t c memo united_states tax_court estate of f wallace langer deceased clarence d langer jr executor petitioner v commissioner of internal revenue respondent docket no filed date john h draneas for petitioner wesley f mcnamara for respondent memorandum findings_of_fact and opinion haines judge respondent determined a federal estate_tax deficiency of dollar_figure against the estate of f wallace langer the estate after concessions the issue for decision is the fair_market_value on date of phase sec_2 and of the langer marketplace planned unit development findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference f wallace langer decedent a lifelong resident of sherwood oregon died on date the date of death decedent’s nephew clarence d langer jr clarence langer was appointed executor of the estate at the time the petition was filed he resided in sherwood oregon amounts are rounded to the nearest dollar the parties have stipulated the taxable_estate will be increased by dollar_figure representing the value of the residence included in the langer residence revocable_trust decedent’ sec_29 19-percent interest in the langer family llc lfllc is included in the estate the fair_market_value of the real_property owned by the lfllc excluding phase sec_2 and of the pud and prior to reduction for deferred property taxes was dollar_figure on date the net value of the real_property owned by lfllc will be calculated by adding the fair_market_value of phase sec_2 and to dollar_figure then subtracting dollar_figure to account for property_tax liabilities that would attach the property on the date of death and the value of decedent’ sec_29 19-percent interest in lfllc will be computed by multiplying the net value of the real_estate owned by lfllc by percent this computation reflects a 5-percent discount to account for all applicable discounts the figure thus computed will be substituted for the value of decedent’s interest in lfllc reported on schedule g transfers during decedent’s life of the estate’s form_706 united_states estate and generation-skipping_transfer_tax return a the city of sherwood sherwood oregon is located approximately miles southwest of portland oregon during the 1990s and through at least sherwood experienced rapid population growth increasing from big_number in to big_number by the population growth led to increased commercial development in the town center area which was centered around the intersection of t-s road and pacific highway to facilitate commercial development the city of sherwood created a master_plan for development which included a comprehensive development plan zoning districts and a zoning map individual land owners could apply for planned unit developments or puds which overlaid the master_plan the puds included categories of use or phases that fit within the general goals and requirements of the comprehensive plan the puds were intended to be flexible offering relief from strict adherence to the zoning map the phases within each pud could be altered without going through a comprehensive plan amendment or zoning change the pud phases were not separate legal parcels and any development reconfiguration or partitioning of the phases required the city’s approval in pacific highway had two to three lanes of traffic running in each direction additional turn lanes and an average daily traffic count of big_number in t-s road had only one lane in each direction a center turn lane and an average daily traffic count of big_number prior to date developers in sherwood were subject_to the traffic mitigation requirements of metro an elected regional government engaged in regional and local planning in the greater portland area traffic mitigation requirements could include constructing new roads widening existing roads or installing traffic signals on date sherwood passed its own traffic mitigation ordinance the capacity allocation program cap cap’s goal was to provide a better mechanism for transportation planning and more accurate calculations of infrastructure improvement costs sherwood’s continued growth and development were not without controversy around the date of decedent’s death many sherwood citizens including the mayor showed some resistance to continued development however the resistence was insufficient to prohibit further development by the date of death new businesses in the town center area included a home depot grocery stores banks restaurants a movie theater and an ice-skating arena b the langer marketplace planned unit development and the langer family limited_liability_company since the langer family owned and farmed land in sherwood their land was located in the town center area approximately a quarter mile east of pacific highway and bisected by t-s road as population and commercial development increased farming became less practicable and the langers turned their attention to commercial development in the langers created the langer marketplace planned unit development the langer pud which defined the development permitted on a 59-acre tract owned by a_trust for decedent and a contiguou sec_29 88-acre tract owned by a_trust for clarence langer while it did not create separate legal parcels the langer pud divided the land into eight phases of development on date the sherwood city council approved the langers’ application_for the pud however the approval was conditioned upon their agreement to among other things develop parks pedestrian walkways and at each phase of development and with each site plan submitted to the city the applicant shall provide a traffic impact analysis for city county and odot oregon department of transportation review and approval recommended traffic safety and road improvements shall be considered by the city and may be required with each phase by agreement dated date decedent clarence langer and other members of the langer family formed the langer family limited_liability_company lfllc the trusts for decedent and clarence langer contributed to lfllc the land subject_to the langer pud at his death decedent held a 19-percent interest in lfllc prior to decedent’s death lfllc sold phase of the langer pud on the date of death lfllc still owned phase sec_2 through because the parties stipulated their value phase sec_3 and are not at issue see supra note at decedent’s death phase was zoned retail commercial was dollar_figure acres and had a rectangular configuration phase was zoned retail commercial wa sec_11 acres and had an awkward configuration on the date of death there were no deals pending regarding the development or sale of phase sec_2 and in date lfllc entered into negotiations with target_corporation target for the purchase of phase on date lfllc filed an application_for development of phase with the city of sherwood which was approved in date because the application was submitted before the cap ordinance was enacted the development of phase was subject_to the traffic mitigation requirements of metro after approval of the development application sherwood’s mayor encouraged lfllc to redesign the development of phase in lfllc proposed an amendment to the langer pud and requested the approval of a new development plan for phase sec_2 and which proposed changing the sizes and configurations of those phases the amended pud and new development plan were approved on date on date lfllc and target signed a sale and purchase agreement for the purchase by target of approximately dollar_figure acres of phase on date lfllc sold approximately dollar_figure acres of phase to gramor langer farms llc gramor c the estate_tax_return the estate timely filed a form_706 united_states estate and generation-skipping_transfer_tax return the estate_tax_return as reflected on the estate_tax_return the estate valued lfllc’s real_property at dollar_figure as of the date of death and determined that the value of decedent’ sec_29 19-percent interest in lfllc after all applicable discounts was dollar_figure on date respondent issued the estate a notice_of_deficiency respondent determined that decedent’ sec_29 19-percent interest in lfllc was dollar_figure rather than dollar_figure in response to the notice_of_deficiency the estate filed a petition with this court on date opinion for federal estate_tax purposes property includable in the gross_estate is generally included at its fair_market_value on the date of the decedent’s death see sec_2031 and sec_2032 sec_20_2031-1 estate_tax regs fair_market_value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant 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 facts united_states v cartwright 411_us_545 sec_20_2031-1 estate_tax regs the willing buyer and the willing seller are hypothetical persons instead of specific individuals and entities and the characteristics of these imaginary persons are not necessarily the same as the personal characteristics of the actual seller or a particular buyer see 658_f2d_999 5th cir real_estate_valuation is a question of fact to be resolved on the basis of the entire record see 674_f2d_761 9th cir 64_tc_889 the valuation must reflect the highest_and_best_use to which the property could be put on the relevant valuation_date 87_tc_892 valuation is an inexact process see 74_tc_441 as the trier of fact we may use experts to assist us in deciding upon value but we are not bound by those experts’ views or opinions see 538_f2d_927 2d cir affg tcmemo_1974_285 84_tc_722 one expert may be persuasive on a particular element of valuation and another expert may be persuasive on another element see 86_tc_547 consequently we may adopt some and reject other portions of expert reports or views see 304_us_282 in attempting to establish the fair_market_value of phase sec_2 and the estate and respondent rely on valuation experts the estate’s valuation expert brian l kelley mr kelley also valued the subject land for purposes of preparing decedent’s estate_tax_return respondent’s valuation expert was stephen j pio mr pio the experts agree that the highest_and_best_use of phase sec_2 and on the date of death was their intended use commercial development the experts also agree that the comparable sales_method is the most appropriate valuation method however the experts disagree over the fair market values of phase sec_2 and on the date of death mr kelley determined that phase sec_2 and had fair market values of dollar_figure and dollar_figure respectively mr pio determined that phase sec_2 because we find both experts to be qualified and because their relative experience does not impact our evaluation of their opinions we do not discuss their qualifications or experience the comparable sales approach is ‘generally the most reliable method of valuation the rationale being that the market place is the best indicator of value based on the conflicting interests of many buyers and sellers ’ 88_tc_1197 ndollar_figure quoting estate of rabe v commissioner tcmemo_1975_26 affd without published opinion 566_f2d_1183 9th cir this method requires gathering information on sales of property similar to the subject property then comparing and weighing the information to reach a likely value for the land being appraised and had fair market values of dollar_figure and dollar_figure respectively both parties encourage us to reject the other party’s expert report in its entirety however we find each expert to be persuasive on some points but not on others and give each report its due weight a valuation of phase mr kelley’s report mr kelley purported to value phase by using the comparable sales_method however after arriving at a value per square foot he then applied a discounted cashflow analysis to arrive at phase 5’s net present ‘as-is’ land value on the date of death a comparable sales to determine the value per square foot of phase mr kelley used four comparables compar- able no location sale date sales_price acres adj price per sq ft intersection of scholls-sherwood rd and pacific highway sherwood oregon dollar_figure dollar_figure pacific highway sherwood oregon big_number big_number adjusted dollar_figure usable dollar_figure adjusted nw 12th ave and pacific highway sherwood oregon t-s road and sw 90th ave tualatin oregon big_number dollar_figure big_number dollar_figure dollar_figure because comparable sec_3 and were sold months and months before the valuation_date respectively mr kelley adjusted the sales prices upward by percent and dollar_figure percent to account for inflation no such adjustments were made to comparable sec_1 and only a portion of comparable was suitable for commercial development mr kelley determined that approximately percent of the site was zoned for exclusive farm use which prohibited commercial development the seller of the property retained an option to repurchase that portion of the land for dollar_figure though the option was never exercised the seller also retained and exercised an option to repurchase a pad site on the property for dollar_figure in order to get an apples-to-apples comparison mr kelley deducted dollar_figure the total of the option prices from the original sales_price to get an adjusted_sales_price for the portion of usable land that was sold to and retained by the buyer mr kelley determined that comparable sec_1 and were high indicators of value because they were located on pacific highway had superior exposure to traffic exposure than phase and were better configured for commercial development he determined that comparable was a low indicator due to the older sales date and inferior configuration finally he determined both experts used the phrase high indicator of value to describe a comparable with a value greater than the property being valued and the phrase low indicator of value to describe a comparable with a value lower than the property being valued that comparable was most similar to phase in exposure and location but it was inferior in configuration and was thus a reasonable to slightly low indicator mr kelley concluded that phase had a value of dollar_figure per square foot comparable sec_3 and were sold in in the period between those sales and the date of death sherwood experienced rapid population growth and increased demand for commercial property given the lapse in time and the change in demand for commercial property we find that comparable sec_3 and are not reliable indicators of value therefore we take into consideration comparable sec_1 and only b discounted cashflow analysis mr kelley determined that phase was not readily marketable on the date of death and that it would take years to sell the property to account for an extended marketing and due diligence period and for the risk associated with the subject property mr kelley applied a discounted cashflow analysis to phase 5’s value per square foot to arrive at its net present ‘as-is’ land value of dollar_figure mr kelley’s discounted cashflow analysis was essentially a three-step analysis he adjusted the value per square foot upwards by percent annually for years to account for inflation he then subtracted sales and marketing costs and he then discounted that amount by percent annually for years to account for the time-value of money and the risks associated with the property to arrive at a net present ‘as-is’ land value we disagree with mr kelley’s use of a discounted cashflow analysis for two reasons first mr kelley did not determine phase 5’s fair_market_value on the appropriate date--the date of death because we are determining fair_market_value on the date of death it necessarily follows that the hypothetical sale between a willing buyer and a willing seller consummates on the date of death see united_states v cartwright u s pincite sec_20_2031-1 estate_tax regs mr kelley did not determine the price at which phase would change hands between a willing buyer and a willing seller on the date of death instead he determined the price at which phase would change hand sec_3 years after the date of death and then discounted this amount by percent annually for years as demonstrated by his testimony in my valuation analysis i’m appraising it for a buyer that would most probably buy it three years from the date of valuation because i didn’t feel that it was really marketable at that point in time and therefore i needed to discount that value over a 3-year period second we do not agree with mr kelley’s conclusions on which he based his use of a discounted cashflow analysis by using a discounted cashflow analysis mr kelley attempted to reduce phase 5’s value to account for the uncertainty of offsite costs the city of sherwood’s stance on further development and the purported oversupply of commercial property in sherwood the uncertain offsite costs to which mr kelley refers are the costs of traffic mitigation requirements imposed on commercial developers by metro however these requirements were not peculiar to phase 5--all commercial developers in sherwood or at least those developing larger tracts of land were subject_to the requirements of metro including the developers of comparable sec_1 and any impact the uncertain traffic mitigation costs had on the market should be reflected in the sales prices of comparable sec_1 and and are thus taken into account by using those comparables in the comparable sale method a further discount is not necessary the estate also argues that phase was subject_to other extraordinary offsite costs in valuing phase we generally take into consideration only those costs that are reasonably foreseeable by a hypothetical buyer and a hypothetical seller on the valuation_date see 88_tc_1197 the estate has not established that extraordinary offsite costs were reasonably foreseeable on the date of death instead it appears that the estate is focusing on the costs associated with the reconfiguration of phase in however the reconfiguration was not contemplated by lfllc on or before the date of death nor was it reasonably foreseeable that such reconfiguration would be necessary therefore we do not take into account any purported extraordinary offsite costs mr kelley and the estate assert that the city of sherwood’s hostility to further development made approval for additional development difficult and expensive like the uncertain offsite costs any impact the city’s attitude toward development had on the market should be reflected in the sales prices of comparable sec_1 and and is thus taken into account by using those comparables in the comparable sale method a further discount is not necessary finally we do not agree with mr kelley’s determination that there was an oversupply of commercial space in sherwood on the date of death in analyzing the supply and demand for commercial property mr kelley conducted a retail expenditure analysis to summarize mr kelley determined that there were big_number people residing in big_number households within a 5-mile radius of the intersection of pacific highway and t-s road using average retail expenditure data he then determined that there is some indication that lfllc had particular difficulty in getting city approval because of strained personal relationships between clarence langer and members of sherwood’s government because we are determining the fair_market_value based on a hypothetical sale by a hypothetical seller we do not necessarily take into consideration the personal characteristics of the actual seller see 658_f2d_999 5th cir therefore we do not factor in any difficulty arising from clarence langer’s relationship with members of the city government big_number households could support only big_number square feet of retail_space because more than big_number square feet of commercial space was available on the date of death mr kelley concluded that there was an oversupply of commercial property by limiting his analysis to a 5-mile radius mr kelley made an implicit assumption that people living outside the radius will not shop within the radius his approach takes into account only big_number people which does not even include the entire population of sherwood in big_number mr kelley did not offer a reasonable explanation for why he so limited his analysis the businesses within the area included a home depot grocery stores banks restaurants a movie theater and an ice- skating arena we find that it is unreasonable to assume that only those people living within miles will frequent such businesses for the above-stated reasons we reject mr kelley’s use of a discounted cashflow analysisdollar_figure we recognize that discounted cashflow analysis can be an appropriate valuation method for example discounted cashflow analysis has been accepted as a method of valuing a company’s stock by determining the present_value of its future stream of income see eg n trust co v commissioner 87_tc_349 also in estate of rodgers v commissioner tcmemo_1999_129 discounted cashflow analysis was accepted to determine the fair_market_value of multiple pieces of real_property the properties were so numerous that they could not be liquidated within a reasonable_time without depressing the sales prices and thus a discounted cashflow analysis was appropriate to take into account a market absorption rate id this case is continued mr pio’s report in valuing the subject property mr pio made a hypothetical assumption that phase sec_2 and were legally partitioned on the date of deathdollar_figure he then determined the fair_market_value of phase using seven comparables continued distinguishable from estate of rodgers because there has been no showing that due to their numerosity the phases could not be sold within a reasonable_time without depressing their sales prices in fact mr kelley did not purport to use his discounted cashflow analysis to take into account a market absorption rate nor does the estate argue that mr kelley’s discounted cashflow analysis was used to take into account a market absorption rate the estate argues that mr pio’s hypothetical assumption was inappropriate because mr pio does not take into account costs associated with the subdivision of the phases for individual sale however both parties valued phase sec_2 and as if they were separate properties on the date of death it does not appear that mr kelley took into account the costs associated with the subdivision of the phases nor does the estate offer an estimate of such costs because the estate has failed to provide any basis upon which we could make an estimate we cannot take such costs into consideration compar- able no location nw imbrie rd at nw cornelius pass rd hillsboro oregon sale date sales_price dollar_figure acres dollar_figure price per sq ft dollar_figure se 24th ave at tv hwy hillsboro oregon big_number dollar_figure dollar_figure nw stucki rd at cornell rd hillsboro oregon intersection of scholls- sherwood rd and pacific highway sherwood oregon big_number dollar_figure dollar_figure big_number dollar_figure pacific highway sherwood oregon big_number big_number adjusted dollar_figure usable dollar_figure adjusted t-s rd between adams ave and langer dr sherwood oregon t-s rd at langer dr sherwood oregon big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure mr pio adjusted the sales_price of comparable downward by dollar_figure to account for the land zoned for exclusive farm use mr pio determined that comparables and were very high or high indicators of value due to their location and development costs that comparable was a reasonable indicator due to its modestly superior exposure but less desirable access and that comparable was a reasonable indicator due to its superior exposure but inferior zoning and less desirable