Rhett Rance Smith and Alice Avila Smith, et al., (2007)
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T.C. Memo. 2007-368UNITED STATES TAX COURT RHETT RANCE SMITH AND ALICE AVILA SMITH, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 11902-05, 13225-05, Filed December 17, 2007. 13226-05, 13227-05, 13228-05. Robert J. Stientjes, Thomas C. Pliske, Shine Lin, and Anthony S. Gasaway, for petitioners. Anne W. Durning, Nicholas J. Richards, Laura Beth Salant, and Chris J. Sheldon, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Judge: Respondent determined the following income tax deficiencies and penalties with respect to petitioners in these consolidated cases: Accuracy-Related Penalty Petitioners Year Deficiency Sec. 6662 Rhett Rance & 1998 $311,514 $62,302.80 Alice Avila Smith 1999 368,777 73,755.40 2000 373,183 74,638.40 2001 110,429 22,085.80 2002 87,535 None Joel Rance & 1998 988,392 197,678.40 LaRhea Smith 1999 1,254,421 250,884.20 2000 439,132 87,826.40 2001 256,486 51,297.20 J. Zane & Shannon 1998 375,999 75,199.80 R. Creese Smith 1999 765,397 153,079.40 2000 386,956 77,391.20 2001 290,027 58,005.40 Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the years under consideration, and all Rule references are to the Tax Court Rules of Practice and Procedure. After concessions2 of the parties, the issues remaining for our consideration are: 1. Whether petitioners, Rhett Rance and Alice Avila Smith; Joel Rance and LaRhea Smith; and J. Zane and Shannon R. Creese Smith, are entitled to charitable contribution deductions with respect to interests in family limited partnerships contributed to a charitable organization and, if so, what the values of the charitable contributions are; 2. whether petitioner J. Zane Smith's dog breeding activity constitutes an activity engaged in for profit within the meaning of section 183(a); 3. whether petitioner J. Zane Smith's cow and dairy farm activity constitutes an activity engaged in for profit within the meaning of section 183(a); 4. whether petitioner Rhett Rance Smith's cutting horse activity constituted an activity engaged in for profit within the meaning of section 183(a); and 5. whether petitioners are liable for section 6662(a) accuracy-related penalties for negligence or disregard of rules or regulations with respect to the above-referenced charitable contribution deductions and/or their section 183 activities. FINDINGS OF FACT Background Petitioners Rhett Rance Smith (Rhett) and Alice Avila Smith (Alice) are married and resided in Scottsdale, Arizona, at the time their petitions were filed. They timely filed Forms 1040, U.S. Individual Income Tax Return, for 1998, 1999, 2000, 2001, and 2002. On April 15, 2005, respondent sent notices of deficiency to Rhett and Alice for their 1998, 1999, 2000, and 2001 tax years. On March 25, 2005, respondent sent a notice of deficiency to Rhett and Alice for their 2002 tax year. Petitioners Joel Rance Smith (Rance) and LaRhea Smith (LaRhea) are married and resided in Eagle Point, Oregon, at the time their petitions were filed. They timely filed Forms 1040 for 1998, 1999, 2000, and 2001. On April 15, 2005, respondent sent notices of deficiency to Rance and LaRhea for their 1998, 1999, 2000, and 2001 tax years. Petitioners J. Zane Smith (Zane) and Shannon R. Creese Smith (Shannon) are married and resided in Earlville, New York, at the time their petition was filed. They timely filed Forms 1040 for 1998, 1999, 2000, and 2001. On April 15, 2005, respondent sent notices of deficiency to Zane and Shannon for their 1998, 1999, 2000, and 2001 tax years. Rance and LaRhea Smith are the parents of Rhett and Zane Smith. Noncash Charitable Contributions Each couple claimed deductions for noncash charitable contributions of interests in their family limited partnership (FLPs) which, essentially, was to hold interests in their closely held, family-owned Arizona C corporation Beneco, Inc. (Beneco). Beneco had been incorporated in 1989 with 1,000 initially issued shares of stock, held as follows: Petitioners Shares Rance 250.5 LaRhea 250.5 Rhett and Alice 249.5 Zane and Shannon 249.5 Total 1,000.0 Beneco's business was to provide a qualified retirement plan and trust and qualified health and welfare trust services to contractors who work under prevailing State and Federal wage laws, including the Federal Davis-Bacon Act. For its taxable years ended March 31, 1997 through 2004, Beneco did not pay a dividend. During December 1995, petitioners' attorney, Robert A. Kelley, Jr. (Attorney Kelley), who specialized in tax and estate planning, established three separate Arizona FLPs in each of which one couple owned a limited partnership interest of approximately 98 percent and the couple's wholly owned corporation, as general partner, owned the remaining 2 percent as follows: FLP Limited Partner General Partner Jireh LP J. Rance & J.A. Rohi Corp. LaRhea Smith Mustard Seed LP J. Zane & Z&S Consulting, Inc. Shannon R. Smith Zerubbabel LP Rhett R. & Bull Run Enters., Alice