, financing terms, size, location, land
size, easements, topography, utilities, zoning, and composite.
The range of price per acre that the comparable properties sold
for was $135,747 to $241,379. After he made adjustments for
location, land size, and composite, the range of the sale prices
per acre was $156,109 to $217,241. The comparable property on
State Route 58 in Amherst Township (the partnership’s property is
in Amherst Township) sold for $195,652 per acre in July 2001, and
Mr. Masters placed the most weight on this property because of
its proximity to the partnership’s property. Mr. Masters
determined the partnership’s commercial property with State Route
58 frontage was worth $197,000 per acre.
No commercial property with State Route 58 frontage was
permanently taken from the partnership. However, as a result of
the OTC’s taking access to State Route 58, some of the commercial
property became restricted. A local zoning ordinance requires
commercial lots to have 175 feet of frontage. The OTC taking
reduced the frontage along State Route 58 from 846 feet to 506
feet by construction of a fence between the partnership’s
property and State Route 58. Accordingly, the OTC taking reduced
- 18 -
the maximum number of commercial lots with State Route 58
frontage from four to two.7
Mr. Masters determined that two commercial lots with
sufficient frontage would occupy 4.8 acres and be worth $197,000
per acre. Accordingly, the 4.90778 acres that had been worth
$197,000 per acre before the OTC taking were no longer worth that
amount because there was no access to State Route 58, and/or
there was insufficient frontage for a commercial lot in Amherst
Township. Mr. Masters determined these 4.9077 acres were
properly valued with the remaining commercial property without
State Route 58 frontage after the OTC taking.
Additionally, Mr. Masters determined a temporary easement on
0.071 acre of the partnership’s commercial property with State
Route 58 frontage had a value of $2,7979 and included this amount
in valuing the OTC taking.10
7
Frontage of 846 feet would produce four potential
commercial lots with 175 feet of frontage each (846 divided by
175 equals 4.8). Frontage of 506 feet would produce only two
commercial lots (506 divided by 175 equals 2.9).
8
9.7077 acres less 4.8 acres.
9
0.071 acre times $197,000 per acre times 10 percent times
2 years equals $2,797.
10
The temporary damage to commercial property with State
Route 58 frontage ($2,797) plus temporary damage to residential
property ($988) equals $3,785, which Mr. Masters rounded to
$3,800.
- 19 -
2. Commercial Property Without State Route 58 Frontage
Mr. Masters determined the partnership had 38.3941
commercial acres without State Route 58 frontage before the OTC
taking. Mr. Masters used five sales of comparable properties
which ranged in price per acre from $43,711 to $223,521. In
weighing the properties as comparable to the partnership’s
property, he considered and made adjustments for the time that
had passed since each sale, financing terms, size, location, land
size, easements, topography, utilities, zoning, and composite.
The adjusted range of prices per acre for the comparable
properties was between $48,191 and $90,034, the median price was
$77,100, and the mean was $73,100. Mr. Masters established a
pre-taking value of $77,000 per acre for the partnership’s
commercial property without frontage. Mr. Masters determined
that before the taking the partnership’s commercial property
without frontage was worth $2,956,000.11
Mr. Masters determined approximately 7.3139 acres of the
partnership’s commercial property without State Route 58 frontage
was taken in the OTC taking. Mr. Masters valued the loss of this
commercial property at $563,000 using his determined value of
$77,000 per acre.
Mr. Masters then determined a post-taking value of $67,400
per acre for commercial property without frontage, using a new
11
38.3941 acres times $77,000 equals $2,956,346.
- 20 -
set of sales of comparable properties. Mr. Masters believed
determining a post-taking value per acre of the partnership’s
commercial property without frontage was appropriate because he
concluded a major problem with access to commercial land would
occur after the OTC taking. He concluded that a possible
solution would be the construction of a two-or-more-lane
access/service drive to the remaining site area providing
commercial access for future development.
Mr. Masters determined the partnership’s remaining 36.377312
commercial acres without State Route 58 access were worth
$2,452,000.13
3. Residential Property
Mr. Masters determined the partnership had approximately
103.4970 residential acres before the taking. Mr. Masters used
five sales of comparable properties in which the sale prices per
acre ranged from $23,422 to $36,709. In weighing the comparable
properties, he considered the time that had passed since each
sale, financing terms, size, location, land size, easements,
12
Before the taking, the partnership had 38.3941 acres.
The OTC took 7.3139 acres from the partnership, and then Mr.
Masters reclassified 4.9077 acres of commercial property with
frontage to commercial property without frontage. 38.3941 minus
7.3139 plus 4.9077 equals 35.9879. (The discrepancy between
36.3773 and 35.9879 acres appears to be the result of rounding,
and this discrepancy has no effect as to the outcome of the
case.)
13
36.3773 acres times $67,400 per acre equals $2,451,830.
Mr. Masters rounded this to the nearest thousand.
- 21 -
topography, utilities, zoning, and composite. As adjusted by Mr.
Masters to reflect the location, land size, and composite, the
adjusted sale prices per acre ranged from $18,254 to $29,367, the
median price was $26,250 per acre, and the mean price was $25,182
per acre. Mr. Masters placed greater weight on properties closer
and more similar in size to the partnership’s property. Mr.
Masters determined a value of $21,300 per acre for the
residential land, and the partnership’s residential property was
worth $2,204,00014 before the OTC taking.
Mr. Masters determined the OTC took approximately 5.0796
residential acres, and this land was worth $108,000.15 Mr.
Masters’ post-taking value per residential acre was the same as
his pre-taking value per residential acre. Accordingly, Mr.
Masters determined the value of the partnership’s remaining
98.417416 acres of residential property to be $2,097,000 after
the taking.17
14
103.4970 times $21,300 is $2,204,486, rounded down to
$2,204,000.
15
5.0796 acres time $21,300 equals $108,195.
16
103.4970 residential acres before the taking less 5.0796
acres taken equals 98.4174 acres.
17
98.4174 acres times $21,300 equals $2,096,291.
- 22 -
In addition Mr. Masters determined the temporary easement on
0.232 acre of residential property for 2 years was worth $988.18
Further, Mr. Masters valued the trees on property taken by the
OTC to be worth $13,768, using a count of the number of trees,
the type, and the average diameter.
4. Taking and Damages
On the basis of his calculations, Mr. Masters determined the
pre-taking value of the partnership’s property to be
$7,086,000.19 He determined the post-taking value of the
partnership’s property to be $5,495,000.20 Accordingly, the
$1,591,000 difference was composed of a total taking of
$686,00021 and damages of $905,000.22
18
0.232 acre times $21,300 per acre times 10 percent times
2 years equals $988.
19
Rounded sum of: 9.7077 commercial acres with frontage
times $197,000; 38.3941 commercial acres without frontage times
$77,000; 103.4970 residential acres times $21,300 plus $13,000
trees.
20
Rounded sum of: 4.8 commercial acres with frontage
times $197,000; 36.3773 commercial acres without frontage times
$67,400; 98.4174 residential acres times $21,300.
21
Rounded sum of: 7.3139 commercial acres without
frontage times $77,000; 5.0796 residential acres times $21,300;
trees worth $13,768; temporary 2-year easement on 0.071
commercial acre with frontage worth $2,797; temporary 2-year
easement on 0.232 residential acre worth $988.
22
$1,591,000 less $686,000.
- 23 -
B. Berk Appraisal
Jay Arthur Berk III holds a senior residential appraiser
designation and is certified by the State of Ohio as a general
appraiser. He issued an appraisal report for the partnership on
April 18, 2002, that was based on March 4 and April 16, 2002,
inspections. His appraisal report determined the value of the
OTC taking to be $2,875,726 on March 4, 2002.
Mr. Berk determined the general area of the partnership’s
property is in the direct path of commercial outgrowth from
Amherst, Ohio, and the completion of a sewer project together
with good access to employment centers makes the partnership’s
property prime for development. He determined the highest and
best use of the property would be to split commercial lots from
the State Route 58 frontage and to develop the residential land
in phases.
Mr. Berk valued the partnership’s property in two parts,
commercial and residential, to account for the different zoning.
He used the sales comparison approach and determined two possible
values for the OTC taking. One value reflected the position that
all of the partnership’s property would be affected by the
taking; the other value reflected the position that not all of
the partnership’s property would be affected by the taking. Mr.
Berk did not express a view on which value was more persuasive;
rather, he stated that the arguments for the one value were as
- 24 -
reasonable as those for the other. Mr. Berk did not explain his
methodology in determining which acres would be affected by the
taking.
Mr. Berk’s determined acreage differed slightly from those
of the other appraisals. He determined the partnership’s
property was 152.15 acres before the OTC taking (46.93 acres of
commercial property and 105.22 acres of residential property).
Mr. Berk determined the net taking was 12.414 acres (6.93 acres
of commercial property and 5.53 acres of residential property).23
After the taking, the partnership was left with 40 acres of
commercial property and 99.69 acres of residential property.
1. Commercial Property
Mr. Berk used two sales of comparable properties to
determine the per-acre value of the partnership’s 46.93 acres of
commercial property. Those properties were sold for $149,176 per
acre and $222,340 per acre. In weighing the comparable
properties, he considered the conditions of each sale (i.e.,
arm’s length), the time that had passed since the sale, the
location, and the demolition costs. Mr. Berk made adjustments to
sale prices of the comparable properties to take into account
differences in demolition costs and location, and he calculated
adjusted prices per acre of $151,600 and $156,800. On the basis
of these two sales and the current market activity in the area of
23
6.93 plus 5.53 equals 12.46 and not 12.414.
- 25 -
the partnership’s property, Mr. Berk determined the partnership’s
commercial property was worth $155,000 per acre and calculated a
total value of $7,274,000.24
To determine the value of the OTC taking, Mr. Berk first
determined the price per acre the partnership’s affected
commercial property would be worth after the OTC taking of 6.93
commercial acres. Mr. Berk used three comparable properties
which sold for $43,711 per acre, $19,820 per acre, and $69,952
per acre. After he made adjustments to the sale prices to
account for location and sewer, the adjusted prices per acre were
$43,500, $27,000, and $49,000. In determining the value of the
partnership’s affected commercial property, Mr. Berk noted that
the first comparable property (prices per acre of $43,711
unadjusted and $43,500 adjusted) had many of the same
characteristics as the partnership’s commercial property.
Accordingly, Mr. Berk determined the partnership’s affected
commercial property was worth $43,000 per acre.
Instead of placing a single value on the partnership’s
commercial property after the OTC taking, Mr. Berk determined two
potential values. The first value was based on the conclusion
that all of the partnership’s commercial property was affected by
the OTC taking, and, accordingly, the 40 commercial acres
24
46.93 acres times $155,000 equals $7,274,000.
- 26 -
remaining were worth $1,720,00025 after the OTC taking. The
second value was based on the conclusion that only a portion of
the partnership’s commercial property was affected by the OTC
taking. Accordingly, only the affected portion of the
partnership’s commercial property was valued at the reduced price
per acre, and the remaining unaffected commercial property was
valued at the higher (pre-OTC taking) price per acre. Citing an
unidentified drawing as authority, Mr. Berk determined 12.95
commercial acres were affected and this left 27.05 commercial
acres not affected by the OTC taking. Accordingly, Mr. Berk
determined that after the OTC taking the partnership’s commercial
property under the second scenario was worth $4,749,500.26
In the first scenario, the value of the commercial property
taken is $5,554,000,27 and in the second scenario the value of
the commercial property taken is $2,524,500.28
2. Residential Property
Mr. Berk used three sales of comparable properties to
determine the per-acre value of the partnership’s 105.22 acres of
residential property. The comparable properties were sold for
25
40 acres times $43,000 equals $1,720,000.
26
12.95 acres times $43,000 plus 27.05 acres times
$155,000.
27
$7,274,000 less $1,720,000 equals $5,554,000.
28
$7,274,000 less $4,749,500 equals $2,524,500.
- 27 -
$36,584 per acre, $21,719 per acre, and $20,927 per acre. In
weighing the comparable properties, Mr. Berk considered the
conditions of each sale (i.e., arm’s length), the time that had
passed since the sale, the location, the demolition costs, and
the site development. Mr. Berk made adjustments to the sale
prices of the properties to take into account demolition costs
and development costs associated with sales of the comparable
properties and calculated adjusted prices per acre of $22,125,
$21,900, and $21,400. On the basis of these sales, Mr. Berk
determined the partnership’s residential property was worth
$22,000 per acre and calculated its total value to be
$2,314,000.29
To determine the value of the OTC taking, Mr. Berk
determined the price per acre the partnership’s affected
residential property would be worth after the taking of 5.53
residential acres. Mr. Berk used one sale of a comparable
property abutting a State route for $12,088 per acre. He did not
make any adjustments to the sale price. Mr. Berk determined that
the partnership’s affected residential property was worth $12,100
per acre.
Again, instead of placing a single value on the
partnership’s residential property after the OTC taking, Mr. Berk
determined two potential values. The first value was based on
29
105.22 acres times $22,000 equals $2,314,000.
- 28 -
the conclusion that all of the partnership’s residential property
was affected by the OTC taking, and, accordingly, the 99.69 acres
remaining were worth $1,205,00030 on the basis of the affected
value per acre of $12,100. The second value was based on the
conclusion that only a portion of the partnership’s residential
property was valued at the reduced price per acre, and the
remaining unaffected residential property was valued at the
higher price per acre. Again citing an unidentified drawing as
authority, Mr. Berk determined 22.65 residential acres were
affected and this left 77.04 residential acres not affected by
the OTC taking. Accordingly, Mr. Berk determined the value of
the partnership’s residential property after the OTC taking under
the second scenario was $1,969,000.
In the first scenario, the value of residential property
taken is $1,109,000,31 and in the second scenario, the value of
residential property taken is $345,000.32
C. Racek Appraisal
Richard G. Racek has received the M.A.I. designation from
the Appraisal Institute. He issued an appraisal report on
30
99.69 acres times $12,100 equals $1,206,249. Mr. Berk
appears to have rounded this number down to $1,205,000.
31
$2,314,000 less $1,205,000 equals $1,109,000.
32
$2,314,000 less $1,969,000 equals $345,000.
- 29 -
December 17, 2003, and determined the fair market value of the
OTC taking was $953,671.
Mr. Racek concluded the highest and best use of the
partnership’s commercial property is development for commercial
or retail purposes. He concluded the highest and best use of the
partnership’s residential property is development for residential
or agricultural use until there is sufficient demand for a
residential subdivision. We refer to the property as
residential.
Mr. Racek used the sales comparison method to separately
determine the fair market values of the partnership’s commercial
and residential property. Mr. Racek determined before the OTC
taking the partnership’s property was 147.72 acres (48.5 acres
zoned commercial and 99.22 acres zoned residential). He
determined that the partnership lost 12.4 acres of property in
the OTC taking (7.4 commercial acres and 5 residential acres).
1. Commercial Property
Mr. Racek used four sales of comparable properties to
determine a price per acre for the partnership’s commercial
property. The range in prices per acre for the sales of
comparable properties was from $44,405 to $99,202. Mr. Racek did
not list the factors he considered in conducting his sales
comparison analysis of the properties and made undisclosed plus
and minus adjustments to the sale prices of the comparable
- 30 -
properties to reflect location, time, inflation, land size
difference, and commercial exposure. After making these
adjustments, he determined the partnership’s commercial property
was worth $75,000 per acre, and the 48.5 acres the partnership
owned were worth $3,637,500.33 Using this value per acre, he
determined the partnership lost $555,00034 of commercial
property.
Mr. Racek determined the OTC taking would not have a
meaningful effect on the commercial property still owned by the
partnership after the OTC taking. Particularly since the
commercial property was then vacant, he determined there would be
no meaningful effect on the commercial residue. However, to
value the commercial property remaining after the OTC taking, Mr.
Racek determined a post-taking value per commercial acre of
$67,500. The post-taking value reflects a discount of 10
percent, a subjective number Mr. Racek determined on the basis of
his experience. Accordingly, he determined the value of the
partnership’s remaining 41.1 commercial acres after the OTC
taking was $2,774,250.35
33
$75,000 times 48.5 equals $3,637,500.
34
$75,000 times 7.4 equals $555,000.
35
$67,500 times 41.1 equals $2,774,250.
- 31 -
2. Residential Property
Mr. Racek used four sales of comparable properties to
determine a price per acre for the partnership’s residential
property. The range in prices per acre for the sales of
comparable properties was from $15,863 to $25,510. Mr. Racek did
not list the factors he considered in conducting his sales
comparison analysis and made undisclosed plus and minus
adjustments to the sale prices of the comparable properties to
reflect land size difference and time since sale. After making
these adjustments, he determined the partnership’s residential
property was worth $17,500 per acre, and the 99.22 acres the
partnership owned were worth $1,736,350.36 Using this value per
acre, he determined the value of residential property the
partnership lost in the OTC taking was $87,500.37
Mr. Racek determined the OTC taking would not have a
meaningful effect on the residential land still owned by the
partnership after the OTC taking. He determined the post-taking
value per acre of the residential property did not differ from
the pre-taking value per acre. Accordingly, he determined the
36
$17,500 times 99.22 equals $1,736,350.
37
$17,500 times 5 equals $87,500.
- 32 -
value of the partnership’s remaining 94.22 residential acres was
$1,648,850.38
3. Damage
According to Mr. Racek, the difference between the value of
the partnership’s property before the taking, $5,375,000, and
after the taking, $4,423,100, is $951,900. Of this amount,
$642,50039 resulted from the value of the property actually taken
as determined by Mr. Racek. After subtracting $1 for “Value of
P.R.O.”, Mr. Racek determined the permanent damage to the residue
of the partnership’s property resulting from the OTC taking to be
$309,399.40
Additionally, Mr. Racek determined the temporary damage to
the residue to be $1,771. For 24 months, .071 commercial acre
and .232 residential acre would be taken for construction by the
OTC. He determined the value of this taking by multiplying the
acreage taken times the post-taking value per acre times 20
percent and placed a value of $959 on the temporary commercial
taking and $812 on the temporary residential taking.
After adding the value of property taken ($642,500), P.R.O.
($1), permanent damage to the residue ($309,399), and temporary
38
$17,500 times 94.22 equals $1,648,850.
39
($75,000 times 7.4 commercial acres) plus ($17,500 times
5 residential acres) equals $642,500.
40
$951,900 less $642,500 less $1 equals $309,399.
- 33 -
damage ($1,771), Mr. Racek determined the value of the OTC taking
was $953,671.
D. Baker Appraisal
Wesley Baker performed an appraisal of the property on the
basis of inspections occurring on October 16, 2000, February 24,
2001, September 3, 2002, and September 29, 2003. He appraised
the taken property at $771,000.
Neither side puts any special emphasis on this report, and
neither do we.
III. The Partnership’s Apportionment of the Property’s Adjusted
Basis
On its Form 8283 the partnership identified $246,647.62 as
its adjusted basis in the property transferred to the OTC.
Accordingly, the partnership reported a capital gain of
$703,35241 on its 2003 Form 1065.
Respondent asserts that the partnership must apportion the
adjusted basis of the property pro rata between the sale/transfer
portion and the charitable contribution portion. As a result of
this pro rata apportionment, respondent asserts that the
partnership must report an additional capital gain of $99,372
(for total capital gain of $802,724 from the transaction)42
41
Amount received, $950,000, less adjusted basis,
$246,647.62.
