LLC Disputes IRS Valuation of Donated Land

LLC Disputes IRS Valuation of Donated Land

News story posted in U.S. District Court on 9 August 2002| 1 comments
audience: National Publication | last updated: 18 May 2011


Marsh Mountain Limited Liability Co. has petitioned for a readjustment of partnership items included in a Final Partnership Administrative Adjustment issued on March 14, 2002, arguing the IRS erroneously valued a gift of land. The LLC valued the land at $5,000 per acre whereas the IRS valuation was $2,000 per acre. Given the differential, the Service is also seeking accuracy retated penalties under Section 6662.

Citation: Edward G. Frazee, et al. v. United States; No. 02CV1816 (28 May 2002)

Full Text:

P.O. BOX 515

(Garrett County)



(Petition for Re-adjustment of Partnership Items Included
in FPAA Dated March 14, 2002 -- 26 U.S.C. § 6226)

Edward G. Frazee, Tax Matters Partner of Marsh Mountain Limited Liability Company, by counsel, brings this action for re-adjustment of partnership items determined by the Internal Revenue Service in a Notice of Final Partnership Administrative Adjustment dated March 14, 2002.


1. Marsh Mountain Limited Liability Company ("Marsh Mountain") is a limited liability company organized under the laws of the State of Maryland, with its principal place of business at McHenry, Garrett County, Maryland. At all times relevant hereto, Marsh Mountain's sole business has been the ownership of certain real estate located in Garrett County, Maryland. Marsh Mountain is treated as a partnership for federal income tax purposes.

2. Plaintiff, Edward G. Frazee ("Frazee"), is a member of Marsh Mountain, with a 12.5% interest in the LLC's profits, losses and capital. He is also the "tax matters partner" ("TMP") of Marsh Mountain, as defined in 26 U.S.C. § 6231 (a)(7).

3. Defendant is the United States of America.


4. This Court has jurisdiction pursuant to 26 U.S.C. § 6226 and 28 U.S.C. § 1346(e).

5. On March 14, 2002, the Internal Revenue Service issued to Frazee, as TMP of Marsh Mountain, a Notice of Final Partnership Administrative Adjustment ("FPAA") for year 1998, a copy of which is attached hereto as Exhibit A and incorporated herein by reference.

6. For calendar year 1998, Frazee timely filed a joint federal income tax return with his spouse, A. Joyce Scott Frazee ("Mrs. Frazee"), Mrs. Frazee is also a member of Marsh Mountain LLC, with a 12.5 % interest in the LLC's profits, losses and capital.

7. On May 14, 2002, pursuant to 26 U.S.C. § 6226(e)(i), Frazee deposited with the Internal Revenue Service the sum of $82,500, representing the amount by which his tax liability would be increased if the treatment of the partnership items on his joint federal income tax return for calendar year 1998 were made consistent with the treatment of partnership items on the partnership return, as adjusted by the FPAA. (Because Mrs. Frazee is also a member of the LLC, such treatment would increase Mr. Frazee's joint and several liability by the amount attributable to the LLC interests held both by him and by Mrs. Frazee, which Plaintiff has calculated to be $82,500.)

8. Venue is appropriate in this district pursuant to 26 U.S.C. § 6226 and 28 U.S.C. § 1402(a).


9. On or about January 25, 1995, Marsh Mountain acquired a tract of unimproved land in Garrett County, Maryland, comprising 2,383 acres, known as the "Brenneman tract."

10. On December 21, 1999, Marsh Mountain conveyed 550 acres of the Brenneman tract to Garrett County Maryland Community Action, Inc., a non-profit organization, as a gift.

11. On its Form 1065, United States Partnership Income Tax Return, for calendar year 1998, Marsh Mountain valued the fair market value of the donation of the 550 acre parcel at $2,750,000 or $5,000 per acre. This valuation was determined by an appraisal dated December 14, 1998 performed by E. Ted Golden, MAI.

12. In the FPAA issued March 14, 2002, the Commissioner of Internal Revenue ("Commissioner") determined that the fair market value of the 550 acre parcel as of December 21, 1998, was $1,100,000, or $2,000 per acre. Accordingly, the Internal Revenue Service increased the taxable income of Marsh Mountain's partners by $1,650,000 for calendar year 1998.

13. The Commissioner erred in determining that the fair market value of the 550 acre parcel was $1,100,000 rather than $2,750,000, or any other amount in excess of $1,100,000.

14. Marsh Mountain correctly valued the fair market value of the 550 acre parcel.

15. In the FPAA, the Commissioner also determined that the accuracy-related penalty under 26 U.S.C. § 6662 should apply to any increase in tax resulting from an adjustment to the value of the 550 acres of land. The § 6662 penalty applies, inter alia, to "any substantial valuation misstatement" § 6662(b)(3). A "substantial valuation misstatement" occurs when the value of any properly claimed on a tax return is 200 per cent or more of the amount determined to be the correct valuation. 26 U.S.C. § 6662(e)(1)(A).

16. Pursuant to 26 U.S.C. § 6664(c)(1), the accuracy-related penalty under 26 U.S.C. § 6662 arising out of an alleged substantial valuation misstatement does not apply where there was reasonable cause for the understatement and the taxpayer acted in good faith. In the case of an understatement attributable to a substantial valuation misstatement, reasonable cause may not be found unless the claimed value of the property was based on a "qualified appraisal" made by a "qualified appraiser."

17. A "qualified appraisal" is defined in 26 U.S.C. § 6664(c)(3)(B) as one which meets the requirement of the regulations prescribed under 26 U.S.C. § 170(a)(1). Reg. § 1.170A- 13(c)(3) describes a qualified appraisal as one which is made not more than 60 days prior to the date of contribution, is prepared, signed and dated by a qualified appraiser, does not involve a prohibited appraisal fee, and includes various items of information set forth in the regulation.

18. A "qualified appraiser" is defined in 26 U.S.C. § 6664(e)(3)(c) as one who meets the requirements of the regulations prescribed under 26 U.S.C. § 170(a)(1). Reg. § 1.170A- 13(c)(5) describes a qualified appraiser as one who holds himself out to the public as an appraiser or performs appraisals on a regular basis, is qualified to make appraisals of the type of property in issue, is not disqualified, and understands the penalties for making a false statement in an appraisal.

19. The appraisal performed by E. Ted Golden on which Marsh Mountain relied in valuing the donation of the 550 acres on its Form 1065 for calendar year 1998 was a "qualified appraisal" performed by a "qualified appraiser" within the meaning of 26 U.S.C. § 6664(c)(1). The Commissioner has not alleged otherwise in the FPAA.

20. In addition to obtaining a "qualified appraisal" by a "qualified appraiser," Marsh Mountain acted with reasonable cause and in good faith with respect to its valuation of the 550 acres. The Commissioner has alleged no facts in the FPAA demonstrating a lack of reasonable cause or good faith on the part of Marsh Mountain.

21. The Commissioner erred in determining that the accuracy- related penalty under 26 U.S.C. § 6662 applies to any understatement of tax which may result from a redetermination of the value of the 550 acres.


22. Plaintiff prays for judgment against Defendant and asks that the Court:

(a) Determine that Marsh Mountain correctly valued its gift of the 550 acres in calendar year 1998;

(b) Reverse the adjustment in the FPAA in the amount of $1,650,000 for reduction in value of the contribution of the 550 acres parcel;

(c) Determine that Marsh Mountain is not liable for the accuracy-related penalty under 26 U.S.C. § 6662;

(d) Order Defendant to return to Plaintiff the sum of $82,500 deposited by him pursuant to 26 U.S.C. § 6226(e);

(e) Grant such other and further relief to which Plaintiff may be entitled.

Paula M. Junghans (No. 589)
Piper Rudnick LLP
1200 Nineteenth Street, NW
Washington, DC 20036
(202) 861-3905
(202) 689-7537 FAX

Attorney for Plaintiff
Edward G. Frazee

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LLC Disputes IRS Valuation of Donated Land

Always choose a MAI (Made as Instructed) appraiser any time you want to MIH (Make it Happen)

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