Ebben v. Commissioner
| Decision Date | 11 April 1983 |
| Docket Number | 18516-80,18308-81.,13766-80,Docket No. 8473-77,7158-78,2765-80 |
| Parties | Leo G. Ebben and Donna W. Ebben, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Douglas W. Argue and Jeffrey Berkowitz, 333 S. Hope St., Los Angeles, Calif., for the petitioners. Karl D. Zufelt, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated cases respondent determined the following deficiencies in petitioners' Federal income taxes:
Addition
Income Tax to tax
Docket No. Petitioners Year Deficiency Sec. 6651(a)(1)2
_____________________________________________________________________________________________
8473-77 Leo G. Ebben and 1973 $ 6,217.00 $933.00
Donna W. Ebben
7158-78 Gilbert Dreyfuss and 1974 4,863.00
Evelyn H. Dreyfuss
2765-80 Donald Kaufman and 1970 870.55
Gloria Kaufman 1973 9,850.00
13766-80 Eli Broad and 1973 248,150.00
Edythe L. Broad 1974 87,977.00
1975 7,742.00
1976 28,578.00
18516-80 Donald Kaufman and 1975 21,045.00
Gloria Kaufman
18308-81 Eli Broad and 1977 52,816.00
Edythe L. Broad
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In an amended answer, respondent has alleged that the deficiency in petitioners Leo G. Ebben and Donna W. Ebben's (docket No. 8473-77) Federal income tax for the year 1973 is $12,160.78.
After concessions,3 the issues are (1) what was the fair market value as of December 28, 1974, of a parcel of real property donated by Whitney Farms Investment Co. (herein Whitney Farms) to Pitzer College (herein Pitzer) and (2) if the fair market value of the parcel exceeds Whitney Farms' basis in the parcel, whether Whitney Farms realized a capital gain upon the transfer of the parcel.
Some of the facts in these cases were stipulated. The stipulation of facts,4 supplemental stipulation of facts, second supplemental stipulation of facts, and stipulated exhibits are incorporated herein by this reference.
All petitioners resided in California at the time of filing their respective petitions herein.
On or about December 26, 1968, petitioners Donald B. Kaufman (herein Kaufman) and Eli Broad (herein Broad) purchased a parcel of unimproved real property (herein sometimes referred to as the subject property) from a trust known as the Sixty Trust for $548,000. Kaufman and Broad gave the Sixty Trust a note in the amount of $544,584, secured by a trust deed on the property, as part of the property's purchase price.
On or about January 1, 1969, Whitney Farms, a general partnership, was formed. Whitney Farms was composed of petitioners5 and others, whose respective interests were as follows:
Eli Broad .............. 63.0%
Donald Kaufman ......... 27.0%
Leo Ebben .............. 3.5%
Gilbert Dreyfuss ....... 3.0%
Others ................. 3.5%
On or about January 1, 1969, Kaufman and Broad each transferred his respective interest in the subject property, subject to the trust deed, to Whitney Farms as a contribution of capital. On that same date, Kaufman and Broad also transferred two other parcels acquired by them on or about December 26, 1968, to Whitney Farms. Whitney Farms' purpose, as set forth in its Agreement of General Partnership, was to hold property of the partnership for investment purposes.
The subject property is located in Placer County, California, between the communities of Roseville and Lincoln.6 It is 931.66 acres: 322.63 acres of the property are located on the west side of Fiddyment Road and the remainder (609.03 acres) is located east of said road. We will hereinafter refer to the portion lying east of Fiddyment Road as the east tract and the remainder as the west tract.
As of December 28, 1973, the northeast "arm" of the subject property, comprising approximately 75 acres, was zoned "M" (Industrial) and "M-D" (Industrial with Design Control). The remainder of the subject property was zoned "U" (Unclassified). The U zoning classification is a transitional or holding zone, which will generally be changed to the zoning of the nearest property. Land zoned U may be used for most residential and agricultural purposes. Industrial use is not permitted on land zoned U.