42
Amount received of $950,000 less $147,275 (alleged
adjusted basis allocated pro rata to the sale/transfer portion,
(continued...)
- 34 -
resulting from a decrease of the adjusted basis attributable to
the sale/transfer portion of the transfer.43
OPINION
The partnership has not claimed that it satisfied the
requirements of section 7491(a)44 to shift the burden of proof to
respondent with regard to any factual issue.
Deductions are a matter of legislative grace, and the
taxpayer has the burden of showing entitlement to any deduction
claimed. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934).
Section 170(a) generally allows a taxpayer a deduction for
any charitable contribution, as defined in section 170(c), made
during the taxable year. Section 170(c) defines the term
“charitable contribution” as “a contribution or gift” to or for
42
(...continued)
based on the partnership’s claimed adjusted basis of $246,627.62
times $950,000 over $1,591,000).
43
The pro rata amount allocated to the charitable
contribution portion of the transfer is $99,372. It was
calculated by multiplying the ratio of the charitable
contribution, $641,000, to the fair market value, $1,591,000,
times the total adjusted basis of the property, $246,647.62.
44
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedures.
- 35 -
the use of certain specified organizations. Respondent does not
dispute that the OTC was a qualified recipient pursuant to
section 170(c).
If a charitable contribution is made in property other than
money, the amount of the taxpayer’s contribution is the fair
market value of the property at the time of the contribution.
Sec. 1.170A-1(c)(1), Income Tax Regs.
A charitable contribution is deductible only if verified
under regulations prescribed by the Secretary, sec. 170(a)(1),
including certain substantiation requirements provided in section
1.170A-13(c)(2), Income Tax Regs.
A taxpayer may not deduct a payment, such as the transfer of
property herein, as a charitable contribution if the taxpayer
receives a substantial benefit in return. United States v. Am.
Bar Endowment, 477 U.S. 105, 116-117 (1986); Ottawa Silica Co. v.
United States, 699 F.2d 1124, 1131 (Fed. Cir. 1983); Singer Co.
v. United States, 196 Ct. Cl. 90, 449 F.2d 413, 420, 422 (1971);
S. Rept. 1622, 83d Cong., 2d Sess. 196 (1954). If the size of a
taxpayer’s payment to a charity is clearly out of proportion to
the benefit received, the taxpayer may claim a charitable
contribution deduction equal to the difference between the
payment and the market value of the benefit received in return,
on the theory that the payment has the “dual character” of a
purchase and a contribution. United States v. Am. Bar Endowment,
- 36 -
supra at 117. To be deductible a charitable contribution must be
a gift; i.e., a transfer of property without adequate
consideration. Sec. 170(c); United States v. Am. Bar Endowment,
supra at 118; Sklar v. Commissioner, T.C. Memo. 2000-118, affd.
282 F.3d 610, 612 (9th Cir. 2002). Thus, a portion of a payment
is deductible as a charitable contribution under section 170 if
the following two conditions are met: “First, the payment is
deductible only if and to the extent it exceeds the market value
of the benefit received. Second, the excess payment must be
‘made with the intention of making a gift.’” United States v.
Am. Bar Endowment, supra at 117-118 (quoting Rev. Rul. 67-246,
1967-2 C.B. 104, 105); Sklar v. Commissioner, supra at 621.
Respondent asserts the partnership received an amount equal
to the fair market value of the taking, lacked the requisite
donative intent when it transferred the land to the OTC, and
failed to satisfy the substantiation requirements of section
1.170A-13(c)(2), Income Tax Regs. Alternatively, respondent
asserts, if the fair market value of the taking exceeded the
money received, then the partnership failed to make the requisite
pro rata apportionment of adjusted basis to the sale portion of
the transaction. We conclude the fair market value of the
property transferred to the OTC exceeded the amount the
partnership received, the partnership did have donative intent
when it transferred the property to the OTC, the partnership
- 37 -
substantially complied with the substantiation requirements of
section 1.170A-13(c)(2), Income Tax Regs., and the partnership is
required to make a pro rata apportionment of its adjusted basis.
I. Value of the Property Transferred
The partnership bears the burden of proving that the fair
market value of the transferred property exceeds the value
determined by respondent. See Rule 142(a); Welch v. Helvering,
290 U.S. 111 (1933); Estate of Gilford v. Commissioner, 88 T.C.
38, 50-51 (1987); McGuire v. Commissioner, 44 T.C. 801, 806-807
(1965).
The parties rely on expert testimony to value the
partnership’s land taken by the OTC. We evaluate expert opinion
in the light of all the evidence in the record and may accept or
reject the expert testimony, in whole or in part, according to
our own judgment. See Helvering v. Natl. Grocery Co., 304 U.S.
282, 295 (1938); Estate of Mellinger v. Commissioner, 112 T.C.
26, 39 (1999). “The persuasiveness of an expert’s opinion
depends largely upon the disclosed facts on which it is based.”
Estate of Davis v. Commissioner, 110 T.C. 530, 538 (1998). We
may be selective in our use of any part of an expert’s opinion.
See id.
Fair market value is the price at which the property would
change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having
- 38 -
reasonable knowledge of the relevant facts. Sec. 1.170A-1(c)(2),
Income Tax Regs. The fair market value of property reflects the
highest and best use of the property on the relevant valuation
date. Stanley Works v. Commissioner, 87 T.C. 389, 400 (1986).
Any realistically available special use of property due to its
adaptability to a particular business is an element that must be
considered in determining the fair market value thereof.
Mitchell v. United States, 267 U.S. 341, 344-345 (1925); Stanley
Works v. Commissioner, supra. The fair market value of property
is not affected by whether the owner actually has put the
property to its highest and best use. The realistic, objective
potential uses for property control the valuation thereof.
Stanley Works v. Commissioner, supra.
The partnership presented testimony of two expert witnesses,
Richard D. Masters and Jay Arthur Berk III. Respondent presented
testimony of one expert witness, Richard G. Racek. The
significant differences between the partnership’s experts and
respondent’s expert can be found in the following factors: (1)
The appraisal of property zoned for commercial use, (2) the
appraisal of property zoned for residential use, and (3) the
damage calculations. See table supra p. 15. We will attempt to
reconcile these differences in reaching our determination as to
the fair market value of the property.
- 39 -
A. Appraisal of the Property
1. Application of the Sales Comparison Approach
Each appraisal report used the comparable sales method to
determine a fair market value per acre of the partnership’s
property. The comparable sales method involves gathering
information on sales of property similar to the subject property,
then making adjustments for various differences between the
comparables and the property being appraised. Estate of Spruill
v. Commissioner, 88 T.C. 1197, 1229 n.24 (1987).
Mr. Masters determined two prices per acre for the
partnership’s commercial property: Commercial property with
frontage along State Route 58 and commercial property without
frontage along State Route 58. Mr. Berk and Mr. Racek did not
separately value the commercial property with and without State
Route 58 frontage; rather, each determined a value per acre of
the commercial property as a whole.
Respondent asserts that by separately valuing the commercial
acres with State Route 58 frontage Mr. Masters has improperly
determined the fair market value using the subdivision
development method. The subdivision development method
determines the value of undeveloped land by treating the land as
if it were subdivided, developed, and sold. Glick v.
Commissioner, T.C. Memo. 1997-65. From the proceeds of the sale
development costs are then subtracted. Id. Finally, the
- 40 -
expected net proceeds are discounted over the estimated period
required for market absorption of the developed lots in order to
determine the amount a developer would pay for the undeveloped
property; i.e., the property’s fair market value. Branch v.
Commissioner, T.C. Memo. 1987-321.
Respondent’s assertion is based on a misunderstanding of the
subdivision development method. Although Mr. Masters does refer
to the loss of commercial lots with State Route 58 frontage, this
is not a subdivision. Rather, because of minimum frontage
restrictions on commercial lots, in order to accurately value the
OTC taking it was reasonable for Mr. Masters to determine the
number of commercial lots with State Route 58 frontage before and
after the taking. Mr. Masters’ valuation is not based on the
assumption that the lots have been developed and sold; rather,
the value per acre is simply a reflection of the location of the
property. It is not necessary for Mr. Masters to subtract any
development costs from his determined value of the commercial
property with State Route 58 frontage because he did not include
development in his determination.
By separately valuing the commercial property with State
Route 58 frontage and without State Route 58 frontage, Mr.
Masters has more accurately applied the sales comparison method
to the partnership’s commercial property. Respondent’s own
expert stated that commercial acres bordering a freeway are worth
- 41 -
more than the commercial acres not bordering a freeway.
Accordingly, it was proper to separately value the commercial
property with State Route 58 frontage and the commercial property
without State Route 58 frontage and use a separate set of sales
of comparable properties to determine the fair market values.
2. Price Per Acre for Commercial Zoned Property
With State Route 58 Frontage
We are satisfied with the comparable properties Mr. Masters
used to determine a price per acre for the partnership’s
commercial property with State Route 58 frontage. In particular,
we find the sale of property on State Route 58 in Amherst
Township for $195,652 per acre in July 2001 especially relevant
to valuing the partnership’s commercial property with State Route
58 frontage. Mr. Masters did not make any adjustments to the
sale price per acre of this comparable property and gave it
greater weight in determining the value of the partnership’s
commercial property with State Route 58 frontage to be $197,000
per acre. We agree with Mr. Masters that the partnership’s
commercial property with State Route 58 frontage was worth
$197,000 per acre.
We also agree with Mr. Masters’ reclassification of
approximately 4.9077 acres of the partnership’s commercial
property. Although no actual acreage of commercial property with
State Route 58 frontage was taken, access to State Route 58 from
part of the property became restricted because of the building of
- 42 -
a fence, and some of the partnership’s property lost the
attribute, which justified a separate valuation. Using local
minimum frontage requirements, Mr. Masters concluded the fence
reduced the number of potential commercial lots from four to two,
and he reclassified 4.9077 acres as commercial property without
State Route 58 frontage. This was proper and values the
commercial development opportunity that was foreclosed as a
result of the OTC taking.
3. Price Per Acre for Residual Commercial Zoned
Property (Pre-Taking)
Mr. Masters determined a pre-taking value of $77,000 per
commercial acre without State Route 58 frontage (residual
commercial property), Mr. Berk determined a pre-taking value of
$155,000 per commercial acre, and Mr. Racek determined a pre-
taking value of $75,000 per acre. We place greater weight on the
sales comparison analysis conducted by Mr. Masters.
Mr. Masters’ analysis is more thorough. He considered more
factors which could potentially warrant an adjustment to the sale
price of a comparable property, he included more sales of
comparable properties in his analysis, and he explained and
disclosed the adjustments he made to the sale prices of
properties and the weight he awarded to particular sales. He
used five sales of comparable properties in his analysis and
considered 10 factors for adjustment. Although Mr. Berk
explained his adjustments to the comparable properties’ sale
- 43 -
prices and disclosed the amounts of those adjustments, he used
sales of only two properties in his comparables analysis. Mr.
Racek used nearly as many sales of comparable properties (four)
as Mr. Masters, but he did not explain the adjustments he made to
the sale prices or even disclose the amounts of the adjustments.
Mr. Racek simply stated a plus or minus adjustment was necessary
to a particular sale without stating the amount.
Further, we place greater weight on Mr. Masters’ analysis
because the sales of comparable properties on which he relied
were specifically tailored to valuing the residual commercial
property. Both comparable properties used by Mr. Berk were along
State routes, and he determined a much higher price per acre. It
appears that he did so because he did not separately value the
portion of the partnership’s commercial property with State Route
58 frontage. Accordingly, we accept Mr. Masters’ determination
that the partnership’s residual commercial property was worth
$77,000 per acre.
4. Price Per Acre for Residential Zoned Property
(Pre-Taking)
Mr. Masters determined a pre-taking value of $21,300 per
residential acre, Mr. Berk determined a pre-taking value of
$22,000 per residential acre, and Mr. Racek determined a pre-
taking and post-taking value of $17,500 per residential acre. We
note that the determined values are much closer in value to one
another than are the commercial values determined by these
- 44 -
experts. We place greater weight on the comparables analysis
conducted by Mr. Masters.
For reasons similar to those mentioned above, we find Mr.
Masters’ analysis to be the most thorough because he considered
the most factors which could potentially warrant an adjustment to
the sale price of a comparable property, he included the most
sales of comparable properties in his analysis, and he explained
and disclosed the adjustments he made to the sale prices of
comparable properties and the weight awarded to particular sales.
Although Mr. Berk included more sales of comparable properties in
his commercial analysis (three) than in his residential value
analysis, he did not consider as many factors as Mr. Masters did
in making adjustments to the sale prices. Mr. Racek included
four sales of comparable properties in his residential value
analysis but disclosed only the factors which called for him to
make adjustments to the sale prices of the properties and did not
disclose the amounts of the plus and minus adjustments he made.
