Tax Court Considers Renovation Value of $10M Home; Bankruptcy Court and Expert Testimony
A Petitioner Relies Reasonably on His CPA in Gaggero v. Commissioner, the Tax Court Finds. That Makes a Difference: Hereâ€™s Why.
In Gaggero v. Commissioner, Judge Holmes at the U.S. Tax Court disagrees with the IRSâ€™s contention that the plaintiff conducted an improper scheme to avoid capital gains.Â In First Street Holdings NV, LLC v. MS Mission Holdings, LLC, Judge Markell at the U.S. Bankruptcy Court finds a lower bankruptcy courtâ€™s errors to be likely prejudicial.
Gaggero v. Commissioner
T.C. Memo 2012-331
United States Tax Court
November 29, 2012
After respondent IRS determined a deficiency in petitioner taxpayer’s taxes on account of his treatment of certain transactions on his 1997 return, petitioner sought review. At issue was whether the manner in which petitioner reported the tax consequences of transactions involving the acquisition, improvement and resale of a residence was improper and whether he was liable for a deficiency and for accuracy-related penalties per IRC Â§ 6662.
Petitioner bought a rundown house in 1990. He and his wholly-owned company (CO) signed a contract under which petitioner agreed to fund renovations. CO agreed to provide development services in exchange for 50% of any increase in property value, payable on the sale of the house to a third party. When the house sold for $9.6 million, petitioner reported $6.6 million on Form 2119 while CO reported over $3 million in ordinary income.
Petitioner bought a replacement house within two years and deferred his gain under IRC Â§ 1034 (later repealed). The IRS claimed that the deal with CO was a scheme to avoid capital gains, but the court disagreed. It held that CO had a bona fide interest in the property, but that petitioner had realized $3 million in gain by reason of the transaction in which CO obtained its interest.
The court calculated that, by reason of both transactions, petitioner had realized a $5.110 million gain. After Â§ 1034 was applied, petitioner was required to recognize a $2.9 million gain.
However, petitioner was not liable for the Â§ 6662 penalty because he had shown per IRC Â§ 6664 that he had reasonably relied on his CPA in structuring the deal and reporting the transactions.Â The court held that petitioner should have recognized a $2.9 million gain in 1997, but that he was not liable for the Â§ 6662 penalty thereon.
First Street Holdings NV, LLC v. MS Mission Holdings, LLC
2012 Bankr. LEXIS 5636
United States Bankruptcy Court
December 5, 2012
Appellant debtor sought review of an order from the United States Bankruptcy Court for the Northern District of California that granted appellee creditor’s motion for relief from the automatic stay under 11 U.S.C.S. Â§ 362(d)(1) and (2).
The court excluded debtor’s non-appraisal expert testimony as a sanction for failure to timely disclose the experts as witnesses pursuant to an oral scheduling order.Â The order terminated the stay as to some of debtor’s real property assets and allowed the creditor to proceed with foreclosure sales against the properties. Because the debtors had other secured properties that were not foreclosed upon, the appellate panel deemed the appeal to not be moot.
The bankruptcy court granted creditor’s motion in limine to exclude the testimony of several expert witnesses as to the likely rezoning and increased value of the properties and the creditor’s errors in determining the equity in the properties.
The bankruptcy court rejected debtor’s $140 million valuation as being too speculative and hypothetical and found that debtor had not shown a reasonable possibility of an effective reorganization. The bankruptcy court made no finding that the properties were depreciating. The written scheduling order did not provide any deadline for disclosing the identity of the witnesses.
The bankruptcy court’s errors were likely prejudicial. The exclusion of the testimony likely violated the debtor’s due process right to be heard.Â The order granting creditorâ€™s relief from the automatic stay was vacated and the matter remanded.Â
In re Protz
2012 Bankr. LEXIS 5446
United States Bankruptcy Court
November 20, 2012
Plaintiff Chapter 7 trustee filed a complaint against defendant, the debtorâ€™s ex-husband, seeking an order pursuant to 11 U.S.C.S. Â§ 542(a) for turnover of one-half of the ex-husbandâ€™s interest in a non-employee retirement income security act (ERISA) qualified deferred retirement plan (the plan).
The ex-husband moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6).Â As part of the dissolution of marriage, a state court entered a judgment that entitled the debtor to one-half of the marital portion of her ex-husbandâ€™s plan within 45 days of disbursement.
The trustee argued that pursuant to 11 U.S.C.S. Â§ 541(a)(1), the debtorâ€™s one-half interest constituted property of the estate that had to be turned over pursuant to 11 U.S.C.S. Â§ 542(a). The ex-husbandâ€™s motion to dismiss was premised on his argument that because he was not guaranteed any disbursements under the plan, no valuation of the plan was possible and thus, the trustee was not entitled to an order providing that one-half of all previous and future disbursements had to be turned over to the trustee.Â
The court held that the trustee stated a claim plausible on its face by alleging that the debtor was entitled to one-half of the plan disbursements, that the debtorâ€™s interest in the disbursements was property of the estate, and that the ex-husband had received at least one disbursement.
Further, the ex-husband admitted nearly all of the trusteeâ€™s allegations and did not deny that the trustee was entitled to the turnover of one-half of plan disbursements when he received them.Â The court denied the ex-husbandâ€™s motion to dismiss.Â
Peter H. Agrapides, MBA, AVA, is a Principal at Western Valuation Advisors, which has offices in Salt Lake City, Utah, and Las Vegas, Nevada. Mr. Agrapidesâ€™ practice focuses primarily on valuations for gift and estate tax reporting. He has experience valuing companies in a diverse array of industries. These engagements have ranged from small family owned businesses to companies over $1billion.