access comparable sec_12 and represented the sales portions of phase as reconfigured in to target in and gramor in mr pio did not accord either comparable great weight mr pio concluded that phase had a fair_market_value on the valuation_date of dollar_figure per square foot or dollar_figure mr pio acknowledged that hillsboro was a completely different market with characteristics distinct from sherwood as such we find that comparables and are not reliable indicators of value likewise comparable sec_12 or are not reliable indicators of value the sales occurred more than years after the valuation_date and because of the reconfiguration the character of the property was significantly different than it was on the date of death therefore we take into consideration comparables and only fair_market_value of phase mr kelley’s comparable was the same property as mr pio’s comparable comparable likewise mr kelley’s comparable was the same property as mr pio’s comparable comparable both comparables were located in the town center area of sherwood and the sales dates were within months of the date of death thus we find that comparables and are the most helpful in determining the fair_market_value of phase based on the expert reports we find that there are five major factors that must be weighed in comparing comparables and to phase location exposure configuration accessibility and zoning a comparable comparable was located on pacific highway while phase was located on t-s road because pacific highway had a significantly higher traffic count than t-s road comparable had superior location and exposure to phase while mr pio did not address comparable 1-10’s configuration we agree with mr kelley that comparable had superior configuration for commercial development due to phase 5’s awkward configuration these three factors indicate that comparable is a high indicator of value the impact of accessibility is less clear however even assuming arguendo that phase had superior accessibility this factor would not outweigh the three factors above in addition both phase and comparable were zoned retail-commercial making zoning a neutral factor thus comparable at dollar_figure per square foot is a high indicator of value b comparable only a portion of comparable was suitable for commercial development the remainder being zoned for exclusive farm use both experts agree that the sale price of comparable must be adjusted to determine the value of the area suitable for commercial development only however they do not agree to the extent of the adjustment additionally their reports conflict regarding the acreage of the land usable for commercial development these issues must be resolved before a reliable comparison can be made mr kelley valued the land zoned for exclusive farm use at dollar_figure based on an option retained by the seller to repurchase that portion of the land mr pio testified that hypothetically if a buyer and seller believed that the land was worth dollar_figure then dollar_figure would be an appropriate value however mr pio did not believe the land was actually worth dollar_figure he concluded that it was worth dollar_figure but did not offer any support for his conclusion other than that he happened to be familiar with that property because the parties to the sale agreed to an option_price of dollar_figure we find that it is an appropriate measure of value for the exclusive farm use portion of comparable mr kelley also reduced the sale price of comparable by dollar_figure to account for an option exercised by the seller to repurchase a 59-acre pad site on the propertydollar_figure mr pio did not make the adjustment because he was not aware that the seller retained and exercised the option however he testified that it would be appropriate to reduce the sale price by dollar_figure so long as the acreage was also reduced by dollar_figure acres a pad site is a building site within a shopping area that is ready for construction of a retail establishment and is usually surrounded by customer parking areas we conclude that the sale price of comparable should be reduced by dollar_figure to reflect the exclusive farm use portion and additional pad site thus we use an adjusted sale price for comparable of dollar_figure mr kelley determined that comparable was dollar_figure acres and approximately of the site was zoned for exclusive farm use he used dollar_figure acres approximately percent of to calculate the adjusted_sales_price per square foot even though he deducted the option_price of the pad site he did not deduct the pad site’s dollar_figure acres from the usable acres mr pio determined that comparable was dollar_figure acres and dollar_figure acres was usable mr pio’s determination was based on a plot map and is thus more reliable than mr kelley’s approximation from the dollar_figure acres we must also subtract the 59-acre pad site because we reduced the adjusted sale price by the pad site’s option_price thus we find that dollar_figure acres of comparable was suitable for commercial development by the buyer resulting in an adjusted sale price of dollar_figure per square foot because of its location on pacific highway comparable had superior location and exposure to phase it also had superior configuration due to its relatively square shape mr pio argues that these factors are offset by comparable 2-11’s inferior accessibility and zoning we disagree as discussed above phase 5’s accessibility is unclear even assuming arguendo that phase had superior accessibility this would not offset the other three factors additionally comparable was zoned light industrial instead of retail-commercial however given the fact that comparable was sold to home depot for the construction of a home depot store we find that its zoning did not have a significant impact on the ability to develop the property thus comparable at dollar_figure per square foot is a high indicator of value c fair_market_value of phase due to the importance of the traffic count we find that location and exposure are the most significant factors in determining phase 5’s fair_market_value in pacific highway had an average daily traffic count of big_number while t-s road had an average daily traffic count of only big_number because of their location on pacific highway comparables and had superior location and exposure to phase additionally phase was less suitable for commercial development due to its awkward configuration to take these factors into consideration we find that a 25-percent discount from the average sales_price per square foot of the comparables is appropriate we conclude that phase had a value of dollar_figure per square foot on the date of deathdollar_figure therefore we find that the fair_market_value of phase on the date of death was dollar_figure c valuation of phase mr kelley’s report similar to his valuation of phase mr kelley used the comparable sales_method to determine phase 2’s value per square foot dollar_figure and then applied a discounted cashflow analysis to arrive at phase 2’s net present ‘as-is’ land value on the date of death dollar_figure for the same reasons described above we reject the discounted cashflow analysis portion of mr kelley’s valuation to determine the value per square foot of phase mr kelley used five comparables phase 5’s value per square foot on date of death dollar_figure dollar_figure dollar_figure average sales_price per square foot of comparables and x dollar_figure to reflect a 25-percent discount dollar_figure the estate argues that phase 5’s value should be reduced due to the uncertainty of traffic mitigation costs imposed by metro the city’s hostility towards further development and the extraordinary offsite costs associated with making phase suitable for commercial development these arguments are discussed supra in our analysis of mr kelley’s discounted cashflow analysis dollar_figure per square foot x big_number square feet per acre dollar_figure per acre x acres dollar_figure compar- able no location edy rd just west of pacific highway sherwood oregon sw 72nd st tualatin oregon smith blvd at pacific highway sherwood oregon intersection of sherwood blvd and pacific highway sherwood oregon intersection of t-s rd and pacific highway sherwood oregon sale date sales_price acres adj price per sq ft dollar_figure dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure because comparable sec_4 and were sold months and months before the valuation_date respectively mr kelley adjusted the sales prices upward by percent and percent to account for appreciation and inflation no such adjustments were made to comparables mr kelley’s expert report provided only a summary analysis of the comparables the high end of the value range is indicated by comparable dollar_figure sf a pad site with superior exposure in concluding a value for the subject primary emphasis is placed on comparable sec_1 and dollar_figure sf to dollar_figure sf both located in the immediate area considering the subject’s secondary locational characteristics a value of dollar_figure per square foot is concluded for this phase of the subject property mr pio’s report mr pio used six comparables to determine phase 2’s fair_market_value on the date of death compar- able no location intersection of sw handley st and pacific highway sherwood oregon sale date sales_price acres price per sq ft dollar_figure dollar_figure dollar_figure sw childs rd tualatin oregon nw 215th ave hillsboro oregon dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure sw borchers dr just west of pacific highway sherwood oregon dollar_figure dollar_figure dollar_figure smith blvd at pacific highway sherwood oregon edy rd just west of pacific highway sherwood oregon dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure mr pio’s comparable sec_5 and are the same properties as mr kelley’s comparable sec_3 and respectively we note that mr pio reported the sale date of his comparable as date while mr kelley reported the sale date of that property his comparable as date in comparing the properties to phase mr pio determined comparable was a high indicator of value because it had superior exposure than phase and was smaller in size which indicated a relatively high value per square foot comparable was a good to slightly high indicator of value due to its location in tualatin comparable was a low indicator of value because of inferior zoning and exposure comparable was a good indicator of value because of similar location and exposure comparable was a low indicator of value because though it was located on pacific highway it was away from most of the commercial development and comparable was a good to modestly high indicator of value it had superior location and exposure but inferior configuration and access mr pio concluded the preceding sales show a range in prices from dollar_figure to dollar_figure sale nos and dollar_figure and dollar_figure are high indicators sale nos and dollar_figure and dollar_figure are low indicators therefore the subject value should be between these two price ranges the mid-range of which is dollar_figure per square foot the remaining sales are dollar_figure and dollar_figure per square foot suggesting a value conclusion closer to the upper end of the range based on the preceding the value opinion is modestly above the mid-range at dollar_figure per square foot after applied to the total land area the final value opinion for subject parcel phase is big_number square feet x dollar_figure dollar_figure rounded dollar_figure fair_market_value of phase we accept mr pio’s valuation of phase mr kelley did not offer a detailed analysis of his comparables and did not further elaborate at trial on the other hand mr pio offered a detailed and reasonable comparison of each comparable to phase we do not find that all of mr pio’s comparables are reliable indicators of value particularly those not located in sherwood however the elimination of those comparables would not have a significant impact on the final value determination because dollar_figure per square foot was in the range of the sales prices for the comparables located in sherwood therefore we find that the fair_market_value of phase on the date of death was dollar_figure in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we find them to be moot irrelevant or without merit to reflect the foregoing and the concessions of the parties decision will be entered under rule


