t c memo united_states tax_court estate of james j mitchell deceased whittier trust company executor and trustee petitioner v commissioner of internal revenue respondent docket no filed date john f ramsbacher john w prokey and dennis i leonard for petitioner trent d usitalo and nathan h hall for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined a dollar_figure deficiency in the federal estate_and_gift_taxes of the estate of james j mitchell the estate the deficiency related to the valuation of interests in five real properties paintings and other various assets held by the estate the parties have resolved all the issues except the valuation of two real properties and two paintings the values of the two real properties consist of the 95-percent interest in each property owned by the james j mitchell trust mitchell trust and the percent interests james j mitchell decedent gifted to his sons’ trust six days before his death we are asked to determine the fair market values of 95-percent interests owned by the mitchell trust as of date valuation_date and the 5-percent interests gifted to decedent’s children as of date transfer date we are also asked to determine the fair market values of two paintings owned by the mitchell trust as of the valuation_date findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference decedent died as a resident of los olivos california on date whittier trust company whittier trust the executor and trustee of the estate 1the parties agree that the valuation_date for decedent’s property interests is date the date of decedent’s death 2the parties agree that the valuation_date for the 5-percent interests gifted to decedent’s children is date the date of transfer from the mitchell trust to a_trust for decedent’s children had its principal_place_of_business in south pasadena california at the time it filed the petition the mitchell family and the mitchell trust decedent was born into a prosperous california family in his father was a co-founder of united airlines and married to lolita armand heiress to a famed chicago meat packing family decedent’s parents accumulated a sizeable fortune and bequeathed a great deal to him including american western art by such famous artists as john gamble frederic remington remington and charles marion russell russell it is unknown when or from whom his father acquired the paintings decedent’s father crated the paintings at a general storage_facility where they remained for over years the paintings were not discovered until after decedent’s death it is unclear whether decedent ever knew the paintings were in storage it is further unclear whether decedent ever thought they were of any value the paintings are currently being professionally stored at art pack inc a securely monitored and climate-controlled fine arts storage_facility decedent also inherited several real properties including an oceanfront property pincite fernald point lane in santa barbara california the beachfront property and a big_number acre ranch along refugio road in santa ynez california the ranch as an adult decedent spent little time at either the beachfront property or the ranch he lived in the san francisco bay area which was more than a 5-hour drive from the properties decedent did however have a great appreciation for both properties decedent grew up on the beachfront property and had many fond childhood memories of the property decedent prized the ranch not only for its size but also for its rich history in the 1930s decedent’s father started a famous riding group called the rancheros vistadores the group’s purpose was to revive the old california western way of life by having a week-long horse ride through the ranch many famous individuals have been members of the rancheros vistadores including president ronald reagan and walt disney the ride continues to attract to rancheros vistadores every year decedent inherited the beachfront property and the ranch subject_to leases executed by his father and decedent determined to continue the leases to keep ownership of the real properties in the mitchell family decedent had a successful life in his own right he was well-educated and worked as the business editor of the san jose mercury news he married susan sutton a prominent bankruptcy attorney and they adopted two sons as a result of his inherited and self-made wealth decedent accumulated many valuable assets he determined it would be in his family’s best interest if he placed his assets in a revocable_living_trust he transferred all of his property interests to the mitchell trust and named himself as trustee decedent’s wife unexpectedly passed away in and in he learned that he had cancer he thereafter amended the mitchell trust and named whittier trust as trustee decedent wanted to pass both real properties to his sons but wanted to ensure that his sons kept the properties in the family accordingly he included provisions in the mitchell trust to keep his sons from receiving outright ownership of the real_property until the youngest son attained the age of decedent gifted a 5-percent interest in both the beachfront property and the ranch to a_trust for his sons’ benefit children’s trust the mitchell trust retained a 95-percent interest in both real properties decedent passed away shortly thereafter his two teenage sons were orphaned at his death the estate consists of oil_and_gas interests jewelry interests in five real properties and paintings at issue here are the estate’s interests in the beachfront property the ranch casuals on the range by remington remington’s casuals and creased by russell russell’s creased collectively the property at issue the beachfront property the beachfront property is a single-family oceanfront property located in the exclusive community of montecito california near santa barbara the property is a gated residence that consists of approximately dollar_figure acres and a huge backyard with feet of ocean frontage the property includes a big_number square foot house a square foot guest house and a square foot carport the estimated annual property_tax was only dollar_figure in because the house had not been sold for several decades decedent began leasing the beachfront property shortly after his father’s death in leasing the property accomplished decedent’s goal of keeping the property in the mitchell family it also transferred the cost of upkeep to the property’s tenants and provided income to decedent and his family many different tenants lived in the property over the 15-year span from the time decedent inherited the property until he learned of his cancer in decedent leased the beachfront property to mark and lynda schwartz the schwartzes lived in los angeles at the time and wanted a weekend and summer home in the more tranquil santa barbara area the schwartzes quickly developed a strong emotional connection to the beachfront property and decided to make it their permanent home 3california proposition generally limits annual increases in base_year value of real_property to no more than two percent except when property changes ownership or undergoes new_construction the schwartzes tried to purchase the beachfront property from decedent on several occasions decedent rebuffed their offers but agreed to a long-term_lease shortly before he died the schwartzes and decedent negotiated a 5-year lease with three optional 5-year extensions exercisable unilaterally by the schwartzes for a total of years schwartz lease they agreed to dollar_figure monthly rent for the first six months of the lease which would increase to dollar_figure per month in date and then increase percent annually annual rent for the first year was approximately dollar_figure all rent was prepaid in an annual lump-sum installment every january the schwartzes and decedent shared responsibility for property expenses the schwartzes negotiated the right to renovate the main house on the beachfront property subject_to decedent’s approval the house had not been renovated in over years so the schwartzes desired to and eventually did spend approximately dollar_figure to renovate the house the schwartzes also negotiated the right to sublet the property they hoped that either decedent would eventually agree to sell to them or they could sublet the property for a profit the ranch the ranch encompasses big_number acres making it one of the largest ranches in the santa ynez valley of santa barbara county california the ranch’s diverse terrain makes much of the land difficult to work the ranch is the steepest ranch in santa ynez valley and much of the property is covered with trees and brush only half of the land is useable for agriculture or livestock grazing there are two houses on the ranch property the primary house is big_number square feet with three bedrooms and the other house is big_number square feet with two bedrooms the houses are approximately years old and in fair to poor condition don and sue hanson the hansons began leasing the ranch from decedent’s father in the hansons both graduates of stanford university have been life-long ranchers and used the property both for living and business purposes mr hanson raised cattle on the ranch during the winter months and then transported them to the hansons’ ranch in wyoming during the summer months he would then sell all his cattle in the fall the hansons signed a 5-year lease with decedent’s father in with a right to renew the lease at the end of the term the hansons found the property very useful for their cattle business and continued to renew the lease for 5-year terms with decedent’s father and then with decedent in the hansons and decedent negotiated a 5-year lease with four optional 5-year extensions exercisable unilaterally by the hansons for a total of years and nine months hanson lease the hansons’ rent was dollar_figure a year beginning in increasing dollar_figure per year the hansons bore responsibility for any property expenses except decedent paid the property taxes the hanson lease satisfied the hansons’ desire to retire on the ranch and decedent’s goal of keeping the property leased and maintained until it would be distributed to his sons outright remington’s casuals remington painted remington’s casuals in remington is regarded as one of the greatest artists and sculptors of the american west having created approximately big_number drawings and paintings and sculptures during his career he developed an impressionist style later in his life which can be seen in remington’s casuals his later works are considered his most refined for their great attention to detail and convincing depictions of western gear remington’s casuals is an by 26-inch oil on canvas depicting a cowboy and an indian talking on horseback in a pastel-colored landscape an expansive mesa forms the backdrop and marks the horizon line the figures in the painting are fixed in their poses rigid and staid remington signed and dated the lower right corner of the painting the painting is thought to have been commissioned by a chicago art dealer for a private purchaser it is unknown how or when decedent’s father received the painting russell’s creased russell painted russell’s creased in russell was known as the cowboy artist because he developed inspiration for his paintings from his work as a cowboy trapper and wrangler his paintings often depicted the difficulties of surviving and taming the american west he completed approximately big_number works including paintings watercolors and sculptures russell’s creased is a by 23-inch watercolor illustrating a cowboy two horses and a dying elk the painting depicts a wounded elk struggling to survive after being shot by the cowboy snow-topped mountains provide the background for the action scene russell signed and dated the lower left corner of the painting no one purchased russell’s creased when it was completed it is unknown how or when decedent’s father received the painting the estate’s estate_tax_return the estate timely filed a federal estate_tax_return the estate reported a dollar_figure gross_estate with a dollar_figure total transfer_tax the estate valued the separate interests in the beachfront property at dollar_figure for the 95-percent interest owned by the mitchell trust and dollar_figure for the 5-percent interest gifted to the children’s trust the estate valued the separate interests in the ranch at dollar_figure for the 95-percent interest owned by the mitchell trust and dollar_figure for the percent interest gifted to the children’s trust the estate also valued remington’s casuals at dollar_figure and russell’s creased at dollar_figure respondent’s examination and tax_court proceedings respondent examined the estate’s federal estate_tax_return and determined that the estate underreported the fair market values of several real properties and several paintings respondent timely issued the estate a deficiency_notice that assigned higher values to the properties including the properties at issue respondent determined that the fair_market_value of the 95-percent interest in the beachfront property was dollar_figure and the 5-percent interest gifted to the children’s trust was dollar_figure respondent determined that the fair_market_value of the 95-percent interest in the ranch was dollar_figure and the 5-percent interest gifted to the children’s trust was dollar_figure respondent valued remington’s casuals at dollar_figure million and russell’s creased at dollar_figure million whittier trust as executor of the estate filed the petition with this court contesting the entire deficiency the parties have been able to resolve all the valuation issues and other estate_tax issues but still dispute the fair_market_value of the two paintings and two real properties the parties stipulated that 19-percent and 32-percent fractional discounts should be applied to the 95-percent and 5-percent leased-fee interests in the beachfront property respectively the parties also stipulated that 35-percent and 40-percent fractional discounts should be applied to the 95-percent and 5-percent leased-fee interests in the ranch respectively opinion we are asked to determine the fair_market_value of two pieces of real_estate and two pieces of art we appreciate that valuing real_property and art can be an ambitious task both real_property and art are unique and infrequently exchange hands moreover the value of art like beauty often lies in the proverbial eye of the beholder this estate and gift_tax valuation case illustrates the difficulty in ascertaining fair_market_value the quintessential fact question the parties have abandoned their valuations reported on the federal estate_tax_return and determined in the deficiency_notice both parties advanced at trial different valuations of the property at issue we shall consider each party’s valuation in turn we begin by considering the burden_of_proof i burden_of_proof in general the commissioner’s determinations in the deficiency_notice are presumed correct and the taxpayer has the burden of proving that the commissioner’s determinations are in error see rule a 290_us_111 the burden_of_proof may shift to the commissioner with respect to a factual issue relevant to a taxpayer’s tax_liability however if the taxpayer introduces credible_evidence and establishes that he or she substantiated items maintained required records and fully cooperated with the commissioner’s reasonable requests sec_7491 and a and b the estate filed a motion to shift the burden_of_proof to respondent after reviewing all of the evidence presented we have found that resolving this case does not depend on which party bears the burden_of_proof the parties adduced testimony and offered exhibits supporting their respective positions accordingly we base our conclusions upon the preponderance_of_the_evidence rather than an allocation of the burden_of_proof see estate of jorgensen v commissioner tcmemo_2009_66 estate of harper v commissioner tcmemo_2002_121 we next consider the valuations of the property at issue beginning with a brief summary of the estate_tax ii estate_tax valuations generally the value of a decedent’s gross_estate includes the fair_market_value of the property owned by the decedent on the date of 4all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the date of decedent’s death unless otherwise indicated death sec_2031 sec_20_2031-1 estate_tax regs fair_market_value is the price that a willing buyer would pay a willing seller both persons having reasonable knowledge of all relevant facts and neither person being under compulsion to buy or to sell see sec_20_2031-1 estate_tax regs morever the value must reflect the highest_and_best_use of the property on the valuation_date 125_tc_227 both parties relied extensively on expert opinions to support their differing views on the fair market values of the subject properties we evaluate the expert valuation opinions in light of the expert’s qualifications and all other evidence 480_f2d_171 9th cir affg 54_tc_493 86_tc_547 we may adopt all or none of the expert’s methodology or value conclusions see 304_us_282 84_tc_722 we must carefully consider all the facts weigh all relevant evidence and draw appropriate inferences and conclusions in determining fair_market_value iii real_property interests at issue we now consider the value of the 95-percent and 5-percent interests in the beachfront property and the ranch the parties agree that the real_property interests at issue are leased-fee interests in contrast to a fee simple interest a leased-fee interest describes the landlord’s rights in leased property including the right to receive lease payments and the reversionary_interest when the lease expires marks v commissioner tcmemo_1985_179 appraisal institute the appraisal of real_estate 13th ed an appraiser values a leased-fee interest subject_to the actual lease and the actual tenant rather than on hypotheticals see estate of proctor v commissioner tcmemo_1994_208 the parties’ experts used different valuation methods for approximating the fair market values of the leased-fee interests of the real properties at issue the estate’s experts calculated the leased-fee interests using the income capitalization method whereas respondent’s expert applied a novel leased buyout method the income capitalization method values income-producing property by estimating the present_value of anticipated future cash flows that is lease payments and the reversionary_interest 115_tc_376 ndollar_figure affd 283_f3d_1258 11th cir the appraiser selects an appropriate lease period for the property forecasts future cash flows and chooses an appropriate discount rate to convert the future cash flows into a present_value the applicable discount rate takes into account the inherent risks of real_estate ownership and competitive alternative investments an increment is added to a base rate to adjust for risk by compensating for the extent of evaluated risk appraisal institute supra pincite respondent’s experts stated that a leased-fee interest under the lease buyout method equals the real property’s fee simple absolute value less the amount a landlord would have to pay to buy out a tenant buyout amount the buyout amount includes among other things a return of advance_payments and deposits as well as the tenant’s costs to terminate the lease and find another similar_property to rent we will consider both methods in determining the fair market values of the leased-fee interests of the real properties at issue moreover the estate’s expert reports submitted at trial valued the real properties at lower values than the estate reported on the estate_tax_return we lack jurisdiction however to find that the values were lower than that reported on the estate_tax_return see 64_tc_589 the only issue before us is whether there is a deficiency we will consider each expert’s report in determining whether the values of the real properties at issue are equal to or higher than the amounts reported on the estate_tax_return the parties stipulated that the fair market values of the 95-percent and 5-percent leased-fee interests in the real_property at issue should be based on each property’s 100-percent leased-fee interest discounted by stipulated fractional amounts accordingly we must first determine the 100-percent leased-fee interest value of the real properties at issue to determine the value of the 95-percent interests owned by the mitchell trust and the 5-percent interests gifted to the children’s trust we will then apply the parties’ stipulated fractional amounts to determine the values of the properties for estate_tax purposes a the beachfront property we begin by considering the 100-percent leased-fee interest value of the beachfront property both parties submitted expert reports providing valuations of the 100-percent leased-fee interest the estate presented expert reports and testimony from james hammock mr hammock and john thomson mr thomson mr hammock and mr thomson are california-certified general appraisers and members of the appraisal institute which has the highest credential level for an appraiser both experts have experience valuing residential and commercial property in the santa barbara area respondent offered expert reports and testimony from keith andersen mr andersen a real_estate appraiser and member of the appraisal institute with experience valuing property in the santa barbara area the estate’s experts valued the 100-percent leased-fee interest value of the beachfront property at dollar_figure million to dollar_figure million respondent’s expert valued the 100-percent leased-fee interest value of the property at dollar_figure million the prime cause for the experts’ different valuations was the method applied for valuing the property valuation method we now consider the proper method for valuing the percent leased fee interest of the beachfront property the estate’s experts applied the income capitalization method which is the general method for valuing leased-fee interests see eg shepherd v commissioner supra estate of hinz v commissioner tcmemo_2000_6 kloppenberg co v commissioner tcmemo_1986_325 marks v commissioner supra respondent’s expert mr andersen contends that appraisers generally use the income capitalization method only with respect to commercial property leases not residential leases moreover he claims the income capitalization method does not yield a value that would make economic sense because the beachfront property’s property expenses far exceeded the rental value he asserts that his lease buyout method should