RERI Holdings v. Commissioner Affirmed by DC Circuit: Pigs and Hogs

We previously discussed how a seemingly simple administrative omission (failure to include basis of donated property on Form 8283 (valuation of non-cash donation)) cost a taxpayer a $33 million charitable contribution deduction, plus a 40% gross valuation misstatement penalty.  We speculated, based on the details of the transaction as described by the Tax Court, that the real reason for the result was that the taxpayer claimed a $33 million charitable contribution deduction for a donation worth only $3.3 million. 

Last Friday, the Circuit Court of Appeals for the District of Columbia affirmed the Tax Court opinion denying the deduction and upholding a 40% valuation misstatement penalty.  The entire case is probably a good example of just plain bad tax planning by the taxpayer, and very good pretrial work by DOJ Tax.  Its always easy to criticize with the benefit of hindsight but there were red flags all over this transaction.  Billionaire Miami Dolphins owner Stephen Ross made a $5 million charitable pledge to the University of Michigan.  Through a series of transactions, he then transferred an interest in a “successor” LLC whose only asset was a future interest in improved property to the University of Michigan in satisfaction of the charitable pledge.  Although he pledged a $5 million donation, he claimed a charitable contribution deduction of $33 million.  That valuation amount was based on an appraisal made when the property was originally acquired by Ross through a different LLC, but the property was subject to a long term lease that significantly reduced its market value by the time it was donated.  And while the donor claimed a $33 million donation,  Big Blue sold the property for only $2 million two years later to one of Mr. Ross’s business partners in the very same LLC that originally owned the property.  In light of those smelly facts, the omission of the cost basis (which was $2.95 million at best) on Form 8283 seems intentional.  The DC Circuit speculated that the Service would have questioned how the property appreciated to $33 million dollars in only two years if the basis had been included.  

The facts are much more detailed but when boiled down to their essence, it looks like Ross pledged $5 million to Michigan, then sold property to a business partner for about that amount and donated the [$5 million] proceeds to Big Blue.  Here is a fairly entertaining, easier to understand summary of the entire scheme.  By using property instead of cash, perhaps Ross’s advisers thought he would get away with inflating the value of the charitable contribution deduction to $33 million.  He lost bigtime on that gamble.  Pigs turn into hogs and hogs get slaughtered!  

Darryll K. Jones