t c memo united_states tax_court yosef a tsehay petitioner v commissioner of internal revenue respondent docket no filed date yosef a tsehay pro_se dean h wakayama and kristin h joe for respondent memorandum findings_of_fact and opinion kerrigan judge respondent determined a deficiency of dollar_figure and a penalty of dollar_figure under sec_6662 with respect to petitioner’s federal_income_tax for tax_year unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar the issues for consideration are whether for tax_year petitioner is entitled to dependency_exemption deductions an earned_income_tax_credit child tax_credits and head_of_household filing_status and liable for a penalty under sec_6662 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by this reference petitioner resided in washington when he timely filed his petition english is not petitioner’s first language and during the tax_year at issue he was employed as a custodian at a community college petitioner and his wife-- who is not a party to this proceeding--were married in their relationship was on-again off-again petitioner credibly testified that during he and his wife were married and living together with their five children in a public housing apartment at some point in petitioner and his wife were again separated and at least at the time of trial they were undergoing divorce proceedings the state of washington’s office of administrative hearings dshs division of child_support child_support granted petitioner’s petition for a modification of prior child_support the child_support order was effective date although petitioner’s wife was responsible for paying the rent on the public housing unit petitioner paid for food and other expenses of his family during petitioner electronically filed a timely form 1040a u s individual_income_tax_return for tax_year it is unclear from the record why petitioner’s paid return preparer listed differing numbers of children for the various claimed credits when petitioner has five children that said on his form 1040a petitioner claimed dependency_exemption deductions for four children the earned_income_tax_credit for three children the child_tax_credit for four children and head_of_household filing_status as explained in the parties’ stipulation of facts petitioner did not attach a form_8332 release revocation of release of claim to exemption for child by custodial_parent or a statement conforming to the substance of a form_8332 to his form 1040a for tax_year on date respondent sent petitioner a notice_of_deficiency that disallowed the claimed dependency_exemption deductions earned_income_tax_credit and child_tax_credit for the notice also changed petitioner’s filing_status from head_of_household to single and determined an accuracy-related_penalty under sec_6662 opinion the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and the taxpayer bears the burden of proving that the determinations are in error rule a 290_us_111 deductions and credits are a matter of legislative grace and the taxpayer bears the burden of proving that he is entitled to any deduction or credit claimed 292_us_435 likewise the taxpayer is obliged to demonstrate entitlement to an advantageous filing_status such as head_of_household see eg smith v commissioner tcmemo_2008_229 although the record in this case is meager we found petitioner to be a credible witness see 58_tc_560 stating that the process of distilling truth from the testimony of witnesses whose demeanor we observe and whose credibility we evaluate is the daily grist of judicial life petitioner testified that although he and his wife had previously been separated and he had at times been ordered to pay child_support for he was married and living in public housing with his wife and their children the determinations in the notice_of_deficiency stemmed from respondent’s records showing that petitioner was not the custodial_parent of his minor children and from petitioner’s failure to attach a copy of form_8332 or its equivalent to his return see sec_152 respondent provided a copy of a child_support order to establish that petitioner was in fact a noncustodial_parent however the child_support order was entered date it does not contradict petitioner’s testimony further the child_support order was not effective until date petitioner sufficiently met his burden of establishing that he and his wife were married during and any special requirement of a form_8332 under sec_152 is inapplicable i dependency_exemption deductions the internal_revenue_code allows as a deduction in computing taxable_income an exemption for each dependent of a taxpayer see sec_151 as relevant here an individual must be a qualifying_child of the taxpayer to be a dependent sec_152 the issue in this case is whether the children claimed on petitioner’s return as dependents had the same principal_place_of_abode as petitioner for more than one-half of the taxable year--a requirement for being a qualifying_child see sec_152 it appears from this limited record that they did and that petitioner is entitled to the dependency_exemption deductions claimed on hi sec_2013 federal_income_tax return ii earned_income_credit sec_32 provides an eligible_individual with an earned_income_credit against the individual’s income_tax_liability subject_to a phaseout explained in sec_32 the amount of the credit to which an eligible_individual is entitled increases if the individual has a qualifying_child sec_32 c because he had three or more qualifying children for tax_year petitioner is entitled to the earned_income_credit sec_32 iii child_tax_credit and additional_child_tax_credit sec_24 allows a taxpayer a dollar_figure credit against income_tax with respect to each qualifying_child sec_24 makes a portion of that credit-- commonly referred to as the additional child tax credit--refundable for purposes of sec_24 a qualifying_child is a qualifying_child of the taxpayer as defined in sec_152 who has not yet reached the age of sec_24 petitioner is entitled to the child tax_credits and the additional child tax_credits claimed iv head_of_household petitioner explained at trial that because he and his wife had separated by the time he was ready to file hi sec_2013 tax_return he had asked his preparer to file for him as married_filing_separately it appears that the preparer erroneously filed at least petitioner’s return as head_of_household petitioner’s wife’s return for is not part of the record before us sec_1 provides a special tax_rate for an individual who qualifies as a head_of_household sec_2 defines a head_of_household as an individual taxpayer who among other things is not married at the close of his taxable_year and is not a surviving_spouse petitioner was married for and therefore he cannot qualify for head_of_household filing_status since petitioner was married he was not eligible to file as single as determined by respondent in the notice_of_deficiency see sec_1 petitioner’s correct filing_status for is married_filing_separately see sec_1 v sec_6662 penalty respondent determined that petitioner is liable for an accuracy-related_penalty pursuant to sec_6662 for tax_year we held above that petitioner is entitled to his claimed dependency_exemption deductions earned_income_tax_credit and child tax_credits we held that petitioner was not entitled to file as head_of_household our discussion of the penalty will be in reference only to any underpayment_of_tax that results from petitioner’s having incorrectly filed with a claimed status of head_of_household sec_6662 imposes a penalty on any underpayment attributable to among other things negligence or disregard of rules or regulations within the meaning of subsection b or any substantial_understatement_of_income_tax within the meaning of subsection b only one accuracy-related_penalty may be applied with respect to any given portion of an underpayment even if that portion is subject_to the penalty on more than one of the grounds set out in subsection b sec_1_6662-2 income_tax regs the commissioner bears the burden of production regarding the taxpayer’s liability for any penalty sec_7491 see also 116_tc_438 respondent can meet the burden of production by showing that petitioner was negligent negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws to exercise due care or to do what a reasonable and prudent person would do under the circumstances sec_6662 85_tc_934 sec_1_6662-3 income_tax regs negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion on a return that would seem to a reasonable and prudent person to be too good to be true under the circumstances sec_1 b ii income_tax regs an understatement of income_tax is substantial if the understatement exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 rule_155_computations will determine whether petitioner has a substantial_understatement_of_income_tax if these computations establish a substantial_understatement_of_income_tax respondent has met his burden of production see olagunju v commissioner tcmemo_2012_119 once the commissioner has met his burden the taxpayer must provide persuasive evidence that the commissioner’s determination was incorrect see rule a higbee v commissioner t c pincite the accuracy-related_penalty does not apply with respect to any portion of an underpayment for which it is shown that the taxpayer had reasonable_cause and acted in good_faith sec_6664 reasonable_cause and good_faith are determined on a case-by-case basis taking into account all pertinent facts and circumstances sec_1_6664-4 income_tax regs on these particular facts petitioner’s reliance on his return preparer was reasonable see 115_tc_43 aff’d f 3d 3d cir among other things petitioner had a language barrier sought and relied on professional advice and was separated from his wife when he actually filed his return under these circumstances we find that petitioner had reasonable_cause and acted in good_faith the penalty does not apply to any portion of the underpayment any contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered under rule