We accept Mr. Masters’ determination that the partnership’s
residential property was worth $21,300 per acre.
5. Commercial Post-Taking Value Per Acre
Each appraiser determined that the value of the
partnership’s remaining commercial property decreased after the
OTC taking. Mr. Masters determined the per-acre value fell from
$77,000 to $67,400, Mr. Berk determined the per-acre value fell
- 45 -
from $155,000 to $43,000 (affected), and Mr. Racek determined the
per-acre value fell from $75,000 to $67,500. Mr. Masters and Mr.
Berk used a sales comparison analysis to determine the post-
taking price per acre, and Mr. Racek did not. Instead, Mr. Racek
reduced the pre-taking value per commercial acre by 10 percent.
For the reasons stated above, we find Mr. Masters’ sales
comparison analysis to be more comprehensive in factors and
number of sales considered than Mr. Berk’s sales comparison.
Accordingly, we accept Mr. Masters’ post-taking value per
commercial acre of $67,400.
6. Residential Post-Taking Value Per Acre
Mr. Masters determined that the per-acre value of the
partnership’s residential property did not decrease after the OTC
taking, on the basis of his sales comparison analysis of five
sales of comparable properties. Mr. Berk determined that the
value of the partnership’s remaining residential property
decreased after the OTC taking. He concluded the partnership’s
remaining residential property fell in per-acre value from
$22,000 to $12,100 after the OTC taking. Mr. Berk determined on
the basis of a comparison to the sale of one comparable property.
Mr. Racek determined there was no change in per-acre value
because the residential acreage is unaffected by the taking. For
the reasons stated above, we find Mr. Masters’ sales comparison
to be more comprehensive in factors and number of sales
- 46 -
considered than Mr. Berk’s sales comparison. Accordingly, we
accept Mr. Masters’ post-taking value per residential acre of
$21,300.
7. Damages
Mr. Masters determined that as a result of the OTC taking
the partnership suffered damages of $905,000. He determined this
by first calculating the difference between his estimated values
of the partnership’s property before and after the OTC taking,
then, subtracting from the difference his estimated value of the
land taken. To determine the value of the land taken, he
multiplied his estimated per-acre price by the number of acres
taken for each respective type of property, i.e., commercial and
residential.
Mr. Berk determined damages of $1,674,550. He determined
this in a calculation similar to Mr. Masters’: first, by
calculating the difference between his estimated values of the
partnership’s property before and after the OTC taking, and then
subtracting from the difference his estimated value of the land
taken.
Mr. Racek determined damages of $309,399. He determined
this in a calculation similar to Mr. Masters’: first, by
calculating the difference between his estimated values of the
partnership’s property before and after the OTC taking, and then
- 47 -
subtracting from the difference his estimated value of the land
taken.
Using the values of the partnership’s land as determined by
Mr. Masters, we determine that the partnership suffered
approximately $934,408 in damages as a result of the taking. The
amount of damage the partnership suffered is from the
reclassification of 4.9077 acres of commercial property and loss
in value of the commercial property without frontage.
After the taking, approximately 4.9077 acres of commercial
property with frontage were reclassified to commercial property
without frontage, and this resulted in a $120,000 decrease in
value per acre for these acres. We find this reclassification
was appropriate and resulted in approximately $588,924 of damage.
Additionally, after the taking, the value of the
partnership’s commercial property without frontage decreased
$9,600 per acre. The partnership started with 38.3941 acres of
commercial property without frontage, the OTC took 7.3139 acres,
and 4.9077 acres were added as a result of their reclassification
as commercial property without frontage; the partnership was left
with 35.9879 acres of commercial property without frontage after
the taking. Accordingly, the decrease in value of these 35.9879
acres resulted in damages of $345,484. The sum of these two
sources of damages is $934,408, and we determine the partnership
suffered damage as a result of the taking in that amount.
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8. Reconciliation of Amounts
We accept Mr. Masters’ determinations of the per-acre fair
market values of the partnership’s property before and after the
taking. The OTC took 7.3139 acres of commercial property without
frontage worth $77,000 per acre, 5.0796 acres of residential
property worth $21,300 per acre, and timber and temporary
easements worth $17,553. The value of the taken acres, timber,
and easements is approximately $688,918. When added to the
damage of $934,408, we determine the value of the property taken
by the OTC to be $1,623,326; the value taken exceeded the
$950,000 of compensation paid to the partnership by $673,326.45
II. Charitable Intent of the Partnership
As used in section 170(a), the term “charitable
contribution” is synonymous with the word “gift”. DeJong v.
Commissioner, 36 T.C. 896, 899 (1961), affd. 309 F.2d 373 (9th
Cir. 1962). A gift is generally defined as a voluntary transfer
of property by the owner to another without consideration. Id.
A gift is the expression of a detached and disinterested
generosity. Commissioner v. LoBue, 351 U.S. 243, 246 (1956). It
is motivated by affection, respect, admiration, charity, or like
impulses. Robertson v. United States, 343 U.S. 711, 714 (1952).
45
We note this amount is higher than the amount the
partnership claimed for a charitable contribution deduction.
- 49 -
It is not compelled by the constraining force of any moral or
legal duty. Bogardus v. Commissioner, 302 U.S. 34, 41 (1937).
We heard three witnesses testify as to the charitable intent
of the partnership in negotiating the transfer of the property to
the OTC. Steven Luca testified on behalf of the partnership, and
Joseph DiSantis and Noel Tsevodos testified on behalf of
respondent. At the time of trial, Ms. Tsevodos was the general
counsel of the OTC.
As a trier of fact it is our duty to listen to the
testimony, observe the demeanor of the witnesses, weigh the
evidence, and determine what we believe. See Christensen v.
Commissioner, 786 F.2d 1382, 1383-1384 (9th Cir. 1986), affg. in
part and remanding on another issue T.C. Memo. 1984-197; Nell v.
Commissioner, T.C. Memo. 1986-246. At trial we had the
opportunity to evaluate Mr. Luca’s, Mr. DiSantis’, and Ms.
Tsevodos’ veracity and to observe their demeanor. We found Mr.
Luca to be a credible witness. His testimony was straightforward
and consistent with other evidence. Mr. Luca credibly testified
that it was the intention of the partnership to make a part gift
and part sale, and the reason the partnership suggested an
appropriation action was to ensure that the full fair market
value of the property was recognized in the combination of the
gift and sale. We have given great weight to his testimony in
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determining that the partnership transferred the property with
donative intent.
We did not find Mr. DiSantis and Ms. Tsevdos to be credible
witnesses. Mr. DiSantis was evasive in his responses. Ms.