be used to value the beachfront property we disagree any property that generates income can be valued using the income capitalization approach appraisal institute supra pincite decedent treated the beachfront property as an investment and profited from leasing the property decedent never intended to live on the property or use it as his residence the beachfront property had been leased to third-party caretakers for decedent’s entire adult life and he intended to continue leasing the property to caretakers until his sons could manage the property moreover the long-term leases served decedent’s legitimate property management and maintenance goals and produced stable income decedent not only received income but also financially benefitted from having third-party caretakers maintain the property the schwartz lease relieved decedent from having to pay a property manager to live on the property as well as giving him someone to share all property expenses respondent’s expert mr andersen claims that the beachfront property’s property expenses exceeded the income generated from leasing the property this assertion is unfounded mr andersen bases his argument on the first year’s lease payments of dollar_figure and his projected expenses of dollar_figure for property taxes maintenance management and reserves his expense calculation largely depends however on a reassessment of the property that would lead to a steep increase in property_tax reassessment occurs only upon completion of new_construction or sale neither of which occurred here moreover he failed to show the court that new_construction or sale would put the land to its best use the mitchell trust’s federal_income_tax returns for and show an average of dollar_figure in expenses associated with the beachfront property compared to approximately dollar_figure in income generated under the first year of the schwartz lease we find that leasing the beachfront property was an income-producing activity that put the land to its best use mr andersen also argues that the income capitalization method generally is used to value commercial rather than residential property and therefore should not be used in this case we recognize that residences are typically owner-occupied not leased so the income capitalization method generally does not provide the best indication of value here however decedent treated the property as an income-producing property rather than a personal_residence mr schwartz frequently sought to buy it but decedent rebuffed each offer decedent however wished to continue leasing the beachfront property to generate income decedent also saw a benefit in having the schwartzes maintain the property and preserve it for his sons’ benefit and enjoyment we see no reason to deviate from the accepted use of the income capitalization method for valuing income-producing property like the beachfront property we further find mr andersen’s lease buyout analysis speculative at best expert testimony must be the product of reliable principles and methods fed r evid mr andersen’s lease buyout method has not been accepted by any court or generally recognized by real_property appraisers in applying his lease buyout method he estimated that the schwartzes’ advance rent payment security deposit and moving_expenses would total between dollar_figure and dollar_figure million which is far from an exact amount moreover he had no basis for assuming that the schwartzes would be willing to take a lease buyout we reject the application of this method in this case accordingly we find that the income capitalization method is the best_method for determining the value of the 100-percent leased-fee interest of the beachfront property the estate’s experts were the only experts to submit valuations based on the income capitalization method we therefore look to the estate’s expert reports for valuing the leased-fee interest using the income capitalization method the estate’s experts determined that the estate’s future cash flows consisted of the lease payments from the schwartz lease and the reversionary_interest of clear title to the property when the lease expired after the 20-year term we first consider the appropriate lease_term for determining the value of the lease payments and reversionary_interest term of the schwartz lease for valuation purposes an appraiser may be justified in concluding that a tenant will exercise options to renew a lease when the renewal terms favor the tenant appraisal institute supra pincite here the lease terms patently favored the schwartzes who had the option to renew the lease three times and not decedent who was at the mercy of the schwartzes’ renewal decision and could not terminate the lease moreover the schwartzes lived in the house for several years spent approximately dollar_figure to renovate the house and had not expressed any desire to move as of the valuation_date accordingly we conclude that a 20-year lease_term is the best estimate of length for the schwartz lease present_value of the lease payments and reversionary_interest we next consider the proper calculation for determining the present_value of the lease payments and the reversionary_interest although both of the estate’s expert analyses were appropriate we tend to favor mr thomson’s methodology for estimating the present_value of the anticipated future lease payments and the reversionary_interest mr thomson averaged the actual expenses reported on the mitchell trust’s income_tax returns for and and annually adjusted the expenses for inflation we find this to be the best expense estimate we also find that mr thomson’s 5-percent discount rate the average discount rate for residential property in the santa barbara area is a better discount rate than mr hammock’s use of the average discount rate for commercial property in the santa barbara area we therefore find mr thomson’s conclusion that the present_value of the lease payments would be dollar_figure for a 20-year lease_term to be the most accurate we next consider the present_value of the reversionary_interest we begin by determining the value of the property in fee simple absolute mr thomson did not value the property in fee simple absolute but rather used the fee simple absolute valuation prepared by respondent’s expert mr andersen mr hammock and mr andersen used the comparable sales_method to value the beachfront property in fee simple absolute the comparable sales_method determines value by analyzing and comparing sales of property similar to the subject property and weighing the information to reach a likely value for the land being appraised 64_tc_889 estate of langer v commissioner tcmemo_2006_232 mr hammock and mr andersen valued the beachfront property in fee simple absolute at roughly the same amount using the comparable sales_method dollar_figure million versus dollar_figure million and both experts selected a reasonable number of comparables both experts considered lot size home improvements and ocean frontage price per foot as important comparable factors the primary difference between the sales comparisons is that mr andersen selected properties sold in and while mr hammock selected properties sold in and mr andersen’s sales were closer in time to the valuation_date both experts acknowledged that the property in santa barbara appreciated rapidly from to we find mr andersen’s valuation more appropriate as it included comparables sold closer to the valuation_date we therefore use a dollar_figure million fee simple absolute valuation to calculate the reversionary_interest mr thomson calculated the present_value of the reversionary_interest using mr andersen’s dollar_figure million fee simple absolute valuation he increased the fee simple absolute value by a percent annual growth rate and reduced it by a 5-percent annual discount rate he noted that the reversionary_interest value was inversely related to the length of the lease_term with the reversion amount decreasing as the lease_term lengthened he concluded that the reversionary_interest amount would be dollar_figure for a 20-year lease_term mr thomson then added the present_value of the lease payments to the present_value of the reversionary_interest and determined that the 100-percent leased- fee interest value would be approximately dollar_figure million applying the stipulated discounts to mr thomson’s determination the percent interest the mitchell trust owned had a fair_market_value of dollar_figure as of the valuation_date and the 5-percent interest gifted to the children’s trust had a fair_market_value of dollar_figure as of the transfer date we find mr thomson’s estimation of the value of the beachfront property most persuasive accordingly we find that the estate properly valued the beachfront property on the estate_tax_return b the ranch we now consider the 100-percent leased-fee interest value of the ranch the parties stipulated that a 35-percent and percent fractional discount should be applied to the 95-percent and the 5-percent leased-fee interests respectively the estate offered the valuation reports and testimonies of mr hammock and mr thomson respondent offered the valuation reports and testimony of donald bratt mr bratt a self-employed real_estate appraiser and a member of the appraisal institute mr bratt has experience valuing property in the santa ynez valley the estate’s experts valued the 100-percent leased-fee interest of the property at approximately dollar_figure million respondent’s expert valued the 100-percent leased-fee interest at dollar_figure million like the beachfront property this sizeable valuation difference is primarily a result of the valuation methods applied valuation method the estate’s experts assert that the income capitalization method is the best indicator of value for us to determine the 100-percent leased-fee interest value of the ranch respondent’s expert mr bratt advocates however that the lease buyout method provides the best indicator we disagree with mr bratt for the same reasons we rejected respondent’s expert lease buyout method to determine the value of the beachfront property the ranch had been leased to the hansons for years this provided decedent with annual income and also reallocated the regular maintenance cost to third-party caretakers it was also consistent with keeping the ranch in the mitchell family we find that the income capitalization method should be used to determine the ranch’s 100-percent leased-fee interest value term of the hanson lease for valuation purposes we now consider the appropriate lease_term for determining the present_value of the lease payments and the reversionary_interest the estate’s experts analyzed the 100-percent leased- fee interest using different lease terms depending on the number of options exercised the lease terms patently favored the hansons who had the option to renew the lease four times moreover the hansons lived on the property for years and had not expressed any desire to move as of the valuation_date we understand that mr hanson’s age may be a factor in determining the total lease_term we were not however provided any data on his life expectancy cf estate of proctor v commissioner tcmemo_1994_208 accordingly we calculate the 100-percent leased-fee interest value based on all options being exercised for a total lease of years and nine months present_value of the lease payments and reversionary_interest we next consider the proper calculation for determining the present_value of the lease payments and the reversionary_interest for determining the present_value of the future lease payments we accept the annual lease payments expenses and discount rate used by mr thomson mr thomson considered decedent’s previous tax returns and determined dollar_figure as a base for expenses in which he annually adjusted for inflation we find that mr thomson’s use of the 5-percent national discount rate on leased residential property best reflects the risks associated with investing in the ranch and more accurately estimates the rate of return investors expect when investing in property like the ranch we agree with mr thomson’s conclusion that the present_value of all lease payments would be dollar_figure if all lease options are exercised we must also consider the proper fee simple absolute valuation for determining the value of the reversionary_interest mr thomson used mr bratt’s comparable sales for his analysis mr hammock and mr bratt valued the property using the comparable sales_method and all experts selected a reasonable number of comparable sales the primary difference is that most of mr bratt’s comparable sales are located in the santa ynez valley while eight of the nine comparables mr hammock selected were located outside the santa ynez valley both experts agreed that property located in santa ynez valley was priced much higher than other_property in the area we find mr bratt’s comparable sales better indicate the fee simple absolute value of the ranch because they were located in the santa ynez valley location location location is paramount in real_estate_valuation we do not however accept in toto mr bratt’s comparable sales methodology we are especially troubled by his applied appreciation rate mr bratt determined that the property most similar to the ranch was a big_number acre ranch that sold for dollar_figure per acre in brinkerhoff ranch he increased the sale price of the brinkerhoff ranch by two percent per month for months for passage of time for a present_value of dollar_figure per acre mr bratt’s valuation appreciates the brinkerhoff ranch by more than percent in just over five years the brinkerhoff ranch had appreciated at only percent per year the previous years while the property value in the santa ynez valley may have been appreciating rapidly between and we find no support for such extreme growth we also are uncomfortable with mr bratt’s dollar_figure million valuation being nearly double his most comparable sale we find mr thomson’s fee simple absolute valuation using mr bratt’s comparable sales much more appropriate mr thomson recognized that there was significant growth from to he applied an average 15-percent annual growth rate to the value of the property based on the median home price appreciation in santa barbara county during this period he determined the proper price per acre should be between dollar_figure and dollar_figure for an estimated dollar_figure million fee simple absolute valuation we agree with mr thomson’s conclusion that the fair_market_value of the ranch in fee simple absolute is dollar_figure million mr thomson applied a 5-percent annual appreciation rate and a 5-percent discount rate to determine the present_value of the reversionary_interest he concluded that the reversionary_interest value would be dollar_figure million if all lease options were exercised he then added the present_value of the lease payments dollar_figure to the current value of the reversionary_interest dollar_figure million to determine the 100-percent leased-fee interest amount to be approximately dollar_figure million applying the stipulated discounts to mr thomson’s determination the fair_market_value of the 95-percent interest in the ranch owned by the mitchell trust is dollar_figure on the valuation_date and the percent interest in the ranch owned by the children’s trust is dollar_figure as of the transfer date we find mr thomson’s estimation of the value of the ranch most persuasive accordingly we find that petitioner properly valued the ranch on its estate_tax_return iv paintings at issue we must now determine the fair_market_value of the american western paintings remington’s casuals and russell’s creased on the valuation_date experts consider several different criteria in valuing art that are not typically used in general property valuations these include thematic appeal period of work style overall quality provenance condition of artwork and market conditions collectively the art valuation factors respondent contends that the fair_market_value of remington’s casuals is approximately dollar_figure million and of russell’s creased is approximately dollar_figure million the estate asserts that the fair_market_value of remington’s casuals is approximately dollar_figure million and of russell’s creased is approximately dollar_figure both parties offered expert reports and testimony to aid the court in making its determination the provenance means the origin or history of ownership of the painting documented evidence of provenance for a painting can help to establish that it has not been altered and is not a forgery a reproduction or stolen art parties jointly offered an expert report prepared by virginia blyth hill ms hill on the condition issues specific to russell’s creased ms hill has over years of experience as a paper conservation expert the estate offered the expert reports and testimonies of nancy escher ms escher catherine gellert ms gellert and richard alasko mr alasko to support its valuations of the paintings at issue the estate’s experts are members or candidate members of the american society of appraisers asa certified by the uniform standards of professional appraisal practice uspap and have extensive experience valuing american western artwork respondent offered the expert reports and testimonies of peter fairbanks mr fairbanks and gretchen wolf ms wolf mr fairbanks is a member of the appraisers association of america and has been an art appraiser for almost years specializing in 19-century american and european paintings and traveling antiques ms wolf is an internal_revenue_service irs art appraiser a member of the asa and certified by the uspap neither mr fairbanks nor ms wolf has an expertise or extensive background in american western art we also received appraisals for both paintings from the irs art_advisory_panel art panel the art panel comprise sec_25 art experts who volunteer to assist the irs in evaluating taxpayers’ fair_market_value appraisals of works_of_art the irs does not tell the art panel whether an item is being valued for charitable_contribution purposes or estate_tax purposes to ensure objectivity the art panel submits its valuation to the irs appraisal office which then makes the ultimate determination of value the art panel’s valuation generally becomes the position of the irs here the art panel determined the value of remington’s casuals to be between dollar_figure and dollar_figure and russell’s creased to be between dollar_figure and dollar_figure million the art panel submitted its appraisals to ms wolf the irs staff appraiser assigned to value the paintings at issue ms wolf was concerned by the art panel’s disparate and wide-ranging valuations which she attributed to its inexperience in american western art she believed that a much higher value was warranted which led her to prepare her own valuation report respondent used ms wolf’s valuation for purposes of the deficiency_notice a remington’s casuals the parties submitted three appraisals of remington’s casuals in addition to the art panel’s appraisal all of the experts used the comparable sales approach to valuing remington’s casuals the estate’s expert ms escher compared remington’s casuals to auction sales of remington paintings between and in valuing the painting at dollar_figure million respondent’s examination expert ms wolf relied on a smaller pool of comparable paintings to reach a dollar_figure million valuation respondent’s trial expert mr fairbanks considered not only public auctions but also private sales in valuing the painting at dollar_figure million the experts agree that the positive valuation factors for remington’s casuals include the period during which it was painted its condition its impressionist style the signature on the painting and the market conditions on the valuation_date the experts disagree however on the proper comparable paintings and sales as well as whether the subject matter of the painting should be viewed as a positive or negative factor in the valuation we begin by analyzing the comparables used by the experts ms escher and the art panel relied only on public sales as comparables in contrast to mr fairbanks who considered private sales the parties dispute whether private sales should be considered this court generally finds auction prices more probative of value than poorly documented private sales see estate of scull v commissioner tcmemo_1994_211 we generally look at private sales when they are well-documented see williford v commissioner tcmemo_1992_450 here mr fairbanks failed to provide the exact sale prices exact sale dates identities of buyers or sellers information on the condition of the paintings or discussions on provenance he even acknowledged that he did not put great weight on the private sales accordingly we focus on comparable paintings that have been publicly auctioned for purposes of valuing remington’s casuals we find the value conclusions of mr fairbanks and ms wolf to be unreasonably high their dollar_figure million to dollar_figure million range is more than twice that of the art panel ms wolf expressed suspicions about the art panel report because the panelists were not experts in american western art if this were the only criterion then the court would only rely upon ms escher as no trial or examination expert for respondent has expertise in valuing american western art ms escher looked at all auctioned remingtons over a 6-year period to determine the best comparables three of the four paintings she selected were selected by the other experts as comparables we find that the estate’s expert’s report is a better indicator of value as she exhaustively researched all sales had expertise in american western art and provided the most understandable report accordingly we find the fair_market_value of remington’s casuals to be dollar_figure million b russell’s creased the parties submitted three appraisals of russell’s creased in addition to the art panel’s appraisal all of the experts used the comparable sales approach to value the painting and considered russell’s painting a disputed trail as a comparable a disputed trail a large watercolor widely recognized as one of russell’s finest works sold at auction in for dollar_figure million which was the highest selling_price of any russell before the valuation_date the estate’s expert ms escher compared russell’s creased to nine other russell paintings including a disputed trail in valuing the painting at dollar_figure she considered a disputed trail far superior to and more valuable than russell’s