Preview
FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017
NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017
Exhibit 12
INDEX NO. 650756/2017
FILED:. NEW YORK COUNTY CLERK 05/26/2017 01:59 PM
NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017
US TAX COURT
RECEIVED ALS
FEB 15 2013
US TAX COURT
02:27 PM
UNITED STATES TAX COURT
eFILED
FEB 15 2013
RERI HOLDINGS I, LLC, )
HAROLD LEVINE, TAX )
MATTERS PARTNER, )
)
Petitioner, )
)
v. ) Docket No. 9324-08
) Judge J. S. Halpern
COMMISSIONER OF INTERNAL REVENUE, )
) Electronically filed
Respondent. )
MEMORANDUM IN SUPPORT OF PETITIONERS' MOTION FOR PARTIAL
SUMMARY JUDGMENT
This memorandum is submitted in support of petitioners' Motion for Partial Summary
Judgment filed simultaneously herewith.
ISSUE STATEMENT
Whether the following new issue raised by Respondent in his Amendment to Answer to
Petition filed August 7, 2009 is applicable to the donation by RERI to the University of
Michigan under section 170: That RERI Holdings I, LLC's donation to the Regents of the
University of Michigan of 100% of the membership interests in a limited liability company
holding real property subject to a term-of-years interest owned by a third party is a sham for
federal income tax purposes and the doctrine of economic substance applies in determining
whether the donation has economic substance independent of tax considerations and/or business
purposes.
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STATEMENT OF FACTS
l. On July 5, 2001, InterGate LA II LLC ("Intergate"), a Washington limited
liability company, and Red Sea Tech I. Inc. ("Red Sea"), a Nevada corporation, executed a Real
Estate Agreement in which Red Sea agreed to purchase a 278,637, square foot building and
14.43 acres ofland (collectively, the "Hawthorne Property") for $44,000,000. This price was
subsequently reduced by amendments to the Real Estate Agreement to $42,350,000. Tax Court
Order of May 5, 2011, p. 2 (hereinafter the "May 5, 2011 Order") Ex. A, Ex. 13-J, (RERI
040797-040835), 14-J (RERI 040836-040838), 15-J (RERI-040839-040842, 16-J (RERI
040843-040844), 17-J (RERI 041598), 18-J (RERI 040845-040846), 19-J (RERI 040847-
040851), 20-J (RERI 040852-040854), 21-J (RERI 040855-040857), and 22-J (RERI 040858-
040861).
2. On February 4, 2002, Red Sea assigned its rights under the Real Estate
Agreement to RS Hawthorne, LLC ("Hawthorne"), a Delaware limited liability company. Ex.
23-J (RERI 041291-041292). All of the membership interests in Hawthorne were held by RS
Holdings, LLC ("Holdings"), a Delaware limited liability company. Ex. 83-J (RERI 041161-
041166). All of the membership interests in Holdings, in turn, were owned by Red Sea May 5,
2011, Order p. 2. Ex. 86-J (RERI 041180-041183).
3. To fund the purchase of the Hawthorne Property, Hawthorne borrowed
$43,671,739 from Branch Banking & Trust Company ("BB&T") as trustee, executed a
Borrower's Closing Certificate and signed a Promissory Note on February 1, 2002, in favor of
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BB&T. The Promissory Note was secured by a Deed of Trust, Security Agreement and Fixture
Filing (collectively, "Deed of Trust"). May 5, 2011 Order p. 2. Ex. 56-J (RERI 041651-
041657), 57-J (RERI 041677-041719), and 58-J (RERI 041919-042309).
4. On February 4, 2002, as part of the loan from BB&T, Hawthorne executed an
Absolute Assignment of Rents and Lease with regards to the Hawthorne Property, which was
dated as of February 1, 2002, and recorded in Los Angeles County, California. Ex. 59-J (RERI
041720-041732). BB&T also secured a guarantee and indemnity with regards to Hawthorne's
debt from Southern Hotels Holding B.V. a Netherlands corporation. Ex. 60-J (RERI 041658-
041676). On February 6, 2002, a Wananty Deed was executed evidencing transfer oftitle for
the Hawthorne Property from Intergate to Hawthorne. May 5, 2011, Order, p. 2. Ex. 27-J
010640-010645).
5. At the time of the closing of the Real Estate Agreement, the Hawthorne Property
was leased to AT&T Corporation, as tenant, pursuant to a triple net Industrial Lease Agreement
dated October 12, 2000, for an initial term of 15 years and 6 months with 3 renewal option terms
of 5 years each. May S, 2011, Order, p. 2. Ex. 8-J (RERI 041010-041060), 9-J (RERI
041064-041065), 10-J (RERI 041061-041063), 11-J (RERI 041066-041068), and 12-J (RERI
041069-041070).
