Court Opinion

ID: 4341171
Source: CourtListenerOpinion
Date Created: 2018-11-14 08:59:47.918232+00
Date Added: 2024-06-11T14:21:15.816789
License: Public Domain

T.C. Memo. 2018-164

                        UNITED STATES TAX COURT

          MARC CHREM AND ESTHER CHREM, ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket Nos. 23516-16, 23517-16,             Filed September 26, 2018.
                  25417-16, 25418-16,
                  25419-16, 25420-16,
                  25421-16, 25422-16,
                  25423-16, 25424-16,
                  25425-16.

      Brian B. Snarr and Michael Craig Weinstein, for petitioners.

      Patrick F. Gallagher, Rose E. Gole, and Gennady Zilberman, for respondent.

      1
       Cases of the following petitioners are consolidated herewith: Jacqueline
Ashkenazi, docket No. 23517-16; Albert Ashkenazi, docket No. 25417-16; David
I. Ashkenazi and Linda Yedid, docket No. 25418-16; Ely I. Ashkenazi and Paulina
Ashkenazi, docket No. 25419-16; Isaac E. Ashkenazi, docket No. 25420-16; Jack
E. Ashkenazi, docket No. 25421-16; Joseph E. Betesh and Sally Ashkenazi,
docket No. 25422-16; Saul E. Ashkenazi and Pauline J. Salame, docket No.
25423-16; Mark Chraime and Barbara Chraime, docket No. 25424-16; and Ralph
Gindi and Grace Gindi, docket No. 25425-16.
                                         -2-

[*2]                       MEMORANDUM OPINION

       LAUBER, Judge: These consolidated cases are before the Court on the par-

ties’ cross-motions for partial summary judgment. Petitioners (along with eight

other individuals or couples) owned 100% of the stock of Comtrad Trading, Ltd.

(Comtrad), a closely held Hong Kong corporation. A related company proposed to

purchase 100% of Comtrad’s stock for $4,500 per share. After Comtrad’s share-

holders agreed to tender about 87% of their shares, petitioners donated the balance

of their stock to a charitable organization. The acquiring company then completed

the acquisition, purchasing the donated stock for $4,500 per share.

       On their 2012 Federal income tax returns, petitioners claimed charitable

contribution deductions for their gifts, valuing the donated stock at $4,500 per

share. In timely notices of deficiency the Internal Revenue Service (IRS or

respondent) determined that petitioners were liable for tax under the assignment of

income doctrine on their transfers of stock to the charity. The IRS also determined

that petitioners had failed to obtain and (where applicable) attach to their returns

“qualified appraisals” of the donated property. See sec. 170(f)(11)(C) and (D).2

       2
        All statutory references are to the Internal Revenue Code (Code) in effect
for the year in issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure. We round all monetary amounts to the nearest dollar.
                                        -3-

[*3] Petitioners seek summary judgment with respect to the first determination,

and the parties have filed cross-motions for summary judgment with respect to the

second pair of determinations. Concluding that material disputes of fact exist, we

will deny all the motions.

                                    Background

      The following facts are drawn from the parties’ pleadings, motion papers,

and the declarations and exhibits attached thereto. These facts are stated solely for

purposes of ruling on the pending motions for summary judgment, not as findings

of fact in these cases. See Rule 1(b); Fed. R. Civ. P. 52(a); Cook v. Commission-

er, 115 T.C. 15, 16 (2000), aff’d, 269 F.3d 854 (7th Cir. 2001). All petitioners

resided in New York when they filed their petitions.

      Formed in August 2001, Comtrad was a Hong Kong corporation that did

business in Hong Kong and Shenzhen, China. As of October 2012 it had 7,000

shares of outstanding common stock, 5,425 of which were owned by petitioners.

Eight other individuals or couples, some of whom appear to have family ties to

petitioners, owned the remaining 1,575 shares.

      Comtrad performed testing and quality control services for three related

companies that produced and marketed consumer electronic products. Comtrad

selected suppliers, took title to component parts manufactured by those suppliers,
                                          -4-

[*4] performed testing on those components to verify specifications and ensure

quality, and managed the logistics of delivering the components to its customers.

Comtrad received for its services commissions ranging between 3.5% and 8%,

computed as markups on its total costs.

      Comtrad’s principal customer was SDI Technologies, Inc. (SDI), which

manufactured and marketed a broad range of consumer electronic products,

including clock radios, home audio systems, headphones, and computer

accessories. SDI accounted for 83% of Comtrad’s revenue and 76% of its gross

profit in 2011.

      SDI is a U.S. corporation that elected to be treated as an S corporation for

Federal income tax purposes. Virtually all of SDI’s stock was owned during 2012

by an employee stock ownership plan (ESOP).3 Petitioners and other Comtrad

shareholders appear to have been beneficiaries of the ESOP. SDI and Comtrad

were also related through common management. A majority of each company’s

board of directors served as directors for both companies.

      In late 2012 SDI made a proposal to acquire 100% of Comtrad’s stock. The

stated purposes of this acquisition were: (1) to recapture for SDI the commissions
      3
      An ESOP is a tax-exempt plan that invests primarily in the securities of its
sponsoring employer. See Employee Retirement Income Security Act of 1974
(ERISA), Pub. L. No. 93-406, sec. 2003(e)(7), 88 Stat. at 976 (codified as
amended at sec. 4975(e)(7)).
                                        -5-

[*5] it had been paying Comtrad, (2) to achieve greater vertical integration and

control over product sourcing in Asia, (3) to give SDI control of certain

trademarks held by Comtrad, and (4) to “take advantage of the favorable tax

treatment that would be afforded Comtrad’s net earnings due to SDI’s status as an

S corporation” whose shares were owned by an ESOP.

      It was proposed that the stock acquisition would proceed in two steps. SDI

would first purchase 6,100 Comtrad shares from petitioners and the other Comtrad

shareholders. The proposed purchase price was $4,500 per share, for a total of

$27,450,000. The consideration paid by SDI for this tranche was to consist of

$450,000 in cash and $27 million in subordinated 15-year promissory notes bear-

ing 8% annual interest.

      The second step involved the remaining 900 shares of Comtrad’s outstand-

ing stock. In connection with SDI’s acquisition of the 6,100 shares, petitioners

agreed to donate 900 shares to the Jewish Communal Fund (JCF), an organization

exempt from Federal income tax under section 501(a) and (c)(3). SDI agreed to

purchase each share tendered by JCF for $4,500 in cash.

      Petitioners agreed, after donating their shares to JCF, “to use all reasonable

efforts” to cause JCF to tender the 900 shares to SDI. If the donors failed to per-

suade JCF to do this, it was expected that SDI would use a “squeeze-out merger, a
                                        -6-

[*6] reverse stock split or such other action that will result in SDI owning 100% of

* * * Comtrad.” If SDI failed to secure ownership of JCF’s shares within 60 days

of acquiring the 6,100 shares, the entire acquisition would be reversed out and SDI

would return the 6,100 shares to the tendering Comtrad shareholders.

      As noted above, virtually all (99.9%) of SDI’s shares were owned by an

ESOP. Because SDI and Comtrad were related parties, the trustee for the ESOP

believed that ERISA4 required it to secure a fairness opinion to ensure that SDI

paid no more than “adequate consideration” for the Comtrad stock. See 29 U.S.C.

secs. 1106(a) (generally prohibiting transactions between ERISA plans and parties

in interest), 1108(b)(17)(A) (permitting such transactions if the plan pays no more

than “adequate consideration”), 1002(18)(B) (defining adequate consideration by

reference to “the fair market value * * * as determined in good faith by the trustee”

in accordance with regulations promulgated by the Secretary of Labor).

      The ESOP trustee hired Empire Consultants, LLC (Empire), to provide a

fairness opinion supported by a valuation report. In describing the proposed trans-

action, Empire expressed its understanding that SDI would acquire 100% of Com-

trad’s stock “in two stages.” “The first stage,” according to Empire, “involves the

      4
       ERISA is an acronym for the Employee Retirement Income Security Act of
1974, Pub. L. No. 93-406, 88 Stat. 829 (codified as amended at various sections of
29 U.S.C. (2012)).
                                          -7-

[*7] acquisition of 6,100 shares, or approximately 87.1%, of Comtrad’s

outstanding ordinary shares,” for $27,450,000 in cash and promissory notes.

“Simultaneously with SDI’s acquisition of the 6,100 shares,” Empire stated,

“certain of Comtrad’s shareholders will transfer 900 shares” to JCF. “The second

stage of the Proposed Transaction involves the acquisition of the JCF shares for

$4,500 per share or $4.05 million in aggregate.”

