Alli v. Comm'r
| Decision Date | 27 January 2014 |
| Docket Number | T.C. Memo. 2014-15,Docket No. 24863-11 |
| Parties | BEN ALLI AND SHAKI ALLI, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Ben Alli and Shaki Alli, pro sese.
Alissa L.Vanderkooi, for respondent.
LARO, Judge: During 2008 an apartment building in Detroit, Michigan, was contributed to Volunteers of America, a section 501(c)(3)1 organization. Inrespect thereof, petitioners claimed a noncash charitable contribution deduction of $499,000 on their 2008 joint Federal income tax return which they carried over in full to their 2009 return. Respondent disallowed the deduction and the carryover in full.
The issues before the court are:
(1) whether the contributed apartment building was owned by petitioners or a wholly owned corporation of petitioner husband when it was contributed. We hold that it was owned by the corporation;
(2) whether petitioners may claim a deduction with respect to the corporation's contribution where respondent is treating the corporation as an S corporation. We hold that they may;
(3) whether the qualified appraisal and other documentation requirements of section 170(f)(11) were satisfied by either of the two appraisals petitioners used to support the contribution and their appraisal summary. We hold that they were not;
(4) whether such noncompliance should be excused under the judicial doctrine of substantial compliance or for reasonable cause pursuant to section 170(f)(11)(A)(ii)(II). We hold that it should not.
Ben Alli is a medical doctor with a master's degree in public health from the University of Pittsburgh, an M.D. from St. George's School of Medicine in the West Indies, and a Ph.D. from Columbia University Union Graduate School. Originally from Africa, Dr. Alli has lived in the United States for over 40 years and is a U.S. citizen. In addition, Dr. Alli and his wife have three children. Petitioners resided in Michigan when they filed their petition.
Dr. Alli and his sister established BSA Corp. (BSA), a Michigan corporation which owns several apartment buildings in Detroit, Michigan.2 After acquiring his sister's interest in BSA, Dr. Alli became BSA's sole shareholder. Petitioners reported BSA's 2008 rental income on Schedule E, Supplemental Income and Loss, of their personal return. Petitioners also reported BSA's 2008 depreciation deduction for its residential rental property on Form 4562, Depreciation and Amortization, of their personal return. Petitioners' 2008 return was prepared by Kent S. Siegel, a paid preparer.
In 1983 petitioners purchased two apartment buildings, 2211 Pingree (Pingree) and 2987 Gladstone (Gladstone) from the U.S. Department of Housing and Urban Development (HUD) at a HUD auction for a total of $353,000. The purchase of these two buildings was financed by a HUD mortgage. Pingree and Gladstone participated in HUD's Section 8 housing program. As part of the program, in 1983 petitioners and HUD entered into a "Housing Assistance Payments" (HAP) contract and a regulatory agreement for the two properties. Pursuant to these contracts, petitioners were required to keep the properties in a decent, safe, and sanitary condition. In 1988 petitioners transferred Pingree and Gladstone to BSA.
In the early 1990s HUD became aware of significant problems at the two properties. In 1992 and 1993 HUD's Detroit office inspected the properties and discovered significant problems (e.g., missing smoke detectors and other fire hazards, roach infestation, peeling paint, significant water damage, etc.). HUD ordered Dr. Alli to effect all of the requisite repairs. Yet despite representations by Dr. Alli that most of the problems had been remedied, inspections in 1994, 1996, and 1997 revealed that the same deficiencies were still present.
In 1998 a second HUD inspector again encountered many of the previously identified deficiencies at Pingree and Gladstone. After the failed inspection, Dr. Alli again represented that the identified deficiencies had either already been corrected or would be corrected within a few weeks. In 1999 when these corrections still had not materialized, HUD classified Pingree and Gladstone as "troubled property" and referred the properties to HUD's Department Enforcement Center (DEC).
In early 1999 a team from DEC inspected the properties and found the conditions to be deplorable--e.g., severe water damage; sink and shower units separating from the walls; actively leaking plumbing; damaged or inoperable appliances, doors and lighting; and roach infestation. Also in 1999 DEC contracted Pinnacle Realty Management Co. (Pinnacle) to conduct an independent review of the Pingree/Gladstone properties. Pinnacle reported that "[t]he picture painted by prior inspections is accurate" and that the properties did not meet minimum standards of decent, safe, and sanitary conditions. In late 1999 an inspection by HUD's Real Estate Assessment Center (REAC) confirmed the continuing existence of many past deficiencies as well as new ones. REAC also directed Dr. Alli to conduct a survey of the properties, which Dr. Alli failed to do.
In 2000 HUD notified petitioners that they had violated the regulatory agreement and defaulted on the Pingree/Gladstone HAP contract for failure to maintain the properties in a decent, safe, and sanitary condition. When petitioners again failed to correct the violations, HUD began relocating tenants and initiating foreclosure proceedings. Before HUD completed the foreclosure, however, petitioners paid off the balance of the HUD mortgage. On October 16, 2000, HUD recorded a "Discharge of Regulatory Agreement", which canceled the regulatory agreement that petitioners and HUD had entered into in 1983.3
On November 29, 2001, petitioners and BSA sued the United States and the Secretary of HUD for breach and termination of the Pingree/Gladstone HAP contract. The United States counterclaimed, alleging that petitioners and BSA breached the HAP contract by failing to provide decent, safe, and sanitary housing. On April 4, 2007, as part of the HUD litigation proceedings, petitioners and BSA stipulated that BSA currently owned and operated the Pingree/Gladstone apartments. In an opinion entered on August 26, 2008, the U.S. Court of Federal Claims held in favor of the United States and the Secretary of HUD and heldagainst petitioners and BSA. The court further held that the corporate veil of BSA should be pierced.
On September 29, 2008, BSA, Dr. Alli, and Mrs. Alli executed a quitclaim deed of Gladstone to Volunteers of America, Michigan for nominal consideration (i.e., $1). On the same day, petitioners' son, Adeola Alli, also executed a quitclaim deed of Gladstone to Volunteers of America. On October 29, 2008, Volunteers of America sent Dr. Alli a letter thanking him for the contribution of Gladstone. The letter included a statement that Dr. Alli "received no goods or services as a result of this donation" and further enclosed a donation receipt. The donation receipt stated that the donation was made on October 23, 2008, and further provided Volunteers of America's taxpayer identification number.
At the time of the donation, only 6 of Gladstone's 34 apartment units had tenants. With regard to real property, Volunteers of America's policy was to find a prospective purchaser before it would accept a donation in order to minimize the organization's liability exposure. With regard to the donation of Gladstone, Brian Wilbur, the Director of Thrift Operations at Volunteers of America, contacted Roger Ackerman, a real estate agent with whom Mr. Wilbur had previously done business.
Mr. Ackerman visited Gladstone twice. The first time, he inspected only four or five of the apartment units. The second time, Mr. Ackerman inspected nearly all 34 apartment units. At trial Mr. Ackerman described the apartment units as "pretty rough" and opined that most of the units were "not rent-ready". In addition, Mr. Ackerman observed that the elevator was broken, the roof leaked, the floors "heav[ed] up", kitchens were missing, and one apartment unit was completely burned.
Volunteers of America wished to sell the property quickly and entered into a contract on September 10, 2008, to sell Gladstone to an investor in California for $60,000. This investor was the only person who expressed interest in purchasing Gladstone.
Petitioners reported the charitable contribution of Gladstone on Form 8283, Noncash Charitable Contributions, of their 2008 return. On the Form 8283 petitioners described Gladstone as a "34 Unit Apartment Building" in "Good Condition" with an appraised fair market value of $499,000. Petitioners further reported that they had acquired Gladstone in June 2000 and that their basis in Gladstone was $1,200,000. Petitioners' Form 8283 did not include an appraiser's name, address, or identifying number, nor did it include an appraiser declaration.
In addition, petitioners' Form 8283 did not include the donee's signature, its taxpayer identification number, or its statement regarding whether the donor had received any consideration for the contribution.
On May 26, 1999, nearly a decade before the contribution of Gladstone, Anthony Sanna, MAI, conducted a market rent survey of the Pingree/Gladstone apartments (Sanna appraisal). Using the rental rates for five comparable apartment buildings, Mr. Sanna concluded that Pingree and Gladstone had an annual gross income potential of $390,840. Mr. Sanna did not estimate the fair market value of the Pingree/Gladstone apartments. In addition, the Sanna appraisal was not performed for income tax purposes, but rather for the purposes of HUD's Section 8 housing program. Finally, the Sanna appraisal did not include the date or expected date of Gladstone's contribution, nor did it include the terms of agreement...
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