Rhett Rance Smith and Alice Avila Smith, et al., (2007)

United States Tax Court

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Rhett Rance Smith and Alice Avila Smith, et al., (2007)

T.C. Memo. 2007-368

UNITED 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 Part...

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