[00:00:02] Speaker 03: Case number 17-1266, Jeff Plow, Patsy Matters' partner of RERI Holdings' High Electoral Appellate versus Commissioner of Internal Revenue Service, Ms. [00:00:13] Speaker 03: Patti Bann for the appellate, Mr. Christensen for the appellate. [00:00:18] Speaker 01: Good morning. [00:00:20] Speaker 01: Good morning, Your Honors. [00:00:21] Speaker 01: My name is Kathleen Hackentown, and I represent the appellant in this matter, Jeff Lau, who is the tax matters partner of Rerie Holdings 1 LLC. [00:00:30] Speaker 01: This is an appeal from the United States tax court's decision to disallow a $33 million charitable contribution deduction and assert a 40% gross valuation misstatement penalty. [00:00:42] Speaker 01: I have 15 minutes for my argument this morning, and I've reserved three minutes for rebuttal of the court's permission. [00:00:48] Speaker 01: The court's decision should be reversed for three independent reasons. [00:00:52] Speaker 01: First, it was error for the court to deny the entire charitable contribution deduction simply because there was a mistake made on an attachment to the tax return. [00:01:02] Speaker 01: Second, it was error for the court to affirm the 40% gross valuation misstatement penalty. [00:01:09] Speaker 01: And last, it was error for the court to conclude that the valuation tables under section 7520 of the Internal Revenue Code should be set aside. [00:01:19] Speaker 01: I'd like to start this morning by talking about the appraisal summary. [00:01:22] Speaker 01: The court concluded that the entire deduction should be disallowed because one of the lines on that form was left blank. [00:01:30] Speaker 01: An appraisal summary is a two-page document that taxpayers who are making a charitable contribution in excess of $5,000 are required to attach to their federal income tax return. [00:01:40] Speaker 01: And the form requires lots of different kinds of information intended to tell the IRS of something about the property that's being donated. [00:01:48] Speaker 01: and rearing fat completed the form and attached it to its tax return. [00:01:52] Speaker 01: And it went beyond the requirement to simply include a summary of the appraisal. [00:01:56] Speaker 01: It also included an entire appraisal as part of its tax return even though it was not required to do so in the year 2003. [00:02:05] Speaker 04: Now the important thing to understand is that the attached appraisal did not include the information, cost basis information that was also omitted from the form itself, correct? [00:02:14] Speaker 04: That's correct. [00:02:15] Speaker 01: The requirements for qualified appraisal do not require that basis be included in the qualified appraisal. [00:02:20] Speaker 04: The filing collectively, no matter how long or through the appraisal you attach, did not provide the information the IRS asked for. [00:02:29] Speaker 01: Well, the form does have a box on it that asks for basis information. [00:02:33] Speaker 01: It's important to understand why is that on the form in the first place. [00:02:37] Speaker 01: Basis is an important consideration sometimes for purposes of determining the amount to which a taxpayer is entitled for its charitable contribution deduction. [00:02:46] Speaker 01: For example, where there's a donation of intellectual property, the taxpayer's donation is capped at its basis. [00:02:54] Speaker 01: Why is it irrelevant here? [00:02:56] Speaker 01: It's not relevant here, Your Honor, because basis is not important for determining whether or not Reary made a charitable contribution, and it's not important for purposes of determining how much Reary's charitable contribution is. [00:03:08] Speaker 03: Do you want to respond to the government's reference to the legislative history of the provision? [00:03:14] Speaker 01: Certainly. [00:03:15] Speaker 01: So the government talks about the legislative history for DEFRA, which was enacted in 1984 and instructed the IRS to promulgate regulations with respect to [00:03:25] Speaker 01: The information that taxpayers should report to the IRS as part of the charitable contribution regulatory scheme, one of those things, relates to basis. [00:03:36] Speaker 01: But the way that the government reconstructs the legislative history in their papers is simply not accurate. [00:03:42] Speaker 01: What's clear when you read the legislative history as a whole is that, yes, Congress was concerned about overvaluations, but that the information about basis is not related to that concern. [00:03:53] Speaker 01: They appear actually in separate places within the legislative history. [00:03:57] Speaker 01: So one has nothing to do with the other. [00:04:00] Speaker 01: The purpose was that Congress wanted taxpayers to provide certain information, but the courts have long recognized that the rules are complicated and taxpayers will from time to time make mistakes when they are reporting information to the Internal Revenue Service. [00:04:14] Speaker 03: But you would agree this little summary could tell you what at least the Senate committee was interested in. [00:04:23] Speaker 03: Is that correct? [00:04:23] Speaker 01: I'm sorry, Your Honor, I missed the first part of your question. [00:04:26] Speaker 03: This summary that you've been discussing, that could alert the Commissioner to the need to look more closely at this very complicated, you know, extensive form. [00:04:49] Speaker 03: Isn't that correct? [00:04:51] Speaker 01: So two points there, Your Honor. [00:04:53] Speaker 01: I don't agree with the underlying premise that the basis information would have alerted the Internal Revenue Service. [00:04:58] Speaker 03: Well, if I buy a piece of property for $1, and I claim a $55 million charitable contribution, it might tell the commissioner, red flag. [00:05:12] Speaker 03: It might. [00:05:13] Speaker 03: And upon looking at it, it might agree with you that basis is irrelevant here. [00:05:19] Speaker 03: That's not true. [00:05:21] Speaker 03: Would you not agree what at least the quoted language from the Senate committee was interested in, regardless of where it appeared in the legislative history? [00:05:32] Speaker 01: Well, I think the concern with respect to basis has to do with different kinds of charitable contributions and the one that are at issue here. [00:05:38] Speaker 03: You mean the gaming of the system? [00:05:41] Speaker 01: Well, the gaming of the system, Your Honor, I don't think that that's what's happening here. [00:05:45] Speaker 01: you're referring to is the box on the return. [00:05:47] Speaker 03: I'm not suggesting one way or another that, but I'm trying to understand why you think this short form is basically, as you put it in your brief, not relevant here. [00:06:04] Speaker 01: It's not so much that the form itself isn't relevant. [00:06:06] Speaker 01: It's that the particular box on this form with respect to this particular terrible contribution is not informative to the IRS. [00:06:15] Speaker 01: Let me go back to your prior question, Your Honor. [00:06:17] Speaker 01: Is it a red flag if you leave the box blank and you claim a charitable contribution deduction of $33 million? [00:06:24] Speaker 01: We've cited case law in our brief that describes the fact that when you leave a box on a return blank, that's the same as putting a zero in the box. [00:06:33] Speaker 04: So if the red flag to the IRS is- Well, that case involved when things you weren't claiming, deductions you weren't claiming, so leaving blank or zero [00:06:42] Speaker 04: It signifies you're just not claiming something. [00:06:44] Speaker 04: Here you are claiming something, and something that requires exceptional levels of substantiation. [00:06:51] Speaker 04: So. [00:06:53] Speaker 01: Well, at most they're claiming that the basis is zero. [00:06:56] Speaker 01: And that provides the very same red flag that the court was referring to earlier. [00:07:01] Speaker 01: It's also important to recognize that the Internal Revenue Service did select this return for audit. [00:07:07] Speaker 01: It did conduct an examination. [00:07:09] Speaker 01: It did issue an FPAT. [00:07:11] Speaker 01: It did file an answer. [00:07:13] Speaker 01: It did file an amendment to answer. [00:07:15] Speaker 01: And it did file a second amendment to answer. [00:07:16] Speaker 04: Well, where did we decide cases for, decide to make decisions in covering the broad rule of cases, not just this particular one? [00:07:23] Speaker 04: You said something earlier about someone could just have a mistake. [00:07:28] Speaker 04: This is a very large donation. [00:07:32] Speaker 04: done by very sophisticated entities with what I assume were sophisticated accountants and lawyers filling out the tax returns. [00:07:40] Speaker 04: And as you said, they've been above and beyond by attaching the full appraisal. [00:07:45] Speaker 04: So is it your client's position that that box was left blank? [00:07:51] Speaker 04: Was it an oversight on a form that I expect was scrubbed pretty thoroughly by lawyers and accountants? [00:07:58] Speaker 04: Or was it deliberate? [00:07:59] Speaker 04: Or do we know? [00:08:00] Speaker 04: Have you made any showing on that? [00:08:02] Speaker 04: That's a good question, Your Honor. [00:08:03] Speaker 01: So this issue was not raised in the court below. [00:08:06] Speaker 01: The IRS never once during the audit, during the litigation, ever raised any concerns with respect to this form. [00:08:13] Speaker 01: So the agency itself that's charged with gathering this information and reviewing it never once, except in this appeal to try to affirm the decision of the tax court, has raised any issue or concern with respect to whether or not they were deprived of any information. [00:08:28] Speaker 01: The record is completely undeveloped on this point because it was not an issue that was based on the court. [00:08:33] Speaker 04: Can you tell us what your client's position is on how something this carefully, thoroughly vetted and over-prepared? [00:08:41] Speaker 04: Are you able to tell us your client's position on whether it was an accident or deliberate? [00:08:44] Speaker 01: I'm not, Your Honor, but we do know that what is in the record is that the return was professionally prepared by a large accounting firm and it just never came up during the trial why the box wasn't filled in. [00:08:57] Speaker 01: The courts have long held that this standard to be applied in this situation is substantial compliance. [00:09:04] Speaker 01: And the requirement, I've already talked about why this would be substantial compliance, because all of the information that the IRS needed to evaluate the deduction was already provided to it. [00:09:14] Speaker 00: Excuse me, did you say that was the standard in court cases involving this