internal_revenue_service department of the treasury index number washington dc number release date person to contact telephone number refer reply to cc dom p si 4-plr-105402-99 date date legend trust - foundation - taxpayer a - taxpayer b - dollar_figurex dollars - dollar_figurey dollars - dear this is in response to the letter from your authorized representative in which he requested rulings concerning the income gift and private_foundation tax treatment of a proposed reformation of a charitable_remainder_trust in taxpayer a and taxpayer b established and funded foundation a charitable_organization described in sec_170 sec_2055 and sec_2522 of the internal_revenue_code and that is recognized as exempt from income taxes under sec_501 as a private_foundation described in sec_509 in taxpayer a and taxpayer b created and funded trust an irrevocable charitable_remainder_annuity_trust described in sec_664 taxpayer a and taxpayer b are the co-trustees of trust under the terms of trust the trustees are directed to annually pay taxpayer a and taxpayer b in equal shares an annuity equal to seven percent of the initial net fair_market_value of the assets transferred to trust on the death of the first to die of taxpayer a and taxpayer b the entire annuity is to be paid to the survivor on the death of the survivor of taxpayer a and taxpayer b the corpus of trust will be paid to foundation providing that it is an organization described in sec_170 sec_2055 and sec_2522 any income in excess of the annuity amount is to be added to trust corpus the terms of trust also provide that no amount other than the annuity amount may be paid to or for_the_use_of any person other than any organization described in sec_170 sec_2055 and sec_2522 the initial net fair_market_value of the assets transferred to trust was dollar_figurex dollars resulting in an annual annuity payable to taxpayer a and taxpayer b of dollar_figurey dollars you represent that the assets held by trust have nearly doubled in value since it was created you also represent that the cost of the charitable activities of the foundation has increased to the point that the foundation no longer has the revenue from investments and donations to conduct its charitable activities in order to improve the financial condition of the foundation so that it may conduct its charitable activities you propose to petition the appropriate local court for approval to reform the dispositive provisions in paragraph first a of trust the trust as reformed will continue to provide for the same annual annuity payments to taxpayer a and taxpayer b and for the distribution of the corpus to foundation upon the death of the survivor of taxpayer a and taxpayer b under the instrument as modified the annuity amount is to be paid first from trust income and if the income is insufficient then from trust principal further trust will be modified to provide that any trust income not distributed in satisfaction of the annuity payable to taxpayer a and taxpayer b will be distributed to the charitable_remainder beneficiary foundation providing that it is an organization described in sec_170 sec_2055 and sec_2522 in addition the trustees will have the discretion to distribute the principal of trust to foundation to improve its financial situation provided the aggregate fair_market_value of the trust assets remaining after the distribution will not be less than dollar_figurex dollars and provided that foundation is an organization described in sec_170 sec_2055 and sec_2522 in addition trust as reformed will provide that in the case of distributions in_kind the adjusted_basis of the property distributed will be fairly representative of the adjusted_basis of the property available for payment on the date of payment the reformed trust will continue to provide that no amount other than the annuity amount can be paid to or for_the_use_of any person other than a qualified charitable_organization you represent that the charitable and non-charitable beneficiaries have agreed to the proposed reformation and will execute written consents prior to the filing of the petition in the appropriate local court you have requested the following rulings status of the trust as a charitable_remainder_annuity_trust you have requested a ruling that the trust as reformed will satisfy the requirements of sec_664 and will continue to qualify as a charitable_remainder_annuity_trust under sec_664 or in the alternative that the proposed reformation will not disqualify the trust as a charitable_remainder_annuity_trust under sec_664 under sec_664 a charitable_remainder_annuity_trust is a_trust from which a sum certain which is not less than percent nor more than percent of the initial net fair_market_value of all property placed in trust is to be paid not less often than annually to one or more persons at least one of which is not an organization described in sec_170 and in the case of individuals only to an individual who is living at the time of the creation of the trust for a term of years not in excess of years or for the life or lives of such individuals sec_664 states generally that no amount other than the annuity amount may be paid to or for_the_use_of any person other than an organization described in sec_170 under sec_664 the value determined under sec_7520 of the remainder_interest must be at least percent of the initial net fair_market_value of all property placed in trust sec_1_664-2 of the income_tax regulations states that the governing instrument of the charitable_remainder_annuity_trust may provide that any amount other than the amount payable to or for_the_use_of a person or persons at least one of which is not an organization described in sec_170 shall be paid or may be paid at the discretion of the trustee to an organization described in sec_170 provided that in the case of distributions in_kind the adjusted_basis of the property distributed is fairly representative of the adjusted_basis of the property available for payment on the date of payment for example the governing instrument may provide that a portion of the trust assets may be distributed currently or upon the death of one or more recipients to an organization described in sec_170 the proposed reformation will authorize the trustee to make distributions of income and principal to qualified charitable organizations this grant of authority is permitted under the regulations discussed above and as discussed below item the reformation will have no effect on the present values of the beneficiaries’ respective interests in trust accordingly assuming trust satisfies all the other requirements for qualification as a charitable_remainder_annuity_trust under sec_664 the reformation as proposed will not adversely effect qualification of trust as a charitable_remainder_annuity_trust under sec_664 tax-exempt status of the trust and the foundation your request a ruling that if trust as reformed qualifies as a charitable_remainder_annuity_trust under sec_664 then it will be exempt from income_tax pursuant to sec_664 sec_664 provides in part that a charitable_remainder_annuity_trust shall for any taxable_year not be subject_to any_tax imposed by this subtitle unless such trust for such year has unrelated_business_taxable_income sec_1_664-1 provides that a_trust created after date which is a charitable_remainder_trust is exempt from all the taxes imposed by subtitle a of the code for any taxable_year of the trust except a taxable_year in which it has unrelated_business_taxable_income accordingly assuming trust satisfies all the other requirements for qualification as a charitable_remainder_annuity_trust under sec_664 and since the reformation as proposed will not adversely effect its qualification as a charitable_remainder_annuity_trust the trust will be exempt from income_tax pursuant to sec_664 in addition you request a ruling that if the foundation now qualifies as a tax- exempt_organization under sec_501 neither the proposed reformation the proposed distribution of principal nor any subsequent distributions of principal or income from the trust to the foundation in accordance with the reformation will disqualify the foundation as a tax-exempt_organization under sec_501 sec_501 provides in part for an exemption from federal_income_tax for corporations organized and operated exclusively for charitable scientific or educational_purposes provided no part of the corporations' net_earnings inures to the benefit of any private_shareholder_or_individual after the reformation the foundation will continue to expand and operate its charitable programs pursuant to sec_501 the trust will also continue to hold assets and make distributions on behalf of the income beneficiaries and the foundation if it is assumed that the foundation now so qualifies neither the proposed reformation of the trust the proposed distribution of principal nor any subsequent distributions of principal or income from the trust to the foundation in accordance with the reformation will disqualify the foundation as a tax-exempt_organization under sec_501 recognition of taxable_income or gain you request a ruling that neither the proposed reformation the proposed distribution of principal nor any subsequent distributions of principal or income from the trust to the foundation in accordance with the trust instrument as reformed will result in recognition of taxable_income or gain by the trust the foundation or taxpayer a and taxpayer b under sec_61or sec_61 provides that gross_income includes gains derived from dealings in property sec_1001 provides that the gain from the sale_or_other_disposition of property shall be the excess of the amount_realized therefrom over the adjusted_basis provided in sec_1011 for determining gain and the loss shall be the excess of the adjusted_basis over the amount_realized for purposes of sec_1001 in an exchange of property each party to the exchange gives up a property interest in return for a new or additional property interest such an exchange is a disposition under sec_1001 see sec_1_1001-1 of the income_tax regulations under the proposal here the trust provisions will be reformed to provide that any income not distributed in satisfaction of the annuity payable to taxpayers a and b will be distributed to the charitable_remainder beneficiary foundation in addition the trustees will have the discretion to distribute the principal of trust to foundation to improve its financial situation provided the aggregate fair_market_value of the trust assets remaining after the distribution will not be less than dollar_figurex dollars under the proposal the corpus will be maintained at a level that will support the annuity_payment to taxpayers a and b any distributions to foundation under the proposed changes however would reduce the trust corpus from what it would be without the distributions ie income in excess of the annuity amount distributed to foundation under the proposal would otherwise have been added to trust corpus the proposed changes would accelerate the payment of part of the remainder to foundation the changes are not intended to have any effect on the life beneficiaries it appears there is only a remote possibility that there would be any effect because trust corpus is to be maintained at a level that appears to be more than sufficient to provide for the continued payment of the annual annuity amounts as described by the taxpayers the trust reformation will not constitute an exchange for purposes of sec_1001 taxpayers a and b do not intend to give up any of their life_annuity interests nor are they receiving any new or additional property interest in return foundation the charitable_remainder beneficiary may benefit from the possibility of the accelerated payment of the remainder_interest but it too is not giving up a property interest thus there is no exchange however to the extent that taxpayers a and b are consenting to an acceleration to foundation of a portion of the trust remainder either trust income that would otherwise be added to corpus or corpus itself they will not be allowed a deduction for a charitable_contribution under sec_170 of the code sec_170 provides a deduction for charitable_contributions as defined in sec_170 payment of which is made within the taxable_year sec_170 provides in part that no charitable_contribution_deduction is allowed for the value of any interest in property other than a remainder_interest transferred in trust unless the interest is in the form of a guaranteed annuity and the grantor is treated as the owner of the interest for purposes of applying sec_671 taxpayers a and b have previously transferred their interest except for their annuity interests in the property transferred to trust in addition they received a charitable_contribution income_tax deduction for the value of the remainder_interest when they