t c memo united_states tax_court trout ranch llc michael d wilson tax_matters_partner commissioner of internal revenue respondent petitioner v docket no filed date larry d harvey for petitioner sara jo barkley and tamara l kotzker for respondent memorandum findings_of_fact and opinion halpern judge by notice of final_partnership_administrative_adjustment the notice respondent reduced the amount of the charitable_contribution that trout ranch llc the partnership claimed on its form_1065 u s return of partnership income from dollar_figure to dollar_figure before trial we granted respondent’s motion to amend his answer to reduce the charitable_contribution further to zero--that is to increase the proposed_adjustment from dollar_figure to dollar_figure by the notice respondent also determined that the amount of any resulting charitable_contribution_deduction is limited to percent of the taxpayer’s contribution_base and not percent of that base in the partnership granted a conservation_easement on land it owned because the value of that conservation_easement determines the amount of the charitable_contribution that the partnership may claim we must determine that value unless otherwise stated section references are to the internal_revenue_code in effect for and all rule references are to the tax_court rules_of_practice and procedure we round all measurements in acres and all dollar amounts to the nearest whole number introduction findings_of_fact some facts have been stipulated and are so found the stipulation of facts and the supplemental stipulation of facts with accompanying exhibits are incorporated herein by this reference when the petition was filed the partnership’s principal_place_of_business was in gunnison county colorado background the partnership was formed as a limited_liability_company in date and elected to be taxed as a partnership for its taxable calendar_year in date the partnership purchased land and certain appurtenant water rights in gunnison county for dollar_figure to consolidate the west line of the property the partnership entered into land trades with neighboring landowners involving adjacent parcels after those trades the partnership owned acres of land including miles of the gunnison river running north to south through the property in date in exchange for dollar_figure the partnership conveyed three permanent easements and a temporary easement to the colorado department of transportation cdot encumbering acre the cdot easement a week later cdot granted the partnership a state highway access permit over acres the cdot access permit not counting the land covered by the cdot access permit the partnership controlled acres which we shall refer to as gunnison riverbanks ranch sometimes the property before the property had been used for agriculture recreation and during one period the extraction of gravel in approximately acres of the property consisted of hay meadows and pastures the east line of the property adjoins several thousand acres managed by the u s department of the interior bureau of land management to the north and west of the property are rural residential tracts most of which are between and acres to the south of the property are larger rural residential tracts all of which are at least acres the gunnison county land use resolution gunnison county has no zoning the gunnison county land use resolution the land use resolution governs land development and subdivision in gunnison county two development regulations are important in this case the large parcel incentive process lpip and the major impact project process mip both lpip and mip require a developer to submit a plan for approval to the gunnison county planning commission the commission under lpip if a developer preserves at least percent of the land for open space or another conservation_purpose then the developer may subdivide the remaining land into three lots for every acres rounded down to the nearest whole multiple of acres if the developer preserves at least percent of the land however then the developer is entitled to a bonus lot for every acres in contrast mip does not explicitly limit the number of lots into which a developer may subdivide land rather the maximum lot density depends on the physical capacity of the land and the impact the proposed subdivision would have on 1e g using lpip a landowner with acres may cluster six homes on lots smaller than acres the community under mip the developer must preserve at least percent of the land as a matter of right a developer may subdivide land into 35-acre parcels in date the partnership filed a land use change permit application under lpip proposing to preserve percent of the property to take advantage of the lpip bonus-density lot provisions the partnership sought to create residential lots in addition to a lot for a clubhouse at gunnison riverbanks ranch the land use change permit the partnership also could have filed a land use change permit application under mip for approval to create more than lots development of gunnison riverbanks ranch from the beginning the partnership intended to develop gunnison riverbanks ranch into a residential subdivision with a minimum of lots and exclusive shared amenities including a clubhouse a guest house fishing a riding arena and stable ponds a boathouse duck blinds and an archery range we shall refer to such a development as a shared ranch in contrast to residential subdivisions without shared amenities to the extent possible the partnership intended to preserve the pristine nature of the land and the river in date the commission formally discussed the land use change permit with the partnership and visited the property in july the commission held a public hearing concerning the land use change permit the conservation_easement in date the partnership donated a conservation_easement to the crested butte land trust encumbering acres at gunnison riverbanks ranch and certain appurtenant water rights the trout ranch ce or simply the conservation_easement on the same day the partnership entered into a land conservation covenant with gunnison county encumbering an additional acres of the property the land covenant neither the conservation_easement nor the land covenant encumbered land that the cdot easement already encumbered the remaining unencumbered acres were along the gunnison river in three parcels the partnership reserved the right to subdivide those three parcels into lots lots in the northern parcel a historic ranch house the clubhouse in the middle parcel and lots in the southern parcel the single-family residential lots each had acres with part of each residential lot including land that the conservation_easement encumbered the conservation_easement allowed the construction of three open horse shelters three duck blinds two corrals three ponds with docks a tent platform and a skeet trap wobble deck on land the conservation_easement encumbered subsequent events in date the partnership submitted to the commission its final plan for gunnison riverbanks ranch in april the commission approved the land use change permit and the partnership entered into a development agreement with the board_of county commissioners of gunnison county in august the partnership conveyed the land encumbered by the conservation_easement the land covenant and the cdot easement to gunnison riverbanks ranch association the partnership incurred dollar_figure in expenses to develop gunnison riverbanks ranch the partnership’s tax_return on its form_1065 the partnership claimed a charitable_contribution of dollar_figure for the contribution of the conservation_easement in date respondent issued the notice to the partnership the notice disallowed dollar_figure of the claimed charitable_contribution ie the notice allowed a charitable_contribution of dollar_figure the notice also determined that a deduction of the charitable_contribution was subject_to the 30-percent limitation in sec_170 and not the percent limitation in sec_170 the court subsequently allowed respondent to amend his answer to increase the proposed_adjustment by dollar_figure thereby disallowing the entire charitable_contribution opinion to determine the amount of the charitable_contribution made by the partnership we must determine the value of the conservation_easement i burden_of_proof in general the taxpayer bears the burden_of_proof although the commissioner bears the burden_of_proof with respect to any increases in deficiency see rule a that general_rule suggests that respondent bears the burden of proving the partnership is entitled to claim a charitable_contribution of less than dollar_figure and that petitioner bears the burden of proving the partnership is entitled to claim a charitable_contribution of more than dollar_figure petitioner however raises the issue of sec_7491 which shifts the burden_of_proof to the commissioner in certain situations if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the proper tax_liability respondent objects that petitioner has failed both to introduce credible_evidence under sec_7491 and to satisfy other preconditions for the application of that section it is unnecessary for us to address the parties’ disagreements and to determine whether the burden has shifted because the parties have provided sufficient evidence for us to find that the value of the conservation_easement was dollar_figure see 124_tc_95 ii the value of the conservation_easement a introduction sec_170 allows a deduction for charitable_contributions in general sec_170 denies a deduction for a charitable_contribution of an interest in property that is less than the taxpayer’s entire_interest in the property one exception to that general_rule however is for a qualified_conservation_contribution see sec_170 respondent concedes that the donation of the conservation_easement was a qualified_conservation_contribution the only issue with respect to the donation is its value b positions of the parties the parties defend their respective valuations through expert and other testimony and each attacks the valuation offered by his opponent we briefly describe the analyses of the experts respondent’s experts michael r nash and louis j garone both experts in real_estate appraisal concluded independently that the conservation_easement was worth nothing they both determined the value of the conservation_easement using the so-called income approach to calculate and compare the highest_and_best_use of the property before and after the imposition of the conservation_easement the income approach to valuing real_property involves discounting to present_value the expected cashflows from the property e g 92_tc_958 affd without published opinion 921_f2d_280 9th cir the theory behind the approach is that an investor would be willing to pay no more than the present_value of a property’s anticipated net_income petitioner’s expert jonathan s lengel an expert with respect to the valuation of conservation easements concluded that the conservation_easement was worth dollar_figure million his original report determined the value of the conservation_easement by calculating the value of the property before the imposition of the conservation_easement using sales of similar properties and then estimating the percentage by which the conservation_easement likely decreased the value of the property mr lengel calculated that percentage by dividing the sale prices of encumbered property by the contemporaneous sale prices of similar unencumbered property to correct certain errors in his original report and to provide two additional estimates of the