A. Smith Inc. Each partnership agreement provided that partners could not transfer a partnership interest without prior written consent of all the other partners and that control over the partnership was vested in the general partner (the couple's wholly owned corporation). During 1995, Rance and LaRhea transferred their 51-percent ownership interest in Beneco to Jireh Limited Partnership (Jireh). Jireh is treated as a partnership for Federal tax purposes, and its only asset is 501 shares of Beneco stock. Sometime after December 20, 1995, Zane and Shannon transferred into Mustard Seed Limited Partnership (Mustard Seed) their 249.5 shares of Beneco stock which, during the years at issue, were its sole asset. Sometime after December 20, 1995, Rhett and Alice transferred into Zerubbabel Limited Partnership (Zerubbabel) their 249.5 shares of Beneco stock which, during the years at issue, were its sole asset. Christian Community Foundation (CCF), a section 501(c)(3) charity for tax purposes, was incorporated in 1980 under the laws of Colorado. On or about December 19, 1995, Attorney Kelley sent a letter to CCF, enclosing a check for $1,000 and an Application to Begin a Charitable Project. CCF set up the Zacchaeus Foundation (Zacchaeus), a donor-advised fund, for petitioners and assigned to it account No. 06022. Attorney Kelley advised CCF that for 1995, Rance and LaRhea would be contributing an FLP interest having a value of $350,000 and that Rhett and Alice and Zane and Shannon would each be contributing an FLP interest having a value of $185,000. Attorney Kelley further advised that petitioners would be making annual gifts in amounts to be determined by their income for the particular year. He further advised that all of the gifts of FLP interests that were made to the project would be reacquired via irrevocable life insurance trusts that were to be funded by life insurance and that application had been made for the insurance. In 1996, the irrevocable trust of each couple and CCF executed a separate Agreement for the Purchase and Sale of Limited Partnership Interest. Each agreement provided that upon the death of the later to die of the couple, CCF had the right to require the trustee to buy CCF's entire limited partnership interest. Similarly, the trust could require CCF to sell its interest to the trustee. CCF or the trust could exercise the right to buy or sell within 'sixty * * * days from the date the * * * [trust] collects the death benefits' from a specified life insurance policy. It was intended that the sale or purchase transaction be funded by a life insurance policy. Sometime later, Attorney Kelley left the United States, and petitioners hired Attorney Frederick Meyer (Attorney Meyer). Attorney Meyer conducted a review of petitioners' documents, including wills, family limited partnerships, and insurance trusts, and he discovered what he considered to be inadequacies. Attorney Meyer believed that the partnership agreements should reflect a fiduciary duty to the charity and an obligation to share cashflow with the charity. Edward Kramer (Mr. Kramer), petitioners' certified public accountant (C.P.A.), and Rance did not believe this was necessary but reluctantly agreed to make the changes. In 1997 the limited partnership agreements were revised to accommodate the recommended changes. Petitioners did not rely on Attorney Meyer with respect to valuation questions. They relied on Mr. Kramer to take care of valuing the partnership interests. Petitioners paid annual administrative fees to CCF. From 1995 through 2001, Rance and LaRhea assigned interests in Jireh to CCF and claimed the following noncash charitable contributions deductions: Date Percent Assigned Per Tax Return Claimed Contribution 12/20/95 10.9157% $350,000 12/29/97 9.9133 Unknown 12/29/00 1.5988 145,000 12/31/01 11.272 480,000 Although Form 8283, Noncash Charitable Contributions, for 2000 indicated that an interest of 1.5988 percent had been contributed to CCF, the actual percentage contributed was 3.22 percent. Pursuant to Rance and LaRhea's request, during the period 1995 to 2002, CCF directed their contributed interests in Jireh to Zacchaeus. During the years 1998 through 2001, Rance and LaRhea did not transfer any Beneco stock to CCF. Rance and LaRhea attached section B of Form 8283 to their 2000 return and described the donated property as '1.5988% Units Jireh Ltd' with an appraised fair market value of $145,000. The Declaration of Appraiser, part III on Form 8283 for 2000, was signed by Mr. Kramer and stated that the appraisal date was September 1, 1999. No such appraisal was attached to Rance and LaRhea's 2000 return or made a part of the record. The Donee Acknowledgment, part IV on Form 8283 for 2000, was signed by Valerie Cornelius, Director of Operations for CCF, next to the typed date December 29, 2000. Attached to Rance and LaRhea's 2000 return was a letter, dated January 31, 2001, thanking them for their charitable...
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