Fakiris v. Comm'r, T.C. Memo. 2017-126

CourtUnited States Tax Court
Writing for the CourtGALE, Judge
Docket NumberDocket No. 18292-12.,T.C. Memo. 2017-126
Decision Date28 June 2017


T.C. Memo. 2017-126
Docket No. 18292-12.


June 28, 2017

Neil David Katz, Richard Stephen Kestenbaum, and Bernard Stephen Mark, for petitioner.

Marc L. Caine and Peggy J. Gartenbaum, for respondent.


GALE, Judge: Respondent determined the following deficiencies and penalties with respect to petitioner's Federal income tax:1

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Accuracy-related penalties
Sec. 6662(a)
Sec. 6662(h)

After concessions,2 the issues for decision are whether petitioner is: (1) entitled to carryover charitable contribution deductions for the years at issue in connection with a purported gift made in 2004 of a theater building and (2) liable for the accuracy-related penalties that respondent determined.


Some of the facts have been stipulated and, together with the exhibits attached thereto, are incorporated herein by this reference. Petitioner resided in New York at the time his petition was filed.

I. Background

During the relevant years petitioner was a commercial real estate owner and developer. He was the managing member of Grou Development LLC (Grou),

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which was principally engaged in the business of renting and developing real estate.

II. Grou's purchase of the St. George Theatre

On March 14, 2001, Grou purchased the St. George Theatre in Staten Island, New York (St. George or theater), for $700,000.3 The St. George was a movie and vaudeville house. It originally opened for business on December 4, 1929, and from 1938 to 1972 was used as a movie theater. Between 1972 and 2001 the theater was used only sporadically.

At the time Grou acquired the St. George, it was dilapidated and in need of substantial repairs and restoration. Vandalism in some areas of the theater had resulted in broken fixtures, debris, and graffiti. Other areas had experienced severe water damage. The flooring of the orchestra level of the theater was unsound, and the electrical, plumbing, and mechanical systems required repair or replacement. From the time it purchased the St. George to the time it transferred it in a bargain sale (discussed hereafter), Grou made no significant repairs to the theater other than some patching of the roof.

Grou initially planned to raze the St. George and erect a highrise structure in its place. However, after encountering significant community opposition to that

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plan, Grou sought instead to divest itself of the theater by donating it to a tax-exempt organization. Grou offered the theater to the City of New York and to a local college. Each declined the offer.

III. Richmond Dance and WEMGO

On or about December 15, 2003, Rosemary Cappozalo4 and two of her daughters organized a nonprofit corporation, Richmond Dance Ensemble, Inc. (Richmond Dance), with the express purpose (besides dance training and performance) of providing for the preservation, restoration, and use for the public good of the St. George. Contemporaneously therewith, Mrs. Cappozalo engaged in negotiations with representatives of Grou regarding acquisition of the theater by Richmond Dance. Sometime before June 29, 2004, the parties agreed in principle that Grou would donate the theater to Richmond Dance.

Petitioner was concerned, however, that Richmond Dance had not yet been recognized by the Internal Revenue Service (IRS) as a tax-exempt organization eligible to receive deductible charitable contributions for Federal income tax purposes. Mrs. Cappozalo had a relationship with a representative of WEMGO Charitable Trust, Inc. (WEMGO), which unlike Richmond Dance was at the time

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recognized by the IRS as exempt from Federal income tax under section 501(c)(3) and therefore eligible to receive such contributions.5 Mrs. Cappozalo, the WEMGO representative, and Grou agreed to an arrangement concerning the transfer of the St. George. Since contributions to WEMGO were eligible to receive favorable tax treatment, petitioner, on behalf of Grou, agreed to transfer the theater to WEMGO. The parties have stipulated that WEMGO in turn agreed to accept Grou's transfer and to subsequently transfer the theater to Richmond Dance.

IV. Transfers of the theater

On June 29, 2004, Grou and WEMGO executed a "Contract of Sale" (contract of sale) concerning a transfer of the St. George. The contract of sale included, inter alia, the following terms:

23. The delivery and acceptance of the deed at the Closing, without the simultaneous execution and delivery of a specific agreement which by its terms shall survive the Closing, shall be deemed to constitute full compliance by Seller [Grou] with all of the terms, conditions and covenants of this Agreement on Seller's part to be performed. [Hereinafter, paragraph 23.]

* * * * * * *

29. This Agreement and the Schedules annexed hereto (a) shall be governed by and construed in accordance with the internal laws of the State of New York without regard to principles of conflicts of law and

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(b) shall be given a fair and reasonable construction in accordance with the intentions of the parties hereto [Grou and WEMGO]. * * * [Hereinafter, paragraph 29.]

* * * * * * *

43. Seller and Purchaser shall enter into the following agreement at the time of closing which shall survive closing and shall be recorded against the property when applicable:

* * * * * * *

d. The Bargain and Sale Deed with covenants against grantors [sic] acts conveying the Premises [St. George] to Purchaser [WEMGO] shall have a restriction prohibiting the sale/transfer or conveyance of the Premises during the first five (5) years after the conveyance to Purchaser herein except that [sic] a conveyance during that period to Richmond Dance Ensemble Inc. [Hereinafter, paragraph 43d.]

* * * * * * *

49. Purchaser [WEMGO] its successors and/or assigns shall be prohibited from selling the premises [St. George] for the first five (5) years after delivery of the deed. Notwithstanding the aforesaid, Seller [Grou] may transfer the premises to Richmond Dance Ensemble Inc. once it receives its 501C(3) [sic] status from the Internal Revenue Service. The provisions of this paragraph shall survive closing. [Hereinafter, paragraph 49.]

On the same date that Grou and WEMGO executed the contract of sale, Grou transferred the St. George to WEMGO in exchange for $470,000.6 This cash

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consideration was provided by Mrs. Cappozalo. The parties have stipulated that WEMGO did not make any payment in consideration for Grou's transfer of the theater to it. The transfer was effected by a deed dated June 29, 2004. Despite the conditions set forth in paragraph 43d of the contract of sale, the deed did not include any restriction on WEMGO's ability to sell, transfer, or convey the theater or grant to Grou any power to direct a transfer of the St. George to Richmond Dance.

Notwithstanding the contract of sale terms conditioning the transfer of the St. George to Richmond Dance upon the latter's having been recognized as tax exempt, WEMGO transferred the theater to Richmond Dance on June 29, 2004, the same day the contract of sale was executed between WEMGO and Grou. At that time, Richmond Dance had not been recognized as tax exempt. The IRS issued a letter to Richmond Dance on September 30, 2004, recognizing it as tax exempt under section 501(c)(3), effective May 11, 2004. The parties have stipulated that WEMGO did not receive any consideration for its transfer of the St. George to Richmond Dance, which was effected by a deed also dated June 29, 2004.

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V. The Equity Valuation appraisals

In the latter half of 2003 petitioner, on behalf of Grou, retained Equity Valuation Associates (Equity Valuation) to appraise the theater. Equity Valuation prepared an appraisal dated November 17, 2003 (2003 appraisal). The 2003 appraisal concluded that as of November 3, 2003, the "estimated Market Value" of the theater "as is" was $4.5 million.

Before the June 2004 transfer of the theater to WEMGO, petitioner, on behalf of Grou, again retained Equity Valuation for purposes of appraising the theater. Equity Valuation prepared an appraisal dated June 23, 2004 (2004 appraisal), in which it concluded that on that date the "estimated Market Value" of the theater "as is" was $5 million.

VI. Return positions and notice of deficiency

A. Grou's partnership return for 2004

Grou filed a Form 1065, U.S. Return of Partnership Income, for 2004 (2004 Grou return).7 Grou reported on the 2004 Grou return that it sold the theater on June 29, 2004, for $470,000, that its basis in the theater was $64,482, and that it realized a $405,518 capital gain from the sale ($470,000 - $64,482).

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The 2004 Grou return does not disclose any charitable contribution with respect to the theater or indeed any noncash charitable contribution. Instead, a statement attached to the return reports a $621,496 cash charitable contribution. The Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., issued to petitioner (and attached to the Grou return) reported 60% of the cash charitable contribution, or $372,898, under "Other deductions".

B. Petitioner's returns for 2004 through 2008

Petitioner's timely filed Federal income tax return for 2004 (2004 Fakiris return) reported on Schedule A, Itemized Deductions, a $3 million noncash charitable contribution and claimed a related deduction of $63,143, leaving $2,936,857 as a carryover to subsequent years, including the years at issue. A partial Form 8283, Noncash Charitable Contributions, was included with the 2004 Fakiris return, describing the donated property as a "3000 SEAT THEATRE" in "VERY GOOD" condition. For 2004 petitioner owned a 60% interest in Grou. The reported $3 million noncash charitable contribution represented 60% of the $5 million appraised value shown in the 2004 appraisal. Petitioner did not...

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