value of the conservation_easement using a so-called sales comparison analysis and the income approach mr lengel later produced a supplemental report his ultimate conclusion remained the same c the proper valuation methodology sec_1_170a-14 income_tax regs states in pertinent part the value of the contribution under sec_170 in the case of a charitable_contribution of a perpetual conservation restriction is the fair_market_value of the perpetual conservation restriction at the time of the contribution if there is a substantial record of sales of easements comparable to the donated easement such as purchases pursuant to a governmental program the fair_market_value of the donated easement is based on the sales prices of such comparable easements if no substantial record of market-place sales is available to use as a meaningful or valid comparison as a general_rule but not necessarily in all cases the fair_market_value of a perpetual conservation restriction is equal to the difference between the fair_market_value of the property it encumbers before the granting of the restriction and the fair_market_value of the encumbered property after the granting of the restriction petitioner argues that if the condition in the second sentence of that provision is satisfied ie if there is a substantial record of sales of easements comparable to the donated easement then the only proper valuation methodology is to calculate the fair_market_value of the donated easement using the sales prices of the comparable easements petitioner argues that respondent’s experts who valued the conservation_easement using the method described in the third sentence of the provision the so-called 2on brief petitioner does not rely on mr lengel’s original report we shall not either before and after method violated the unambiguous language of the regulation we need not address that legal issue however because we find that the condition in the second sentence of the provision was not in fact satisfied that is we find that there was no substantial record of sales of easements comparable to the donated easement the use of the before and after method by all three experts to value the conservation_easement was thus proper and in accordance with the regulation d mr lengel’s sales comparison analysis petitioner argues that according to sec_1 170a- h i income_tax regs the only mandatory methodology for the valuation of a conservation_easement is the methodology described in the second sentence of that provision the sales comparison method in the sales comparison analysis in his supplemental report mr lengel relies on five sales of conservation easements in gunnison county on brief petitioner relies on only four of those sales disregarding a fifth sale that occurred after the partnership donated the conservation_easement nonetheless none of the other four conservation easements is comparable to the trout ranch ce for that reason we find mr lengel’s sales comparison analysis to be of no help 3that is consistent with petitioner’s argument that the court should not consider any evidence not available before the donation of the conservation_easement because such evidence cannot be relevant to the value of the conservation_easement we address that argument in sec ii e d c of this report in determining the value of the conservation_easement we discuss the four conservation easements below the niccoli conservation_easement in date as part of a bargain sale robert niccoli conveyed to colorado cattlemen’s agricultural land trust a colorado nonprofit corporation a conservation_easement encumbering acres of primarily open ranchland there are no water rights associated with the property and there was no creek or river frontage the niccoli property was about miles southeast of crested butte directly west of the crested butte south subdivision and about miles north of gunnison riverbanks ranch both the niccoli property and gunnison riverbanks ranch abutted colorado state highway the niccoli conservation_easement niccoli ce precluded any development on the niccoli property that is the niccoli property went from at least four 35-acre lots to none in the bargain sale mr niccoli received dollar_figure from great outdoors colorado trust fund a state_agency that provides money to colorado land trusts and local governments to acquire conservation easements the appraised value of the niccoli ce was dollar_figure the guerrieri conservation_easement in date as part of a bargain sale with the grantor receiving land guerrieri ranches l l c conveyed to gunnison ranchland conservation legacy a colorado land trust and nonprofit corporation a conservation_easement encumbering acres of primarily open ranchland the guerrieri conservation_easement guerrieri ce however did not cover the entire guerrieri property which wa sec_952 acres the guerrieri ce encumbered the northern section of the irregular guerrieri property which was connected to the greater guerrieri property only by a relatively narrow strip of land the guerrieri property irrigated and with creek frontage i sec_11 miles north of gunnison riverbanks ranch the guerrieri ce precluded any development on acres of encumbered acres the remaining acres were reserved for one single-family residence that is the guerrieri property went from at least twenty-three 35-acre lots to at least fourteen or fifteen 35-acre lots and one 5-acre lot in the bargain sale guerrieri ranches l l c received land in gunnison county worth dollar_figure from gunnison ranchland conservation legacy the appraised value of the guerrieri ce was dollar_figure the miller conservation_easement in date as part of a bargain sale with the grantor receiving land miller land and cattle conveyed to gunnison legacy fund a colorado land trust and nonprofit corporation a conservation_easement encumbering acres of primarily open ranchland the miller property was irrigated the miller conservation_easement miller ce precluded any development on acres of the miller property the remaining acres were reserved for one single-family residence that is according to the contemporaneous appraisal the miller property went from nine 40-acre lots to one 5-acre lot in the bargain sale miller land and cattle received land in gunnison county worth dollar_figure from gunnison legacy fund the appraised value of the miller ce was dollar_figure the trampe conservation_easement in date as part of a bargain sale trampe ranches l l l p conveyed to colorado open lands a colorado land trust and nonprofit corporation a conservation_easement encumbering acres of primarily open ranchland the trampe property contain sec_1 miles of the east river the trampe property was just north of almont about miles north of gunnison riverbanks ranch both the trampe property and gunnison riverbanks ranch abutted colorado state highway the trampe conservation_easement trampe ce precluded any development on acres of the trampe property trampe ranches l l l p retained the right to build one single-family residence on one of three 5-acre lots that is the trampe property went from at least twenty-seven acre lots to one 5-acre lot in the bargain sale trampe ranches l l l p received dollar_figure from colorado open lands the appraised value of the trampe ce was dollar_figure discussion the most obvious problem with mr lengel’s comparable sales analysis is that none of the four conservation easements above had an effect on the donor’s land comparable to the effect the trout ranch ce had on gunnison riverbanks ranch with the exception of the guerrieri ce the conservation easements restricted development rights to a much greater extent than the trout ranch ce the niccoli ce restricted development from at least four residential lots to none a reduction of potential development of percent the miller ce restricted development from nine residential lots to one lot a reduction of potential development of percent the trampe ce restricted development from residential lots to one lot a reduction of potential development of percent in essence in all three cases the conservation easements all but eliminated residential development in stark contrast the trout ranch ce restricted development from at least residential lots to lots a reduction in potential development of percent we are simply not convinced that the value of a conservation_easement that 4there are other problems for one mr lengel used the appraised value of each conservation_easement as its sales_price given that the sales described above were bargain sales in which the purchaser paid less than the appraised value we question the propriety of his implicit assumption that the appraised values were indicative of what a purchaser would pay absent the implicit gift by the seller nonetheless we need not find the true value of any of the four conservation easements because we find that none was comparable to the trout ranch ce restricts development to at most one residential lot sheds any light on the value of a conservation_easement that allows as many a sec_22 residential lots although the guerrieri ce and the trout ranch ce restricted overall development to a similar degree the details of the former are too different from those of the latter for the guerrieri ce to be of much help in valuing the trout ranch ce regardless of the true value of the guerrieri ce that conservation_easement provides no help in valuing the trout ranch ce because the restrictions of the two conservation easements had significantly different effects the guerrieri ce restricted all development across a block of acres the single 5-acre residential lot being in the northeast corner of the encumbered acres the appraisal stated there are several successful residential developments within the subject neighborhood along with sales of 35-acre parcels for homes and large ranches for development and exclusive use the conservation_easement prevented guerrieri ranches l l c from developing acres of semi-secluded pristine valley with creek frontage views majestic mountains wildlife and proximity to economic centers at gunnison riverbanks ranch however the conservation_easement restricted the land surrounding the most valuable asset the river but was designed to allow the partnership to develop the entire parcel into a lot shared ranch with residential lots and a clubhouse along the river the two conservation easements thus had greatly different effects on the surrounding land whereas the appraisal of the guerrieri ce stated that the conservation_easement would provide no specific benefit to the rest of the guerrieri property the trout ranch ce provided a clear benefit to the unencumbered land along the river we simply do not consider the guerrieri ce comparable to the trout ranch ce moreover even if the guerrieri ce were comparable the record of a single comparable conservation_easement would be insufficient to constitute a substantial record of sales of easements comparable to the donated easement see sec_1_170a-14 income_tax regs e the before and after analyse sec_1 introduction all three experts agreed that the highest_and_best_use of gunnison riverbanks ranch before and after the granting of the conservation_easement was as a residential subdivision and they all used the income approach to calculate the before and after values of the property given the lack of comparable market sales we agree that the income approach is the most appropriate method to value the property to calculate the before and after values the experts used the so-called subdivision method to find the present_value of the hypothetical residential subdivisions they