      Using regulatory guidelines and professional standards that it deemed rele-

vant,5 Empire provided its estimate of the fair market value (FMV) of “100% of

the ordinary shares of Comtrad * * *.” It employed a market approach and a

discounted cashflow approach, and it applied a 5% downward adjustment to

reflect a discount for lack of marketability.6 It concluded that the FMV of

Comtrad, “valued on a going concern basis,” was between $29.5 million and $32.4

million, or $4,214 to $4,626 per share.

      Empire submitted its findings to the ESOP trustee in a “restricted use ap-

praisal report” dated December 8, 2012, and a fairness opinion dated December

10, 2012 (collectively, Empire report). Given the range of FMVs it determined for
      5
      Empire stated that it performed its appraisal according to guidelines set by
the Department of Labor, the IRS, and the American Society of Appraisers.
      6
        In explaining this relatively small discount, Empire “note[d] that the appro-
priate level of discount is materially less on a control block than it would be on a
minority interest block.”
                                        -8-

[*8] Comtrad, Empire opined that the proposed transaction was fair to the

beneficiaries of SDI’s ESOP. Empire emphasized that its report was for the “the

sole use of * * * [the ESOP trustee] in its fiduciary capacity” and could “not be

used for any other purpose or by any other user(s) without the express consent of

Empire.” Empire expressly stated that its appraisal “does not take into

consideration any tax consequences related to Comtrad’s selling shareholders.”

      On December 12, 2012, two days after the date of Empire’s fairness

opinion, SDI purchased 6,100 shares of Comtrad stock from petitioners and the

other Comtrad shareholders. The parties dispute when petitioners donated their

900 shares to JCF; petitioners assert that these donations occurred on December 5,

whereas respondent contends that they occurred no earlier than December 10, al-

legedly after JCF unconditionally agreed to sell the 900 shares to SDI. But the

parties agree that JCF formally tendered its 900 shares to SDI on December 12, the

same day on which the other Comtrad shareholders tendered their shares. And the

parties agree that JCF received the same per-share price, $4,500, that the other

Comtrad shareholders received, but that JCF was paid entirely in cash.

       All petitioners timely filed (sometimes jointly) Forms 1040, U.S.

Individual Income Tax Return, for 2012. On their respective Schedules A,
                                          -9-

[*9] Itemized Deductions, petitioners claimed noncash charitable contributions for

the stock they donated to JCF, as follows:

                                           Docket      Shares      Claimed
                 Petitioner(s)              No.      contributed   deduction
       Marc Chrem & Esther Chrem          23516-16        45       $202,500
       Jacqueline Ashkenazi               23517-16        45        202,500
       Albert Ashkenazi                   25417-16      125         562,500
       David I. Ashkenazi & Linda Yedid   25418-16        90        405,000
       Ely I. Ashkenazi & Paulina
       Ashkenazi                          25419-16        90        405,000
       Isaac E. Ashkenazi                 25420-16      125         562,500
       Jack E. Ashkenazi                  25421-16      125         562,500
       Joseph E. Betesh & Sally
       Ashkenazi                          25422-16        35        157,500
       Saul E. Ashkenazi & Pauline J.
       Salame                             25423-16      125         562,500
       Mark Chraime & Barbara Chraime     25424-16        50        225,000
       Ralph Gindi & Grace Gindi          25425-16        45        202,500
        Total                                           900        4,050,000

      When a taxpayer makes a charitable contribution of property (other than

publicly traded securities) valued in excess of $5,000, he is required to secure a

“qualified appraisal.” Sec. 170(f)(11)(C). If he claims a value in excess of

$500,000 for such property, he is required to attach a copy of the appraisal to his
                                        - 10 -

[*10] return. Sec. 170(f)(11)(D). None of petitioners secured for their

contributions, or attached to their returns, an appraisal that was addressed to them.

      However, each of petitioners’ returns included an “appraisal summary” on

Form 8283, Noncash Charitable Contributions. In Part I of these forms, captioned

“Information on Donated Property,” petitioners noted the number of Comtrad

shares that each had donated. They stated that they had acquired those shares by

purchase and supplied their respective cost bases for the donated shares. Gregory

Sullivan, the managing director of Empire who had signed the fairness opinion

issued to the ESOP trustee, signed the “Declaration of Appraiser” on each Form

8283. Saul Wadowski, an officer of JCF, signed the “Donee Acknowledgment”

on each form, which listed December 5, 2012, as the date on which JCF had

received the donated stock.