creased respondent’s trial expert mr fairbanks and respondent’s examination expert ms wolf viewed russell’s creased as very similar to a disputed trail though they both viewed a disputed trail as an overall better painting mr fairbanks valued russell’s creased at dollar_figure million and ms wolf valued russell’s creased at dollar_figure million both parties’ experts agree that positive valuation factors for russell’s creased include the period during which it was painted russell’s signature on the painting and the market conditions on the valuation_date the experts disagree however on the proper comparable paintings and sales as well as whether the subject matter of the painting should be viewed as a positive or negative factor we have fully considered all of the experts’ reports and testimony all of the experts agreed that a disputed trail was one of russell’s greatest works and no expert claims that russell’s creased should be considered a great work the estate’s expert mr alasko pointed out that the painting’s provenance leaves much to be desired no one purchased russell’s creased when it was completed ms hill determined that the watercolor image of the painting was in good condition in contrast the paper and back boarding were irremediably poor because of weak ground wood and acidic paper pulp the estate’s expert ms gellert testified as to the condition of russell’s creased and determined that the surface of the painting has yellow stains because of the poor paper quality we place less weight on the reports of respondent’s experts as they failed to adjust their valuation of russell’s creased for its inferior status and for its poor paper quality and back boarding the estate’s expert ms escher’s appraisal contains a reasonably detailed description of nine comparables including comments about the condition of each piece moreover she fully considers the painting’s provenance and poor paper and back boarding in making her valuation ms escher’s valuation rests squarely within the art panel value range of dollar_figure to dollar_figure million we find the estate’s expert valuation the most reasonable and well-supported accordingly we determine the fair_market_value of russell’s creased to be dollar_figure v conclusion this court applies the stipulated fractional percentages in finding that the fair_market_value of the mitchell trust’s percent interest in the beachfront property was dollar_figure and in the ranch was dollar_figure as of the valuation_date we hold that the fair_market_value of the children’s trust’s 5-percent interest in the beachfront property was dollar_figure and in the ranch was dollar_figure on the transfer date we also hold that the fair_market_value of remington’s casuals was dollar_figure million and of russell’s creased was dollar_figure as of the valuation_date we have considered all arguments made in reaching our decision and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing an appropriate order will be issued denying petitioner’s motion to shift the burden_of_proof and decision will be entered under rule


department of the treasury internal_revenue_service washington d c tax exempt and government entities may date significant index no contact person identification_number telephone number t eo employer_identification_number legend foundation association corporation state x dear this is in reference to your ruling_request dated date concerning the federal_income_tax consequences stemming from proposed grants from the foundation to the association the proposed transfer of corporation assets to the association and the foundation and the association’s assumption of responsibility for conducting continuing legal education in state facts foundation is a nonprofit corporation established over years ago and has been found to be an organization exempt from federal_income_tax under sec_501 of the internal_revenue_code as an organization described in sec_501 foundation has been classified as other than a private_foundation under sec_509 its purposes include advancing the science of jurisprudence promoting and improving the administration of justice and facilitating the understanding of and compliance with the law in pursuing these objectives foundation publishes and distributes reports and other literary works on law-related subjects and the administration of justice association is a nonprofit business league and has been found to be an organization exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 association is an integrated bar association consisting of all attorneys licensed to practice law in state and is governed by rules established by the state supreme court its purposes include improving the administration of justice fostering and maintaining high standards of conduct integrity confidence and public service of those persons engaged in the practice of law safeguarding and promoting the professional interests of bar members and encouraging continuing legal education of bar members corporation is a nonprofit organization and public charity established over years ago and has been found to be an organization exempt from federal_income_tax under sec_501 of the code as an organization described in sec_501 it has for many years administered an educational program for the study discussion and dissemination of information related to local and state laws and the laws of the united_states practicing attorneys in state are encouraged but not required to avail themselves of these educational opportunities in accordance with a state supreme court decision corporation receives the majority of its funding through grants from foundation and gross_receipts from its continuing legal education seminars and publications all persons who are admitted to practice law in state are members of association membership in foundation is limited to those attorneys active members of association who have contributed money to foundation the members of corporation are active members of association who are elected qualifying for and serving on association’s executive council the proceeds from corporation's seminars and publications have not kept up with expenses to resulting in the organization being operated at a loss association has made loans totaling x corporation and also has provided corporation with staff support and other administrative resources the solution proposed by association and corporation is to consolidate inasmuch as many of their activities overlap corporation would be dissolved and association would organize and sponsor continuing legal education programs for attorneys in state the number of programs would be reduced and the seminars with broadest appeal would continue to be held once association has assumed the role of corporation in organizing and sponsoring continuing legal education programs and activities in state foundation may make grants or contributions to association to reimburse it for expenses and overhead incurred in conducting the programs and activities since article ill of foundation’s articles of incorporation provides that foundation will make grants only to exempt_organizations qualified under sec_501 of the code to further exempt educational_purposes foundation has proposed amending its articles of incorporation to allow foundation to make gifts grants or contributions to be used exclusively to facilitate understanding of and compliance with the law to promote the study of law legal research and the diffusion of knowledge foundation also has proposed implementing expenditure safeguards to ensure that association uses the grant funds for educational_purposes including a grant restriction under which association would be required to deposit all foundation grant funds in a separate_account for continuing legal education programs and related activities all funds deposited in this account would be restricted to expenses and overhead incurred by association for continuing legal education programs the separate_account is intended to prevent the commingling of grants or contributions from foundation with other funds received by association for purposes not consistent with foundation’s purposes in addition association would provide foundation with annual reports detailing deposits and withdrawals from the account which would be certified by an authorized association official as true correct and complete in the event association were to fail to comply with any material provision contained in the grant restriction agreement or ceases organizing sponsoring or conducting continuing legal education programs any remaining unexpended gifts grants or contributions made under the agreement plus net_income thereon would be returned to foundation the entire agreement and any gifts grants or contributions to association for continuing tegal education programming would be subject_to approval by foundation’s board_of directors further corporation would obtain an independent appraisal of its assets including its copyrighted written audio and audiovisual continuing legal education materials based on this appraisal it would transfer assets to association with a value equal to x thus repaying the loans association would forgive amounts owed by corporation to the extent the appraised value of the assets is less than the full amount of corporation’s liability article xi of corporation’s articles of incorporation requires distribution of any assets upon winding-up and dissolution to an organization qualified as an exempt_organization under sec_501 of the code thus any assets and continuing legal education materials in excess of the liability remaining upon corporation’s dissolution would be transferred to foundation these copyrighted materials would then be licensed to association under a nonexclusive perpetual nontransferable and royalty-free license the license agreement would restrict association's use of the licensed continuing legal education materials solely for purposes in furtherance of foundation’s educational_purposes in addition it would require association to prepare and submit annual reports to foundation regarding any continuing legal education activities organized sponsored and conducted by association in connection with which the licensed materials were used these reports would have to be certified by a duly authorized officer of association as being true correct and complete finally the proposed license agreement provides that if at any time association fails to substantially comply with any material provision in the agreement or ceases organizing or conducting continuing legal education activities the authorization to use the copyrighted materials would be revoked and that all such materials must be returned to foundation the license agreement is subject_to approval by foundation’s board_of directors ruling requests you have requested the following rulings neither the proposed grants from foundation to association solely to fund association’s continuing legal education programs and related educational activities and associated overhead nor the corresponding amendment to foundation’s articles of incorporation permitting such grants to be made from foundation to association will adversely affect the tax-exempt status of foundation prior to its winding-up and dissolution_corporation may in connection