Tsevdos was argumentative in her responses. Neither was able to
credibly explain why the OTC did not offer to pay the partnership
fair market value for the property when it was required to do so
to engage in good faith negotiations. Further, neither was able
to credibly explain why the OTC did not deposit the fair market
value of the property as required by State law. We give little
weight to their testimony that the partnership lacked donative
intent in transferring the property.
The testimony of Mr. Luca and the partnership’s
correspondence in negotiating the transfer of the property to the
OTC persuades us that the partnership made a gift to the OTC.
The written correspondence between the partnership and the OTC
demonstrates the partnership’s commitment to supporting the OTC
in its pursuits as a government entity and illustrates a pattern
of offering a portion of the property as a gift to the OTC. On
July 17, 2002, the partnership informed the OTC orally and in
writing that the partnership was interested in a part-gift part-
sale transfer of the property to the OTC. Again, on July 22,
2002, the partnership reminded the OTC about its offer to
transfer the property in a part-gift part-sale transaction, and
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on July 25 and August 28, 2001, the partnership reminded the OTC
that it supported the OTC’s activities.
Although respondent asserts the filing of the quick take
action negates donative intent on the part of the partnership,
the circumstances of the partnership’s negotiations with the OTC
do not support respondent’s assertion. We find the OTC failed to
negotiate in good faith when it did not offer to pay the
partnership full fair market value. We find the partnership
suggested the OTC file a quick take action as a last attempt to
prompt good-faith negotiations on the part of the OTC and to have
the full fair market value of the property recognized in a part-
gift part-sale transaction. This intention, i.e., to have the
full fair market value recognized by the OTC, does not negate the
donative intent of the partnership because the partnership always
intended a part-gift part-sale transaction.
The OTC failed to acknowledge the fair market value of the
property to the partnership and prompted years of protracted
negotiations not conducted in good faith by the OTC. After the
OTC had orally offered to pay the partnership $200,000 for the
property in 1999, in 2001 the OTC sent the partnership an offer
of $93,800 for the property. After part of the property was
rezoned commercial, the OTC did not disclose the new appraisal or
increase the amount it was offering to pay the partnership.
After the OTC received an appraisal report valuing the property
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at $600,000, the OTC did not increase the amount it was offering
to pay the partnership. The OTC never offered to pay the
partnership an amount different from $93,800 until the
partnership was forced to hire counsel and the partnership’s
counsel discovered the appraisal report, which determined the
property to be worth $600,000, and brought it to the attention of
the Court of Common Pleas in Lorain County.
The correspondence between the partnership and the OTC
illustrates the frustration the partnership experienced in
attempting to negotiate the terms for transferring the property
to the OTC. The partnership made clear that it wanted to make a
gift to the OTC of some portion of the land. An acknowledgment
by the OTC of a higher fair market value would not necessarily
have resulted in the OTC’s being forced to pay the partnership
more because some part of the property would be tendered as a
gift. However, the OTC would not acknowledge the property had a
fair market value other than $93,800 throughout negotiations and
in spite of rezoning and an appraisal report which reported
otherwise. Mr. Luca’s testimony set forth the frustrating
pattern of unfair negotiations by the OTC. We find the
partnership suggested the OTC file an appropriation action merely
to have a neutral party determine the fair market value of the
property. The partnership intended to donate a portion of the
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property to the OTC throughout the appropriation proceedings and
did donate a portion of the property to the OTC.
Furthermore, the settlement agreement entered into by the
OTC and the partnership includes a provision which recognizes
that the partnership made a donation of a portion of the property
to the OTC. The language is indicative of the partnership’s
donative intent and a gift. It is consistent with the
partnership’s pattern of correspondence expressing its intention
to donate part of the property to the OTC. Accordingly, we find
the partnership made a gift of $641,000 worth of property to the
OTC in a part-gift part-sale transfer.
III. Substantiation Requirements
Section 1.170A-13(c)(2), Income Tax Regs., requires
additional substantiation for charitable contributions of
property worth more than $5,000. Specifically, section 1.170A-
13(c)(2)(i), Income Tax Regs., requires a donor to: (1) Obtain a
“qualified appraisal” for the property contributed; (2) attach a
fully completed appraisal summary to the tax return on which the
deduction for the contribution is first claimed by the donor, and
(3) maintain records containing the information required by
paragraph (b)(2)(ii) of this section (relating to content of
records).
Section 1.170A-13(c)(3)(i)(A), Income Tax Regs., requires a
“qualified appraisal” to be made not earlier than 60 days before
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the date of contribution of the appraised property nor later than
the due date of the return on which a deduction is first claimed
under section 170. As relevant here, section 1.170A-
13(c)(3)(ii), Income Tax Regs., requires a “qualified appraisal”
to include the date of contribution to the donee, a statement
that the appraisal was prepared for income tax purposes, and the
fair market value of the appraised property on the date of the
contribution, among other information. Sec. 1.170A-13(c)(3)(C),
(G), (I), Income Tax Regs. Respondent asserts the partnership
has failed to substantiate its claimed charitable contribution
deduction with a “qualified appraisal” because the appraisals it
submitted are untimely and lacking required information.
We have previously allowed deductions for charitable
contributions where taxpayers have substantially complied with
the substantiation requirements of section 1.170A-13(c)(2) and
(3), Income Tax Regs. See Bond v. Commissioner, 100 T.C. 32
(1993); Simmons v. Commissioner, T.C. Memo. 2009-208. In Bond
this Court considered whether certain requirements of the above-
referenced regulations were mandatory or directory and whether
the taxpayer had substantially complied so as to be entitled to a
charitable contribution deduction. In reaching the conclusion
that the requirements were directory, the Court expressed the
following rationale:
Under the above test we must examine section 170 to
determine whether the requirements of the regulations are
- 55 -
mandatory or directory with respect to its statutory
purpose. At the outset, it is apparent that the essence of
section 170 is to allow certain taxpayers a charitable
deduction for contributions made to certain organizations.
It is equally apparent that the reporting requirements of
section 1.170A-13, Income Tax Regs., are helpful to
respondent in the processing and auditing of returns on
which charitable deductions are claimed. However, the
reporting requirements do not relate to the substance or the
essence of whether or not a charitable contribution was
actually made. We conclude, therefore, that the reporting
requirements are directory and not mandatory. See Taylor v.
Commissioner, * * * [67 T.C. 1071,] 1078-1079 [(1977)].
[Bond v. Commissioner, supra at 41.]