      The IRS selected all of petitioners’ returns for examination and requested

that they supply qualified appraisals to substantiate their claimed deductions. In

response each petitioner supplied a copy of the report that Empire had prepared for

the ESOP trustee. The IRS issued notices of deficiency to all petitioners,

determining that they were liable for tax under the anticipatory assignment of

income doctrine on their transfers of shares to JCF. The IRS also disallowed in

full the claimed charitable contribution deductions for failure to satisfy the
                                       - 11 -

[*11] requirements of section 170(f)(11). Finally, the IRS determined that

petitioners were liable for 20% accuracy-related penalties under section 6662(a)

and, in the alternative, 40% “gross valuation misstatement” penalties under section

6662(h).

      Petitioners timely petitioned this Court for redetermination. On February 1,

2017, the Court consolidated the 11 cases for purposes of trial, briefing, and opin-

ion. On March 8, 2018, respondent filed his motion for partial summary judg-

ment. Petitioners filed their cross-motion one week later.

                                    Discussion

I.    Summary Judgment Standard

      The purpose of summary judgment is to expedite litigation and avoid costly,

time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90

T.C. 678, 681 (1988). Under Rule 121(b), we may grant summary judgment when

there is no genuine dispute as to any material fact and a decision may be rendered

as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992),

aff’d, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judg-

ment, we construe factual materials and inferences drawn from them in the light

most favorable to the nonmoving party. Id.; see Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 255 (1986). However, the nonmoving party may not rest upon the
                                        - 12 -

[*12] mere allegations or denials in his pleadings but instead must set forth

specific facts showing that there is a genuine dispute for trial. Rule 121(d); see

Sundstrand Corp., 98 T.C. at 520.

II.   Assignment of Income

      Petitioners seek summary judgment on respondent’s application of the as-

signment of income doctrine to their donations of stock. A longstanding principle

of tax law is that income is taxed to the person who earns it. United States v.

Basye, 410 U.S. 441, 450 (1973) (“[H]e who earns income may not avoid taxation

through anticipatory arrangements no matter how clever or subtle[.]”). Thus, a

person anticipating receipt of income “cannot avoid taxation by entering into a

contractual arrangement whereby that income is diverted to some other person.”

Id. at 449 (citing Lucas v. Earl, 281 U.S. 111, 115 (1930)).

      This Court has previously considered the assignment of income doctrine as

applied to charitable contributions. In the typical scenario, the taxpayer donates to

a charity stock that is about to be acquired by the issuing corporation via redemp-

tion, or by another corporation via merger or acquisition. In determining whether

the taxpayer has assigned income in these circumstances, one relevant question is

whether the prospective acquisition is a mere expectation or a virtual certainty.

“More than expectation or anticipation of income is required before the
                                        - 13 -

[*13] assignment of income doctrine applies.” Greene v. United States, 13 F.3d

577, 582 (2d Cir. 1994).7

      Another relevant question is whether the charity is obligated, or can be com-

pelled by one of the parties to the transaction, to surrender the donated shares to

the acquirer. Rev. Rul. 78-197, 1978-1 C.B. 83 (1978); see Rauenhorst v.

Commissioner, 119 T.C. 157, 166 (2002) (finding “the donee’s control to be * * *

an important factor”). The existence of an “understanding” among the parties, or

the fact that transactions occur simultaneously or according to prearranged steps,

may be relevant in answering that question. See, e.g., Blake v. Commissioner, 697

F.2d 473, 480 (2d Cir. 1982) (stating that an “understanding” among the parties

need not be “legally enforceable under state law”), aff’g T.C. Memo. 1981-579;

Ferguson v. Commissioner, 108 T.C. 244 (1997) (finding assignment of income

with respect to proceeds of merger that occurred contemporaneously with

charitable contribution), aff’d, 174 F.3d 997 (9th Cir. 1999).

      7
       Compare, e.g., Palmer v. Commissioner, 62 T.C. 684, 695 (1974) (finding
no assignment of income where stock was transferred before corporation had
voted to redeem it), aff’d, 523 F.2d 1308 (8th Cir. 1975), with Ferguson v.
Commissioner, 174 F.3d 997, 1006 (9th Cir. 1999) (finding an assignment of
income where stock was donated after tender offer had effectively been completed
and it was “most unlikely” that the offer would be rejected), aff’g 108 T.C. 244
(1997), and Hudspeth v. United States, 471 F.2d 275, 279 (8th Cir. 1972) (finding
an assignment of income where stock was donated after shareholders had voted
and taken steps to liquidate the corporation).
                                        - 14 -

[*14] We conclude that there exist genuine disputes of material fact that prevent

us from resolving the assignment of income issue summarily. Comtrad and SDI

were related by common management, the interests of both companies appear to

have been aligned, and both companies seemingly desired that the stock acquisi-

tion be completed. If so, these facts may support the conclusion that the acquisi-

tion was virtually certain to occur. Respondent also points to emails and an al-

leged exchange of documents between JCF and petitioners on November 12, 2012.

This evidence may support respondent’s contention that JCF agreed in advance to

tender its shares to SDI and that all steps of the transaction were prearranged.

      The parties also dispute the dates on which relevant events occurred. Peti-

tioners assert that they transferred their shares to JCF on December 5 and there ap-

pears to be documentary evidence arguably supporting that assertion. Respondent

contends that JCF did not acquire ownership of its 900 shares until (at the earliest)

December 10, allegedly after JCF unconditionally agreed to sell the 900 shares to

SDI. That contention derives arguable support from other documentary evidence,

as well as from Empire’s description of the proposed transaction, which recited

that petitioners would transfer 900 shares to JCF “[s]imultaneously with SDI’s

acquisition of the 6,100 shares.”
                                        - 15 -

[*15] There are also genuine disputes of material fact concerning the extent to

which JCF, having received the 900 shares, was obligated to tender them to SDI.

Empire stated in its report that petitioners would use “all reasonable efforts to

cause * * * [JCF] to agree to sell the shares to SDI.” At this juncture the record

includes little if any evidence concerning petitioners’ ability to sway JCF’s actions

or JCF’s separate negotiations (if any) with SDI. Respondent contends that JCF

had no meaningful discussions with SDI at all but was “simply informed by

petitioners” that the 900 shares should be tendered at once. A trial will be

necessary to determine whose version of the facts is correct.

      One fact potentially relevant to this question concerns JCF’s fiduciary

duties as a custodian of charitable assets. If JCF tendered its Comtrad shares, it

would immediately receive $4,050,000 in cash. If it refused to tender its shares

and the entire transaction were scuttled, JCF would apparently be left holding a

13% minority interest in a closely held Hong Kong corporation, the market value

of which might be questionable.

      In sum, viewing the facts and the inferences that might be drawn from the

facts in the light most favorable to respondent as the nonmoving party, we find

that there exist genuine disputes of material fact that prevent summary
                                       - 16 -

[*16] adjudication of the assignment of income issue. To the extent petitioners

seek summary judgment on this question, we will deny their motion.

III.   Charitable Contribution Deductions

       A.    Governing Legal Framework

       Section 170(a)(1) allows as a deduction any charitable contribution made

within the taxable year. If the taxpayer makes a charitable contribution of

property other than money, the amount of the contribution is generally equal to the

FMV of the property when contributed. See sec. 1.170A-1(c)(1), Income Tax

Regs. “A charitable contribution shall be allowable as a deduction only if verified

under regulations prescribed by the Secretary.” Sec. 170(a)(1).

       The Secretary has prescribed extensive regulations governing verification of

charitable contributions. See sec. 1.170A-13, Income Tax Regs. A taxpayer who

claims a deduction for a contribution of property (other than publicly traded secu-

rities) valued in excess of $5,000 must obtain a “qualified appraisal” of the prop-

erty. Sec. 170(f)(11)(C). He must also attach to his return “such information

regarding such property and such appraisal as the Secretary may require,” which

includes a fully completed appraisal summary on Form 8283. Id.; see Jorgenson v.

Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450; sec. 1.170A-

13(c)(2), Income Tax Regs. When a contribution of property is valued in excess of
                                        - 17 -

[*17] $500,000 the taxpayer must attach a copy of that appraisal to his return.

Sec. 170(f)(11)(D). This last requirement applies to the four petitioners who

claimed charitable contribution deductions of $562,500. See supra p. 9.