constructed discounted cashflow analyses by estimating the number and prices of the lots the costs of their development and sale and other parameters we find none of the experts completely convincing we shall discuss their assumptions and their arguments and we shall then construct our own discounted cashflow analyses to calculate the before and after values of the property for a couple of reasons we start by calculating the present_value of the property after the imposition of the conservation_easement first the experts spent the most time and effort calculating the after value of the property and their competing analyses lead to their most substantial disputes our analysis depends on resolving those disputes and we can more coherently address them in their original context second the presence of the conservation_easement would have no effect on several parameters we must estimate that is several parameters should remain constant in the calculations of the before and after values in choosing those parameters we want to consider the arguments of all three experts mr nash however used only a single discounted cashflow analysis to support his after value mr nash used a sales comparison approach and a cost approach to calculate his before value which was less than his after value that is unlike the other experts he did not use multiple discounted cashflow analyses to compare different developments nonetheless his report is in evidence and we find some of his analysis of the after value helpful by calculating the after value first we can evaluate his parameters in their original context the after value because messrs nash and garone found that the imposition of the conservation_easement did not change the highest_and_best_use of the property their respective analyses of the before value and the after value are identical mr nash found the highest_and_best_use to be a development identical to gunnison riverbanks ranch--ie a 21-lot shared ranch he valued that development at dollar_figure million mr garone found the highest_and_best_use to be a 22-lot residential subdivision he valued that development at dollar_figure million mr lengel like mr nash found the highest_and_best_use after the imposition of the conservation_easement to be a development identical to gunnison riverbanks ranch--ie a lot shared ranch he however valued that development at dollar_figure million all the discounted cashflow analyses we discuss had the following basic structure to calculate gross_sales revenue the experts estimated the prices of the lots their absorption rate ie the number of lots that would sell every year and their appreciation rate to calculate expenses the experts estimated capital expenses ie the development costs all expended in the first year the sales expenses eg sales commissions and general and administrative costs and developer’s profit for convenience a percentage the experts also estimated a discount rate ie the interest rate used to determine the present_value of the future cashflows with their estimates the experts then calculated the present_value of the future cashflows and thus the present_value of the proposed development we discuss their discounted cashflow analyses below and then we construct our own a mr nash the discounted cashflow analysis mr nash used to calculate the value of the 21-lot shared ranch had the following parameters mr nash estimated that the lots would sell for dollar_figure before appreciation over years at a rate of he estimated the lots would appreciate pincite percent but for some reason starting only in the second year he estimated that capital expenses would be dollar_figure million that sales expenses would be percent of gross_sales revenue ie commissions of percent and closing costs of percent and that developer’s profit would be percent mr nash did not explicitly estimate project management expenses we offer an explanation for that apparent oversight in section ii e d of this report for sensitivity testing he used discount rates of and percent and he ultimately settled on a discount rate between and percent b mr garone the discounted cashflow analysis mr garone used to calculate the value of the 22-lot residential subdivision had the following parameters mr garone estimated that the lots would sell for dollar_figure before appreciation over years at a rate of he estimated the lots would appreciate pincite percent he estimated that capital expenses would be approximately dollar_figure that project management expenses would be percent of gross_sales revenue that sales expenses would be percent of gross_sales revenue ie commissions of percent and closing costs of percent and that developer’s profit would be percent he used a discount rate of percent c mr lengel the discounted cashflow analysis mr lengel used to calculate the value of the 21-lot shared ranch had the following parameters mr lengel estimated that the lots would sell for dollar_figure before appreciation over years at a rate of he estimated the lots would appreciate pincite percent he estimated that capital expenses would be approximately dollar_figure million that project management expenses would be dollar_figure a year that sales expenses would be percent of gross_sales revenue ie commissions of percent and closing costs of percent and that developer’s profit would be percent he used a discount rate of percent d analysis number of lots we agree with messrs lengel and nash that the highest_and_best_use of the property after the imposition of the conservation_easement was a 21-lot shared ranch the implicit assumption is that the clubhouse would increase the value of the other lots by more than the value of an additional lot and the cost of the clubhouse itself that assumption does not strike us as implausible especially given that the partnership in fact developed gunnison riverbanks ranch as a 21-lot shared ranch because mr garone failed to explain exactly why he placed such a low value on the clubhouse we find that a 21-lot shared ranch was the highest_and_best_use after the imposition of the conservation_easement lot prices a the experts’ estimates the experts broadly disagreed about lot prices indeed the value of the lots after the imposition of the conservation_easement is their essential dispute mr lengel assumed that all lots would sell for dollar_figure mr lengel relied on six lot sales at hidden river ranch to support his lot price of dollar_figure we discuss the experts’ data in the next section yet mr lengel himself abandoned that estimate in his rebuttal reports in those reports mr lengel stated that a reasonable conclusion given the data available was using mr nash’s data dollar_figure and using mr garone’s data dollar_figure we are not surprised that mr lengel did not defend his estimate in his analysis of the property before the imposition of the conservation_easement mr lengel found that a 40-lot residential subdivision was the highest_and_best_use mr lengel assumed that lots distributed across roughly the same to percent of the property a sec_21 lots would also sell for dollar_figure mr lengel apparently assumed either that the lots would not sell at a discount or that the lots would not sell at a premium we find his assumption that lot prices would remain the same regardless of the number of lots implausible his estimate of dollar_figure per lot is somewhat more reasonable however for a lot residential subdivision see sec ii e c of this report notably in the rebuttal reports mr lengel accepted all the other assumptions that messrs nash and garone made mr nash assumed that all lots would sell for dollar_figure to arrive at that figure he used lot sales from three different developments in the area mr nash considered three sales from eagle ridge ranch six sales from hidden river ranch and four sales from gunnison riverbanks ranch mr garone assumed that all the lots in his analysis would sell for dollar_figure to arrive at that figure he scaled down the lot price from his 12-lot residential subdivision which assumed a matter-of-right subdivision into 35-acre lots by approximately percent we find that approach unsatisfactory we shall simply use the raw data from which he derived the lot price for his 12-lot residential subdivision mr garone used nine lot sales from four different developments in the area he considered three sales from danni ranch three sales from hidden river ranch one sale from eagle ridge ranch and two sales from horse river ranch b the experts’ data with respect to lot sales at hidden river ranch the experts offer slightly different accounts we find the facts of those sales to be the following hidden river ranch comprised acres approximately miles south of crested butte which included half a mile of the east river amenities included a barn corrals and acres of open space protected by a conservation_easement the remaining acres had lots of approximately acres each two lots sold in date for dollar_figure one lot sold in date for dollar_figure and three lots sold in date for dollar_figure dollar_figure and dollar_figure mr nash compared hidden river ranch to gunnison riverbanks ranch describing its location close to crested butte as slightly superior the size of its lots which he believed to be acres as slightly superior and its aesthetic appeal and amenities eg inferior tree cover and a shorter stretch of river with an inferior fishery as significantly inferior overall he judged hidden river ranch to be slightly inferior to gunnison riverbanks ranch in his supplemental report mr lengel presented an almost identical analysis calling hidden river ranch slightly superior in size and location but along a substantially inferior river nonetheless given that only a single lot at hidden river ranch sold for as little as dollar_figure mr lengel evidently concluded that gunnison riverbanks ranch was inferior to that development mr garone concluded that because of the inferior east river fishery hidden river ranch lots would after otherwise adjusting their values to reflect differences with hidden river ranch lots be worth approximately dollar_figure less than lots at gunnison riverbanks ranch eagle ridge ranch comprised big_number acres approximately miles northwest of gunnison which included miles of the ohio creek amenities included two mountain cabins a barn corrals and equestrian facilities and big_number acres of open space including big_number acres of mountainous lands the remaining 5messrs lengel and nash apparently judged slight superiority in size differently or else slight superiority in size covers a vast range acres had lots of acres each one lot sold in date for dollar_figure one lot sold in date for dollar_figure and one lot sold in date for dollar_figure in comparison to gunnison riverbanks ranch mr nash described the location of eagle ridge ranch as under less development pressure and so slightly inferior the size of its lots as slightly superior and its aesthetic appeal and amenities eg similar tree cover a river with an inferior fishery and a much lower density as slightly superior overall he judged eagle ridge ranch to be moderately superior to gunnison riverbanks ranch mr garone described the eagle ridge ranch amenities as superior and estimated that its lots were worth percent more than those at gunnison riverbanks ranch mr lengel did not discuss eagle ridge ranch mr garone did not provide much background on danni ranch or horse river ranch at danni ranch one 35-acre lot sold in date for dollar_figure one 39-acre lot sold in date for dollar_figure and one 35-acre lot sold in date for dollar_figure the first