with a qualified independent valuation transfer certain copyrighted written audio and audiovisual materials and other assets used by corporation for continuing legal education programs and related activities to association in full satisfaction of a bona_fide liability payable by corporation to association without adversely affecting the tax-exempt status of either corporation or association and without causing unrelated_business_taxable_income for corporation and in the event the fair_market_value of such assets and continuing legal education materials exceeds the amount of such liability corporation may distribute the portion of the assets and the copyrighted written audio or audiovisual materials that exceeds such liability to foundation pursuant to corporation’s winding-up and dissolution with foundation licensing the intangibles portion of such assets to association under a nonexclusive perpetual nontransferable and royalty-free license without adversely affecting the tax-exempt status of either foundation or association law sec_501 of the code provides in part for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable and educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_501 of the code provides in part for the exemption from federal_income_tax of nonprofit business_leagues provided that no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_511 of the code in part imposes a tax on the unrelated_business_income of organizations exempt from tax under sec_501 sec_512 of the code defines unrelated_business_taxable_income as gross_income derived by any organization from any unrelated_trade_or_business regularly carried on by such organization sec_512 of the code provides that all gains or losses from the sale exchange or other_disposition of property other than property which is i stock_in_trade or other_property of a kind which would properly be includible in inventory if on hand at the close of the taxable_year or ii property_held_primarily_for_sale to customers in the ordinary course of the trade_or_business are excluded from unrelated_business_taxable_income sec_513 of the code defines an unrelated_trade_or_business to include any trade_or_business the conduct of which is not substantially related to the exercise or performance by such organization of its charitable educational or other exempt purposes sec_1 a -1 c of the income_tax regulations defines the term private_shareholder_or_individual to include persons having a personal and private interest in the activities of an organization sec_1_501_c_3_-1 of the regulations provides that a tax-exempt_organization operates exclusively for sec_501 purposes only if it engages primarily in activities that accomplish such purposes sec_1 c -1 c of the regulations provides that an organization will not be deemed to be operated exclusively for exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 of the regulations states that an organization that is not organized or operated exclusively for exempt purposes specified in sec_501 of the code unless it serves a public rather than a private interest revrul_68_489 1968_2_cb_210 holds that an organization described in sec_501 of the code will not jeopardize its exemption even though it distributes funds to organizations not themselves exempt under sec_501 the exempt_organization ensured use of the funds for sec_501 purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes the exempt_organization also retained control and discretion as to the use of the funds and maintained records establishing that the funds were used for sec_501 purposes analysis under the proposed transaction foundation’s articles of incorporation would be amended to allow foundation to make distributions to association solely to further foundation’s educational_purposes foundation plans to enter into a grant restriction agreement to ensure that any gifts grants or contributions made to association at foundation’s discretion will be used solely to further foundation’s educational_purposes this agreement was drafted using the expenditure_responsibility_rules found in sec_4945 of the code as guidelines sec_4945 of the code provides that private_foundations must exert all reasonable efforts and establish reasonable procedures to ensure that a grant to an organization such as a professional association is spent solely for the purposes for which it was made obtain full and complete reports from the recipient organization on how the grant funds will be or were spent and make full and detailed reports on such expenditures to the internal_revenue_service although foundation is a public charity and not a private_foundation foundation will adhere to the rules under sec_4945 which are consistent with the holding of revrul_68_489 supra thus in accordance with the agreement association would be required to deposit al grant funds from foundation in a separate bank account established solely to receive funds for continuing legal education programs and activities at a bank selected by foundation association also would be required to submit annual reports to foundation detailing the deposits and withdrawals from the account and the purposes of the withdrawals because association will take steps to ensure that grants gifts and contribution amounts transferred to it by foundation will be used solely for foundation’s educational_purposes foundation may amend its articles of incorporation to permit the grants gifts and contributions to be made to association where such amounts are sufficiently restricted to be used soiely to facilitate understanding of and compliance with the law to promote study of law legal research and diffusion of legal knowledge accordingly the funds may be distributed directly from foundation an organization exempt under sec_501 of the code to association a business league exempt under sec_501 without affecting foundation’s exempt status under sec_501 all nonexclusive nontransferable and royalty-free licenses of copyrighted continuing legal - education materials made by foundation to association will be treated similarly to the gifts grants and contributions and should not affect foundation’s exempt status under sec_501 of the code foundation and association pian to enter into a licensing agreement that would restrict association’s use of the licensed continuing legal education materials to purposes in furtherance of foundation’s educational_purposes thus as foundation plans to take steps to ensure that any licensed continuing legal education materials are used solely in furtherance of its educational_purposes any nonexclusive nontransferable license between foundation and association will not adversely affect foundation’s exempt status under sec_501 under its articles of incorporation corporation's purposes are to conduct continuing legal education programs in various forms for association members and other interested parties and to publish information relating to the practice of law it seeks to foster and improve the study of jurisprudence and law reform as well as to provide for the continuing legai education of association’s members the attorneys licensed to practice in state as noted previously corporation’s liability to association is a bona_fide debt based on the advances made by association to corporation to fund the continuing losses_incurred by corporation in connection with its continuing legal education activities since association is assuming corporation’s role in organizing sponsoring and conducting continuing legai education activities in state and since corporation has little cash or other available funds to repay the debt it is beneficial to both corporation and association that corporation repay the debt with in-kind assets corporation plans to hire a qualified independent_appraiser to evaluate its continuing legal education publications and other materials and determine the accurate fair_market_value of this property once this independent valuation has been obtained only assets with a fair_market_value not greater than the amount of the debt will be transferred from corporation to association in full satisfaction of liability since a qualified independent valuation will be obtained and care will be taken to ensure that arm’s-length and reasonableness standards will be observed the prohibitions against inurement and private benefit will not be violated by the transfer of in-kind assets in full satisfaction of the debt owed by corporation to association see sec_1 c -1 c and c -1 d ii of the regulations corporation's transfer to association of copyrighted materials and other assets related to its continuing legal education activities in full satisfaction of its debt to association would be substantially related to the furtherance of corporation’s exempt purposes therefore any gain on such transfer will not create unrelated_business_taxable_income for corporation further sec_512 of the code provides that all gains or losses from the sale exchange or other_disposition of property other than property which is i stock_in_trade or other_property of a kind which would properly be includible in inventory if on hand at the close of the taxable_year or ii property_held_primarily_for_sale to customers in the ordinary course of the trade_or_business are excluded from unrelated_business_taxable_income any office equipment and supplies or furniture transferred by corporation to association in satisfaction of the debt would fal within this category accordingly if the appraised value of any furniture or office equipment or supplies exceeds corporation’s basis in such assets the resulting gain upon transfer of the assets to association in satisfaction of corporation’s debt to association will not constitute unrelated_business_taxable_income rulings therefore we rule that neither the proposed grants from foundation to association solely to fund association's continuing legal education programs and related educational activities and associated overhead nor the corresponding amendment to foundation’s articles of incorporation permitting such grants to be made from foundation to association will adversely affect the tax-exempt status of foundation prior to its winding-up and dissolution_corporation may in connection with a qualified independent valuation transfer certain copyrighted written audio and audiovisual materials and other assets used by corporation for continuing legal education programs and related activities to association in full satisfaction of a bona_fide liability payable by corporation to association without affecting the tax-exempt status of either corporation or association and without causing unrelated_business_taxable_income for corporation in the event the fair_market_value of such assets and continuing legal education materials exceeds the amount of such liability corporation may distribute the portion of the assets and the copyrighted written audio and audiovisual materials that exceeds such liability to foundation pursuant to corporation’s winding-up and dissolution with foundation licensing the intangibles portion of such assets to association under a nonexclusive perpetual nontransferable and royalty-free license without adversely affecting the tax-exempt status of either foundation or association this ruling is directed only to the organization that requested it sec_6110 of the code provides that this ruling may not be used or cited by others as precedent this ruling is limited to the applicability of the provisions of the sections of the code as noted above this ruling is based on the understanding that there will be no material changes in the facts on which it is based if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely relate hepes d- robert c harper jr manager exempt_organizations technical group