The subject property had no water and sanitary sewage services in 1973. The nearest water and sewer lines were located approximately 4,000 feet east of the most northeasterly part of the property and approximately 1,200 feet from the southeast portion of the property. Although Fiddyment Road and Sunset Boulevard West, which borders the west tract on its north side, provided access to the subject property, these roads needed to be improved to be adequate for industrial use.
On December 5, 1973, pursuant to a request of Roland Sutton (herein Sutton), the then Director of Industrial Development for Placer County, an engineering firm submitted a written proposal for preparation of a basic development plan for the Sunset/Whitney Industrial Area. In May 1974 the county entered an agreement with the engineering firm for preparation of such a plan, whereby the engineering firm agreed to (1) "perform an in-depth study of the suggested Core Area as shown on Exhibit "A" attached to the agreement to determine the proper location of future roadways and utilities" and (2) "to determine the extent to which future expansion of the Core Area would result in probable development of the peripheral area, and to determine the logical form such development should take." No part of the subject property was in the so-called "Core Area." The 75 acres zoned M and M-D were in the peripheral area and the remainder of the subject property was adjacent to the peripheral area.
In January 1975 the engineering firm submitted its report to Placer County. The conclusions of the report were accepted by the Board of Supervisors of Placer County and were used by the county staff in making various decisions. The report proposed several new roadways, sewerlines, and waterlines. There were no proposals contained therein to extend any of the waterlines or sewerlines to the subject property. Under the subject heading "Zoning", the report states:
The Basic Plan of Development considers the adjacent county areas zoned "F-B-X" and "U" east of Fiddyment Road as logical future expansions of the present industrial district. These areas represent approximately 1,200 additional acres for potential industrial usage. Since the zoning process can be time-consuming and often requires an amendment to the General Plan, it would be prudent to review this matter as a trend of development occurs within the present industrial district.
According to a map included in the report, the 534.03 acres of the east tract zoned U (609.03, total acres in east tract, less 75 acres zoned M or M-D) are part of the adjacent county areas zoned U east of Fiddyment Road referred to in the above quote.
On December 28, 1973, Whitney Farms contributed the subject property to Pitzer, a qualified charitable organization under section 170. The contribution was made subject to the trust deed, which secured an outstanding obligation in the amount of $544,584 as of the date of the contribution.
In preparation for the filing of Whitney Farms' 1973 information return, petitioner Leo G. Ebben (herein Ebben), the managing partner of Whitney Farms, employed Donald L. Vogel (herein Vogel) and Peter F. Brennan (herein Brennan), qualified expert appraisers, to value the subject property. Vogel and Brennan submitted an appraisal report to Ebben on April 10, 1974. They used a market data approach and estimated a per acre value of $2,000 for the east tract and a per acre value of $650 for the west tract. Thus, they concluded that the subject property's fair market value as of December 28, 1973, was $1,420,000.7 Whitney Farms, consequently, reported the contribution of the subject property on its 1973 information return as follows:
Appraised Value at Date of Gift .... $1,420,000
Less: Deed of Trust ................ — 544,584
__________
Total .............................. $ 875,416
In 1978, petitioners employed Thomas W. Clark, Jr. (herein Clark), to appraise the subject property. Clark used the market data approach and considered the east tract to have a greater potential than the west tract for near term industrial development. He concluded a per acre value for the east tract of $1,500 and a per acre value for the west tract of $650, resulting in a total value of $1,117,000 for the subject property.8
Respondent employed Francis L. Blaesi (herein Blaesi), an expert appraiser, to estimate the fair market value of the subject property. Blaesi determined that, relative to the December 28, 1973, valuation date, the approximately 75 acres of the subject property zoned M and M-D would have been considered to have industrial potential and that the remainder should be evaluated as agricultural property. He determined that the subject property's fair market value as of December 28, 1973, was $569,000: $1,000 per acre for the 75 acres zoned M and M-D and $600 per acre for the acreage zoned U.9
Table 1 below sets forth sales of certain agricultural properties in the vicinity of the subject property during the period from February 25, 1972, to June 17, 1975:
Table 1
Sale Total Price
Parcel Date Grantor Grantee Acreage Per Acre...To continue reading
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