lot like the lots at hidden river ranch was on the inferior east river the second two lots did not have river frontage at horse river ranch one 35-acre lot sold in date for dollar_figure and one 35-acre lot sold in date for approximately dollar_figure both lots were on the ohio creek which mr garone considered even less desirable than the east river mr garone concluded that because of the inferior ohio creek fishery horse river ranch lots were worth approximately dollar_figure less than gunnison riverbanks ranch lots the following is a summary of lot sales at gunnison riverbanks ranch after the donation of the conservation_easement date date date date date date date date lot no price dollar_figure big_number big_number big_number big_number big_number big_number the lot sold in date did not have river frontage c the use of postvaluation data before we discuss the data presented above we must address petitioner’s argument that we may not consider evidence of lot sales after the date of valuation ie the date the partnership donated the conservation_easement petitioner argues that the plain language of the regulation makes events occurring after the date of valuation irrelevant in support he quotes sec_1_170a-14 income_tax regs the value of a perpetual conservation restriction is its fair_market_value at the time of the contribution that statement however does not limit the evidence one may consider in determining that value the regulation does not support petitioner in 88_tc_38 on which petitioner relies we stated the rule that has developed and which we accept is that subsequent events are not considered in fixing fair_market_value except to the extent that they were reasonably foreseeable at the date of valuation see eg 279_us_151 the rule against admission of subsequent events is a rule_of relevance rule federal rules of evidence applicable in this court pursuant to rule tax_court rules_of_practice and procedure and sec_7453 defines relevant evidence as evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more or less probable than it would be without the evidence emphasis added see 87_tc_865 estate of gilford does not support petitioner we find that the evidence of lot sales within a reasonable period after the date of valuation especially those at gunnison riverbanks ranch itself tends to make a given estimate of the lot prices more or less likely that is such evidence is relevant petitioner argues that even if such evidence is relevant we should give it no weight because between date and date gunnison county real_property appreciated overall by 6indeed in the case of valuation for stocks and bonds for estate and gift_tax purposes where the standard is also fair_market_value and there may be no sales on the appropriate valuation_date the regulations specifically contemplate the use of sales data within a reasonable period both before and after the valuation_date to determine value on that date sec_20_2031-2 estate_tax regs sec_25_2512-2 gift_tax regs percent moreover petitioner argues that in those years vacant land in gunnison county appreciated by percent respondent objects that gunnison county comprises many different economic areas including the towns of gunnison and crested butte and the area surrounding the latter’s ski resorts respondent argues that the gunnison economic area which included gunnison riverbanks ranch experienced only in the words of a senior appraiser for the gunnison county assessor’s office a minor upward adjustment according to that senior appraiser the sale of the crested butte mountain caused an increase in market volume and market prices in crested butte and the area surrounding the ski resorts although that sale did not occur until date the purchasers of the crested butte ski resort signed a letter of intent in date petitioner does not suggest that any lot sales with the notable exception of lot sales at gunnison riverbanks ranch support the proposition that prices of real_estate in and around the town of gunnison appreciated at more than a reasonable rate we find no evidence that the lots at gunnison riverbanks ranch appreciated at more than a reasonable rate after the date of valuation nonetheless we shall give the most weight to lot sales within a year of the date of valuation ie sales in and and less weight to lot sales outside that range d analysis of the data we are not convinced that the prices of the 35-acre lots at danni ranch horse river ranch and eagle ridge ranch tell us much about the lot prices at gunnison riverbanks ranch danni ranch and horse river ranch are complete unknowns we are reluctant to draw any conclusion from the lot sales at those two developments eagle ridge ranch was almost completely different from gunnison riverbanks ranch eagle ridge ranch had fewer and much larger lots in a more secluded area with superior amenities we are certain and the experts all agreed that those lots were worth far more than lots at gunnison riverbanks ranch but exactly how much more is not clear we shall rely on the sales at hidden river ranch and gunnison riverbanks ranch we find that lots at hidden river ranch were much less desirable than lots at gunnison riverbanks ranch mr nash called the east river significantly inferior and even mr lengel called it substantially inferior given that both parties stress the beauty of the gunnison river and the quality of its fishery we find the difference between the two rivers to be important the sales data suggest that hidden river ranch had two tiers of lots those worth around dollar_figure and those worth around dollar_figure the experts offered no explanation for the significant difference in prices we also find the two lot sales at gunnison riverbanks ranch in date to be important nonetheless we are wary of relying too much on the sale prices of dollar_figure which is the sale price year after the date donation of the trout ranch ce mr garone suggested adding at least dollar_figure to the prices of lots at hidden river ranch to estimate the prices of lots at gunnison riverbanks ranch we shall add dollar_figure to the top-tier lots at hidden river ranch to estimate the price of the average lot at gunnison riverbanks ranch that strikes us as a reasonable indeed a generous compromise our estimate suggests that appreciation over year was almost percent although petitioner failed to present any evidence of such appreciation we must reconcile the sales data before us we shall thus use dollar_figure as the price of lots absorption the experts again broadly disagreed mr lengel estimated a rapid absorption rate he stated that in years hidden river ranch had sold six lots with river frontage he argued that given the limited supply of similar lots and the anticipated competition for lots at gunnison riverbanks ranch the absorption rate there would be much higher mr garone stated that developments with lots between dollar_figure and dollar_figure had absorption rates of about three lots a year mr nash also considered lot sales at hidden river ranch but he did not limit himself to lots with river frontage he stated that hidden river ranch had sold lots in years but that given the higher lot prices at gunnison riverbanks ranch he estimated slightly slower absorption we agree with the analyses of messrs lengel and nash whereas mr garone failed to justify his sluggish absorption rate they provided data in support of their estimates yet we agree with mr garone that mr lengel’s absorption rate--with eight sales in each of the first years--seems slightly aggressive we find that mr lengel’s arguments do not justify his own estimates but do support those of mr nash we shall adopt the absorption rate of four to five lots a year that mr nash proposed we assume as did all the experts that the first sales are in the year after the year of the contribution of the trout ranch ce appreciation with respect to appreciation mr lengel stated that the rate of increase in selling prices is difficult to predict he suggested that at the time of the donation of the conservation_easement because demand had been low for the few years before one might have expected demand to increase in 7we presume the experts did not consider the actual absorption of lots at gunnison riverbanks ranch because many of the partners who each received at least one lot were interested in building homes for themselves not in selling to others the future he reasoned that with only a small supply of vacant river front lots between one and ten acres in the neighborhood and no known new developments planned rising demand should lead to escalating values he noted that historically similar properties generally appreciated between and percent a year mr lengel concluded that the lots would appreciate pincite percent a year for the first years and would stop appreciating thereafter looking to the sluggish economy and historical performance in the area at the time of the donation of the conservation_easement mr garone estimated appreciation of percent a year relying solely on the sale and resale of lot at gunnison riverbanks ranch mr nash estimated appreciation of percent bearing in mind mr lengel’s initial caveat the rate of increase in selling prices is difficult to portend we find the assumption that appreciation would not be uniform unwarranted there is no evidence that the property would either not appreciate in the first year or abruptly stop appreciating after years although mr lengel’s analysis does not justify appreciation of percent we do find that his reasons justify appreciation of more than percent we shall use flat appreciation of percent a year capital expenses to calculate capital expenses all three experts started with the actual expenses the partnership incurred developing the property approximately dollar_figure million and subtracted certain expenses and related interest mr lengel subtracted one expense a finder’s fee for petitioner which left him with development costs of approximately dollar_figure million mr nash subtracted six additional expenses related to the conservation_easement the land swaps the ranch house and the barn which left him with development costs of approximately dollar_figure million mr garone subtracted several more expenses eg related to the digging of lakes and ditches --the ponds we presume which left him with development costs of approximately dollar_figure because we have already rejected mr garone’s 22-lot residential subdivision we shall not consider his proposed development costs for that plan mr garone however also estimated costs for a syndicated plan intended to reflect a shared ranch similar to the actual gunnison riverbanks ranch for that estimate he subtracted far fewer costs ie not those related to the clubhouse which left him with development costs of approximately dollar_figure million messrs nash and garone however failed to explain why they excluded certain costs mr nash characterized the costs he excluded as abnormal costs not typical for most subdivision developments yet failed to acknowledge that those costs may have increased the value of property given respondent’s insistence that the partnership developed the land according to its highest_and_best_use we find his experts’ reasons for excluding some of its costs lacking we shall use mr lengel’s estimate of capital expenses of approximately dollar_figure million project management expenses mr lengel allocated dollar_figure a year for marketing and advertising mr garone however stated that project management expenses would also include project oversight costs and miscellaneous administrative costs we find