internal_revenue_service number release date index number ------------------------------------------------------------ ---------- --------------------------------------- ------------------------------------------ ----------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ------------ telephone number -------------------- refer reply to cc fip b02 plr-136399-16 date date legend taxpayer state a area ------------------------------------------ --------------------------- ------------ ----------------------------------------------- property a ----------------------------------- property b ----------------------------------- property c ---------------------------------------- dear ---------------- this is in reply to a letter dated date requesting a ruling on behalf of taxpayer taxpayer requests a ruling that the provision of services described below does not give rise to impermissible_tenant_service_income and will not cause rent received from tenants to be treated as other than rents_from_real_property under sec_856 of the internal_revenue_code taxpayer is a state a corporation that has elected to be taxed as a real_estate_investment_trust reit under sec_856 of the code through disregarded entities facts plr-136399-16 taxpayer wholly owns three separate residential properties in area property a property b and property c each a property and collectively the properties description of the properties each property includes some or all of the following amenities that are available to all tenants of that property at no additional cost a swimming pool an exercise room with exercise equipment televisions and water sports courts and related equipment a tennis court a fire pit a roof deck a lounge with a television a movie screen and games a kitchen a picnic area with grills a playground a dog playground a jogging path laundry rooms and a business center collectively the facilities taxpayer represents that rent attributable to personal_property that is leased under or in connection with any lease of the properties does not exceed percent of the total rent for the taxable_year attributable to both the real and personal_property leased under or in connection with such lease services provided at the properties taxpayer provides the following services at each property leasing functions wireless internet in common areas of the property ordinary and necessary maintenance functions such as service to hvac plumbing and electrical systems and repair of basic kitchen appliances and light fixtures in tenants’ units landscaping of the property’s grounds security services routine doorman services as described below and routine maintenance cleaning and activities to ensure the safety and security of tenants and taxpayer’s property in the common areas including the facilities described above collectively the taxpayer provided services the doorman services provided at each property include managing the flow of residents and non-residents into and out of the property monitoring security cameras and other security systems admitting guests receiving packages assisting locked-out tenants and acting as the first point_of_contact for an apartment emergency taxpayer will also engage in occasional marketing activities hereinafter the marketing services to enhance its ability to attract new tenants and keep existing tenants the marketing services are seasonal holiday parties and social event sec_1 to help bolster a positive atmosphere and feeling of community at the properties which will attract new tenants and induce current tenants to renew their leases the marketing services will be available to all tenants and not specifically to any particular tenant taxpayer represents that the taxpayer provided services and marketing services are customarily furnished or rendered in connection with the rental of real_property in luxury apartment buildings located in the geographic area where the social events may include a tasting event for which a local merchant may donate products a breakfast a happy hour an ice cream party an outing a bingo night a raffle or a pool party plr-136399-16 properties are located taxpayer further represents that the taxpayer provided services and marketing services are provided to all tenants and do not constitute personal services rendered to any particular tenant services provided by a third party in addition to the services provided by taxpayer taxpayer has hired independent contractors from whom it does not derive or receive any income to provide lifeguards at the pools extermination services and cable and internet law and analysis sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that at least percent of a reit's gross_income must be derived from among other sources rents_from_real_property sec_856 provides that rents_from_real_property include subject_to exclusions provided in sec_856 a rents from interests_in_real_property b charges for services customarily furnished or rendered in connection with the rental of real_property whether or not such charges are separately_stated and c rent attributable to personal_property leased under or in connection with a lease of real_property but only if the rent attributable to the personal_property for the taxable_year does not exceed percent of the total rent for the tax_year attributable to both the real and personal_property leased under or in connection with such lease sec_1_856-4 provides that for purposes of sec_856 and c the term rents_from_real_property includes charges for services customarily furnished or rendered in connection with the rental of real_property whether or not the charges are separately_stated services furnished to tenants of a particular building will be considered customary if in the geographic market in which the building is located tenants in buildings of a similar class such as luxury apartment buildings are customarily provided with the service sec_1_856-4 provides that trustees or directors of the reit are not required to delegate or contract out their fiduciary duty to manage the trust itself as distinguished from rendering or furnishing services to the tenants of the property or managing or operating the property thus the trustees or directors may do all those things necessary in their fiduciary capacities to manage and conduct the affairs of the trust itself including establishing rental terms choosing tenants entering into renewal of leases and dealing with taxes interest and insurance relating to the trust’s property the trustees may also make capital expenditures with respect to the trust’s property as defined in sec_263 and may make decisions as to repairs of the trust’s property of plr-136399-16 the type that would be deductible under sec_162 the cost of which may be borne by the trust see also revrul_67_353 1967_2_cb_252 sec_856 provides that any impermissible_tenant_service_income is excluded from the definition of rents_from_real_property sec_856 defines impermissible_tenant_service_income to mean with respect to any real or personal_property any amount received or accrued directly or indirectly by the reit for services furnished or rendered by the reit to the tenants of such property or for managing or operating such property sec_856 provides that if the amount of impermissible_tenant_service_income exceeds one percent of all amounts received or accrued during any taxable_year directly or indirectly by the reit with respect to such property the impermissible_tenant_service_income of the reit will include all of the amounts received or accrued with respect to the property sec_856 provides that the amounts treated as received by a reit for any impermissible tenant service shall not be less than percent of the direct_cost of the reit in furnishing or rendering the service or providing the management or operation sec_856 provides certain exclusions from impermissible_tenant_service_income for purposes of sec_856 services furnished or rendered or management or operation provided through an independent_contractor from whom the reit does not derive or receive any income shall not be treated as furnished rendered or provided by the reit and there shall not be taken into account any amount which would be excluded from unrelated_business_taxable_income under sec_512 if received by an organization described in sec_511 sec_512 provides in part that there shall be excluded from the computation of unrelated_business_taxable_income all rents_from_real_property and all rents from personal_property leased with such real_property if the rents attributable to such personal_property are an incidental amount of the total rents received or accrued under the lease determined at the time the personal_property is placed_in_service sec_1_512_b_-1 provides that payments for the use or occupancy of rooms and other space where services are also rendered to the occupant such as for the use or occupancy of rooms or other quarters in hotels boarding houses or apartment houses furnishing hotel services or in tourist camps or tourist homes motor courts or motels or for the use or occupancy of space in parking lots warehouses or storage garages do not constitute rent from real_property generally services are considered rendered to the occupant if they are primarily for his convenience and are other than those usually or customarily rendered in connection with the rental of rooms or other space for occupancy only the supplying of maid service for example constitutes such service whereas the furnishing of heat and light the cleaning of public plr-136399-16 entrances exits stairways and lobbies and the collection of trash are not considered as services rendered to the occupant in determining whether a taxpayer has income that is impermissible_tenant_service_income only the income that is attributable to a provision of a service is analyzed although services may be provided in the facilities the facilities themselves are not services additional cost a space such as one of the facilities is not income from the provision of a service and is therefore not impermissible_tenant_service_income any services eg the taxpayer provided services that are provided in or with respect to the facilities are analyzed as any other service provided to tenants income that is attributable to making available to all tenants at no taxpayer has represented that the taxpayer provided services and marketing services are customarily furnished or rendered in connection with the rental of real_property in luxury apartment buildings located in the geographic area where the properties are located taxpayer further represents that the taxpayer provided services and marketing services are provided to all tenants and do not constitute personal services rendered to any particular tenant the income from the taxpayer provided services and marketing services is for purposes of determining whether the income is qualifying_income for reit qualification purposes income that would be excluded from unrelated_business_taxable_income under sec_512 if received by an organization described in sec_511 or is an activity that is a fiduciary duty to manage the trust itself taxpayer represents that any additional services are provided through independent contractors from whom taxpayer does not derive or receive any income accordingly income from the taxpayer provided services and marketing services is not impermissible_tenant_service_income and therefore will not cause any portion of the rents received by taxpayer from the tenants of each property to fail to qualify as rents_from_real_property under sec_856 conclusion based on the facts and representations submitted we rule that income from the taxpayer provided services and marketing services is not impermissible_tenant_service_income and therefore will not cause any portion of the rents received by taxpayer from the tenants of each property to fail to qualify as rents_from_real_property under sec_856 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied on whether taxpayer otherwise qualifies as a reit under subchapter_m of the code plr-136399-16 furthermore the ruling herein relates to whether income from services performed by taxpayer is impermissible_tenant_service_income and is specifically limited to whether the income is qualifying_income for reit qualification purposes the definition of rents_from_real_property under sec_856 differs in scope and structure from the definition of rents_from_real_property under sec_512 which applies to exempt_organizations described in sec_511 therefore an exempt_organization providing the same services may have unrelated_business_taxable_income because the income may not be excluded under sec_512 as rents_from_real_property this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely __________________________ andrea m hoffenson chief branch office of associate chief_counsel financial institutions products


internal_revenue_service number release date index number legend department of the treasury washington dc person to contact telephone number refer reply to cc psi plr-125998-02 date date x a b state d1 dear this letter responds to your letter dated date and subsequent correspondence requesting on behalf of x a ruling under sec_1362 of the internal_revenue_code facts x was incorporated under state law on d1 and x's shareholders a and b intended for x to be an s_corporation a and b relied upon their tax advisers to file x's form_2553 election by a small_business_corporation however due to a miscommunication the form_2553 was not filed timely x requests a ruling under sec_1362 that it will be recognized as an s_corporation effective for the taxable_year beginning d1 law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made if an s election is made after the first two and one-half months of a plr-125998-02 corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year conclusion based on the facts submitted and representations made we conclude that x has established reasonable_cause for its failing to make a timely election and that x is eligible for relief under sec_1362 accordingly if x makes an election to be an s_corporation by filing with the appropriate service_center a completed form_2553 containing an effective date of d1 for the election within days following the date of this letter then such election will be treated as timely made a copy of this letter should be attached to the form_2553 filed with the service_center a copy is enclosed for that purpose except as expressly provided herein we express or imply no opinion concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically we express or imply no opinion concerning whether x is an s_corporation for federal tax purposes pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely christine ellison chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc


tcmemo_2010_220 united_states tax_court michael w and linda m van brunt petitioners v commissioner of internal revenue respondent docket no filed date michael b nelson and david m fogel for petitioners kimberly a kazda for respondent memorandum opinion vasquez judge this matter is before the court on respondent’s motion to dismiss for lack of jurisdiction on the ground that the petition was not filed within the time prescribed by sec_6213 or sec_7502 unless otherwise indicated all section references are to the internal_revenue_code as amended and all rule references are to the tax_court rules_of_practice and procedure background at the time the petition was filed petitioners resided in california on date respondent mailed a notice_of_deficiency to petitioners for tax years and petitioners filed the petition on date days after the notice_of_deficiency was mailed on date respondent filed a motion to dismiss for lack of jurisdiction because the petition was not filed or postmarked within the day period after the notice_of_deficiency was mailed see sec_6213 sec_7502 petitioners argue that they timely mailed the petition on date but the court received it late because the u s postal service usps severely damaged the envelope in which the petition was mailed rendering it undeliverable on date nearly months after the envelope was mailed it was returned to petitioners’ attorney who then promptly mailed a new copy of the petition to the court a hearing on this matter was held on date in san francisco california at the hearing petitioners submitted two affidavits to support their arguments one was an affidavit from petitioners’ attorney michael nelson mr nelson and the other was an affidavit of mukesh patel mr patel the coowner of the united parcel service inc ups store in san ramon california from which mr nelson mailed the petition according to mr nelson’s affidavit which we find credible on the morning of date he took the envelope containing the petition to the ups store affixed a properly addressed certified mailing label to the envelope and paid dollar_figure in cash for proper postage he then left the envelope with a ups employee with the understanding that it would be postmarked the same day mr nelson recorded this transaction in the contemporaneously updated postage log that he maintains for all client mailings mr patel’s affidavit which we also find credible states that mr nelson delivered the envelope to the ups store on date and that the usps picked up the envelope the same day on date the usps returned the envelope to mr nelson in severely damaged condition the mailing label that had been attached to the envelope had been torn off during processing according to mr nelson’s affidavit he addressed the envelope to office of the clerk of the court united_states tax_court second street n w washington dc petitioners’ attorney was unable to find the certified mail receipt mr nelson tracks the following data in his postage log date of mailing client description of the item mailed method of postage and shipping cost according to the entry dated date mr nelson mailed the petition in this case via certified mail and paid dollar_figure for postage by the usps the right half of the envelope where the postmark typically appears had been completely torn off mr nelson’s return address label however which was affixed to the upper lefthand portion of the envelope was not damaged the portion of the envelope that was returned to mr nelson was stamped with the following notation returned for better address what remained of the envelope and its contents was encased in a clear plastic wrap with a red sticker that states we’re sorry that your article was damaged during processing the petition which is dated date was nearly torn in half in a letter dated date tracy liu ms liu a usps employee apologized for the damage caused during processing and explained that the envelope was returned to mr nelson for a better address on date mr nelson mailed a new copy of the petition along with the original damaged envelope and its contents to the court as stated above the petition was filed on date days after the notice_of_deficiency was mailed discussion the tax_court is a court of limited jurisdiction and we may exercise our jurisdiction only to the extent authorized by congress 85_tc_527 this court’s jurisdiction to redetermine a deficiency depends on the issuance of a valid notice_of_deficiency and a timely filed petition rule a c 93_tc_22 90_tc_142 sec_6212 expressly authorizes the commissioner after determining a deficiency to send a notice_of_deficiency to the taxpayer by certified or registered mail the taxpayer in turn ha sec_90 days or days if the notice is addressed to a person outside of the united_states from the date that the notice_of_deficiency is mailed to file a petition with this court for a redetermination of the contested deficiency sec_6213 by virtue of sec_7502 a petition that is timely mailed is deemed to be timely filed although timely mailing is generally determined by the postmark date see sec_7502 sec_301_7502-1 proced admin regs extrinsic evidence is admissible to prove the date of mailing if a postmark date is illegible or destroyed see 68_tc_354 65_tc_548 maddox v commissioner tcmemo_2009_241 the burden is on the taxpayer to produce sufficient credible_evidence that the petition was timely mailed see mason v commissioner supra pincite maddox v commissioner supra perry segura associates inc v commissioner tcmemo_1975_80 see also sec_301 c iii a proced admin regs if the postmark on the envelope is made by the u s postal service but is not legible the person who is required to file the document or make the payment has the burden of proving the date that the postmark was made in determining whether the timely mailing is timely filing rule applies we look to the date the original envelope was mailed see 76_tc_389 estate of cranor v commissioner tcmemo_2001_27 sec_7502 does not require that the qualifying envelope ie the envelope which was timely mailed properly addressed and bore the proper postage be the envelope in which the petition is received nor does sec_7502 bar application of the ‘timely mailing is timely filing’ rule if a petition contained in a properly addressed envelope that otherwise meets the above requirements is returned to and remailed by the taxpayer the evidence establishes that mr nelson delivered the envelope containing the petition to the ups store on the morning of date for pickup by the usps later that day mr patel confirmed that mr nelson left the envelope at the ups store in the morning and the usps picked it up later in the day on date mr nelson’s postage log which we find credible also provides contemporaneously recorded details eg date of mailing method of postage cost establishing that mr nelson mailed the petition on date finally we note that the original petition was dated date exactly day before the deadline for timely filing in light of all the evidence in the record we find that petitioners have established that the envelope was postmarked on date thus timely filed consequently respondent’s motion will be denied to reflect the foregoing an order will be issued denying respondent’s motion to dismiss for lack of jurisdiction