form? [00:09:20] Speaker 00: Yes, it is, Your Honor. [00:09:22] Speaker 01: That's correct. [00:09:23] Speaker 01: There are at least three cases that reach that conclusion, including the Second Circuit and Shileman. [00:09:28] Speaker 01: Now, the other reason that we would say that this is not fatal to the deduction is that the regulations recognize specifically that there will be times when taxpayers either fail to include the form in its entirety, [00:09:41] Speaker 01: or will fail to include information that's required to be included on the form. [00:09:46] Speaker 01: And that's Regulation Section 170A-13. [00:09:49] Speaker 03: I want to ask you about that. [00:09:51] Speaker 03: Yes, Your Honor. [00:09:52] Speaker 03: Was there any, after the tax court ruled, was there any further objection along these lines or any request of the Commissioner? [00:10:05] Speaker 03: With respect to... For time to cure. [00:10:07] Speaker 01: The time to cure. [00:10:08] Speaker 01: Well, during the examination, the IRS was provided with information about what we repaid for the charitable contributions. [00:10:17] Speaker 01: So the answer to my question is no? [00:10:19] Speaker 01: The answer was they already had basis. [00:10:21] Speaker 01: So the answer is no. [00:10:22] Speaker 01: There was no opportunity to cure. [00:10:24] Speaker 01: And there was no request by the IRS to provide the missing information at any point in time, or even any discussion about the form itself. [00:10:34] Speaker 01: But the regulation is clear. [00:10:35] Speaker 01: that it is not only the failure to conclude the informant in its entirety, it's also the requirement to complete a fully completed appraisal summary. [00:10:45] Speaker 01: The court also erred when it concluded that the 40% gross valuation misstatement should lie. [00:10:50] Speaker 03: So I'm just trying to understand your argument. [00:10:54] Speaker 03: You're saying substantial compliance. [00:10:59] Speaker 03: Your client was denied the opportunity under the regulation. [00:11:05] Speaker 03: to have the option of curing the omission. [00:11:12] Speaker 03: And your answer to me when I asked, well, is there any effort to make that point and argue it? [00:11:17] Speaker 03: And you said, well, I already had the information. [00:11:21] Speaker 03: So you're not relying on the regulatory cure. [00:11:29] Speaker 03: Well, I think there are two. [00:11:30] Speaker 03: You're only relying on the title [00:11:35] Speaker 03: the doctrine of substantial compliance? [00:11:39] Speaker 01: Well, I'm relying on two interrelated points. [00:11:41] Speaker 01: One is to the point of whether or not substantial compliance should be the standard. [00:11:46] Speaker 01: Is this requirement so important that we should set aside the longstanding substantial compliance doctrine? [00:11:53] Speaker 01: And my point is that the regulations themselves accept that there will be instances in which perfection is not the standard. [00:12:00] Speaker 03: I understand that. [00:12:02] Speaker 03: I'm just trying to understand how it applies in your client's case. [00:12:06] Speaker 01: Well, the way that the regulation applies is that because the IRS never requested the cure, they never said, wait, we're missing this basis information on your form 8283. [00:12:18] Speaker 01: You have 90 days to supply this information. [00:12:20] Speaker 01: Otherwise, we're going to deny your deduction. [00:12:23] Speaker 01: Your Honor, I see that my time is up. [00:12:25] Speaker 01: May I just finish my answer to the question? [00:12:27] Speaker 01: Yes, please do. [00:12:30] Speaker 01: That the point is that, [00:12:33] Speaker 01: Although they were not provided with the opportunity to cure, the IRS has effectively waived its objection to saying that this information should have been supplied. [00:12:45] Speaker 04: Can I ask you about the Gelbtuck, am I saying that name correctly? [00:12:52] Speaker 01: I believe so, Your Honor, yes. [00:12:53] Speaker 04: Gelbtuck Appraisal. [00:12:54] Speaker 04: And he praised the remainder interest in property and the government says it should have been a remainder interest in holdings. [00:13:03] Speaker 04: Does that distinction make a difference if all holdings is holding the property? [00:13:14] Speaker 04: Is one more marketable than the other, a remainder interest in just a piece of property versus a remainder interest in an entity that's holding a piece of property? [00:13:23] Speaker 01: So there are two related answers to your question, Your Honor. [00:13:26] Speaker 01: The first is that for purposes of the tax law, it's absolutely correct what Mr. Galptok did, which is that he disregarded [00:13:33] Speaker 01: the LLCs for purposes of doing the valuation. [00:13:36] Speaker 01: And the law is clear that under regulatory section 301.7701-3 that an LLC with a single owner is disregarded for all federal tax purposes. [00:13:48] Speaker 01: The government relies on a case decided six years later, the Pierre case in which the tax court concluded that, well, maybe there are some times when a disregarded entity is not disregarded. [00:13:58] Speaker 01: But in 2003, the government's position was exactly the same as the argument I'm presenting to the court today, which is that the LLC is irrelevant to the determination of value because an LLC is not important for federal tax purposes. [00:14:14] Speaker 01: The other point to Your Honor's question, which is, well, does it matter? [00:14:18] Speaker 01: Are they effectively the same value? [00:14:20] Speaker 01: And the evidence that was presented in the court below was yes, that they would be the same value. [00:14:25] Speaker 01: And respondents, experts did not submit any evidence on the point as to whether or not there was a difference between valuing the LLC and a difference between valuing the fee interest in the underlying property. [00:14:37] Speaker 04: So even if in some situations there could be, if the LLC had some other credit card problem or something like that, but that nothing like that, we don't need to go there because nothing like that was shown in this case? [00:14:50] Speaker 01: That's right. [00:14:51] Speaker 01: The one issue that the government raises is with respect to the mortgage on the property. [00:14:55] Speaker 01: But there are two reasons that the mortgage is not relevant to the determination here. [00:15:00] Speaker 01: One is that the mortgage would have been satisfied at the time that the possessory interest came into play. [00:15:06] Speaker 01: And the other is that it would distort the value as the expert reports showed in this case. [00:15:12] Speaker 04: And then as to the question about the discount rate, do you agree that [00:15:20] Speaker 04: as to the tax court's determination of how, whether the, between different experts, whether a discount rate was mathematically computed in a proper manner, that that's a fact finding subject to clear error review? [00:15:39] Speaker 01: The actual mathematic computation is certainly subject to clear error review, the method that the court applies is subject to de novo review. [00:15:47] Speaker 04: The method the tax court applied in reviewing the expert competing approaches? [00:15:55] Speaker 01: I'm over time here, Your Honor. [00:16:01] Speaker 01: The expert provided different methods to the court for purposes of determining what the fair market value was of the property. [00:16:08] Speaker 01: The court took primarily Dr. Craig's method. [00:16:12] Speaker 01: We talk about why that was not the correct method. [00:16:14] Speaker 01: for the court to use for purposes of valuing a property of this type. [00:16:19] Speaker 01: The selection of that method is subject to clear error review. [00:16:23] Speaker 01: The particular facts relied on, I'm sorry, the choice of the method is subject to denover review. [00:16:28] Speaker 01: The particular fact. [00:16:29] Speaker 04: What do you mean by the choice of the method? [00:16:30] Speaker 04: Whether they could, your position is that whether they like Dr. Craig's method versus one of the other expert's methods, [00:16:43] Speaker 04: where they felt one was, they were equally reliable, or one was better than the other, that's a legal question? [00:16:48] Speaker 01: No, no, no, I'm sorry, Your Honor. [00:16:50] Speaker 01: So the particular method that the court uses, discounted cash flow, income method, that is a legal choice by the court. [00:16:58] Speaker 02: And they did that here. [00:17:00] Speaker 01: And they did the discounted cash flow method. [00:17:02] Speaker 01: But it was also a choice of method to reject the tables under section 7520, and that's subject to de novo review, Your Honor. [00:17:11] Speaker 01: Thank you. [00:17:26] Speaker 03: Good morning. [00:17:27] Speaker 05: Good morning. [00:17:27] Speaker 05: May it please the court, Jacob Christensen for the Commissioner of Internal Revenue. [00:17:33] Speaker 05: Mary acquired the property in issue for $3 million. [00:17:36] Speaker 05: 17 months later, donated it to the University of Michigan and claimed a charitable contribution deduction for $33 million for that donation. [00:17:48] Speaker 05: Mary's valuation was based on tables under Section 7520 that don't apply, and it ignored [00:17:55] Speaker 05: the outstanding debt of $42 million that encumbered the property as well as other restrictions on the university's use of the property that we're not accounted for in that valuation. [00:18:07] Speaker 04: Is it common for the tax court to invoke a reason for denying a deduction that was never advanced by the IRS at the first level or the commissioner before the court and was never raised in any way to give the party advance notice? [00:18:25] Speaker 05: I don't know how common that is, but I will say that the Internal Revenue Code, Section 6214, authorizes and provides jurisdiction to the tax court to determine the correct amount of the tax, even if the correct amount is greater than the amount determined by the commissioner in a notice of deficiency. [00:18:44] Speaker 04: But do they have to give the parties notice that they're considering an entirely different argument that would have different financial effect? [00:18:51] Speaker 04: Because this argument about substantiation [00:18:55] Speaker 04: eliminated the entire deduction, whereas the prior one about misvaluation would have only eliminated the differential between what the IRS thought was the right valuation and what they claimed. [00:19:09] Speaker 04: So it's both a whole new theory and a whole new consequence. [00:19:13] Speaker 05: So I agree that notice issues could arise. [00:19:16] Speaker 05: In this case, Rary could have sought reconsideration after the tax court issued its opinion, but did not do that. [00:19:24] Speaker 04: Also, in this case... Is the burden on the taxpayer to seek reconsideration, or is there some burden on the tax court to give advance notice? [00:19:38] Speaker 05: Well, in this case, I don't think there was a burden on the tax court to provide that notice, and the court was within its jurisdiction to consider this issue to determine the correct amount, particularly because the arguments made by the parties [00:19:51] Speaker 05: don't require any further factual development. [00:19:53] Speaker 05: So there was no prejudice to Rary in the tax court deciding this issue. [00:19:59] Speaker 05: The relevant evidence was Rary's tax return, the appraisal summary that had already been submitted with the return. [00:20:08] Speaker 05: And the regulations. [00:20:10] Speaker 04: Well, they say, had we given notice, we could have made a substantial compliance argument to the tax court. [00:20:16] Speaker 04: And they weren't giving it so. [00:20:19] Speaker 04: I get that the form is the form and it's blank, but now we're supposed to sort out substantial compliance, whether it applies or not, whether it is met here or not, in the first instance without any of those determinations having been made by the tax court, which I would have thought would be your preferred approach. [00:20:39] Speaker 05: Well, I would just say that the regulations that are applicable here, they require the taxpayer at the time it [00:20:50] Speaker 05: claims the deduction to provide a fully completed appraisal summary, and if they fail to do that, and they don't come within one of the exceptions under the regulation, then the deduction is not allowable for that reason. [00:21:07] Speaker 04: Or that just triggers the whole debate about whether you can have a substantial compliance, whether substantial compliance can satisfy [00:21:17] Speaker 04: the failure to meet that provision to make that disclosure. [00:21:20] Speaker 04: And if it can, substantial compliance is available. [00:21:25] Speaker 04: You have competing views on that, whether it was met here. [00:21:28] Speaker 04: And we're supposed to be a court of review, and we're having to be first view on those issues in this case. [00:21:36] Speaker 05: Well, in this case, as you said, there is a dispute about whether the doctor of substantial compliance should even apply, particularly where the secretary has already specifically provided instances where taxpayers can obtain relief from these provisions for not disclosing their cost basis, and the instance where the taxpayer is unable to do so for reasonable cause. [00:21:58] Speaker 05: The evidence in this case shows that Rary had sold the property only 17 months before, such that it's inescapable [00:22:05] Speaker 05: the inference that Rary knew what the cost basis was, but for some reason that's never been explained, didn't disclose it on the form. [00:22:14] Speaker 05: And so Rary wouldn't fall within that exception in the regulations that the Secretary has provided, and we don't think it's appropriate [00:22:23] Speaker 05: to enlarge the exceptions that the secretary has already provided by regulation under the doctrine of substantial compliance. [00:22:31] Speaker 00: What about this case that was cited in the Second Circuit, the Schneiderman case? [00:22:36] Speaker 05: So the facts were much different in that case in the Second Circuit. [00:22:42] Speaker 05: In that case, there were two forms, 8283, the appraisal summary form, that were submitted. [00:22:48] Speaker 05: And together, they contained all the signatures and information necessary. [00:22:53] Speaker 05: and the court held that the fact that they weren't submitted in one single form was the most technical of deficiencies that could be overlooked in that circumstance. [00:23:03] Speaker 00: But here... In other words, it was substantial compliance. [00:23:06] Speaker 00: Yes. [00:23:07] Speaker 00: And it was Form 8283. [00:23:09] Speaker 00: Yes. [00:23:09] Speaker 00: You didn't call that to our attention in your brief in arguing that restrict compliance. [00:23:16] Speaker 05: No, well, that had been cited by Rary in the opening brief. [00:23:20] Speaker 05: And we agree with that, that the Sheldman did recognize the doctrine of substantial compliance in that case. [00:23:27] Speaker 05: And the tax court also has recognized the doctrine of substantial compliance. [00:23:34] Speaker 05: In this context, where the information that has not been disclosed is crucial information and important for the commissioner, [00:23:43] Speaker 05: allowing the commissioner to identify. [00:23:46] Speaker 04: That's the very debate, right? [00:23:48] Speaker 04: That's the very debate. [00:23:49] Speaker 04: They say it might be for some types of donations, but for this type of donation, if you had the form, you had the full attached appraisal, which let you know that it was the type of donation for which cost basis isn't a cap on the donation. [00:24:10] Speaker 04: given that you didn't need it to make the determination whether, which you ultimately did, that this contribution was claimed to be overstated in its amount, that you, as in the other case, had all the information you needed to make the decisions that you needed to make. [00:24:31] Speaker 04: And I don't know why a blank isn't just as much of a flag that there's a problem here as if they put a dollar in the line. [00:24:41] Speaker 05: The taxpayer's argument is that cost basis is only relevant when it's relevant in computing the amount of the deduction. [00:24:52] Speaker 05: In fact, the provisions to which taxpayer prefers at section 170 paragraph E, A1, those provisions have been in existence in the tax code since the Tax Reform Act of 1969. [00:25:06] Speaker 05: And that is not what motivated Congress in 1984 [00:25:10] Speaker 05: to direct the secretary to require taxpayers to disclose their cost basis. [00:25:16] Speaker 05: Congress was concerned with taxpayers claiming excessive deductions based on overvaluations of property. [00:25:23] Speaker 05: And the specific concern was with appreciated property that taxpayers donate. [00:25:29] Speaker 05: And the only way the commissioner can identify appreciated property, and all this is in the legislative history, [00:25:36] Speaker 05: is for the taxpayer to disclose its cost basis. [00:25:40] Speaker 04: That's the red flag. [00:25:41] Speaker 04: That's the red flag argument. [00:25:43] Speaker 04: I guess what I'm asking you is why isn't leaving that blank, especially when it's fancy shmancy accounting firms and lawyers that filled this thing out, isn't that just as much of a red flag? [00:25:55] Speaker 05: Well, it's also supposed to serve a goal of deterrence. [00:25:59] Speaker 05: The legislature history explains that this is supposed to prevent taxpayers from playing the audit lottery [00:26:06] Speaker 05: And by requiring the taxpayer to disclose their cost basis right next to the amount of the claim deduction, the information that would and will alert the commissioner... Because they think the IRS will see it was left blank and go, oh, must be okay and move on? [00:26:24] Speaker 04: That doesn't make any sense. [00:26:26] Speaker 05: No, what I mean is when you compare the cost basis, in this case $3 million, [00:26:32] Speaker 05: had they disclosed it, but they didn't. [00:26:33] Speaker 05: So they disclosed zero. [00:26:35] Speaker 05: And when you compare that with the $33 million of the claim deduction, that raises a red flag. [00:26:40] Speaker 05: And it also deters the taxpayer from making the claim and claiming the audit lottery, which is how this has been served. [00:26:46] Speaker 04: I get that. [00:26:46] Speaker 04: I guess I'm trying to ask, as a practical matter, why, when it seems to have been deliberately left blank, is that not just as much of a red flag to the IRS? [00:26:55] Speaker 04: Is that your position? [00:26:56] Speaker 05: I don't think it is, because it would be more of a red flag to see that the deduction claimed is $33 million, and it was only acquired a year before for $3 million. [00:27:04] Speaker 05: Then they left it out? [00:27:07] Speaker 05: So by leaving the form blank, the argument that that means that Rary meant to portray that the cost basis was zero is a curious argument, because in fact, Rary was aware that the cost basis was not zero, and signed this form under penalty of perjury. [00:27:22] Speaker 05: And so that would be false information [00:27:24] Speaker 04: No, it's just that it has left blank. [00:27:27] Speaker 04: Left blank. [00:27:27] Speaker 04: And so you can assume zero if you want. [00:27:29] Speaker 04: That's their position. [00:27:31] Speaker 05: Yes. [00:27:32] Speaker 05: And again, it doesn't serve the same purpose with the requirement of forcing the taxpayer to disclose the cost basis next to the amount of the deduction that's being claimed. [00:27:48] Speaker 05: I mean, in this case, the commissioner did eventually select Rary for audit. [00:27:54] Speaker 05: But the goal of Congress was to deter taxpayers from playing the audit lottery in the first instance. [00:28:01] Speaker 05: And that's why it imposed these substantiations. [00:28:03] Speaker 04: Just to be clear, your position is that the point of that box, at least is here in a case where cost basis is not relevant to the actual amount of the donation or contribution that's allowed, the deduction that's allowed. [00:28:20] Speaker 04: It's sole but important function [00:28:23] Speaker 04: is to be a red flag to the IRS. [00:28:25] Speaker 04: But you don't need it once you decide you're going to look at this to compute whether they complied or not with the tax law. [00:28:33] Speaker 05: Well, I'd say the purpose is to deter the taxpayer from claiming an overvaluation in the first instance because by disposing that information, the commissioner would be alerted that there was a potential overvaluation and it would trigger an audit. [00:28:47] Speaker 05: So that's the purpose of the disclosure requirement. [00:28:51] Speaker 00: And a blank. [00:28:52] Speaker 00: form what blank basis doesn't automatically trigger an inquiry? [00:28:58] Speaker 05: I can't answer as a factual matter whether that's correct or not. [00:29:03] Speaker 00: It would be very peculiar. [00:29:05] Speaker 05: I think here the tax court made the finding that the significant disparity between the $3 million cost basis and the $33 million, had it been disclosed, would have alerted the commissioner. [00:29:17] Speaker 05: I can't speak to what would happen in the event [00:29:21] Speaker 05: I don't know how the IRS views that when it's left blank, as a matter of fact. [00:29:25] Speaker 03: One question I had, and I don't know if you're familiar with the record or not, but your brief has that note that this is part of a larger scheme. [00:29:36] Speaker 03: Does that factor in here at all in the tax court's decision to focus on this unfilled box? [00:29:50] Speaker 05: I think what it shows is that there was some effort to manipulate the tables under section 7520 in using those tables to obtain a grossly inflated value for a charitable contribution, and then passing the same piece of property on to subsequent taxpayers who would do the same thing, relying on the same tables, and in fact, on the same appraiser, Guelta, to support their claims. [00:30:17] Speaker 05: I think that's where it becomes relevant. [00:30:21] Speaker 05: in the fact that the tables were not meant to apply to this type of interest, where the interest is not adequately preserved and protected as it would be under the law of trust. [00:30:36] Speaker 05: Now, as to that argument, the taxpayer argues that, incorrectly, the commissioner's position is that unless the interest is held in trust, that it can't qualify under the tables. [00:30:49] Speaker 05: That's not at all the commissioner's argument. [00:30:51] Speaker 05: Instead, it's only one aspect of the law of trust that the regulation focuses on, which is the preservation and protection of the property consistent with that that would be provided by the law of trust. [00:31:03] Speaker 05: In other words, there's no duty of loyalty that must accompany it as there would be under the law of trust. [00:31:10] Speaker 05: It's just this one aspect of the law of trust that is relevant. [00:31:14] Speaker 00: Well, let me try to understand that. [00:31:16] Speaker 00: With elimination of the two clauses that you focused on, one relating, I think, to non-recourse and the other two restrictions on resale, if those had not been part of the transaction, there would be no objection? [00:31:36] Speaker 05: No, there still would be because the reason that the property in interest here did not provide [00:31:44] Speaker 05: the SMI holder with the protection and preservation required, or that's consistent with the law of trust, is that the SMI holder had no ability to sue for damages for waste committed against the property. [00:31:57] Speaker 00: So that's the non-recourse provision? [00:31:59] Speaker 00: Excuse me? [00:31:59] Speaker 00: That's the non-recourse provision, isn't it? [00:32:01] Speaker 05: Okay, yes, yes. [00:32:03] Speaker 00: So if that were out of the picture, and the restraint on resale were out of the picture, you wouldn't actually have to have a trust. [00:32:11] Speaker 05: Right. [00:32:12] Speaker 05: Right, correct. [00:32:13] Speaker 05: And then there is the case law wherein the courts have held that the tables are inapplicable if the result is unrealistic and unreasonable. [00:32:25] Speaker 05: And that case law was not superseded by the regulations that were enacted here, which the Sixth Circuit held in the Negron case. [00:32:34] Speaker 05: The last thing, I see I am over time. [00:32:37] Speaker 04: I actually wanted to ask you about the Gelb Hook. [00:32:40] Speaker 04: You make a lot in your book. [00:32:43] Speaker 04: lot in your brief about appraising the wrong property, but did you present any evidence that there is a differential in value between the remainder interest in Holdings LLC versus remainder interest in the property? [00:33:00] Speaker 05: Yes, actually in our brief we [00:33:05] Speaker 05: First of all, Geltuk, who appraised the property, testified that he would have come up with a different number. [00:33:11] Speaker 05: That's in the appendix, page 316. [00:33:15] Speaker 04: And then he confirmed... If I don't read that testimony the same way as you, then tell me why, in the IRS's view, [00:33:23] Speaker 04: the value is different. [00:33:25] Speaker 05: It's the debt that's on the property that was ignored under the appraisal. [00:33:29] Speaker 04: And if you're valuing an LLC interest... That would apply whether they were evaluating the property interest itself or the holdings interest, would it not? [00:33:37] Speaker 04: They both carried the debt, so that wasn't a difference between what he evaluated. [00:33:41] Speaker 04: It may have been error not to address that mortgage debt period one way or the other, but that doesn't turn on the difference between evaluating holdings versus evaluating the property, correct? [00:33:53] Speaker 05: I can't answer that. [00:33:56] Speaker 05: I don't have the expertise to answer that. [00:33:58] Speaker 04: You can't be in your position that had he evaluated the remainder interest in the property, in evaluating the remainder interest in the property itself, he could ignore the mortgage debt. [00:34:10] Speaker 04: But he couldn't do that if he was evaluating interest in holdings? [00:34:13] Speaker 05: No, I agree with you, Your Honor, that the debt does impact both. [00:34:18] Speaker 04: OK, so that's not a difference in the... [00:34:20] Speaker 05: Yes, and the other evidence that we've cited is the expert report of Dr. Craig where he explains that the ownership structure would make a difference to the value, both in terms of a different marketability and different levels of control that the LLC owner would have over the property as opposed to a direct interest in the property. [00:34:50] Speaker 05: And that's in Dr. Craig's expert report that we've cited. [00:34:56] Speaker 05: Unless there are further questions, I see my time is up. [00:35:11] Speaker 03: Thank you. [00:35:11] Speaker 03: Council for a panel. [00:35:16] Speaker 01: Your Honor, just a few follow-up points. [00:35:19] Speaker 01: First, with respect to the question of substantial compliance in the appraisal summary, it's absolutely clear that the government had the burden on that issue. [00:35:28] Speaker 01: And they never raised it. [00:35:29] Speaker 01: And they never presented any evidence. [00:35:32] Speaker 01: The court's conclusion below that the IRS was somehow hampered is purely hypothetical. [00:35:37] Speaker 01: It wasn't based on any actual information about what happened in this case. [00:35:41] Speaker 03: So explain to me what you mean by that. [00:35:44] Speaker 03: Substantial compliance is? [00:35:49] Speaker 03: raised here as a defense. [00:35:53] Speaker 03: So doesn't your client have to raise it? [00:35:56] Speaker 03: Well, they would have raised it had it been... No, I'm just trying to understand your reliance on this regulatory scheme here. [00:36:05] Speaker 01: The regulatory scheme relating to the cure period you're on, or the 90 days? [00:36:09] Speaker 03: Yeah, and your argument here is there was substantial compliance. [00:36:16] Speaker 01: Well, the first point is that the government had the burden to raise this issue in the first place because it allowed a portion of the deduction in its EFPA and therefore it had conceded that we remit all of its substantiation requirements. [00:36:32] Speaker 03: I don't know why that necessarily follows. [00:36:37] Speaker 03: That's what I'm trying to be clear on here. [00:36:39] Speaker 01: So the reason that that necessarily follows is the government allows any portion of the charitable contribution deduction in its final partnership administrative adjustment. [00:36:50] Speaker 01: That's the letter that goes to the partnership that says this is what our finding is after the audit. [00:36:58] Speaker 01: They allowed a several million dollar deduction as part of that. [00:37:02] Speaker 01: So they did not disallow the deduction by saying [00:37:06] Speaker 01: you're not entitled to anything, because you didn't provide us with the information that you were required to have to substantiate your deduction. [00:37:15] Speaker 01: And that is why the government had the burden to raise it in the court below, and they had the burden to establish that there had not been compliance. [00:37:23] Speaker 04: So they couldn't, sorry. [00:37:25] Speaker 04: I'm trying to make sure, Andrew. [00:37:26] Speaker 04: So your argument is they couldn't have figured out what the right deduction is if they were missing [00:37:35] Speaker 04: substantiation information that was needed to substantially comply with this. [00:37:41] Speaker 01: What happens at the conclusion of an IRS audit is that if the taxpayer has not substantiated their deduction, if they don't have receipts, if they don't have an appraisal, the whole deduction is disallowed. [00:37:50] Speaker 01: You don't get any part of the deduction. [00:37:53] Speaker 01: If you fail, that's the gating issue, which is, can you even come in the door and talk to us about how much it is? [00:37:59] Speaker 01: Do you have the right documents? [00:38:01] Speaker 01: And by allowing a portion of the deduction, [00:38:03] Speaker 01: They conceded that and bore the burden with respect to all of these issues. [00:38:07] Speaker 01: And they just didn't bring this up as an issue in the court. [00:38:10] Speaker 04: What do they mean? [00:38:12] Speaker 04: They may have conceded that they thought it was substantiated, but that doesn't mean they conceded they had the burden of proof. [00:38:19] Speaker 04: Did you say they conceded they had the burden of proof? [00:38:21] Speaker 01: No, I'm not saying they conceded they had the burden of proof, but it's clear under the tax court rules that any new issue raised after the issuance of the APA under tax court rule 142 that the government has the burden of proof on that. [00:38:33] Speaker 04: What about their argument that you could have sought reconsideration from the tax court and raised this whole issue, and I get it took everyone by surprise. [00:38:45] Speaker 04: But there's a process there. [00:38:46] Speaker 04: If you wanted to hash this out in front of them, you could have raised it there. [00:38:50] Speaker 01: There's no requirement that a taxpayer seek reconsideration. [00:38:54] Speaker 01: We took an appeal to this court because we disagreed with that conclusion. [00:38:58] Speaker 01: The other thing that's important to note [00:39:00] Speaker 01: is that the party stipulated, as part of the record in this case and as part of the appendix here, what the basis was. [00:39:08] Speaker 01: So there was no cure. [00:39:09] Speaker 04: Was that stipulation? [00:39:12] Speaker 04: I thought you stipulated that the prices paid were not the fair market value. [00:39:16] Speaker 04: But it was actually a stipulation as to the basis? [00:39:20] Speaker 04: Did you just say there was a stipulation on the basis? [00:39:22] Speaker 01: Well, the price paid for the remainder interest is the same. [00:39:26] Speaker 01: That's the cost basis. [00:39:28] Speaker 01: In the remainder interest, they're the same thing. [00:39:30] Speaker 01: And there's a stipulation on that fact. [00:39:33] Speaker 01: I can find the reference and provide it to the honor. [00:39:36] Speaker 01: Thank you, Your Honors.