that mr lengel underestimated project management expenses we shall adopt mr garone’s estimate of project management expenses percent of gross_sales revenue sales expenses mr lengel stated that real_estate agents charge percent to percent commissions on vacant land sales he then stated that because potential buyers of real_estate in gunnison county come from a wide geographical range marketing costs extend out of the immediate area mr lengel concluded that real_estate agents would charge a commission of percent--that is a low commission--to cover those marketing costs mr garone proposed a commission of percent and given that mr lengel’s own analysis supports such a figure we shall adopt it mr garone however did not suggest any reason that closing costs would exceed percent so we shall assume closing costs of percent as messrs nash and lengel do we find the figure mr nash used for commissions to be slightly high and without much support moreover a survey attached as an appendix to mr lengel’s supplemental report the winter real_estate investment survey for the rocky mountain region concluded that according to real_estate brokers developers lenders real_estate appraisers and consulting firms total sales expenses of percent were reasonable for sales of vacant land worth up to dollar_figure million we shall use sales expenses of percent of gross_sales revenue developer’s profit mr lengel stated that developers typically require or anticipate profits ranging from percent usually for short term development projects with a minimum of well identified risk factors to percent or more for longer term more hazardous projects mr lengel stated that one colorado developer typically anticipates at least a percent profit for ‘subdivision’ development he then claimed that interviews with developers in resort areas of colorado revealed only that they anticipate a to percent profit mr lengel then inexplicably concluded that the developer would require a profit of only percent given that percent was not even within his own range and because mr lengel provided no reason the range was inappropriate we cannot accept that figure mr garone suggested percent mr nash suggested percent we recall that mr nash did not incorporate project management expenses into his analysis we believe that he rolled those costs into his estimate of developer’s profit we have found project management expenses to be percent of gross_sales revenue see sec ii e d of this report we shall assume a developer’s profit of percent discount rate mr lengel stated that an appropriate discount rate reflects competitive rates of return on similar investments he referred to a survey the winter real_estate investment survey for the rocky mountain region attached to his supplemental report as an appendix in which real_estate brokers developers lenders real_estate appraisers and consulting firms opined as to the discount rates they anticipated and used for residential land development their figures ranged from to percent mr lengel concluded that percent was appropriate mr garone cited two different surveys with discount rates ranging from to percent he stated that at the time of the donation the anticipated selling period was long 8both messrs garone and nash applied their profit percentages to projected gross_sales revenue both in determining their after and their before values rather than to projected net revenue from sales as did mr lengel we shall follow the lead of messrs garone and nash years the demand for finished housing was low and the area had a sufficient supply of residential lots for those reasons he considered the project to be relatively higher risk nonetheless he chose a discount rate of percent mr nash chose a discount rate of approximately percent but he failed to offer much support messrs lengel and garone agreed and we find their evidence and their reasons convincing we shall adopt their discount rate of percent e conclusion we conclude that the 21-lot shared ranch had at the time of the donation of the conservation_easement a present_value of approximately dollar_figure million see the appendix for our discounted cashflow analysis the before value mr lengel found the highest_and_best_use of the property before the imposition of the conservation_easement to be a 40-lot residential subdivision he valued a 40-lot residential subdivision at dollar_figure million mr garone valued a 40-lot residential subdivision at dollar_figure million we discuss their discounted cashflow analyses and then we construct our own a mr lengel the discounted cashflow analysis mr lengel used to calculate the value of the 40-lot residential subdivision had the following parameters mr lengel estimated that the lots would sell for dollar_figure over years at a rate of he estimated the lots would appreciate pincite percent for years and then stop appreciating he estimated that capital expenses would be dollar_figure million that project management expenses would be dollar_figure a year that sales expenses would be percent of gross_sales revenue ie commissions of percent and closing costs of percent and that developer’s profit would be percent he used a discount rate of percent mr lengel also stated that a conservation_easement protecting the river corridor could be sold in the first year for dollar_figure million b mr garone the discounted cashflow analysis mr garone used to calculate the value of the 40-lot residential subdivision had the following parameters mr garone like mr lengel estimated that all the lots would sell in years mr garone however estimated three different prices for three different kinds of lots he estimated that buffer lots would sell for dollar_figure each at a rate of that west river lots would sell for dollar_figure each at a rate of and that east river lots would sell for dollar_figure each at a rate of he estimated the lots would appreciate pincite percent a year he estimated that capital expenses would be approximately dollar_figure million that project management expenses would be percent of gross_sales revenue that sales expenses would be percent of gross_sales revenue ie commissions of percent and closing costs of percent and that developer’s profit would be percent he used a discount rate of percent c analysis we shall use those estimates from our analysis of the after value of the property that are not related to the number of lots in the development we shall assume that the lots appreciate pincite percent that project management expenses are percent of gross_sales revenue that sales expenses are percent of gross_sales revenue ie commissions of percent and closing costs of percent and that developer’s profit i sec_15 percent we shall use the following estimates to calculate the present_value of a 40-lot residential subdivision lot prices in contrast to their sharp dispute over lot prices in the 21-lot shared ranch messrs garone and lengel hardly disagreed about lot prices in the 40-lot subdivision they did however disagree about the optimal placement of the lots mr lengel assumed that all lots could be placed along the river on approximately to percent of the subject property with the remainder of the site being unencumbered open space for the use and enjoyment of the lot owners that is he assumed each lot would be between dollar_figure and acres mr garone assumed each lot would be acres we recall that a developer to subdivide the property into any more than lots would have needed to apply under mip and not lpip under mip however a developer would have needed to preserve only percent of the land mr lengel failed to explain why a developer would have restricted itself to between to percent of the land when as much a sec_50 percent of the land was available mr lengel provided no evidence that such a dense configuration on the river was even possible and mr garone doubted the riverfront could accommodate the necessary wells and septic systems we find mr lengel’s configuration unnecessarily restrictive and so find his estimate of dollar_figure for all lots unreliable we find mr garone’s analysis more convincing because we find his proposed configuration more likely that is lots along the river the actual configuration at gunnison riverbanks ranch plus lots not on the river nonetheless mr garone did not explain why east river lots would sell at a premium to west river lots and the other experts made no such distinction indeed mr garone himself made no such distinction in his analysis of a 22-lot subdivision we shall assume that buffer lots would sell for dollar_figure and that river lots would sell for dollar_figure our conclusion however hardly conflicts with that of mr lengel the undiscounted value of mr lengel’s gross_sales revenue dollar_figure million and the undiscounted value of our gross_sales revenue dollar_figure million differ by only dollar_figure absorption because both experts do so we shall assume that all the lots are sold in years the absorption rates of the two experts are broadly similar but again we find that mr lengel’s assumptions are slightly aggressive mr garone’s absorption rate is quite close to the absorption rate mr nash reported for hidden river ranch lots in years which included lots both with and without river frontage we find hidden river ranch to be similar to but given the inferior east river less desirable than the 40-lot subdivision here thus mr garone’s slightly faster absorption rate seems reasonable we shall adopt mr garone’s estimates capital expenses to calculate capital expenses mr lengel started with the actual expenses the partnership incurred developing the property approximately dollar_figure million and subtracted two expenses a finder’s fee for petitioner and costs related to the conservation_easement which left him with development costs of approximately dollar_figure million after adding approximately dollar_figure to account 9dollar_figure million dollar_figure per lot x lots 10dollar_figure million dollar_figure per lot x lots dollar_figure per lot x lots for the increased expenses related to the additional lots he concluded capital expenses would be dollar_figure million mr garone had a much lower estimate for capital expenses approximately dollar_figure million that figure comes from a supplement to his report that provides a detailed comparison of capital expenses for five different development plans all derived from the partnership’s actual expenses in his discounted cashflow analysis for some reason mr garone separately calculated estimated project costs which he found to be approximately dollar_figure million we prefer his more detailed supplement in the supplement mr garone started with the actual expenses the partnership incurred increased some expenses to reflect the greater cost of developing more lots and subtracted other expenses that in his opinion were not appropriate for the development model at trial mr garone explained why the excluded expenses would not have been necessary and we found some of his testimony convincing for example mr garone excluded all the expenses related to the renovation of the clubhouse yet mr garone failed to explain his reasons for excluding other costs although we find that mr lengel failed to justify both his use of nearly all the partnership’s expenses and his additional dollar_figure upward adjustment we also find that mr garone failed to justify his exclusion of many expenses beyond those related to the clubhouse we shall start with mr garone’s estimate of capital expenses and add back certain expenses those not related to the clubhouse and not excluded by mr lengel we thereby calculate capital expenses to be approximately dollar_figure million discount rate mr garone used a discount rate of percent to account for the risk associated with developing lots yet he also used a discount rate of percent for his 60-lot residential subdivision that is mr garone argued that developing lots involved no more risk than developing lots but developing lots involved substantially more risk than developing lots we are not convinced we shall again use a discount rate of percent river corridor conservation_easement in his supplemental report mr lengel asserted that the partnership could have sold a conservation_easement protecting the river corridor for dollar_figure million nonetheless in an addendum to that report he stated that contrary to his previous understanding no government_entity had made any offer to purchase such a conservation_easement we find that petitioner failed to show that a developer would have been likely to sell such a conservation_easement for such a large sum d conclusion we conclude that the 40-lot residential subdivision had at the time of the donation of the conservation_easement a present_value of approximately dollar_figure million see the appendix for our discounted cashflow analysis f the value of the conservation_easement we find that gunnison riverbanks ranch was worth dollar_figure million as a 40-lot residential subdivision before the imposition of the conservation_easement and was worth dollar_figure million as a 21-lot shared ranch after the imposition of the conservation_easement the value of the conservation_easement is the difference dollar_figure and we so find iii the percentage limitation rules of sec_170 by the notice respondent determined that any charitable_contribution_deduction is subject_to the limitations in sec_170 and not those in sec_170 the general_rule of sec_170 is that any charitable_contribution to certain organizations is allowed to the extent that the aggregate of such contributions does not exceed percent of the taxpayer’s contribution_base for the taxable_year the general_rule of sec_170 is that charitable_contributions other than those to which sec_170 applies are allowed to the extent that the aggregate of such contributions does not exceed the lesser of-- i percent of the taxpayer’s contribution_base for the taxable_year or ii the excess of percent of the taxpayer’s contribution_base for the taxable_year over the amount of charitable_contributions allowable under subparagraph a petitioner did not in the petition assign error to respondent’s determination with respect to the percentage limitation that is enough for us to deem the issue conceded see rule d c moreover he did not raise the issue at trial or in his opening brief in his reply brief however petitioner argues that we do not have jurisdiction to decide the issue because the issue turns on questions of fact specific to the partners that is petitioner argues that the issue is not a partnership_item see sec_6231 but a nonpartnership item see sec_6231 we disagree to decide whether the charitable_contribution here falls under subparagraph a or b of sec_170 all we must decide is to what kind of organization the partnership donated the conservation_easement see sec_170 and b that question is best answered at the partnership level and so is a partnership_item see sec_6231 petitioner has presented no evidence or argument with respect to that question we find against him iv conclusion the conservation_easement was worth dollar_figure and so the partnership made a contribution in that amount the percentage limitations in sec_170 apply an appropriate decision will be entered appendix trout ranch discounted cashflow analysis--40 lots assumptions discount rate commissions closing costs sales expenses developer’s profit project management appreciation lot prices buffer west river east river dollar_figure big_number big_number capital expenses big_number year sales --buffer lot price revenue --west river lot price revenue --east river lot price revenue gross_sales revenue sales expenses capital expenses project management developer’s profit net sales revenue present_value dollar_figure big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number absorption rate year buffer west east totals dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number totals dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number total sec_5 dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number trout ranch discounted cashflow analysis--21 lots assumptions discount rate commissions closing costs sales expenses developer’s profit project management appreciation lot prices west river east river dollar_figure big_number capital expenses big_number year sales --west river lot price revenue --east river lot price revenue gross_sales revenue sales expenses capital expenses project management developer’s profit net sales revenue present_value dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number total sec_5 dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number year west absorption rate east totals dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number total sec_11 dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number


id office uilc cca_2010042711251747 number release date from ----------------------- sent tuesday date am to --------------------- cc ------------------- subject re informal gl advisory request hi --------- sec_6331 provides that that the service may issue a continuous_levy upon specified_payments the levy shall be continuous from the date such levy is first made until such levy is released id the levy attaches to up to percent of any specified_payment due to the taxpayer id for purposes of sec_6331 specified_payments include workmen’s compensation id in this case a continuous_levy could attach to up to percent of both the one-time payment and the series of workmen’s compensation payments due to the taxpayer although the code authorizes the service to issue continuous levies on workmen’s compensation payments the service has decided as a policy matter not to pursue these payments at this time see i r m please let me know if you have any questions thank you ----------------------- ---------------------


internal_revenue_service number release date index number ------------------------- ----------- --------------------------------- in re late acceptance of an s_corporation_election under sec_1362 department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi b06 plr-148377-08 date january legend taxpayer ------------------------- ----------------------- state --------- date ------------------------- date ---------------------- dear ----------- this responds to a letter dated date submitted on behalf of taxpayer by taxpayer’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted and the representations made indicate that taxpayer registered as a corporation in state on date taxpayer intended to elect s_corporation treatment effective date however taxpayer failed to timely file a form_2553 election by a small_business_corporation sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation’s taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation’s taxable_year then the plr-148377-08 corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the information submitted and the representations made we conclude that taxpayer has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that taxpayer makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center within days following the date of this letter then the election will be treated as timely made for taxpayer’s taxable_year beginning date a copy of this letter should be attached to the form_2553 except as specifically set forth above we express or imply no opinion concerning the federal_income_tax consequences of the transaction described above under the cited provisions or any other provision of the code specifically we express or imply no opinion concerning whether taxpayer is in fact an s_corporation for federal tax purposes 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 an 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 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-148377-08 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer’s authorized representative sincerely peter c friedman senior technical reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy copy for sec_6110 purposes cc


t c memo united_states tax_court edgar g e morgan petitioner v commissioner of internal revenue respondent docket no 19018-14l filed date bruce elwyn gardner and beverly l winstead for petitioner william j gregg and bartholomew cirenza for respondent memorandum findings_of_fact and opinion lauber judge in this collection_due_process cdp case petitioner seeks review pursuant to sec_6330 of the determination by the internal_revenue_service irs or respondent to uphold a notice_of_intent_to_levy the 1all statutory references are to the internal_revenue_code in effect at all continued irs initiated the collection action to assist in collecting petitioner’s unpaid federal_income_tax liability for we will sustain the proposed levy findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated by this reference petitioner re- sided in pennsylvania when he petitioned this court from until petitioner held jobs in various foreign countries he did not file any federal_income_tax returns during this period the irs prepared substitutes for returns sfrs for those years that met the requirements of sec_6020 after returning to the united_states in petitioner retained counsel to prepare and file delinquent returns on his behalf these returns were filed on various dates and were not filed in chronological order this haphazard filing has created a fair bit of complexity in date petitioner filed a delinquent_return for showing tax due of dollar_figure the irs processed this return and assessed the tax shown as due plus a late-filing addition_to_tax under sec_6651 and applicable_interest in an effort to collect this unpaid liability the irs sent petitioner on date continued relevant times and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar a final notice_of_intent_to_levy and notice of your right to a hearing petitioner timely requested a cdp hearing in his hearing request he did not indi- cate an intention to challenge his underlying liability for a settlement officer so from the irs appeals_office was assigned to peti- tioner’s case on date she held a face-to-face hearing with petitioner and his representative the only issue petitioner raised at the hearing concerned the application of overpayment credits from and these credits arose from delinquent returns petitioner had filed for those years which showed over- payments of dollar_figure and dollar_figure respectively the irs had processed those re- turns and carried the overpayments back to petitioner’s tax_year the earliest year with a balance due for the irs had originally prepared an sfr on the basis of which it had assessed tax interest and additions to tax in the aggregate amount of dollar_figure in date petitioner filed a delinquent_return for after examining that return the irs abated the sfr assessment the result of which was to generate a total credit balance of dollar_figure for of that sum dollar_figure was attributable to the overpayment credits from and dollar_figure dollar_figure dollar_figure and was available to be carried forward at the cdp hearing petitioner contended that the credit balance from should be carried forward to that would eliminate his liability and produce refunds for