6. Prior to the transfer of the Hawthorne Property, on February 5, 2002, RJS Realty
Corp ("RJS "), a Delaware Corporation, entered into a Letter Agreement with Red Sea,
referencing the purchase of a remainder interests in Holdings. On the same day, Red Sea
executed a Letter Agreement between Prism Venture Partners, LL, RJS and Red Sea forming
Prism Ventures Paitners-Red Sea Group (PVP-RSG), a Delaware limited partnership,
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referencing a Partnership Contribution Transaction by Red Sea of its "terms of years estate" in
Holdings, following the acquisition of the remainder interest in Holdings. May 5, 2011, Order,
p. 3. Ex. 88-J (RERI 042261-042305), 89-J (RERI 042503-042507), 90-J (RERI 041184-
041215), and 91-J (RERI 047687-047689).
7. On February 7, 2002, Red Sea created two temporal interests in Holdings -- a
term of years member interest (TOYS interest) and a successor remainder member interest (the
"Asset") referenced in the February 5 Letter Agreements involving Red Sea-RSG and/or RJS and
other entities. May 5, 2011, Order, p. 3, Ex. 89-J (RERI 042503-042507), 102-J (RERI
010892-010937), and 103-J (RERI 042494-042502).
8. Red Sea transferred the Toys interest, commencing February 2002, and ending
December 31, 2020, to PVP-RSG for a 90% interest in PVP-RSG. Prism and RJS contributed
$90,000 for a 90% interest in PVP-RSG. May 5, 2011, Order, p. 3. Ex. 89-J (RERI 042503-
042507), and 90-J (RERI 041184-041215).
9. On February 7, 2002, RJS acquired the Asset, or alternatively, the right to receive
all membership interests in Holdings, from Red Sea on January 1, 2021, upon the expiration of
the TOYS interest. May 5, 2011, Order, p. 3. Ex.102-J (RERI 010892-010937).
10. RERI Holdings I, LLC ( 11 RER1 11 ) was a Delaware limited liability company
organized on or about March 4, 2002, and classified as a partnership for Federal income tax
purposes with its principal place of business in New York, New York. May 5, 2011, Order, p.
1. Ex. 1-J (RERl-002029-002141), and 104-J (RERI 007263-007264).
11. As of March 22, 2002, RERI entered into an agreement with RJS to acquire the
Asset for $2,950,000. On March 25, 2002, RERI paid $1,880,000 in cash and executed a non-
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recourse promissory note for $1,065,000 in favor ofRJS, in exchange for the Asset. May 5,
2011, Order, p. 4. Ex. 109-J (RERI 006052-006067), 110-J (RERI 002355-002356). The
Note was paid off in four installments made by August 19, 2002. Ex.111-J (RERI 012178).
12. On August 27, 2003, RERI's primary investor, Stephen M. Ross ("Mr. Ross"),
pledged to make a gift to the University of Michigan ("University") of $4,000,000 for the benefit
of its Department of Athletics ("Gift Agreement"). The Gift Agreement was subseque~tly
increased to $5,000,000 on or as of September 14, 2004. May 5, 2011, Order, p. 4. Ex. 125-J
(RERI 015375-015378), and 130-J (RERI 015379-015380).
13. Under the Gift Agreement, Ross pledged and agreed "to transfer, or to have
transferred", the Asset to the University no later than December 31, 2003. Upon receiving the
Asset, the University was to hold the Asset at a nominal value of $1.00 and credit Mr. Ross's
pledge in the amount of $1.00. The University was required to hold the Asset for a minimum of
2 years, "after which the University shall sell" the Asset II in a manner and to a buyer of its
choosing" and credit Mr. Ross's account "to a value equal to the net proceeds received by the
University" for the Asset's remainder interest. May 5, 2011, Order, p. 4. Ex. 125-J (RERI
015375-015378).
14. The donation to the University was completed on August 27, 2003 Ex.124-J
(RERI 015186-015193), 126-J (RERI 012121-012122), and 131-J (RERI 007321-007323) and
consisted of the right to receive outright ownership of RS Hawthorne Holdings, a single member
LLC, at the expiration of the TOYS interest. Ex 134-J (RERI 016285-016293). Holdings was a
disregarded entity under Treas. Reg. §301.7701-(2)(c)(2). Accordingly, for tax purposes, the
subject matter of the donation was a remainder interest in property; that is a remainder interest in
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real property. Ex. B Memorandum from the Office of Chief Counsel Internal Revenue
Service to Associate Area Counsel Large and Mid-Size Business Division (May 8, 2008)
(attached as Exhibit A to Petitioner's Reply to Respondent's Response to Petitioner's
Motion for Continuance of Trial filed on September 29, 2011).
15. In September, 2003, RERI retained Mr. Howard Gelbtuch (Mr. Gelbtuch) of Greenwich
RealtyAdvisors to appraise the value of the Asset. Ex. 132-J (RERI 012169-012172). Mr.
Gelbtuch concluded that the value of the Asset was $32,935,000. Mr. Gelbtuch determined the
value of the Asset by multiplying the value of the underlying leased fee interest by an actuarial
factor taken from the tables promulgated under Internal Revenue Code sections 2031 and 7520.
Sec. 20.2031-7(d)(l), Estate Tax Regs.; Sec. 1.7520-l(a)(l), Income Tax. Regs. May 5, 2011,
Order, p. 4. Ex. 1-J (RERI 002029-002141).
16. On March 26, 2008, respondent issued the FPAA to petitioner as tax matters
partner ofRERI for the 2003 tax year, disallowing $29,119,000 of the claimed charitable
contribution deduction. May 5, 2011, Order, p. 4. Ex. C.
17. The University's intent at the time of entering into the Gift Agreement was to
hold the properties that were subjects of Stephen Ross' s gifts for the two-year period required by
the Gift Agreement and then, in accordance with its policy of promptly converting gifts-in-kind
to cash, sell the properties. Ex. 151-J (RERI 016411-016417).
18. During the period when the University was considering how to market the
Remainder Interest, Ronald Katz and Harold Levine on behalf of HRK Real Estate Holdings,
LLC ("HRK"), approached the University to inquire about the possible sale of the Remainder
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Interest. They offered $1,940,000 for the Remainder Interest. Ex. 151-J (RERI 016411-
016417), 152-J (RERI 015559-015561).
19. Neither Stephen Ross nor any other member ofRERI was an investor in HRK.
20. "[HRK's] offer was discussed at length among members of the [University's]
management group and their internal advisors. It was also discussed with Stephen Ross, because
of his familiarity with the RERI property and his interest in the University's maximizing its
return on the property as a credit against his $5,000,000 pledge. In one of those discussions,
Stephen Ross indicated that if the University failed to accept the offer and ultimately sold the
property for less, he would consider his pledge to have been reduced by the full amount of the
offer. In order to eliminate the risks, the most important one being that the University not having
the cash, the University officials agreed to sell the property." Ex. 151-J (RERI 016411-
016417).
21. The University sold the Remainder Interest to HRK for $1,940,000 on or about
December 23, 2005. Ex.- 159-J (RERI 015466-015482).
ARGUMENT
The donation is not a sham but a gift of real property for federal income tax purposes and
applying the economic substance doctrine is improper since whether the transaction lacked
economic substance independent of tax considerations and/or business purpose is irrelevant
under I.R.C. § 170. Section l 70(a) allows as a deduction any charitable contribution defined in
section 170(c) payment of which is made within the taxable year. A charitable contribution
deduction under section 170(a) may be denied as a gift to a charitable donee if the gift is a
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"sham" or alternatively, if the gift is not in substance, a gift for federal income tax purposes.
Notwithstanding the foregoing, the mere fact that a taxpayer desires to obtain a charitable
deduction and conducts his affairs in such a manner as to obtain a deduction does not cause its
denial. See. e.g., Grossman v. Commissioner, T.C. Memo. 1973-219 (citing Waller v.
Commissioner, 39 T.C. 665, 676-677 (1963)); Maysteel Products, Inc. v. Commissioner, 33 T.C.
1021, 1024-1025 (1960), rev'd on another issue, 287 F.2d 429 (7th Cir. 1961).
As Judge Learned Hand observed, "[a]ny one may so arrange his affairs that his taxes
shall be as low as possible; he is not bound to choose that pattern which will best pay the
Treasury." Helvering v. Gregory, 69 F.2d 809,810 (2nd Cir. 1934), affd, 293 U.S. 465 (1935).
In applying the judicial doctrine of "sham" transaction, "the question for determination is
whether what was done, apart from the tax motive, was the thing which the statute intended."
Gregory v. Helvering, 293 U.S. 465, 469 (1935).
As stated in the above facts it is undisputed that RERI contributed the Asset to the
University and received nothing in return. Whether a transaction lacks economic substance
independent of tax considerations or business purpose is irrelevant in determining whether a
charitable deduction is allowed. See Skripak v. Commissioner, 84 T.C. 285,315 (1980) (court
held that business purpose and objective of economic profit insignificant in determining whether
a charitable contribution was made). cf. Schiedelman v. Commissioner, 682 FJd 189,200 (2d
Cir. 2012) (court held that motivation to receive a tax benefit irrelevant in determining whether a
charitable gift was made under section 170). Section 170(a) allows as a deduction any charitable
contribution defined in Section 170(c) payment of which is made within the taxable year. The
mere fact that a taxpayer desires to obtain a charitable deduction and conducts his affairs in such
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manner as to obtain the deduction does not cause its denial unless the donor receives a quid pro
quo. See, e.g., Schiedelman, 682 F.3d at 199; Grossman v. CommissionerT.C. Memo. 1973-219
(citing Waller v. Commissioner, 39 T.C. 665, 676-677 (1963)); Maysteel, 33 T.C. at 1024, (rev'd
on another issue, 287 F.2d 429 (7th Cir. 1961)).
While Petitioner did anticipate deriving a tax benefit from its donation through a
deduction, this benefit would not come from the recipient of the gift and, therefore, there was no
quid pro quo. As stated in Scheidelman,
[i]t is true the taxpayer hoped to obtain a charitable deduction for
her gifts, but this would not come from the recipient of the gift. It
would not be quid pro quo. If the motivation to receive a tax
benefit deprived a gift of it charitable nature under Section 170,
virtually no charitable gifts would be deductible.
682 F.3d at 200 (emphasis added). By implementing the principal
of quid pro quo the subjective intent if the donor is irrelevant. Id.
Thus, whether Petitioner's donation was tax motivated is
immaterial to the application of section 170.
For the purposes of Section 170, the determinative question is whether the donor has
effectively parted with dominion and control over the subject matter of the gift. See, e.g.,
Skripak, 84 T.C. at 318 (citing Guest v. Commissioner, 77 T.C. 116, 122 (1981), affd, 676 F.2d
682 (1 51 Cir. 1982); Londen v. Commissioner, 45 T.C. 110 (1965)). RERI's contribution to the
University effectuated the transfer of all ofRERI's ownership interest in the Asset. Thus, where
a taxpayer in fact owns property before the donation and the property is in fact transferred to the
donee, the donor is entitled to a charitable contribution deduction. See, e.g., Waller v.
Commissioner, 39 T.C. 665 (1963)(donated property was owned by the donor before donation);
Maysteel, 33 T.C. at 1024; Allen v. Commissioner, 92 T.C. 1 (1989)(a charitable deduction
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allowed to the extent of the taxpayer's own funds but disallowed to the extent of funds borrowed
from the charity and returned to it).
Petitioner has been unable to find any case law authority for the proposition that an
economic substance analysis is applicable to section 170. In fact the contrary is true. See
Skripak, 84 T.C. at 315. In Skripak, petitioners participated in a charitable contributions
program through which they purchased books, held them for slightly more than 6 months, and
then contributed them to various small rural public libraries. Respondent argued that petitioners
were merely purchasing "tax deductions" rather than books and therefore, the deduction should
not qualify for a charitable deduction. Id. at 285, 315. The court explained the reason why the
application of the economic substance doctrine is irrelevant in the context of section 170:
[t]he deduction for a charitable contribution provided by section
170 is a legislative subsidy for purely personal (as opposed to
business) expenses of a taxpayer. Accordingly, doctrines such as
business purposes and an objective of economic profit are of little,
if any, significance in determining whether petitioners have made
charitable gifts.
Id. at 315 (emphasis added). The Court further explained that:
[d]espite his protests to the contrary, respondent's seeming
obsession with the mechanics of these transactions as shams
appears to be caused by the admitted tax-avoidance motivation of
the various petitioners. However, as stated above, the deduction
for charitable contributions was intended to provide a tax incentive
for taxpayers to support charities. Consequently, a taxpayer's
desire to avoid or eliminate taxes contributing cash or property to
charities cannot be used as a basis for disallowing the deduction
for that charitable contribution.
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Id. at 319. Therefore, the donation of books purchased specifically for making donations to
schools was not a sham because the taxpayers in fact acquired ownership interests in the books
and parted with them upon the donation. "This is precisely the result intended by section 170."
Id. at 319, 320. Similarly, taxpayers who purchased medical equipment for donation to a
hospital were entitled to a charitable contribution deduction. Weitz v. Commissioner, T.C.
Memo. 1989-99.
The Court has re-affirmed this principle on numerous occasions involving the donor's
acquisition of property for purposes of making a charitable contribution. See, e.g., Maysteel, 33
T.C. at 1021 (taxpayer entitled to a charitable contribution deduction for donation of bonds
purchased for such purpose); Weintrob v. Commissioner, T.C. Memo. 1990-513, supplemented
fil'.,
T.C. Memo. 1991-67 (acquisition & conveyance of grave-sites); Hunter v. Commissioner,
T.C. Memo. 1986-308 (ownership and conveyance of the property to a charity). The fact that the
taxpayer acquires property with the intent to donate it to a charitable trust controlled by the
donee similarly does not result in the denial of a charitable contribution deduction where the
donee in fact acquires the property and parts with ownership of the property upon donation. See
Grossman, T.C. Memo. 1973-219.
CONCLUSION
To summarize, the undisputed facts are as follows:
1. RERI purchased the Asset from RJS, an unrelated third party for $2,950,000.
2. RJS, in turn, acquired the Asset from yet another unrelated third party, Red Sea.
3. RERI had the beneficial ownership of the Asset between March, 2002 until the time
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of its donation in August, 2003.
4. RERI received no quid pro quo from the University for its donation.
The application of the principles discussed above to the undisputed facts support the proposition
that a charitable donation was made. Tue law is clear that based on these facts a deduction is
allowable and that the sham and economic substance doctrines may not be used to disallow the
deduction.
For the reasons set forth above, petitioner's motion for partial summary judgment filed
simultaneously herewith should be granted.
Dated: fEb · (;' 1 )Ol.3
RANDA LG. ICK
Tax Court Bar No.: DR0534
Law Office of Randall G. Dick
290 Stonecrest Drive
San Francisco, CA 94132
415-786-5232
rgd 1018@yahoo.com
12
Preview
FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 Exhibit 12 INDEX NO. 650756/2017 FILED:. NEW YORK COUNTY CLERK 05/26/2017 01:59 PM NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 US TAX COURT RECEIVED ALS FEB 15 2013 US TAX COURT 02:27 PM UNITED STATES TAX COURT eFILED FEB 15 2013 RERI HOLDINGS I, LLC, ) HAROLD LEVINE, TAX ) MATTERS PARTNER, ) ) Petitioner, ) ) v. ) Docket No. 9324-08 ) Judge J. S. Halpern COMMISSIONER OF INTERNAL REVENUE, ) ) Electronically filed Respondent. ) MEMORANDUM IN SUPPORT OF PETITIONERS' MOTION FOR PARTIAL SUMMARY JUDGMENT This memorandum is submitted in support of petitioners' Motion for Partial Summary Judgment filed simultaneously herewith. ISSUE STATEMENT Whether the following new issue raised by Respondent in his Amendment to Answer to Petition filed August 7, 2009 is applicable to the donation by RERI to the University of Michigan under section 170: That RERI Holdings I, LLC's donation to the Regents of the University of Michigan of 100% of the membership interests in a limited liability company holding real property subject to a term-of-years interest owned by a third party is a sham for federal income tax purposes and the doctrine of economic substance applies in determining whether the donation has economic substance independent of tax considerations and/or business purposes. 1 SERVED Feb 20 2013 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 STATEMENT OF FACTS l. On July 5, 2001, InterGate LA II LLC ("Intergate"), a Washington limited liability company, and Red Sea Tech I. Inc. ("Red Sea"), a Nevada corporation, executed a Real Estate Agreement in which Red Sea agreed to purchase a 278,637, square foot building and 14.43 acres ofland (collectively, the "Hawthorne Property") for $44,000,000. This price was subsequently reduced by amendments to the Real Estate Agreement to $42,350,000. Tax Court Order of May 5, 2011, p. 2 (hereinafter the "May 5, 2011 Order") Ex. A, Ex. 13-J, (RERI 040797-040835), 14-J (RERI 040836-040838), 15-J (RERI-040839-040842, 16-J (RERI 040843-040844), 17-J (RERI 041598), 18-J (RERI 040845-040846), 19-J (RERI 040847- 040851), 20-J (RERI 040852-040854), 21-J (RERI 040855-040857), and 22-J (RERI 040858- 040861). 2. On February 4, 2002, Red Sea assigned its rights under the Real Estate Agreement to RS Hawthorne, LLC ("Hawthorne"), a Delaware limited liability company. Ex. 23-J (RERI 041291-041292). All of the membership interests in Hawthorne were held by RS Holdings, LLC ("Holdings"), a Delaware limited liability company. Ex. 83-J (RERI 041161- 041166). All of the membership interests in Holdings, in turn, were owned by Red Sea May 5, 2011, Order p. 2. Ex. 86-J (RERI 041180-041183). 3. To fund the purchase of the Hawthorne Property, Hawthorne borrowed $43,671,739 from Branch Banking & Trust Company ("BB&T") as trustee, executed a Borrower's Closing Certificate and signed a Promissory Note on February 1, 2002, in favor of 2 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 BB&T. The Promissory Note was secured by a Deed of Trust, Security Agreement and Fixture Filing (collectively, "Deed of Trust"). May 5, 2011 Order p. 2. Ex. 56-J (RERI 041651- 041657), 57-J (RERI 041677-041719), and 58-J (RERI 041919-042309). 4. On February 4, 2002, as part of the loan from BB&T, Hawthorne executed an Absolute Assignment of Rents and Lease with regards to the Hawthorne Property, which was dated as of February 1, 2002, and recorded in Los Angeles County, California. Ex. 59-J (RERI 041720-041732). BB&T also secured a guarantee and indemnity with regards to Hawthorne's debt from Southern Hotels Holding B.V. a Netherlands corporation. Ex. 60-J (RERI 041658- 041676). On February 6, 2002, a Wananty Deed was executed evidencing transfer oftitle for the Hawthorne Property from Intergate to Hawthorne. May 5, 2011, Order, p. 2. Ex. 27-J 010640-010645). 5. At the time of the closing of the Real Estate Agreement, the Hawthorne Property was leased to AT&T Corporation, as tenant, pursuant to a triple net Industrial Lease Agreement dated October 12, 2000, for an initial term of 15 years and 6 months with 3 renewal option terms of 5 years each. May S, 2011, Order, p. 2. Ex. 8-J (RERI 041010-041060), 9-J (RERI 041064-041065), 10-J (RERI 041061-041063), 11-J (RERI 041066-041068), and 12-J (RERI 041069-041070). 6. Prior to the transfer of the Hawthorne Property, on February 5, 2002, RJS Realty Corp ("RJS "), a Delaware Corporation, entered into a Letter Agreement with Red Sea, referencing the purchase of a remainder interests in Holdings. On the same day, Red Sea executed a Letter Agreement between Prism Venture Partners, LL, RJS and Red Sea forming Prism Ventures Paitners-Red Sea Group (PVP-RSG), a Delaware limited partnership, 3 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 referencing a Partnership Contribution Transaction by Red Sea of its "terms of years estate" in Holdings, following the acquisition of the remainder interest in Holdings. May 5, 2011, Order, p. 3. Ex. 88-J (RERI 042261-042305), 89-J (RERI 042503-042507), 90-J (RERI 041184- 041215), and 91-J (RERI 047687-047689). 7. On February 7, 2002, Red Sea created two temporal interests in Holdings -- a term of years member interest (TOYS interest) and a successor remainder member interest (the "Asset") referenced in the February 5 Letter Agreements involving Red Sea-RSG and/or RJS and other entities. May 5, 2011, Order, p. 3, Ex. 89-J (RERI 042503-042507), 102-J (RERI 010892-010937), and 103-J (RERI 042494-042502). 8. Red Sea transferred the Toys interest, commencing February 2002, and ending December 31, 2020, to PVP-RSG for a 90% interest in PVP-RSG. Prism and RJS contributed $90,000 for a 90% interest in PVP-RSG. May 5, 2011, Order, p. 3. Ex. 89-J (RERI 042503- 042507), and 90-J (RERI 041184-041215). 9. On February 7, 2002, RJS acquired the Asset, or alternatively, the right to receive all membership interests in Holdings, from Red Sea on January 1, 2021, upon the expiration of the TOYS interest. May 5, 2011, Order, p. 3. Ex.102-J (RERI 010892-010937). 10. RERI Holdings I, LLC ( 11 RER1 11 ) was a Delaware limited liability company organized on or about March 4, 2002, and classified as a partnership for Federal income tax purposes with its principal place of business in New York, New York. May 5, 2011, Order, p. 1. Ex. 1-J (RERl-002029-002141), and 104-J (RERI 007263-007264). 11. As of March 22, 2002, RERI entered into an agreement with RJS to acquire the Asset for $2,950,000. On March 25, 2002, RERI paid $1,880,000 in cash and executed a non- 4 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 recourse promissory note for $1,065,000 in favor ofRJS, in exchange for the Asset. May 5, 2011, Order, p. 4. Ex. 109-J (RERI 006052-006067), 110-J (RERI 002355-002356). The Note was paid off in four installments made by August 19, 2002. Ex.111-J (RERI 012178). 12. On August 27, 2003, RERI's primary investor, Stephen M. Ross ("Mr. Ross"), pledged to make a gift to the University of Michigan ("University") of $4,000,000 for the benefit of its Department of Athletics ("Gift Agreement"). The Gift Agreement was subseque~tly increased to $5,000,000 on or as of September 14, 2004. May 5, 2011, Order, p. 4. Ex. 125-J (RERI 015375-015378), and 130-J (RERI 015379-015380). 13. Under the Gift Agreement, Ross pledged and agreed "to transfer, or to have transferred", the Asset to the University no later than December 31, 2003. Upon receiving the Asset, the University was to hold the Asset at a nominal value of $1.00 and credit Mr. Ross's pledge in the amount of $1.00. The University was required to hold the Asset for a minimum of 2 years, "after which the University shall sell" the Asset II in a manner and to a buyer of its choosing" and credit Mr. Ross's account "to a value equal to the net proceeds received by the University" for the Asset's remainder interest. May 5, 2011, Order, p. 4. Ex. 125-J (RERI 015375-015378). 14. The donation to the University was completed on August 27, 2003 Ex.124-J (RERI 015186-015193), 126-J (RERI 012121-012122), and 131-J (RERI 007321-007323) and consisted of the right to receive outright ownership of RS Hawthorne Holdings, a single member LLC, at the expiration of the TOYS interest. Ex 134-J (RERI 016285-016293). Holdings was a disregarded entity under Treas. Reg. §301.7701-(2)(c)(2). Accordingly, for tax purposes, the subject matter of the donation was a remainder interest in property; that is a remainder interest in 5 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 real property. Ex. B Memorandum from the Office of Chief Counsel Internal Revenue Service to Associate Area Counsel Large and Mid-Size Business Division (May 8, 2008) (attached as Exhibit A to Petitioner's Reply to Respondent's Response to Petitioner's Motion for Continuance of Trial filed on September 29, 2011). 15. In September, 2003, RERI retained Mr. Howard Gelbtuch (Mr. Gelbtuch) of Greenwich RealtyAdvisors to appraise the value of the Asset. Ex. 132-J (RERI 012169-012172). Mr. Gelbtuch concluded that the value of the Asset was $32,935,000. Mr. Gelbtuch determined the value of the Asset by multiplying the value of the underlying leased fee interest by an actuarial factor taken from the tables promulgated under Internal Revenue Code sections 2031 and 7520. Sec. 20.2031-7(d)(l), Estate Tax Regs.; Sec. 1.7520-l(a)(l), Income Tax. Regs. May 5, 2011, Order, p. 4. Ex. 1-J (RERI 002029-002141). 16. On March 26, 2008, respondent issued the FPAA to petitioner as tax matters partner ofRERI for the 2003 tax year, disallowing $29,119,000 of the claimed charitable contribution deduction. May 5, 2011, Order, p. 4. Ex. C. 17. The University's intent at the time of entering into the Gift Agreement was to hold the properties that were subjects of Stephen Ross' s gifts for the two-year period required by the Gift Agreement and then, in accordance with its policy of promptly converting gifts-in-kind to cash, sell the properties. Ex. 151-J (RERI 016411-016417). 18. During the period when the University was considering how to market the Remainder Interest, Ronald Katz and Harold Levine on behalf of HRK Real Estate Holdings, LLC ("HRK"), approached the University to inquire about the possible sale of the Remainder 6 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 Interest. They offered $1,940,000 for the Remainder Interest. Ex. 151-J (RERI 016411- 016417), 152-J (RERI 015559-015561). 19. Neither Stephen Ross nor any other member ofRERI was an investor in HRK. 20. "[HRK's] offer was discussed at length among members of the [University's] management group and their internal advisors. It was also discussed with Stephen Ross, because of his familiarity with the RERI property and his interest in the University's maximizing its return on the property as a credit against his $5,000,000 pledge. In one of those discussions, Stephen Ross indicated that if the University failed to accept the offer and ultimately sold the property for less, he would consider his pledge to have been reduced by the full amount of the offer. In order to eliminate the risks, the most important one being that the University not having the cash, the University officials agreed to sell the property." Ex. 151-J (RERI 016411- 016417). 21. The University sold the Remainder Interest to HRK for $1,940,000 on or about December 23, 2005. Ex.- 159-J (RERI 015466-015482). ARGUMENT The donation is not a sham but a gift of real property for federal income tax purposes and applying the economic substance doctrine is improper since whether the transaction lacked economic substance independent of tax considerations and/or business purpose is irrelevant under I.R.C. § 170. Section l 70(a) allows as a deduction any charitable contribution defined in section 170(c) payment of which is made within the taxable year. A charitable contribution deduction under section 170(a) may be denied as a gift to a charitable donee if the gift is a 7 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 "sham" or alternatively, if the gift is not in substance, a gift for federal income tax purposes. Notwithstanding the foregoing, the mere fact that a taxpayer desires to obtain a charitable deduction and conducts his affairs in such a manner as to obtain a deduction does not cause its denial. See. e.g., Grossman v. Commissioner, T.C. Memo. 1973-219 (citing Waller v. Commissioner, 39 T.C. 665, 676-677 (1963)); Maysteel Products, Inc. v. Commissioner, 33 T.C. 1021, 1024-1025 (1960), rev'd on another issue, 287 F.2d 429 (7th Cir. 1961). As Judge Learned Hand observed, "[a]ny one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury." Helvering v. Gregory, 69 F.2d 809,810 (2nd Cir. 1934), affd, 293 U.S. 465 (1935). In applying the judicial doctrine of "sham" transaction, "the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended." Gregory v. Helvering, 293 U.S. 465, 469 (1935). As stated in the above facts it is undisputed that RERI contributed the Asset to the University and received nothing in return. Whether a transaction lacks economic substance independent of tax considerations or business purpose is irrelevant in determining whether a charitable deduction is allowed. See Skripak v. Commissioner, 84 T.C. 285,315 (1980) (court held that business purpose and objective of economic profit insignificant in determining whether a charitable contribution was made). cf. Schiedelman v. Commissioner, 682 FJd 189,200 (2d Cir. 2012) (court held that motivation to receive a tax benefit irrelevant in determining whether a charitable gift was made under section 170). Section 170(a) allows as a deduction any charitable contribution defined in Section 170(c) payment of which is made within the taxable year. The mere fact that a taxpayer desires to obtain a charitable deduction and conducts his affairs in such 8 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 manner as to obtain the deduction does not cause its denial unless the donor receives a quid pro quo. See, e.g., Schiedelman, 682 F.3d at 199; Grossman v. CommissionerT.C. Memo. 1973-219 (citing Waller v. Commissioner, 39 T.C. 665, 676-677 (1963)); Maysteel, 33 T.C. at 1024, (rev'd on another issue, 287 F.2d 429 (7th Cir. 1961)). While Petitioner did anticipate deriving a tax benefit from its donation through a deduction, this benefit would not come from the recipient of the gift and, therefore, there was no quid pro quo. As stated in Scheidelman, [i]t is true the taxpayer hoped to obtain a charitable deduction for her gifts, but this would not come from the recipient of the gift. It would not be quid pro quo. If the motivation to receive a tax benefit deprived a gift of it charitable nature under Section 170, virtually no charitable gifts would be deductible. 682 F.3d at 200 (emphasis added). By implementing the principal of quid pro quo the subjective intent if the donor is irrelevant. Id. Thus, whether Petitioner's donation was tax motivated is immaterial to the application of section 170. For the purposes of Section 170, the determinative question is whether the donor has effectively parted with dominion and control over the subject matter of the gift. See, e.g., Skripak, 84 T.C. at 318 (citing Guest v. Commissioner, 77 T.C. 116, 122 (1981), affd, 676 F.2d 682 (1 51 Cir. 1982); Londen v. Commissioner, 45 T.C. 110 (1965)). RERI's contribution to the University effectuated the transfer of all ofRERI's ownership interest in the Asset. Thus, where a taxpayer in fact owns property before the donation and the property is in fact transferred to the donee, the donor is entitled to a charitable contribution deduction. See, e.g., Waller v. Commissioner, 39 T.C. 665 (1963)(donated property was owned by the donor before donation); Maysteel, 33 T.C. at 1024; Allen v. Commissioner, 92 T.C. 1 (1989)(a charitable deduction 9 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 allowed to the extent of the taxpayer's own funds but disallowed to the extent of funds borrowed from the charity and returned to it). Petitioner has been unable to find any case law authority for the proposition that an economic substance analysis is applicable to section 170. In fact the contrary is true. See Skripak, 84 T.C. at 315. In Skripak, petitioners participated in a charitable contributions program through which they purchased books, held them for slightly more than 6 months, and then contributed them to various small rural public libraries. Respondent argued that petitioners were merely purchasing "tax deductions" rather than books and therefore, the deduction should not qualify for a charitable deduction. Id. at 285, 315. The court explained the reason why the application of the economic substance doctrine is irrelevant in the context of section 170: [t]he deduction for a charitable contribution provided by section 170 is a legislative subsidy for purely personal (as opposed to business) expenses of a taxpayer. Accordingly, doctrines such as business purposes and an objective of economic profit are of little, if any, significance in determining whether petitioners have made charitable gifts. Id. at 315 (emphasis added). The Court further explained that: [d]espite his protests to the contrary, respondent's seeming obsession with the mechanics of these transactions as shams appears to be caused by the admitted tax-avoidance motivation of the various petitioners. However, as stated above, the deduction for charitable contributions was intended to provide a tax incentive for taxpayers to support charities. Consequently, a taxpayer's desire to avoid or eliminate taxes contributing cash or property to charities cannot be used as a basis for disallowing the deduction for that charitable contribution. 10 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 Id. at 319. Therefore, the donation of books purchased specifically for making donations to schools was not a sham because the taxpayers in fact acquired ownership interests in the books and parted with them upon the donation. "This is precisely the result intended by section 170." Id. at 319, 320. Similarly, taxpayers who purchased medical equipment for donation to a hospital were entitled to a charitable contribution deduction. Weitz v. Commissioner, T.C. Memo. 1989-99. The Court has re-affirmed this principle on numerous occasions involving the donor's acquisition of property for purposes of making a charitable contribution. See, e.g., Maysteel, 33 T.C. at 1021 (taxpayer entitled to a charitable contribution deduction for donation of bonds purchased for such purpose); Weintrob v. Commissioner, T.C. Memo. 1990-513, supplemented fil'., T.C. Memo. 1991-67 (acquisition & conveyance of grave-sites); Hunter v. Commissioner, T.C. Memo. 1986-308 (ownership and conveyance of the property to a charity). The fact that the taxpayer acquires property with the intent to donate it to a charitable trust controlled by the donee similarly does not result in the denial of a charitable contribution deduction where the donee in fact acquires the property and parts with ownership of the property upon donation. See Grossman, T.C. Memo. 1973-219. CONCLUSION To summarize, the undisputed facts are as follows: 1. RERI purchased the Asset from RJS, an unrelated third party for $2,950,000. 2. RJS, in turn, acquired the Asset from yet another unrelated third party, Red Sea. 3. RERI had the beneficial ownership of the Asset between March, 2002 until the time 11 FILED: NEW YORK COUNTY CLERK 05/26/2017 01:59 PM INDEX NO. 650756/2017 NYSCEF DOC. NO. 49 RECEIVED NYSCEF: 05/26/2017 of its donation in August, 2003. 4. RERI received no quid pro quo from the University for its donation. The application of the principles discussed above to the undisputed facts support the proposition that a charitable donation was made. Tue law is clear that based on these facts a deduction is allowable and that the sham and economic substance doctrines may not be used to disallow the deduction. For the reasons set forth above, petitioner's motion for partial summary judgment filed simultaneously herewith should be granted. Dated: fEb · (;' 1 )Ol.3 RANDA LG. ICK Tax Court Bar No.: DR0534 Law Office of Randall G. Dick 290 Stonecrest Drive San Francisco, CA 94132 415-786-5232 rgd 1018@yahoo.com 12