Cohan v. Comm'r of Internal Revenue
| Decision Date | 10 January 2012 |
| Docket Number | Docket No. 19854-05,Docket No. 19849-05,Docket No. 19857-05,T.C. Memo. 2012-8 |
| Parties | MARSHALL AND JUDITH COHAN, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Kenneth A. Glusman, Kelly M. Townsend, Jason T. Bell, and Edward DeFranceschi, for petitioners.
Carina J. Campobasso and Michael R. Fiore, for respondent.
FINDINGS OF FACT........................................... 6
I. Preliminary Matters............................ 6
II. The Farm....................................... 7
A. Description.................................. 7
B. 1969 Agreement............................... 8
III. Other Owners of Adjoining Land................. 11
IV. Formation of HCAC.............................. 12
V. Actions Taken With Respect to the Farm......... 13
VI. Negotiations With TNC.......................... 14
VII. Final Agreement................................ 21
VIII. The Closing.................................... 25
A. Overview..................................... 25
B. Four Properties Transferred to HCAC.......... 26
1. Blue Heron.............................. 26
2. Sanderling.............................. 26
3. Lots 2 and 3............................ 27
C. Horse Barn Lease............................. 27
D. Aldeborgh Lease.............................. 28
E. Lot 29 Option................................ 29
F. Wild Right-of-Way Relocation and
Other Road Modifications..................... 30
G. New Beach Rights............................. 30
H. Release of the Reciprocal Right.............. 31
I. Land Bank Fees............................... 31
J. Legal Fees Reimbursement..................... 31
IX. Postclosing Negotiations........................ 32
X. Federal Income Tax Reporting.................... 36
XI. Notices of Deficiency........................... 38
OPINION.................................................... 41I. Burden of Proof................................ 41
II. Charitable Contribution Deductions............. 42
A. Background................................... 42
B. Section 170 and Regulations.................. 43
C. Analysis..................................... 45
1. Good-Faith Estimate..................... 46
2. Reasonable Reliance..................... 53
3. Substantial Compliance Doctrine......... 55
4. Conclusion.............................. 56
III. Valuation...................................... 57
A. Background................................... 57
B. Fair Market Value Standard................... 58
1. Overview................................ 58
2. Common Approaches for Determining Fair Market Value............................ 60
a. Overview........................... 60
b. Market Approach.................... 60
c. Income Approach.................... 61
d. Asset-Based Approach............... 61
C. Experts...................................... 61
D. Overview of Expert Testimony................. 63
1. Mr. LaPorte............................. 63
2. Mr. Czupryna............................ 64
E. Valuation of the Four Properties............. 66
1. Blue Heron.............................. 66
a. Mr. LaPorte's Appraisal............ 66
b. Mr. Czupryna's Appraisal........... 67
2. Sanderling.............................. 69
a. Mr. LaPorte's Appraisal............ 69
b. Mr. Czupryna's Appraisal........... 70
3. Lots 2 and 3............................ 71
a. Mr. LaPorte's Appraisal............ 71
b. Mr. Czupryna's Appraisal........... 72
4. Analysis................................ 73
F. Horse Barn Lease............................. 77
1. Overview................................ 77
2. Land Value.............................. 79
3. Rate of Return.......................... 81
4. Vacancy Adjustment...................... 82
5. Conclusion.............................. 82
G. Aldeborgh Lease.............................. 83
1. Overview................................ 83
2. Land Value.............................. 84
3. Discount for Restricted Use............. 85
4. Fair Return Rate........................ 86
5. Inwood Annuity Factor................... 86
6. Conclusion.............................. 87
H. Wild Right-of-Way Relocation................. 87
I. New Beach Rights............................. 89
IV. Gain From the Sale of the Rights of First Refusal........................................ 91
A. Overview..................................... 91
B. Amount Realized.............................. 92
1. Number of New Beach Rights.............. 93
a. Petitioners' Position.............. 93
b. Respondent's Position.............. 97
2. Release of the Reciprocal Right Encumbering the Aldeborgh
Children's Existing Properties.......... 97
C. Adjusted Basis............................... 98
1. Wallace & Co. Payment...................100
2. Success Fee.............................101
3. Tax Advice..............................102
V. Character of Gain..............................103
VI. Accuracy-Related Penalties.....................108
A. Overview.....................................108
B. In General...................................108
C. Respondent's Initial Burden of Production....110
MARVEL, Judge: Respondent determined Federal income tax deficiencies and section 6662(a)2 accuracy-related penalties as follows:
Marshall and Judith Cohan, docket No. 19849-05
+-----------------------------------------------------+
¦Year¦Deficiency¦Accuracy-related penalty sec. 6662(a)¦
+----+----------+-------------------------------------¦
¦2001¦$1,794,445¦$358,889 ¦
+-----------------------------------------------------+
John and Janet Aldeborgh, docket No. 19854-05
+-----------------------------------------------------+
¦Year¦Deficiency¦Accuracy-related penalty sec. 6662(a)¦
+----+----------+-------------------------------------¦
¦2001¦$363,562 ¦$72,639 ¦
+-----------------------------------------------------+
Robert and Susan Hughes, docket No. 19857-05
+-----------------------------------------------------+
¦Year¦Deficiency¦Accuracy-related penalty sec. 6662(a)¦
+----+----------+-------------------------------------¦
¦2001¦$2,381,396¦$476,279 ¦
+-----------------------------------------------------+
Petitioners filed petitions seeking redetermination of the deficiencies and penalties. We consolidated the cases for trial, briefing, and opinion and shall refer to the consolidated cases as this case throughout this opinion.
After concessions by the parties, discussed infra, the issues for decision are:
(1) Whether Marshall and Judith Cohan (Marshall Cohans) and Robert and Susan Hughes (Hugheses) may each claim a charitable contribution deduction under section 170 relating to a transaction between Herring Creek Acquisition Co., L.L.C. (HCAC), and the Nature Conservancy (TNC) that occurred in 2001 (the 2001 transaction);
(2) whether petitioners failed to report taxable income from the 2001 transaction;
(3) whether the income generated by the 2001 transaction is taxable as ordinary income or as a long-term capital gain; and
(4) whether petitioners are liable for accuracy-related penalties under section 6662(a) (section 6662(a) penalties).
I. Preliminary Matters
Some facts were stipulated. We incorporate the stipulation of facts, the first supplemental stipulation of facts, and the second supplemental stipulation of facts into our findings by this reference.
Petitioners in each docket are a married couple. Benjamin and Hildegarde Cohan (Benjamin Cohans) are the parents of petitioners Marshall Cohan (Mr. Cohan) and Janet Aldeborgh, and the Benjamin Cohans are grandparents of petitioner Robert Hughes(Mr. Hughes). When the petitions were filed, the Marshall Cohans resided in Florida, John and Janet Aldeborgh (Aldeborghs) resided in Massachusetts, and the Hugheses resided in California.
HCAC is a Massachusetts limited liability company. The parties stipulated that petitioners were its only members in 2001, and we so find. HCAC redeemed the Aldeborghs' interest on October 16, 2001. For Federal income tax purposes, HCAC reported on its Form 1065, U.S. Return of Partnership Income, for 2001, and we so find, that HCAC is a partnership not subject to the TEFRA partnership audit and litigation procedures of sections 6221 through 6234. See sec. 301.7701-3(b)(1)(i), Proced. & Admin. Regs.
II. The Farm
A. Description
Herring Creek Farm (farm) is an approximately 220-acre property in Edgartown, Massachusetts, on the southeast shoreline of Martha's Vineyard.3 The farm is in a neighborhood that fronts Edgartown Great Pond on the west, Slough Cove on the north, and Crackatuxet Cove and the Atlantic Ocean on the south.
The farm sits in an ecologically significant area known as the Katama maritime sand plains. The Katama maritime sand plainsinclude a rare type of soil that is found only in Martha's Vineyard, except perhaps that it may be found to a limited extent in Nantucket, and a number of natural communities such as grasslands and heathlands dominated by shrubs and oak trees. The Katama maritime sand plains also host many rare, threatened, and endangered species.
B. 1969 Agreement
One or more members of the Wallace family (Wallace family) purchased the farm from the Benjamin Cohans in 1969.4 At that time, the Wallace family (through a trustee) entered into a December 30, 1969, agreement (1969 agreement) with the Benjamin Cohans, the Marshall Cohans, and the Aldeborghs. Hildegarde Cohan, the Marshall Cohans, and the Aldeborghs owned land adjoining the farm.
Among other things, the 1969 agreement limited development of the farm and the adjoining properties owned by the Benjamin Cohans, the Marshall Cohans, and the Aldeborghs and granted both to the Wallace family, as one party, and to the Benjamin Cohans, to the Marshall Cohans, and to the...
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