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Partnership Challenges Denial of $32 Million Charitable Deduction

NOV. 13, 2019

Malibu Valley Land LLC et al. v. Commissioner

DATED NOV. 13, 2019
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Malibu Valley Land LLC et al. v. Commissioner

[Editor's Note:

The exhibits can be viewed in the PDF version of the document.

]

MALIBU VALLEY LAND, LLC,
SPECTRUM DEVELOPMENT INC., TAX MATTERS PARTNER,
Petitioner,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION FOR READJUSTMENT OF PARTNERSHIP ITEMS
UNDER CODE SECTION 6226

PETITIONER HEREBY PETITIONS for a readjustment of the partnership items set forth by the Commissioner of Internal Revenue (“Respondent”) in the Notice of Final Partnership Administrative Adjustment dated August 21, 2019 (hereinafter “FPAA”) issued to Spectrum Development, Inc. for the taxable year ending December 31, 2014. As the basis for its case, Petitioner alleges as follows:

1. Petitioner Spectrum Development, Inc. is the Tax Matters Partner (“TMP”).

2. The legal residence of Petitioner is 26885 Mulholland Highway, Calabasas, CA 91302.

3. The Partnership is Malibu Valley Land, LLC (“Partnership”), whose principal place of business is 26885 Mulholland Highway, Calabasas, CA 91302.

4. The FPAA was purportedly mailed to the TMP on August 21, 2019 and was issued by the Western Technical Services Territory Manager in Los Angeles, California. A copy of the FPAA is attached as Exhibit A.

5. The FPAA asserts multiple partnership adjustments, including a charitable contribution deduction disallowance in the amount of $32,075,000.00.

6. In the FPAA, Respondent has erred, inter alia, with respect to the following:

a. In violating the notice requirements of I.R.C. § 7522(a) by failing to describe the basis for the adjustment to the Partnership's tax return.

b. In disallowing the Partnership's Interest deduction in the amount of $450,000.00.

c. In determining that the Partnership is not entitled to the Section 170 charitable contribution deduction in the amount of $32,075,000.00 because the Partnership failed to establish all of the requirements of Section 170.

d. In determining, alternatively, that if the Partnership met all the requirements of Section 170, the Partnership failed to establish that the value of the contributed property was greater than zero.

e. In determining, alternatively, that if the Partnership met all the requirements of Section 170, the Partnership failed to establish that the value of the contributed property was greater than the property's adjusted basis of $1,396,226.00.

f. In adjusting the Partnership's Schedule M-l, Capital Contributed: Cash, by $617,927.00.

g. In finding that the Partnership had Distributions of other property for the 2014 tax year.

h. In increasing the Partnership's Distributions of other property by $103,774.00 for the 2014 tax year.

i. In determining that the Partnership is liable for the 40 percent gross valuation misstatement penalty under Section 6662(h) for the 2014 tax year.

j. In determining, alternatively, that the Partnership is liable for the 20 percent penalty under Section 6662(a) for either negligence or disregard of rules and regulation, or any substantial understatement of income tax.

k. Respondent has not complied with Section 6751(b)(1) in asserting the relevant accuracy-related and other penalties for the 2014 tax year.

7. The facts upon which Petitioner relies are, inter alia, as follows:

a. Partnership. The Partnership was formed on November 25,2013 as a California limited liability company.

b. The Partnership acquired 316.27 acres of property in Los Angeles County, California on or about December 2, 2013 from Diamond Realty West, Inc. (the “Property”).

c. On December 30, 2014, the Partnership donated a conservation easement on approximately 298 acres of the Property (the “Conservation Property”) to Mountains Recreation & Conservation Authority (“MRCA”) in a Grant of Conservation Easement (“Conservation Deed”).

d. The Conservation Deed was recorded in Los Angeles County, California on December 30, 2014.

e. At the time of the donation of the easement, the Partnership was owned 75% by Don R. Hankey, 22.275% by Brian Boudreau, 2.5% by Beth Palmer, and 0.225% by Spectrum Development, Inc.

f. Tax Return. The Partnership timely filed its Form 1065, U.S. Return of Partnership Income, for the 2014 tax year (“Partnership Tax Return”).

g. The Partnership Tax Return contained all required attachments and information, including a properly completed Form 8283.

h. The Partnership Tax Return reported a charitable contribution deduction for a conservation easement in the amount of $32,075,000, pursuant to the qualified appraisal (the “Conservation Easement”).