      Section 170(f)(11)(E)(i) defines “qualified appraisal” to mean an appraisal

performed by a qualified appraiser that “is treated for purposes of this paragraph

as a qualified appraisal under regulations or other guidance prescribed by the Sec-

retary.” The regulations prescribed by the Secretary require that a “qualified ap-

praisal” include (among other things) the following: (1) “[a] description of the

property in sufficient detail for a person who is not generally familiar with the type

of property to ascertain that the property that was appraised is the property that

was (or will be) contributed,” (2) a “statement that the appraisal was prepared for

income tax purposes,” (3) “[t]he date (or expected date) of contribution to the

donee,” (4) “[t]he date (or dates) on which the property was appraised,” and (5)

“[t]he appraised fair market value * * * of the property.” Sec. 1.170A-13(c)(3)(ii),

Income Tax Regs.

      In Bond v. Commissioner, 100 T.C. 32, 41 (1993), we held that the regula-

tory reporting requirements listed above, while “helpful to respondent in the proc-

essing and auditing of returns on which charitable deductions are claimed,” are

“directory and not mandatory.” Thus, in appropriate circumstances, these require-
                                        - 18 -

[*18] ments can be satisfied by substantial, rather than literal, compliance. Id. at

42; see Hewitt v. Commissioner, 109 T.C. 258, 265, n.10 (1997) (describing

substantial compliance as satisfied where the taxpayer has “provided most of the

information required” or made omissions “solely through inadvertence”), aff’d

without published opinion, 166 F.3d 332 (4th Cir. 1998). While substantial

compliance may excuse minor, technical, or merely procedural defects, it offers no

relief to taxpayers who have failed to disclose information that goes to “the

essential requirements of the governing statute.” Estate of Evenchik v.

Commissioner, T.C. Memo. 2013-34, 105 T.C.M. (CCH) 1231, 1234 (quoting

Estate of Clause v. Commissioner, 122 T.C. 115, 122 (2004)).

      Section 170(f)(11)(A)(ii)(II) excuses failure to satisfy the reporting require-

ments discussed above if it is shown that such failure “is due to reasonable cause

and not to willful neglect.” The formulation of this defense--requiring the

existence of “reasonable cause” and the absence of “willful neglect”--resembles

that appearing in numerous Code provisions that impose penalties or additions to

tax. See, e.g., secs. 6039G(c)(2), 6704(c)(1), 6652(f)-(j), 6709(c); see also sec.

6664(c)(1) (requiring that the taxpayer have “reasonable cause” and have “acted in

good faith”). Although section 170(f)(11)(A)(ii)(II) relieves the taxpayer from

disallowance of a deduction rather than from imposition of a penalty, we have
                                         - 19 -

[*19] construed the contours of these defenses similarly. See Alli v.

Commissioner, T.C. Memo. 2014-15, 107 T.C.M. (CCH) 1082, 1096; Crimi v.

Commissioner, T.C. Memo. 2013-51, 105 T.C.M. (CCH) 1330, 1353.

      “Reasonable cause requires that the taxpayer have exercised ordinary busi-

ness care and prudence as to the challenged item.” Crimi, 105 T.C.M. (CCH) at

1353 (citing United States v. Boyle, 469 U.S. 241 (1985)). “The determination of

whether a taxpayer acted with reasonable cause and in good faith is made on a

case-by-case basis, taking into account all pertinent facts and circumstances.” Sec.

1.6664-4(b)(1), Income Tax Regs. Reasonable cause may be shown by

establishing reliance on the advice of a tax professional. But such “advice must

generally be from a competent and independent advisor unburdened with a

conflict of interest and not from promoters of the investment.” Mortensen v.

Commissioner, 440 F.3d 375, 387 (6th Cir. 2006), aff’g T.C. Memo. 2004-279.

      B.     Analysis

      While not challenging Empire’s status as a “qualified appraiser,” respondent

urges that petitioners have failed, in two respects, to satisfy the regulatory

reporting requirements. Respondent first contends that the Empire report does not

constitute a “qualified appraisal.” Even if it is a “qualified appraisal,” respondent

contends that those petitioners who donated stock valued in excess of $500,000
                                         - 20 -

[*20] are entitled to no deductions because they did not attach copies of that

appraisal to their tax returns as section 170(f)(11)(D) requires. Petitioners contend

that they substantially complied with all of the regulatory reporting requirements

or, in the alternative, that they had reasonable cause for failing to do so.

      As respondent observes, the Empire report in several respects fits

awkwardly with the appraisal reporting requirements. For starters, it is not

addressed to petitioners, it does not examine any charitable contributions of

property, it does not set forth the “date (or expected date) of the contribution,” and

it does not include a statement that it “was prepared for income tax purposes.” See

sec. 1.170A-13(c)(3)(ii), Income Tax Regs. Quite the contrary: The report

explicitly states that it was prepared for ERISA compliance purposes, that it was

intended solely for the use of the ESOP trustee, and that it “d[id] not take into

consideration any tax consequences related to Comtrad’s selling shareholders.”

      Respondent further emphasizes that Empire did not value the specific prop-

erty that each petitioner actually contributed. Petitioners individually donated to

JCF between 35 and 125 shares of Comtrad stock. The largest block represented

only 1.8% of Comtrad’s 7,000 outstanding shares, and petitioners collectively do-

nated fewer than 13% of its outstanding shares.
                                           - 21 -

[*21] But whereas petitioners contributed small minority interests, Empire valued

Comtrad “on a going concern basis” and determined the value of “100% of the or-

dinary shares of Comtrad.” In so doing Empire discharged the mission the ESOP

trustee had entrusted to it, that is, to determine whether SDI’s offering price of

$4,500 was fair to the Comtrad shareholders. Since Empire was valuing the entire

company, it correctly applied no minority discount. And while it applied a

discount of 5% for lack of marketability, that adjustment was small because “the

appropriate level of discount is materially less on a control block than it would be

on a minority interest block.” Had Empire been asked to value the minority

interest block that each petitioner donated to JCF, Empire would obviously have

written a very different sort of report.

      When an appraisal values property different from that which was actually

contributed to charity, that failure can be fatal because it “goes to the essence of

the information required.” Costello v. Commissioner, T.C. Memo. 2015-87, 109

T.C.M. (CCH) 1441, 1447 (holding that an appraisal was not “qualified” where it

valued the wrong asset); Estate of Evenchik, 105 T.C.M. (CCH) at 1234 (holding

that an appraisal was not “qualified” because it valued corporate assets, whereas

the taxpayer had donated corporate stock). Citing cases such as these, respondent

contends that petitioners neither strictly nor substantially complied with the regu-
                                       - 22 -

[*22] latory reporting requirements because the Empire report valued the wrong

asset and (for that reason) neglected to apply the discounts that should

appropriately be applied when valuing minority stock interests.

       Petitioners reply that this is a case of “no harm, no foul.” SDI was offering

to buy 100% of Comtrad’s shares and to pay the same price ($4,500) for each

share. That being so, petitioners say, all of Comtrad’s shares had equal value, and

there was no logical reason to apply a minority interest discount to the shares

tendered by JCF. Indeed, because JCF received cash for its 900 shares, whereas

the other Comtrad shareholders received mostly promissory notes, JCF’s shares, as

compared with those other shares, may arguably have justified a valuation

premium rather than a discount.

      For these reasons, petitioners urge that they substantially complied with the

appraisal reporting requirements. Although Empire did not recite the analysis set

forth in the preceding paragraph, it described the proposed transaction in detail

and made clear that SDI was offering to buy each share tendered by JCF for

$4,500 in cash. Under these circumstances, petitioners say, it would be obvious to

any sophisticated reader that no minority discount was required, thus neutralizing

respondent’s argument that Empire valued the wrong property.
                                         - 23 -

[*23] Petitioners admit that the Empire report did not explicitly state that “the ap-

praisal was prepared for income tax purposes.” See sec. 1.170A-13(c)(3)(ii)(G),

Income Tax Regs. But Empire allegedly followed IRS guidelines when doing its

valuation, and the Empire professional who signed the appraisal also signed the

Forms 8283 attached to petitioners’ returns. Petitioners admit that the Empire

report did not explicitly state “the date (or expected date) of contribution to the

donee.” Id. subdiv. (ii)(C). And while the parties dispute the exact date on which

the contributions occurred, the Empire report makes clear that all relevant events

occurred sometime between December 5 and 12, 2012. Petitioners contend that

any technical shortcomings of the Empire report can thus be excused on grounds

of substantial compliance.8

      The four petitioners who made contributions valued in excess of $500,000

have a second hurdle to overcome. Section 170(f)(11)(D) required them, not only

to get a qualified appraisal, but also to attach a copy of that appraisal to their 2012
      8
        See, e.g., Zarlengo v. Commissioner, T.C. Memo 2014-161, 108 T.C.M.
(CCH) 155, 163 (finding appraisal “qualified” where contribution dates were list-
ed in the appraisal summary); Gorra v. Commissioner, T.C. Memo. 2013-254, 106
T.C.M. (CCH) 523, 533-534 (finding appraisal “qualified” where Commissioner
could discern that the contribution was made during a specific month); Consol.
Inv’rs. Grp. v. Commissioner, T.C. Memo. 2009-290, 98 T.C.M. (CCH) 601, 614
(finding appraisal “qualified” despite omission of any statement regarding income
tax purpose); Simmons v. Commissioner, T.C. Memo. 2009-208, 98 T.C.M.
(CCH) 211, 215-216 (finding appraisal “qualified” despite omission of an explicit
statement regarding income tax purpose), aff’d, 646 F.3d 6 (D.C. Cir. 2011).
                                         - 24 -

[*24] tax returns, which they did not do. They say that they nevertheless

“substantially complied” with this requirement by attaching to their return a fully

completed Form 8283. But the Code requires that a taxpayer in this position

attach to his return both an appraisal summary and a copy of the appraisal itself.

Compare sec. 170(f)(11)(C), with id. subpara. (D). When a statute separately

requires that a taxpayer satisfy two requirements, it is not obvious that literal

compliance with the first constitutes substantial compliance with the second.9

      Even if petitioners did not strictly or substantially comply with the regula-

tory reporting requirements, they all seek haven in section 170(f)(11)(A)(ii)(II).

That provision excuses failure to satisfy the reporting requirements discussed

above if it is shown that such failure “is due to reasonable cause and not to willful

neglect.” Petitioners allege that their 2012 returns were prepared by an experi-

enced certified public accountant (CPA), that they supplied her with the Empire

report and all relevant information about the Comtrad stock acquisition, and that

she did not direct any of petitioners to include a copy of the Empire report with
      9
        Petitioners cite section 1.170A-13(c)(4)(iv)(H), Income Tax Regs., in sup-
port of their position. That section provides possible relief where a donor, owing
to “a good faith omission,” fails to attach “an appraisal summary” to his return. In
that event the charitable contribution deduction will not be automatically denied if
the taxpayer supplies a Form 8283 within 90 days of an IRS request therefor. Ibid.
But there is no comparable relief provision covering situations where the donor,
having reported a value in excess of $500,000 for donated property, fails to attach
to his return a copy of the appraisal itself.
                                        - 25 -

[*25] their returns. The record as it stands now is silent concerning the advice (if

any) that the CPA provided petitioners regarding the Empire report and whether

they relied in good faith on whatever advice she may have supplied. For these

reasons, we conclude that petitioners’ ability to rely on the “reasonable cause”

defense of section 170(f)(11)(A)(ii)(II) presents genuine disputes of material fact

that are not susceptible to resolution by summary judgment.

      Barring settlement, these cases will need to go to trial on the assignment of

income issue and on petitioners’ entitlement to the “reasonable cause” defense.

Under these circumstances we deem it prudent, for two reasons, to deny in their

entirety both pending motions for partial summary judgment. First, if petitioners

prevail on the “reasonable cause” defense, it will be unnecessary for us to decide

whether they substantially complied with the appraisal reporting requirements.

      Second, there could be some factual overlap between the two sets of issues.

During trial of the assignment of income issue, we will need to determine (among

other things) whether the prospective acquisition of Comtrad’s stock was a mere

expectation or a virtual certainty. See supra p. 13. The resolution of that factual

question could affect whether petitioners substantially complied (or had

reasonable cause for failing to comply) with the appraisal reporting requirements.

That might be so (for example) if petitioners contend that they did not need to get
                                        - 26 -

[*26] an appraisal at all, or were advised that they did not need to get an appraisal,

because the value of the Comtrad stock was fixed at $4,500 per share by an offer

from SDI that was certain to close.

      To reflect the foregoing,

                                                 An appropriate order will be issued.