Tax Court tells Dolphins owner to sleep with the fishes
The Tax Court has denied a claimed charitable deduction of $33,019,000 by RERI Holdings, whose principal investor is Miami Dolphins owner Stephen Ross.
On its 2003 tax return, RERI Holdings claimed a charitable contribution deduction for the transfer of a noncash asset—a remainder interest in property—to the University of Michigan. RERI had paid $2.95 million in March 2002 to acquire the remainder interest, with an agreement that provided covenants intended to preserve the value of the property, but which also limited the remedy available to the holder of the remainder interest for a breach of those covenants to immediate possession of the property.
The covenants provided that in no event would the holder of the corresponding term interest be liable for damages to the holder of the remainder interest. The Form 8283, Noncash Charitable Contributions, that RERI attached to its return provided the date and manner of its acquisition of the contributed remainder interest but left blank the space for the “donor’s cost or other adjusted basis.”
In its FPAA (final partnership administrative adjustment), the IRS reduced RERI’s claimed charitable contribution deduction on the ground that the contributed property was worth only $3,900,000. In an amendment, the IRS asserted that RERI was not entitled to any deduction for its contribution because the transaction was a sham or lacked economic substance or, alternatively, that RERI’s deduction should be limited to the amount, $1,940,000, which the university realized on its sale of the contributed property. In a second amendment to its answer, the IRS asserted RERI’s claimed deduction resulted in a “gross valuation misstatement” within the meaning of Code section 6662(h)(2).
The Tax Court held in the case, RERI Holdings I, LLC v. CIR, 149 T.C. No. 1, that RERI’s omission from its Form 8283 of its cost or other adjusted basis in the contributed remainder interest violated the substantiation requirement of Reg. section 1.170A-13(c(4)(ii)(E).
“Congress intended the new substantiation requirements [in the Deficit Reduction Act of 1984] to alert the Commissioner to potential overvaluations of contributed property and thus deter taxpayers from claiming excessive deductions,” the Tax Court stated. Because omission of that information prevented the Form 8283 from achieving its intended purpose, the Tax Court said the omission could not be excused on the grounds of substantial compliance. And since RERI failed to comply, either strictly or substantially, with the requirements of Reg. sec. 1.170A-13(c)(2), the court denied the claimed deduction in full.