Bond involved the contribution of two blimps to a qualified
charity. The parties agreed upon the value, the fact that the
appraiser was qualified, and all other regulatory requirements
except whether the taxpayers’ failure to obtain and attach to
their return a separate written appraisal containing the
information specified in the regulations would result in the
disallowance of a charitable contribution deduction. The Court
noted that substantially all of the information specified in the
regulations had been provided, except the qualifications of the
appraiser, on the Form 8283 attached to the return. The Court
concluded that the taxpayers in Bond had substantially complied
with the regulations and that disallowance of the deduction under
those circumstances would be too harsh a sanction.
Subsequently, in Hewitt v. Commissioner, 109 T.C. 258
(1997), affd. without published opinion 166 F.3d 332 (4th Cir.
1998), the Court again considered these regulations in a
situation where taxpayers donated to a charitable organization
- 56 -
their shares of stock of a corporation that was not publicly
traded. They claimed deductions in amounts that the parties
agreed represented the fair market value of the stock. However,
the taxpayers did not obtain appraisals before filing their
returns for the years at issue. The values reported or
deductions claimed were not based upon qualified appraisals;
instead, they were based upon average per-share prices of the
stock traded in arm’s-length transactions at approximately the
same time as the gifts. Even though the values were undisputed,
the Court found that the taxpayers had not complied with section
170 and section 1.170A-13, Income Tax Regs., and that they were
not entitled to deduct any amount in excess of the amount allowed
by the Commissioner, which was their basis.
In Hewitt the Commissioner disallowed the value of the stock
in excess of basis because of the lack of qualified appraisals.
The Commissioner agreed that the taxpayers made charitable
contributions, that the donee was charitable, and that the
claimed values represented fair market values of the
contributions. However, unlike the taxpayers in Bond, the
taxpayers in Hewitt did not provide information on the Form 8283
that satisfied most of the requirements of the regulation. In
holding that the taxpayers were not entitled to a deduction in
excess of their basis (for the full fair market value), the Court
provided the following rationale:
- 57 -
Petitioners herein furnished practically none of the
information required by either the statute or the
regulations. Given the statutory language and the thrust of
the concerns about the need of respondent to be provided
with appropriate information in order to alert respondent to
potential overvaluations, * * * petitioners simply do not
fall within the permissible boundaries of Bond v.
Commissioner, supra, where an appraisal summary, which was
completed by a qualified appraiser, contained most of the
required information and could therefore be treated as a
written appraisal, was attached to the return. Cf.
D’Arcangelo v. Commissioner, T.C. Memo. 1994-572 (respondent
prevailed where no qualified appraisal was obtained).
[Hewitt v. Commissioner, supra at 264.]
Taken together, Bond and Hewitt “provide a standard by which
we can consider whether petitioners provided sufficient
information to permit respondent to evaluate their reported
contributions, as intended by Congress.” Smith v. Commissioner,
T.C. Memo. 2007-368.
Respondent asserts the partnership’s July 21, 2001,
appraisal report from Mr. Masters is untimely (obtained more than
60 days before the December 17, 2003, date of contribution) and
lacking some of the information required by the regulations (the
date the partnership contributed the property to the OTC, a
statement that the appraisal was prepared for income tax
purposes, and the fair market value of the appraised property as
of the date of contribution). Respondent asserts the partnership
is not entitled to a charitable contribution deduction because of
these substantiation flaws and that it has not substantially
complied with the regulations. We conclude the partnership has
substantially complied with the regulations and is entitled to a
- 58 -
$641,000 charitable contribution deduction for the property
transferred to the OTC.
Similar to the taxpayer in Bond, the partnership timely
provided respondent with nearly all of the information required
in the regulations. Respondent was provided with the date of the
contribution and the fair market value of the property on the
date of contribution on the partnership’s completed Form 8283.
The appraisal did lack a statement that it was prepared
specifically for income tax purposes; however, we find this
omission to be insubstantial. See also Simmons v. Commissioner,
supra (finding substantial compliance with section 170 income tax
regulations) (“Although the appraisals did not contain an
explicit statement that they were prepared for income tax
purposes, the appraisals did contain statements that the owner of
the parcels petitioner was contemplating donating conservation
easements to L’Enfant.”).
It is clear that the partnership did obtain an appraisal
report before filing its tax return and claimed a charitable
contribution deduction based on the fair market value in the
appraisal report. Cf. Bond v. Commissioner, 100 T.C. at 42
(“Therefore, this is not a case where petitioners failed to
obtain a timely appraisal of the donated property and thereby
failed to establish its value for claiming a contribution
deduction on their return.”); Smith v. Commissioner, supra (where
- 59 -
an appraisal report submitted by the taxpayers was completed
after the due date for filing the taxpayers’ 2000 returns).
Accordingly, we conclude the premature nature, by approximately 3
months, of the partnership’s appraisal report was insubstantial.
The information provided to respondent was sufficient to
permit respondent to evaluate the partnership’s reported
contribution and monitor and address concerns about overvaluation
and other aspects of the reported charitable contribution.
Accordingly, the partnership has substantially complied with the
regulations.
IV. Apportionment of the Property’s Adjusted Basis
Section 1011(b) provides: “If a deduction is allowable
under section 170 (relating to charitable contributions) by
reason of a sale, then the adjusted basis for determining the
gain from such sale shall be that portion of the adjusted basis
which bears the same ratio to the adjusted basis as the amount
realized bears to the fair market value of the property.”
The partnership subtracted the full adjusted basis
($246,648) of the property from the amount received ($950,000)
and reported a $703,352 gain from the bargain sale. Because
section 170 applies to this transaction, section 1011(b) does not
allow the partnership to subtract the full adjusted basis of the
property. Instead, the partnership may deduct only the amount of
the adjusted basis proportional to the amount realized in the
- 60 -
part sale over the fair market value of the entire property.
Accordingly, the partnership may subtract only an adjusted basis
of $147,27646 from the amount realized ($950,000), and the
partnership must recognize an additional gain of $99,372.47
V. Conclusion
We have found the partnership had donative intent when it
transferred the property to the OTC, and it substantially
complied with the substantiation requirements of section 1.170A-
13, Income Tax Regs. The partnership is entitled to a $641,000
charitable contribution deduction, the amount it claimed. We
also find that the partnership must make a pro rata apportionment
of the adjusted basis of the property to the sale portion of the
transaction.
To reflect the foregoing,
Decision will be entered
under Rule 155.
46
Amount realized on sale portion of bargain sale
($950,000) over total fair market value of property ($1,591,000)
times total adjusted basis of $246,648.
47
New gain (amount realized, $950,000, less proportionate
adjusted basis, $147,276) less old gain ($703,352).