other years the so replied that the credit balance if carried forward would be fully absorbed by petitioner’s outstanding tax_liability for leaving nothing to be carried forward to for the irs had originally prepared an sfr on the basis of which it had assessed tax interest and additions to tax in the aggregate amount of dollar_figure in date petitioner had filed a delinquent_return for after examining that return the irs had assessed more tax and additions to tax as of date the date of petitioner’s cdp hearing his outstanding liability for was dollar_figure because that liability exceeded dollar_figure the credit balance available for carryforward from the so explained that nothing would be left to be carried forward to the tax_year in question 2the remainder of the credit balance or dollar_figure was frozen be- cause it stemmed from overpayments for which the applicable refund period of limitations had long since expired see sec_6402 accordingly that portion of the credit balance was not available for refund or offset against petitioner’s other outstanding tax_liabilities see 136_tc_422 crum v commissioner tcmemo_2008_216 96_tcm_156 petitioner countered that he had recently filed an amended_return for once that return was processed he said his tax_liability would be eliminated thus freeing up the credit balance to be carried forward to and subse- quent years the so replied that the irs had not received an amended re- turn from him the record reflects that the irs service_center received petition- er’s amended_return on date eight days after the cdp hearing on the date of the cdp hearing petitioner’s account transcript for showed a balance due that exceeded the available overpayment credit from the so accordingly informed him that she could not allow any portion of that credit to be carried forward to she explained that she had no jurisdiction to consider the merits of any claims set forth in an amended_return for which the irs had not yet received or processed the so invited petitioner to submit a proposal for a collection alternative but he did not do so the so accordingly closed the case and on date the irs issued petitioner a notice_of_determination sustaining the proposed collec- tion action petitioner timely petitioned this court for review after extensive pre-trial proceedings a trial was held in date opinion a standard of review sec_6330 does not prescribe the standard of review that this court should apply in reviewing an irs administrative determination in a cdp case but our case law tells us what standard to adopt where the validity of a taxpay- er’s underlying tax_liability is properly at issue we review the irs’ determination de novo 114_tc_176 where the tax- payer’s underlying liability is not properly at issue we review the irs action for abuse_of_discretion only id pincite petitioner did not challenge during the cdp hearing or in his petition the correctness of the dollar_figure tax_liability that he reported on his delinquent re- turn rather he contends that the so erred in refusing to apply against that liability a credit balance that he believes should be available for carryforward from there is some uncertainty in our precedents as to whether a de novo or an abuse-of-discretion standard of review applies in a situation such as this a sec_3see 125_tc_14 in 116_tc_60 we applied a de novo standard of review where the taxpayer challenged the irs’ failure to apply an overpayment credit from another year we concluded that this was a challenge to the taxpayer’s un- derlying tax_liability ie the amount unpaid after application of credits to which the taxpayer was entitled id pincite in other cases we have applied continued explained below we conclude that the so answered correctly the credit carry- forward question that petitioner raises because we would sustain her resolution of this issue under either standard of review we need not decide which applies see 141_tc_173 n estate of adell v commissioner t c memo 107_tcm_1463 golub v commissioner t c memo 106_tcm_173 with regard to matters other than application of the overpayment credit we will review the so’s action for abuse_of_discretion b analysi sec_1 overpayment credit from our jurisdiction in cdp cases generally does not permit us to consider mat- ters involved for nondetermination years however we may consider facts and issues from other years to the extent they are relevant in evaluating a claim that an unpaid tax has been paid 125_tc_14 an available credit from another year is a fact that may affect the taxpayer’s cor- continued abuse-of-discretion review when considering challenges to the irs’ application of a check or other tax payment see orian v commissioner tcmemo_2010_234 100_tcm_356 holding that whether a payment was properly cred- ited to the taxpayer’s account for a particular tax_year is not a challenge to his underlying tax_liability kovacevich v commissioner tcmemo_2009_160 98_tcm_1 ndollar_figure same rect liability for the year that is the subject of the collection action 138_tc_348 but a credit must actually exist in order to constitute an available credit a mere claim for a credit is not an ‘available credit’ and such a claim need not be resolved before the irs can proceed with collection of the liability at issue ibid see del-co w v commissioner tcmemo_2015_142 110_tcm_119 here the irs applied petitioner’ sec_2010 and sec_2011 overpayment credits to his account consistently with its policy of applying overpayments to the oldest tax_liabilities first see internal_revenue_manual irm pt date sec_6402 explicitly allows the irs to credit a taxpayer’s overpay- ment against any existing liability in another tax_year see weber t c pincite after the irs had applied the credits from and petitioner filed a delinquent_return for this caused the irs to abate the original sfr assess- ment leaving a credit balance of dollar_figure that was available for carryforward petitioner contends that this credit from should have been carried for- ward and applied to his liability there is no dispute that the credit was an available credit that could be carried forward see id pincite an overpay- ment that has been determined by the irs or a court but has not been either refunded or applied to another liability may be an ‘available credit’ that could be taken into account in a cdp hearing however that credit was not available to be carried forward all the way to because petitioner had an outstanding liability for that would absorb the credit in full petitioner acknowledges that at the time of the cdp hearing his account transcript showed a debit balance larger than dollar_figure petitioner nevertheless insists that if the irs had processed and accepted his amended_return for the irs would have abated his tax_liability freeing up the credit for carryforward to but petitioner’s amended_return was simply a claim that he had made an overpayment for as we stat- ed in weber a mere claim of an overpayment is not an ‘available credit’ but is instead a claim for a credit t c pincite at the time of petitioner’s cdp hearing the irs had not received much less processed his amended_return the so was not required to consider the 4under our case law the court can consider only nonrefunded or not yet applied ‘available’ credits arising in nondetermination years when determining whether a tax_liability at issue has been refunded or eliminated precision pro- sthetic v commissioner tcmemo_2013_110 105_tcm_1669 see everett assocs inc v commissioner tcmemo_2012_143 103_tcm_1773 while the credit had not yet been applied at the time of petitioner’s cdp hearing the so correctly reasoned that it would be applied first to petitioner’s liability for leaving nothing available for application to sos are instructed to use available overpayments to satisfy outstanding liabilities in the order of first-in_first-out see irm pt a date merits of the position taken on that return when determining whether to sustain the proposed collection action see eg burt v commissioner tcmemo_2013_140 precision prosthetic v commissioner tcmemo_2013_110 everett assocs inc v commissioner tcmemo_2012_143 we may consider whether a credit available from another tax_year should be applied to the taxpay- er’s liability for the year before the court only if that other credit indisputably exists del-co w t c m cch pincite petitioner did not have for a credit that indisputably exist ed but only a debatable claim for a credit we do not have jurisdiction in this cdp case to determine an overpayment of an unrelat- ed liability for petitioner’s taxable_year weber t c pincite there is no evidence that the irs ever processed petitioner’s amended re- turn for in any event the so was not required to consider the merits of the position he took on that return when determining whether to sustain the proposed collection action whether we review the so’s action under a de novo or an abuse 5if a taxpayer submits information to an so after the cdp hearing but be- fore issuance of the notice_of_determination guidelines in the irm may require the so to consider that information as part of the administrative record see emery celli cuti brinkerhoff abady p c v commissioner tcmemo_2018_55 at here the so did not ignore the fact that petitioner may have filed an amended_return for rather she explained that she lacked authority in re- viewing proposed collection action for to determine the merits of that claim_for_refund of discretion standard we sustain her determination that petitioner had no available credit for that would enable his credit balance to be carried forward to eliminate his tax_liability other issues in deciding whether the so abused her discretion in any other respect we consider whether she properly verified that the requirements of any applicable law or administrative procedure had been met considered any relevant issues petitioner raised and considered whether any proposed collection action bal- ances the need for the efficient collection_of_taxes with the legitimate concern of petitioner that any collection action be no more intrusive than necessary see sec_6330 petitioner advanced various additional arguments in his pre-trial memoran- dum at trial and in his post-trial brief specifically he contends that the irs improperly applied levied funds to tax years other than failed to ap- ply overpayments from tax years other than and and failed to issue valid notices of deficiency for his tax years because petitioner did 6an assertion that the irs failed to issue valid notices of deficiency is con- sidered a challenge to the verification requirement in sec_6330 a tax- payer must raise a verification issue in his petition in order for the court to consid- er it see triola v commissioner tcmemo_2014_166 108_tcm_185 continued not advance these arguments during the cdp hearing or in his petition we could deem them waived see rule b 129_tc_107 118_tc_488 sec_301_6330-1 q a-f3 proced admin regs we will nevertheless address them briefly 115_tc_523 petitioner first contends that the irs misapplied to hi sec_2002 and liabil- ities certain levy proceeds that should have been applied to his liability levy proceeds are involuntary payments that the irs may apply in any manner it chooses see 47_tc_65 after application of the and overpayments to petitioner’s account had a credit balance the irs applied the levy proceeds to and in accordance with its established procedures which direct that levy proceeds be applied to the year of the levy and then to the earliest nonlevy year if there is a surplus see irm pt date continued noting that petition did not