i. Donee. MRCA is a tax exempt public charity under Section 501(c)(3), as described in Sections 509(a)(1) and 170(b)(l)(A)(vi).

j. MRCA was at all relevant times a qualified organization under Section 170(h)(3) and eligible to receive deductible conservation easements pursuant to Section 170(h)(1)(B).

k. MRCA has the experience and means to monitor and enforce the Conservation Easement.

l. MRCA has made annual inspections of the Conservation Easement to ensure compliance with the terms of the Conservation Deed.

m. Petitioner received a letter acknowledging the donation of the Conservation Easement in compliance with Section 170(f)(8).

n. Baseline Report. In connection with the donation of the Conservation Easement, MRCA issued a baseline report and accompanying documentation (the “Baseline Report”) for the Conservation Easement.

o. The Baseline Report contains an evaluation of certain conservation values and purposes protected by the Conservation Easement.

p. The Baseline Report documents the condition of the Conservation Property at the time of the donation of the Conservation Easement and summarizes the conservation values present within the Conservation Property.

q. Conservation Purpose. The Conservation Easement meets at least one of the four conservation purposes required under Section 170(h)(4)(A) andTreas. Reg. § 1.170A-14(d), as documented by the Baseline Report, the Conservation Deed, and the attributes of the Conservation Property.

r. Respondent has made no determination that the Conservation Easement failed to preserve any one of the four conservation purposes described in Section 170(h)(4).

s. Appraisal. The appraisal of the values of the Conservation Easement (the “Appraisal”) was performed by Thomas W. Erickson, MAI. Mr. Erickson was, at the time of the appraisal, a “qualified appraiser” as defined in Treas. Reg. § 1.170A-13(c)(5) (the “Qualified Appraiser”).

t. The Qualified Appraiser concluded the highest and best use of the Property before donation of the Conservation Easement to be a residential subdivision.

u. The Qualified Appraiser determined the value of the Conservation Easement to be $32,075,000.00, using the before and after method pursuant to Treas. Reg. § 1.170A-14(h)(3).

v. The effective date of the Appraisal was December 30,2014.

w. The Appraisal performed by the Qualified Appraiser, and used as a basis for the charitable deduction taken for the donation of the Conservation Easement, was a “qualified appraisal” under Treas. Reg. § 1.170A-13(c)(3).

x. Respondent has made no determination that the Qualified Appraiser was not a qualified appraiser, or that the Appraisal was not a qualified appraisal, as defined in Treas. Reg. § 1.170A-13(c)(3) or (c)(5).

y. The Appraisal correctly determined the value of the Conservation Easement donated by the Partnership.

z. Reliance on Experts. The Partnership reasonably relied upon the Appraisal in establishing the amount of the charitable contribution deduction.

aa. The Partnership's reliance was reasonable and in good faith, and the Partnership made an independent investigation of the value of the Conservation Easement.

bb. The Partnership provided all of the necessary information to their Certified Public Accountant (“CPA”) and believed the CPA prepared and accurate tax return.

cc. The Partnership reasonably relied on the CPA to prepare an accurate tax return.

dd. The Partnership satisfied all other requirements necessary to be entitled to a charitable deduction for the donation of the Conservation Easement, as reported on its Partnership Tax Return for the 2014 tax year.

ee. Pursuant to Section 7491, the burden should be shifted to Respondent as to both the deductibility and the value of the Conservation Easement because the Partnership has produced credible evidence establishing that it is entitled to a charitable contribution deduction for the Conservation Easement in the amount of $32,075,000.00 for the 2014 tax year, and has otherwise maintained all records, cooperated with Respondent in all phases of the examination process, and complied with all requirements of the Internal Revenue Code and the Treasury Regulations.

WHEREFORE, Petitioner prays the Court finds:

i. That there is no deficiency in tax due from Petitioner for the tax year ending December 31, 2014;

ii. That Respondent bears the burden of proof as to all issues; and

iii. That the Court grant such other and further relief as it deems appropriate.

Respectfully submitted this 13th day of November, 2019.

ADMITTED

Vivian D. Hoard
Tax Court Bar No. HV0055
Counsel for Petitioner
Taylor English Duma LLP
1600 Parkwood Circle, Suite 400
Atlanta, GA 30339
(770) 541-2223
vhoard@taylorenglish.com

ADMITTED

R. Brian Gardner, III
Tax Court BarNo.GR0812
Counsel for Petitioner
Taylor English Duma LLP
1600 Parkwood Circle, Suite 400
Atlanta, GA 30339
(678) 336-7180
bgardner@taylorenglish.com

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