created and funded trust as an irrevocable charitable_remainder_annuity_trust under the provisions of sec_664 as discussed below inasmuch as taxpayers a and b are not intending reducing the present_value of their annuity interests they are not making a further gift to charity this is different from the facts described in revrul_86_60 1986_1_cb_302 where the donor beneficiaries transferred their retained annuity interests to the charitable remainderman and were found to have qualified for an income_tax charitable_contribution tax deduction gift_tax you request a ruling that neither the proposed reformation the proposed distribution of principal nor any subsequent distribution of principal or income from the trust to the foundation in accordance with the trust instrument as reformed will be subject_to gift_tax under sec_2501 sec_2501 imposes a tax for each calendar_year on the transfer of property by gift during the calendar_year by any individual resident or nonresident sec_2511 states that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-1 the gift_tax regulations states that donative_intent on the part of the transferor is not an essential element of the application of the gift_tax to the transfer the application of the tax is based on the objective facts of the transfer and the circumstances under which it is made rather than on the subjective motives of the donor a transfer by a trustee of trust property in which he has no beneficial_interest does not constitute a gift by the trustee but such a transfer may constitute a gift by the creator of the trust if until the transfer he had the power to change the beneficiaries by amending or revoking the trust sec_25_2511-2 provides that a gift is complete where the donor has so parted with dominion and control as to leave in him no power to change its disposition whether for his own benefit or for the benefit of another sec_25_2511-2 provides that a gift is not considered incomplete merely because the donor reserves the power to change the manner or time of enjoyment thus the creation of a_trust the income of which is to be paid annually to the donee for a period of years the corpus being distributable to him at the end of the period and the power reserved by the donor being limited to a right to require that instead of the income being so payable it should be accumulated and distributed with the corpus to the donee at the termination of the period constitutes a completed_gift sec_25_2511-2 provides that the application of the tax is based on the objective facts of the transfer and the circumstances under which it is made rather than on the subjective motives of the donor for instance if a donor transfers property to himself as trustee and retains no beneficial_interest in the trust property and no power over the property except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax however the gift_tax is not applicable to a transfer for full and adequate_consideration in money or money’s worth or to ordinary business transactions as stated above under the proposal the trust provisions will be reformed to provide that any income not distributed in satisfaction of the annuity payable to taxpayers a and b will be distributed to the charitable_remainder beneficiary foundation in addition the trustees will have the discretion to distribute the principal of trust to foundation to improve its financial situation provided the aggregate fair_market_value of the trust assets remaining after the distribution will not be less than dollar_figurex dollars the amount originally transferred to the trust by taxpayer a and taxpayer b these proposed changes authorize acceleration of the payment of part of the remainder to foundation however taxpayers a and b are not transferring or relinquishing any interest in their life-time annuities and the present_value of the annuities payable to taxpayer a and taxpayer b determined under sec_7520 assuming the december sec_7520 rate of percent will be the same before and after the reformation accordingly assuming a sec_7520 rate that is percent or greater for the month of the reformation the proposed reformation the proposed distribution of principal and any subsequent distribution of principal or income from the trust to the foundation in accordance with the trust as reformed will not constitute transfers by taxpayer a and taxpayer b that will be subject_to gift_tax under sec_2501 self-dealing you request a ruling that neither the proposed reformation the proposed distribution of principal nor a subsequent distribution of principal or income from the trust to the foundation in accordance with the trust instrument as reformed will constitute an act of self-dealing under sec_4941 by the trust the foundation or taxpayer a and taxpayer b that would subject them to tax under sec_4941 for self-dealing sec_4941 provides for the imposition of tax on each act of self-dealing between a disqualified_person and a private_foundation sec_4941 provides that the term self-dealing means any direct or indirect transfer to or use by or for the benefit of a disqualified_person of the income or assets of a private_foundation sec_4946 provides that the term disqualified_person means with respect to a private_foundation a person who is a substantial_contributor to the foundation sec_4946 provides that the term disqualified_person means with respect to a private_foundation a person who is a foundation_manager within the meaning of sec_4946 sec_4946 provides in part that the term foundation_manager means with respect to any private_foundation an officer director or trustee of a foundation or an individual having powers or responsibilities similar to those of officers directors or trustees of the foundation sec_53_4941_d_-1 of the foundation and excise_taxes regulations provides that the term indirect self-dealing shall not include a transaction with respect to a private foundation's interest or expectancy in property whether or not encumbered held by an estate or revocable_trust including a_trust which has become irrevocable on a grantor's death regardless of when title to the property vests under local law if- i the administrator or executor of an estate or trustee of a revocable_trust either-- a possesses a power of sale with respect to the property b has the power to reallocate the property to another beneficiary or c is required to sell the property under the terms of any option subject_to which the property was acquired by the estate or revocable_trust ii such transaction is approved by the probate_court having jurisdiction over the estate or by another court having jurisdiction over the estate_or_trust or over the private_foundation iii such transaction occurs before the estate is considered terminated for federal_income_tax purposes pursuant to paragraph a of sec_1_641_b_-3 of this chapter or in the case of a revocable_trust before it is considered subject_to sec_4947 iv the estate_or_trust receives an amount which equals or exceeds the fair_market_value of the foundation's interest or expectancy in such property at the time of the transaction taking into account the terms of any option subject_to which the property was acquired by the estate_or_trust and v with respect to transactions occurring after date the transaction either-- a results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up b results in the foundation receiving an asset related to the active carrying out of its exempt purposes or c is required under the terms of any option which is binding on the estate_or_trust sec_53_4947-1 provides that for purposes of this section and sec_53_4947-2 a split-interest trust within the meaning of sec_4947 is a_trust which is not exempt from taxation under sec_501 not all of the unexpired interests in which are devoted to one or more of the purposes described in sec_170 and which has amounts in trust for which a deduction was allowed within the meaning of paragraph a of this section under sec_170 sec_545 sec_556 sec_642 sec_2055 sec_2106 or sec_2522 a_trust is one which has amounts in trust for which a deduction was allowed under sec_642 within the meaning of sec_4947 once a deduction is allowed under sec_642 to the trust for any amount permanently set_aside sec_53_4947-1 provides that a split-interest trust is subject_to the provisions of sec_507 except as provided in paragraph e of this section e to the extent applicable to a split-interest trust except as provided in sec_4947 except as provided in sec_4947 and in the same manner as if such trust were a private_foundation since taxpayer a and taxpayer b are the foundation's managers and substantial contributors to the foundation they are disqualified persons within the meaning of sec_4941 and b taxpayer a and taxpayer b as trustees of the trust as well as income beneficiaries will seek to have the trust reformed to ensure that the foundation will have the assets necessary to continue as well as expand its charitable programs pursuant to sec_501 the reformation will not be an attempt to change the interest of the income beneficiaries or otherwise reduce the interest of the foundation as charitable_beneficiary the trustees of the trust will obtain the approval of a court having jurisdiction over the trust before completing the proposed transaction pursuant to sec_53_4941_d_-1 accordingly neither the proposed reformation the proposed distribution of principal nor a subsequent distribution of principal or income from the trust to the foundation in accordance with reformation would constitute an act of self-dealing under sec_4941 by the trust the foundation or the foundation's managers taxpayer a and taxpayer b such as would subject any of the them to taxation under sec_4941 for self-dealing with a private_foundation termination_tax sec_507 provides that except as provided in sec_507 the status of any private_foundation shall be terminated only if such organization notifies the secretary of its intent to accomplish such termination or with respect to such organization there have been either willful or repeated acts or a willful and flagrant act giving rise to liability for tax under chapter and the secretary notifies the organization that because of such act the organization is liable for the tax imposed by sec_507 and either the organization pays the tax or the entire amount of the tax is abated under sec_507 sec_507 imposes an excise_tax on each terminating private_foundation equal to the lower_of the aggregate tax_benefit resulting from such termination or the value of its net assets after the reformation the foundation will continue to expand and operate its charitable programs pursuant to sec_501 the trust will also continue to hold assets and make distributions on behalf of the income beneficiaries and the foundation neither the trust nor the foundation will notify the secretary of its intention to terminate pursuant to sec_507 therefore the termination_tax imposed by sec_507 does not apply accordingly neither the trust nor the foundation would be subject_to the tax under sec_507 as a result of the proposed reformation the proposed distribution of principal or a subsequent distribution of principal or income from the trust to the foundation in accordance with the reformation the conclusions are based on the assumption that the trust meets the requirements of sec_664 this ruling is contingent upon the trustees obtaining approval of the amendment as proposed from the appropriate court a copy of this letter should be attached to any income gift estate or generation- skipping transfer_tax returns that you may file relating to these matters the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under the cited provisions or any other provision of the code 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 assistant chief_counsel passthroughs and special industries by george masnik chief branch enclosure copy for purposes


department of the treasury internal_revenue_service washington d c tax_exempt_and_government_entities_division contact person identification_number telephone number uil number release date date date legend state foundation foundation2 trust year1 date1 date2 date3 date4 dates date6 h j s b m dear this is in response to your letter dated date requesting an extension for an additional five years under sec_4943 of the internal_revenue_code code for the disposition of certain excess_business_holdings facts foundation1 a now dissolved state nonprofit corporation and private_foundation described in sec_501 c received a distribution from trust upon the death of the grantor ofdollar_figure worth of assets and ownership in various business enterprises these enterprises comprised an unusually large bequest of diverse and complex holdings the information provided shows that foundation1 received these ownership interests other than by purchase from the trust within the meaning of sec_4943 the ownership of the interests in the business enterprises were treated as held by a disqualified_person beginning on the date when they were distributed by the trust to foundation1 in year1 the board_of directors of foundation1 restructured its ownership of interests in various business enterprises and then bifurcated into two new private_foundations foundation2 and you as a result of the bifurcation and restructuring you and foundation2 acquired ownership of certain business enterprises including h _ s and b and bare wholly-owned by m each of these owns development real_estate and is in the business of selling real_estate to homebuilders and other developers such distribution constitutes a significant disposition of assets to one or more private_foundations within the meaning of sec_1_507-3 under sec_1 a s if a private_foundation makes a sec_507 transfer of all or part of its net assets to another private_foundation the applicable_period of time described in sec_4943 or s shall include both the period during which the transferor foundation held such assets and the period during which the transferee foundation holds such assets as these are potential excess_business_holdings during the initial period for disposition you have undertaken diligent efforts to dispose_of the ownership interests in various business enterprises and the underlying assets in h _ s b and m h and s are both state corporations that are each currently developing a real_estate project h and swill undertake significant efforts to continue to market the projects by working with third party builders and real_estate brokers t _anticipates that by the end of the initial five-year divestment period it will have disposed of most of its project's assets h indicates it will complete its disposition of the remainder of its project's assets and dissolve by date4 s anticipates that by the end of the initial five-year divestment period it will have disposed of a portion of its project's assets s_indicates that it will complete its disposition of the remainder of its project's assets and dissolve by dates and bare both state limited_liability companies that are each currently developing a real_estate project are b will increasingly work more closely with local authorities in order to acquire the necessary permits to subdivide and sell real_estate as well to convert some real_estate to civic use anticipates that by the end of the initial five-year divestment period it will have disposed of a significant portion of its project's assets indicates that it will complete its disposition of the remainder of its project's assets and dissolve by date4 b anticipates that by the end of the initial five-year divestment period it will not have disposed of any of its project's assets b indicates that it will complete its disposition of its project's assets and dissolve by dates due to the dramatic downturn in demand for real_estate in specific markets in which these enterprises operate and the lack of financing for large tracts of raw undeveloped real_estate conditions that have persisted for years disposition of real_estate_assets has not been possible except at prices substantially below fair_market_value in order to divest your ownership_interest in the business enterprises you must first sell the underlying assets on behalf of each of the enterprises involved in this transaction you have submitted a detailed description of their activities with respect to the sale of their real_estate holdings and their plans for eventual dissolution by the end of the additional five-year divestment period the plan involves continued efforts to complete the divestment as described above you represent that each of these divestment plans may be reasonably expected to be complete within the additional five-year period prior to the end of the initial five-year period for disposing of excess_business_holdings under sec_4943 you submitted a request to the internal_revenue_service for an extension of five years to complete the required disposition in addition you submitted your plan and notified the state attorney_general ruling requested you have requested the following ruling pursuant to the authority provided under sec_4943 you request that you be granted five-year extensions to dispose_of your ownership interests in the following enterprises i with respect to your ownership_interest in h you request that you be granted a five-year extension from date3 to date4 to dispose_of such interest ii with respect to your indirect ownership_interest in j and the related portion of your ownership_interest in m you request that you be granted a five-year extension from date3 to date4 to dispose_of such ownership interests iii with respect to your ownership_interest in j s you request that you be granted a five-year extension from dates to date6 to dispose_of such ownership_interest iv with respect to your indirect ownership_interest in and the related portion of your ownership_interest in m you request that you be granted a five-year extension from dates to date6 to dispose_of such ownership interests law sec_4943 imposes excise_taxes on the excess_business_holdings of any private_foundation in a business_enterprise sec_4943 provides that the excess_business_holdings means with respect to the holdings of any private_foundation in any business_enterprise the amount of stock or other interest in the enterprise which the foundation would have to dispose_of to a person other than a disqualified_person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings sec_4943 provides in part that the permitted holdings of any private_foundation in an incorporated business_enterprise are percent of the voting_stock reduced by the percentage of the voting_stock owned by all disqualified persons sec_4943 provides that the permitted holdings of a private_foundation in any business_enterprise which is not incorporated shall be determined under regulations prescribed by the secretary such regulations shall be consistent in principle with paragraphs and except that in the case of a partnership or joint_venture profits interest shall be substituted for voting_stock and capital interest shall be substituted for nonvoting_stock sec_4943 provides that if there is a change in the holdings in a business_enterprise other than by purchase by the private_foundation or by a disqualified_person which causes the private_foundation to have excess_business_holdings in such enterprise the interest of the foundation in such enterprise immediately after such change shall while held by the foundation be treated as held by a disqualified_person rather than by the foundation during the 5-year period beginning on the date of such change in holdings sec_4943 provides that the internal_revenue_service may extend for an additional five years the initial five-year period for the disposition of excess_business_holdings in the case of an unusually large gift or bequest of diverse business holdings or holdings with complex corporate structures if a the foundation establishes that i it made diligent efforts to dispose_of such holdings during the initial five-year period and ii disposition within the initial five year period has not been possible except at a price substantially below fair_market_value by reason of such size and complexity or diversity of holdings b before the close of the initial five-year period i the private_foundation submits to the internal_revenue_service a plan for disposing of all of the excess_business_holdings involved in the extension and ii the private_foundation submits the plan to the attorney_general or other appropriate state official having administrative or supervisory authority or responsibility with respect to the foundation's disposition of the excess_business_holdings involved and submits to the internal_revenue_service any response the private_foundation received during the five-year period and c the internal_revenue_service determines that such plan can reasonably be expected to be carried out before the close of the extension period analysis you are subject_to sec_4943 which imposes a tax on the excess_business_holdings of private_foundations generally under sec_4943 and sec_4943 a private_foundation is permitted to hold percent of the voting_stock or profit interest in a business_enterprise with any excess constituting excess_business_holdings however if a private_foundation acquires holdings in a business_enterprise other than by purchase eg bequest which causes the foundation to have excess_business_holdings then the interest of the foundation in such business_enterprise shall be treated as held by a disqualified_person rather than the foundation for a five-year period beginning on the date such holdings were acquired by the foundation under sec_4943 under sec_4943 the internal_revenue_service may extend the initial five-year period for the disposition of excess_business_holdings for an additional five years if you establish that i you made diligent efforts to dispose_of such holdings during the initial five-year period and disposition within the five-year period has not been possible except at a price substantially below fair_market_value by reason of such size and complexity or diversity of holdings ii before the close of the initial five-year period you submit to the internal_revenue_service and attorney_general or other appropriate state official having administrative or supervisory authority or responsibility with respect to your disposition of the excess_business_holdings a plan for the disposition of all of the excess_business_holdings involved during the extension and iii the internal_revenue_service determines that such plan can reasonably be expected to be carried out before the close of the extension period you acquired from foundation1 ownership in h j s band m you acknowledge that you have excess_business_holdings in each of these enterprises under sec_4943 therefore you are required under sec_4943 to dispose_of these holdings during the initial five-year period applicable to each enterprise described above during the initial period you have made diligent efforts to divest the excess_business_holdings on behalf of each of the enterprises involved in this transaction you have submitted a detailed description of their activities with respect to the sale of their real_estate holdings and their plans for eventual dissolution by the end of the additional five-year divestment period before the end of the initial five-year period you submitted this to the internal_revenue_service under sec_4943 for an additional five-year period within which to dispose_of your excess_business_holdings in the above-described enterprises and you described your plan for disposition of these holdings you also submitted the plan to the attorney_general of state based on the information submitted we have determined that your plan to dispose_of your excess_business_holdings in the enterprises involved within an additional five-year period can reasonably be expected to be carried out therefore we conclude that you do meet the requirements under sec_4943 for an extension of five years to dispose_of your excess_business_holdings in the enterprises described above ruling under sec_4943 you are granted five-year extensions to dispose_of your ownership interests in the following enterprises i with respect to your ownership_interest in h you request that you be granted a five-year extension from date3 to date4 to dispose_of such interest ii with respect to your indirect ownership_interest in and the related portion of your -s- ownership_interest in m you request that you be granted a five-year extension from date3 to date4 to dispose_of such ownership interests iii with respect to your ownership_interest in k you request that you be granted a five-year extension from dates to dates to dispose_of such ownership_interest iv with respect to your indirect ownership_interest in and the related portion of your ownership_interest in m you request that you be granted a five-year extension from dates to dates to dispose_of such ownership interests we are not ruling on whether your interests in any of the enterprises described above constitute excess_business_holdings this ruling will be made available for public inspection under section sec_110 after certain deletions of identifying information are made for details see enclosed notice notice of intention to disclose a copy of this ruling with deletions that we intend to make available for public inspection is attached to notice if you disagree with our proposed deletions you should follow the instructions in notice this ruling is directed only to the organization that requested it section sec_110 provides that it may not be used or cited by others as precedent this ruling is based on the facts as they were presented and on the understanding that there will be no material changes in these facts this ruling does not address the applicability of any section of the code or regulations to the facts submitted other than with respect to the sections described because it could help resolve questions concerning your federal_income_tax status this ruling should be kept in your permanent records 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 in accordance with the power_of_attorney currently on file with the internal_revenue_service we are sending a copy of this letter to your authorized representative sincerely michael seta manager eo technical enclosure notice


office_of_chief_counsel internal_revenue_service memorandum number release date cc intl b04 postu-120420-08 uilc date august to manager of foreign payments and international information reporting lmsb international se lm in c fp senior internal revenue_agent lmsb international se lm in c fp hq tax analyst bmf policy procedures branch se w cas sp bmf n from branch chief branch office of associate chief_counsel international cc intl b04 subject sec_1445 withholding on transfers by disregarded entities issue whether a domestic entity that has elected to be treated as an entity that is disregarded from its foreign owner may certify that it is a domestic transferor for purposes of withholding under sec_1445 on transfers of u s real_property interests postu-120420-08 conclusion under sec_1_1445-2 a disregarded_entity may not certify that it is the transferor of a u s real_property interest for purposes of sec_897 and sec_1445 facts we understand that some buyers of u s real_property interests are not withholding percent of the sales_price when purchasing such real_property from domestic entities that have filed a form_8832 entity classification election to be disregarded from their foreign owners under sec_301_7701-3 these transferees are obtaining certifications from domestic disregarded_entity transferors of u s real_property interests certifying that the transferring disregarded entities are domestic entities law and analysis under sec_897 gain_or_loss of a nonresident_alien_individual or foreign_corporation from the disposition of a u s real_property interest is subject_to u s tax as if the gain_or_loss were effectively connected with the conduct of a u s trade_or_business under sec_1445 if a foreign_person disposes of a u s real_property interest the transferee of such interest is required to deduct and withhold a tax equal to percent of the amount_realized on the disposition under sec_1_1445-2 a disregarded_entity may not certify that it is the transferor of a u s real_property interest as such an entity is disregarded for u s tax purposes including sec_897 and sec_1445 the owner of the disregarded_entity is treated as the transferor of the u s real_property interest and must provide a certificate of non-foreign status to avoid withholding under sec_1445 the disregarded_entity itself may not provide such a certificate sec_1_1445-2 provides a model form for an entity to use when the entity owns a disregarded_entity which transfers a u s real_property interest the form must include certifications that the owner of the disregarded_entity is not a foreign_corporation a foreign_partnership a foreign_trust or a foreign_estate further the owner must certify that it is not a disregarded_entity as defined in sec_1 b iii if the owner cannot or does not certify both its non-foreign status and that it is not a disregarded_entity the transferee must withhold percent of the amount_realized on the disposition of the u s real_property interest please call branch of the office of associate chief_counsel international at if you have any questions


internal_revenue_service index numbers number release date department of the treasury p o box ben franklin station washington dc 2gtuqp cid vq cid qpvcev cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid cid 6gngrjqpg cid 0wodgt cid 4ghgt cid 4grn cid 6q cc dom corp - plr- cid cid cid cid cid cid cid cid cid cvg cid rtkn cid cid cid cid cid cid cid cid cid re parent sub business x date date date a b c d shareholder plr-115522-98 dear this is in response to a letter dated date in which you requested a ruling on behalf of parent and sub that under sec_1504 of the internal_revenue_code the code the service waive the general_rule of sec_1504 of the code additional information was submitted in a letter dated date the pertinent information submitted indicates that parent is a corporation engaged in business x parent files its federal_income_tax return on a calendar_year basis on date parent acquired of the outstanding common_stock of sub at all times relevant to this ruling there was no sub stock outstanding other than common_stock parent and sub elected to file a consolidated federal_income_tax return parent remained the sole shareholder of sub common_stock until date on date sub issued a shares of common_stock to certain individuals including shareholder as compensation_for services rendered the value of the common_stock issued was included in the compensation of each individual as shown on form_w-2 shareholder received b shares as a result of that issuance of stock parent’s ownership of the total voting power and the total value of sub fell from to c resulting in the disaffiliation of parent and sub under sec_1504 of the internal_revenue_code parent states that the reduction of parent’s ownership of sub stock to less than was inadvertent after parent management realized that sub’s stock issuance on date had caused a disaffiliation of parent and sub parent on date purchased from shareholder the b shares of sub stock that had been issued to shareholder on date as compensation the purchase_price was equal to the value that had been included in shareholder’s compensation as a result of the date issuance of shares to shareholder the date purchase increased parent’s ownership of sub shares to d of both the total value and the total voting power of sub meeting the requirements of sec_1504 of the code parent subsequently filed this request that it be allowed to file consolidated_returns with sub for the period beginning on date parent has represented and has submitted information indicating that its disaffiliation on date and reaffiliation on date will not provide a benefit of a reduction in income increase in loss or any other deduction credit or allowance that would not otherwise be secured had the disaffiliation and reconsolidation not occurred this representation forms a material basis for the issuance of this ruling letter sec_1504 of the code provides that if a corporation is included or required to be included in a consolidated_return filed by an affiliated_group for a taxable_year which includes any period after date with respect to periods after such cessation such corporation and any successor of such corporation may not be included in any consolidated_return filed by the affiliated_group or by another affiliated_group with the same common parent or a successor of such common parent before the 61st month beginning after its first taxable_year in which it ceased to be a member of such affiliated_group plr-115522-98 revproc_91_71 1991_2_cb_900 grants an automatic waiver of the general_rule of sec_1504 of the code for taxpayers that meet its requirements if a taxpayer qualifies for the automatic waiver under revproc_91_71 the procedure described therein is the exclusive procedure available for obtaining a waiver of the rule contained in sec_1504 the automatic waiver in revproc_91_71 generally applies to any corporation that left a group and rejoined the same group ie the group remained in existence within the meaning of sec_1 of the income_tax regulations the automatic waiver in revproc_91_71 does not apply in this case because the parent group ceased to exist within the meaning of sec_1_1502-75 based on the information submitted and representations made it is concluded that application of sec_1504 of the code is hereby waived provided that parent and sub constitute an affiliated_group_of_corporations within the meaning of sec_1504 parent and sub may join in the filing of a consolidated federal_income_tax return beginning with date and for subsequent years no opinion is expressed about the tax treatment of the transaction under any other provisions of the code and regulations of about the tax treatment of any conditions existing at the time of or effects resulting from the transaction that are not specifically covered by the above ruling specifically no opinion has been requested or is expressed about the income_tax consequences of the issuance of a shares of parent common_stock to certain individuals on date or the purchase of b shares of parent common_stock from shareholder by parent on date temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted therefore this ruling will be modified or revoked by adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusions in the ruling see dollar_figure of revproc_99_1 1999_1_irb_6 however when the criteria in dollar_figure of the rev_proc are satisfied a ruling is not revoked or modified retroactively except in rare or unusual circumstances this ruling is directed only to the taxpayers who requested it sec_6110 of the code provides that it may not be used or cited as precedent plr-115522-98 a copy of this letter should be attached to the federal_income_tax return of the taxpayers involved for the taxable_year in which the transaction covered by this ruling letter is consummated sincerely yours assistant chief_counsel corporate by __________________________ edward s cohen chief branch