allege that assessment was improper and deeming the issue conceded dinino v commissioner tcmemo_2009_284 98_tcm_559 noting that verification issue must be adequately raised in peti- tion citing rule b cf 131_tc_197 n considering verification issue where it was tried by consent even though not raised in petition petitioner next contends that he has an available overpayment for that should have been applied to as was true for his account petitioner’s account showed a balance due not a credit at the time of the cdp hearing the so properly made her decision on the basis of the account balances as they existed at that time we lack jurisdiction to determine otherwise see weber t c pincite del-co w t c m cch pincite finally petitioner alleges that the notices of deficiency issued for his tax years were invalid because they were not sent to his last_known_address see sec_6212 a taxpayer’s last_known_address is generally the address ap- pearing on his most recently filed and properly processed federal tax_return see sec_301_6212-2 proced admin regs petitioner does not dispute that the notices of deficiency were sent to the address shown on his most recently filed and properly processed tax_return as of the date on which those no- tices were mailed a taxpayer can update his last_known_address by providing to the irs a clear and concise notification of a new address see ibid contrary to petitioner’s assertion documents provided to the irs by third parties such as suppliers of information reports do not constitute clear and concise notification to the irs of a new address see id para b finding no abuse_of_discretion in any respect we sustain the proposed levy to reflect the foregoing an appropriate decision will be entered for respondent


internal_revenue_service number release date index number --------------------------------------------------------- ------------------------------------------------------------ ----------------------------------------------- -------------------- ----------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------------ telephone number ---------------------- refer reply to cc psi b01 plr-119146-16 date date legend x ---------------------------------------------------------------- ----------------------------------- exempt_organization --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- ----------------------------------------------------------------------- p state date year -------------------------------------------------- -------- --------- ------------------------ ---- ------- dear -------------------- this letter responds to a request for a private_letter_ruling dated date and subsequent correspondence submitted on behalf of x by x’s authorized representative requesting that the service grant x an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as an association_taxable_as_a_corporation for federal tax purposes effective on date additionally x requests an extension of time under sec_301_9100-3 to make an election under sec_168 of the code not to be treated as a tax-exempt_controlled_entity from date plr-119146-16 facts according to the information submitted and representations made x was formed as a limited_liability_company under the laws of state on date x represents that it is an entity eligible to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes x is wholly owned by exempt_organization which is represented to be a tax-exempt_organization described in sec_501 x is the general_partner of p a limited_partnership which is treated as a partnership for federal tax purposes p owns and operates a residential_rental_property and placed the property in service in year p rehabilitated the rental property while it was in service x intended to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date the corporation election however due to inadvertence x failed to timely file form_8832 entity classification election to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes x also intended to make an election under sec_168 to not be treated as a tax-exempt_controlled_entity for purposes of the tax-exempt_use_property rules sec_168 election however due to inadvertence x failed to file in a timely manner its tax_return for year and include a sec_168 election with that return because of these actions under the applicable regulations x was considered an entity disregarded from exempt_organization for federal tax purposes and therefore exempt_organization was considered a partner in p for federal tax purposes after x realized that it had not timely filed the two elections it requested relief under sec_301_9100-3 to make an election to be treated as an association_taxable_as_a_corporation effective date as well as relief to make the election provided for under sec_168 effective date from the materials submitted it is evident that at all times x intended to make the sec_168 election moreover x represents that it has acted reasonably and in good_faith that granting relief will not prejudice the interests of the government and that it is not using hindsight in making either election law sec_167 of the code provides generally for a depreciation deduction for property used in a trade_or_business under sec_168 the alternative_depreciation_system must be used for any tax-exempt_use_property as defined in sec_168 sec_168 provides that for purposes of sec_168 if any property which but for this subparagraph is not tax-exempt_use_property is owned by a partnership having a tax-exempt_entity and a nontax-exempt entity as partners and any allocation to the plr-119146-16 tax-exempt_entity is not a qualified_allocation then an amount equal to the tax-exempt entity's proportionate share of such property is treated as tax-exempt_use_property sec_168 provides generally that any tax-exempt_controlled_entity is treated as a tax-exempt_entity for purposes of sec_168 under sec_168 a tax-exempt_controlled_entity means any corporation without regard to that subparagraph and sec_168 if percent or more in value of the corporation's stock is held by one or more tax-exempt entities other than a foreign_person_or_entity sec_168 applies similar rules in the case of tiered partnerships and other entities under sec_168 a tax-exempt_controlled_entity can elect not to be treated as a tax-exempt_entity such an election is irrevocable and will bind all tax-exempt entities holding an interest in the tax-exempt_controlled_entity under sec_301_9100-7t of the regulations the sec_168 election must be made by the due_date of the tax_return for the first taxable_year for which the election is to be effective sec_301_9100-7t provides the manner in which the sec_168 election is made sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with a single owner can elect to be classified as an association_taxable_as_a_corporation or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301_7701-3 unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 entity classification election with the service_center designated on form_8832 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 cannot be more than days prior to the date on which the election is filed and cannot be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed plr-119146-16 sec_301_9100-1 through provide the standards the service will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 provides that the commissioner of internal revenue has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including any election the due_date for which is prescribed by a regulation because the due_date of the sec_168 election is prescribed in sec_301_9100-7t that election is a regulatory election in addition because the due_date of the corporation election is prescribed in sec_301_7701-3 of the regulations that election is a regulatory election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer - i requests relief before the failure to make the regulatory election is discovered by the service ii failed to make the election because of intervening events beyond the taxpayer's control iii failed to make the election because after exercising due diligence the taxpayer was unaware of the necessity for the election iv reasonably relied on the written advice of the service or v reasonably relied on a qualified_tax professional and the tax professional failed to make or advise the taxpayer to make the election under sec_301_9100-3 a taxpayer is considered to have not acted reasonably and in good_faith if the taxpayer - i seeks to alter a return position for which an accuracy-related_penalty could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested plr-119146-16 ii was fully informed of the required election and related tax consequences but chose not to file the election or iii uses hindsight in requesting relief if specific facts have changed since the original deadline that make the election advantageous to a taxpayer the service will not ordinarily grant relief sec_301_9100-3 provides that the service will grant a reasonable extension of time only when the interests of the government will not be prejudiced by the granting of relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax_liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made under sec_301_9100-3 the interests of the government are ordinarily prejudiced if the taxable_year in which the regulatory election should have been made or any taxable years affected by the election had it been timely made are closed by the period of limitations on assessment under sec_6501 before the taxpayer's receipt of a ruling granting relief under this section analysis the information and representations submitted indicate that at all times x intended from the outset to make the corporation election and the sec_168 election that x relied on qualified_tax professionals to make both elections and that x’s failure to make the corporation election and the sec_168 election was inadvertent x represents that it has requested relief before the failure to make both elections was discovered by the service there is no evidence that x is using hindsight in requesting relief we conclude that x has acted reasonably and in good_faith further the interests of the government will not be prejudiced by the granting of relief based solely on the above facts and representations we conclude that x has met the requirements of sec_301_9100-1 and sec_301_9100-3 with respect to obtaining an extension of time to file both the corporation election and the sec_168 election conclusion based solely on the information submitted and the representations made we conclude that with respect to x's failure to timely elect to be treated as an association_taxable_as_a_corporation effective date the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file a form_8832 with the appropriate service_center to elect to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the form_8832 filed for x plr-119146-16 in addition we also conclude that the requirements of sec_301_9100-3 have been satisfied with respect to x's failure to make the election under sec_168 for year accordingly x is granted an extension of time of days from the date of this letter to make the election under sec_168 the election must be attached to x’s return for year x should also attach a copy of this letter to its return except as specifically set forth above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office we are sending a copy of this letter to x's authorized representative sincerely associate chief_counsel passthroughs special industries david r haglund by david r haglund chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes