Ebben v. C.I.R.

Citation783 F.2d 906
Decision Date25 February 1986
Docket NumberNo. 84-7474,84-7474
Parties-901, 86-1 USTC P 9250 Leo G. EBBEN and Donna W. Ebben, Gilbert Dreyfuss and Evelyn H. Dreyfuss; Donald Kaufman and Gloria Kaufman; Eli Broad and Edythe L. Broad, Petitioners- Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Gilbert Dreyfuss, Douglas W. Argue, Richard, Watson, Dreyfuss & Gershan, Los Angeles, Cal., petitioners-appellants.

Bruce Ellisen, Michael Paup, Dept. of Justice, Washington, D.C., for respondent-appellee.

Petition to Review a Decision of the Tax Court of the United States.

Before REINHARDT, BEEZER and HALL, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

Taxpayers Leo G. Ebben, Donna W. Ebben, Gilbert Dreyfuss, Evelyn H. Dreyfuss, Donald Kaufman, Gloria Kaufman, Eli Broad, and Edythe L. Broad petition for review of a tax court decision redetermining deficiencies in their federal income taxes. The Internal Revenue Service (IRS) asserted the deficiencies after taxpayers, a partnership, claimed charitable deductions from the donation of property to Pitzer College. We affirm in part and reverse in part the tax court's redetermination of taxpayers' liability.

I

In December 1968 taxpayers Kaufman and Broad purchased an unimproved parcel of real estate for $548,000. They paid $3,416 in cash and gave a nonrecourse note for $544,584, secured by a deed of trust. In addition, Kaufman and Broad prepaid $999,211.20 of interest on the note.

On January 1, 1969 taxpayers and others formed Whitney Farms, a general partnership created to hold real estate investments. A few days later, Kaufman and Broad transferred their interests in the subject property to Whitney Farms as a contribution of capital. The partnership took the property subject to the note and trust deed. Whitney Farms continued to hold the property until December 28, 1973 when the entire parcel was donated to Pitzer College, a qualified charitable organization under the Internal Revenue Code of 1954, 26 U.S.C. Sec. 170 (cited hereafter as "I.R.C."). Pitzer accepted the gift subject to the note and deed of trust, which secured an outstanding obligation in the amount of $544,584 on the date of transfer.

The donated property consisted of 931.66 acres located in Placer County. Fiddyment Road divides the parcel into two areas: 322.63 acres west of the road (west tract) and 609.03 acres east of the road (east tract). As of December 28, 1973, both tracts were zoned "U," except for an irregular 75-acre "arm" of the east tract which was zoned "M" or "M-D." A "U" zone permits agricultural or residential uses, while an "M" or "M-D" zone allows for more valuable industrial uses.

Taxpayers hired three expert appraisers to value the land at the date of transfer to Pitzer for purposes of calculating their charitable deductions. From interviews with county officials and a planning report commissioned by the county, these appraisers concluded that the entire east tract had industrial potential and valued the land accordingly. Taxpayers used these appraisals to calculate their charitable deductions as follows:

Appraised value at date of gift $1,420,000

Less: Deed of trust $ 544,584

----------

Total deduction $ 875,416

The taxpayers claimed a deduction on their individual tax returns proportionate to their partnership interest in Whitney Farms.

The IRS disagreed with taxpayers' valuation, and asserted deficiencies in the various years in which the deductions were claimed. Specifically, the IRS asserted: (1) that the east tract had been overvalued by almost $1 million, and (2) that taxpayers' relief from the nonrecourse loan should be treated as a bargain sale to a charity resulting in taxable gain under I.R.C. Sec. 1011(b). Taxpayers then filed a petition in the tax court to redetermine the deficiencies; the tax court upheld the IRS's assessment.

II

We review the tax court's determination of property value under the clearly erroneous standard. Hokanson v. Commissioner, 730 F.2d 1245, 1249 (9th Cir.1984); United States v. McConney, 728 F.2d 1195, 1200 n. 5 (9th Cir.1984) (en banc), cert. denied, --- U.S. ----, 105 S.Ct. 101, 83 L.Ed.2d 46 (1985). Complex factual inquiries such as valuation require the trial judge to evaluate a number of facts: whether an expert appraiser's experience and testimony entitle his opinion to more or less weight; whether an alleged comparable sale fairly approximates the subject property's market value; and the overall cogency of each expert's analysis. Trial courts have particularly broad discretion with respect to questions of valuation. 1 The tax court's decision to analyze the gift of encumbered property as a bargain sale is reviewed de novo. McConney, 728 F.2d at 1201.

III

The IRS asserts that taxpayers overvalued the east tract in two ways. First, the portion of the east tract zoned "U" should be valued as farm land rather than a potential industrial site because agriculture was the highest and best use for the land on the transfer date. Second, taxpayers failed to prove that the portion of the east tract zoned "M" or "M-D" was worth more than the government's appraisal of $1,000 per acre. The tax court ruled for the IRS on both of these issues. We affirm the tax court's valuation of the portion of the east tract zoned "U" and reverse the tax court's decision with respect to the portion zoned "M" or "M-D".

A

Treasury Regulation Sec. 1.170A-1(c)(2) defines the fair market value of property as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts." 2 Both parties cite this regulation approvingly, but they disagree as to the "relevant facts." The amount a "willing buyer" would pay for the subject property depends, of course, on the uses to which he may put the land. As of the transfer date, all but 75 acres of the east tract was zoned for agricultural or residential use. The tax court found agriculture to be the highest and best use for the land and assigned a value of $600 per acre. 3

Taxpayers contend that the tax court's valuation is clearly erroneous because it conflicts with their evidence that the east tract will be rezoned for industrial uses. The appraisers hired by taxpayers considered the entire east tract to have industrial potential and valued it at $1,500 to $2,000 per acre. 4 The tax court, however, relied on the alternative analysis put forth by the government's appraiser. The tax court found that the portion of the east tract zoned "U" had no industrial potential in the foreseeable future because: (1) a surplus of undeveloped industrial land existed in 1973 (only 10% of the designated industrial district had been developed); (2) testimony that county officials would have approved rezoning in 1977 was inadequate to show there would have been support for rezoning in 1973; and (3) the government's appraiser relied in part on two sales of land adjoining the industrial district, both of which had sold in the $600 range. 5 On the basis of these facts, we hold that the tax court's decision to value the east tract as agricultural land is not clearly erroneous. We therefore affirm the tax court's value of $600 per acre for the portion of the east tract zoned for unclassified uses.

B

The parties also disagree as to the value of the 75 acres in the east tract zoned for industrial use. In five of the six consolidated cases the tax court ruled that this portion of the east tract was worth $1000 per acre. In the Ebben case, however, the tax court assigned a value of $1600 per acre to the same land. The tax court clearly erred in assigning a lower value to the same land in five of the six cases. We reverse the tax court in those five cases and hold that the 75 acres in the east tract zoned "M" or "M-D" should be valued at $1600 for each taxpayer.

By tax court rule, the value used by the IRS in its statutory notice of deficiency is presumed correct. T.Ct. Rule 142(a) (codified at 26 U.S.C. foll. Sec. 7453). The notices of deficiency mailed to the taxpayers in this case contained different values for the subject property. 6 The tax court, however, chose not to rely on the presumed correctness of the notices of deficiency and instead assigned its own value to the 75 acres. Having decided to make an independent valuation, the tax court should have assigned just one value for the subject property. 7

Our review of the record indicates that the evidence supports a value of $1600 per acre for the land zoned "M" or "M-D" in all of the six cases before us. We therefore reverse the tax court's decision to value the industrial portion of the east tract at $1000 per acre in five of the six cases.

IV

The second issue before us is how basis is to be computed upon the gift of the subject land to a charitable organization. We hold that a transfer by gift of encumbered property to a charity is a "sale" under section 1011(b).

Section 1001 states that "the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011...." I.R.C. Sec. 1001(a). Under section 1001, the phrase "other disposition of property" includes a gift of property. Treasury Regulation Sec. 1.1001-2(a)(4)(iii) provides: "A disposition of property includes a gift of the property or a transfer of the property in satisfaction of liabilities to which it is subject."

Taxpayers concede that the amount of the encumbrance on the property contributed to charity is an "amount realized." See Estate of Levine v. Commissioner, 72 T.C. 780, 789-91 (1979) aff'd, 634 F.2d 12, 15 (2d Cir.1980). Taxpayers also concede that the contribution to charity is a disposition of property which causes the amount of the encumbrance to be an "amount realized"...

To continue reading

Request your trial
50 cases
  • Estate of True v. Commissioner, Docket No. 10940-97.
    • United States
    • United States Tax Court
    • July 6, 2001
    ...v. Commissioner [88-1 USTC ¶ 9152], 838 F.2d 330, 334 (9th Cir. 1988) (quoting Ebben v. Commissioner [86-1 USTC ¶ 9250], 783 F.2d 906, 909 (9th Cir. 1986), affg. in part and revg. in part [Dec. 40,033(M)] T.C. Memo. 1983-200), affg. in part and revg. in part on another ground [86-1 USTC ¶ 9......
  • In re Dow Corning Corp., Bankruptcy No. 95-20512.
    • United States
    • United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan
    • July 30, 1999
    ...... See Bricklayers' Pension Trust Fund v. Taiariol, 671 F.2d 988, 989 (6th Cir.1982) ("This provision mandates the imposition of post-judgment interest, thus removing the award ... Ebben v. IRS, 783 F.2d 906, 916 (9th Cir.1986). For this reason, one of the cornerstone rules of ......
  • Alumax Inc. v. Comm'r of Internal Revenue, 7779–95.
    • United States
    • United States Tax Court
    • September 30, 1997
    ...overall cogency of each expert's analysis.’ ” Sammons v. Commissioner, 838 F.2d 330, 334 (9th Cir.1988) (quoting Ebben v. Commissioner, 783 F.2d 906, 909 (9th Cir.1986), affg. in part and remanding in part T.C. Memo.1983–200.) We shall disregard any opinion of an expert that constitutes not......
  • Scar v. C.I.R., 85-7212
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • April 14, 1987
    ...... Orvis v. Commissioner, 788 F.2d 1406, 1407 (9th Cir.1986); Ebben v. Commissioner, 783 F.2d 906, 909 (9th Cir.1986). .         Section 6212(a) ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT